The Value of Investment Banking

Some of my recent posts reflect my thinking about unlocking value.

In thinking about unlocking value, I have understood what investment banking is really all about, at least in the ideal sense, and why investment bankers make so much money. For some reason, this came as a great revelation. It had eluded me that investment banking is all about unlocking business value. Investment bankers unlock value through mergers and acquisitions where the value of combined entities is greater than the sum of the individual entities. They unlock value through spin-offs where the opposite is true: the value of the separate entities is greater than the combination. Other such transactions may also unlock value. Investment bankers are able to solve the large and small problems that arise in such transactions. The categories of problems they solve include the following, listed in what I believe to be descending order of importance:

  • Strategic: ensuring the entities involved in the transaction have the correct strategic objectives to unlock the full value of the transaction, and helping them achieve those objectives
  • Financial: acquiring the funds necessary to execute the transaction, and ensuring the entities can sustain any ongoing financial obligations
  • Legal: ensuring that every aspect of the transaction takes place within legal and ethical bounds, in good faith, and that the interests of various stakeholders are protected
  • Managerial: ensuring that the management of the entities involved in the transaction is able to execute the transaction strategy through culture clashes and other disruptions

To achieve these breakthroughs in value certainly merits high salaries and bonuses. And it is no wonder that investment bankers are good candidates for CEOs of startups. They have well-established personal networks and supply chains for the goods and services necessary to solve such problems.

That is not to say that investment bankers cannot be greedy, corrupt, short-sighted, or just plain incompetent. I am talking about ideals, after all.

Tags: Business, Finance, Philosophy

Updated at: 25 December 2006 12:12 AM

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