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Investment Banking and Corporate Restructuring

There was a quickened pace of corporate restructuring in the 1980s. Many U. S. corporations radically changed their organizational form through mergers, acquisitions, spin-offs, and recapitalization. Corporate “raiders” played a significant role in this process of industrial change. Investment bankers are the key in this restructuring who advise on and structure the deals and arrange the financing.

During the 1960s, investment bankers acted as the instruments of the corporate clients, not the instigators of deals when a wave of mergers and acquisitions led to the formation of large conglomerates. They were well-paid advisers to the corporate heads who put together those conglomerates. Subsequently in the 1980s, there was a shift in power from the corporate chiefs to the corporate raiders and the investment banking houses that managed the changes in control.

The mergers and acquisitions specialists of investment-banking firms earned millions of dollars for their firms, often by instigating the acquisitions and then structuring the deals for the raiders. The mergers and acquisitions business has been a tight oligopoly dominated by the large investment bankers, including Morgan Stanley, Goldman Sachs and several others. Along with the intense competition for securities commissions and underwriting revenues, mergers and acquisitions (M&A) represent a very profitable line of business for securities firms.

Although the mergers and acquisitions teams are small, they are generating large revenues for their firms. In 1985 Morgan Stanley’s mergers and acquisitions group included just 120 out of the firm’s total employment of 5,000. In that same year, Morgan Stanley’s mergers and acquisitions unit produced $300 million of the firm’s total investment-banking revenues of $424 million and one-third of its total operating revenue (Business Week, November 24, 1986, cited in Matthews 1994 p. 20).

The financing for these deals opened the door to creative new ways in raising capital. Even though corporate raiders were able to borrow from banks to finance these deals, the rates were relatively high, and each dollar borrowed would likely necessitate a dollar of collateral behind it. Instead, raiders needed unsecured, junior debt in amounts larger than insurance companies and other traditional suppliers of high-risk capital would provide. The source of that capital became the junk bond market.

Investment Banking Activities Some firms to engage in diverse investment-banking activities, including acting as managers, co-managers, or syndicate members in underwriting public offerings of debt and equity securities; assisting in mergers and acquisitions; providing consulting and financial advisory services to corporations; arranging for private placements of securities issued with institutions and other investors; and acting as tender or exchange agents in connection with tender offers (Matthews 1994).

Profits gained from underwriting and selling groups contributed around 10 percent of gross revenues between 1980 and 1988, even though this figure understates the importance of this line. Asset Management Broker-dealers provide portfolio management and fiduciary services to taxable and nontaxable institutions, international organizations, and individuals investing in U. S. and international equities and fixed-income securities.

Furthermore, firms also act as fiduciaries for pension funds and trusts, in which capacity firms make asset allocation decisions (determining the choice and timing of different investments) and act as the selector, supervisor, and evaluator of a fund’s investment managers. Firms also act as mutual fund managers. Research Broker-dealers provide equity and fixed-income research for institutional and individual clients in order to support their sales and trading activities.

Research departments produce publications and studies on the economy and financial markets, portfolio strategies, technical market analysis, industry developments, and individual companies. Research activities are oriented to making specific purchase and sale recommendations on individual securities for investment purposes. The broker-dealers own commercial rights to their publications, and some large firms sell “institutional quality” research. In addition to written material, analysts are in direct contact with clients at individual and group meetings sponsored by the broker-dealers.