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Monitoring in underwriting.
Well, first of all,
most of the terms that I will produce right now are quite well known.
I will just make a few comments.
First of all, the investment bank engages in due diligence. What is it?
Due diligence is clearly the activity that is closest to the ideal of monitoring.
So this is a way by which the investment bank,
after having entered into a contract with the issuer,
really studies the issuer and understands to what extent
the information that the issuer provides to the investment bank can be
properly translated and transferred to the public to induce demand.
So basically, it's not only scanning what the issuer
does and what the issuer doesn't to analyze
the pitfalls in the issuer's managerial practices or otherwise support their approach,
see their forecasts to what extent they are realistic and to what extent they're not.
At the same time, in the process of due diligence,
the investment does valuation and basically comes up with
the number that would be the best to be used as the offer price.
Now, not only that, after that,
the investment bank does what is called, a road show.
Well, it's not exactly monitoring,
it's actually transmitting the information that
has been collected and analyzed through the process of due diligence to the public.
So, the represents the issuer together it represents really a dozen banks, or banks,
if this is a group of banks working for the issue,
or they go to meet with prospective investors.
Sometimes, these are most often large institutional investors,
but there maybe some other areas where small investors also are present.
So there, they tell the story of why the company is now willing to place its stock.
They provide some information,
disclose it to these investors to a certain extent.
They answer questions, they provide forecasts,
and they basically try to transmit
some private information from the issuer
to the potential investors to alleviate this problem.
And the fact that the investment bank does this,
serves as a good signal for the investors because they know that this bank is not
in a position to lie to them or even in the position to misinformed them.
Because they're the pool of money and
they have a primary advantage of the investment bank
when it's approached by the issuers to enter into a contract.
Now, what else?
In this press of underwriting.
This is after issue support.
Here, we talk not about specifically trading,
that's the essence on our next episode.
But oftentimes, the issuer has to be
given advice of how they keep negotiating with potential other investors,
what information they have to transmit.
Because, let's say you successfully placed the issue,
but why would investors engage in that?
They want to make money on that,
so they would like to see the stock price appreciating.
Well, that may not always happen or that may not always happen immediately.
Because for example, if it jumped up immediately,
that would mean that the investment didn't do a great job
in valuation because this money is pocketed by investors
and part of that could be pocketed or could have been pocketed by
the insurer if the offered price would be set in a better way,
but the idea is that you cannot just complete the transaction.
This is the time of everything is successful so
people would just toast each other, they drink champagne.
But then the story goes on and you have to make
sure that the investors are not actually unhappy,
that the stock does not depreciate and their living goes on with the company.
Not a maybe exactly as has been promised,
but at least in concert with what both the issuer in
the investment bank was telling them before.
Now, a special thing here that I promised to come back to earlier is a private placement.
Now what is it? Private placement is a special situation.
When the issuer says,
I would not like to go to the public because that involves the disclosure
of a lot of information and then some other limitations to my freedom.
Instead, I would like you with your investment bank to consult with
your major financial institutional investors to say, well,
wouldn't you mind if you became
my strategic partners and you would buy a significant share of my stock,
and that would still be at private company?
So this stock that sometimes called, leather stock,
is not freely and openly traded.
But these people, they participate in equity financing,
but sort of in a private way.
So we're back to our week two.
And here, the investment bank serves as the lifter of the unobserverability avails.
So basically it's says, well,
I disclose them information,
I will bring you into the direct negotiations.
You, potential investors, we will ask all these questions,
so this is a really private transaction.
In this case, the company, the issuer,
does not have to make its all financial information public,
they can still keep it to itself to share only with these investors.
So basically, we're back to the situation of very much like
a private transaction from our week two.
And the final thing that I would like to draw your attention to is the following.
In recent decades and the writing has become really global.
And although whenever we talk about something global
that can be taken as a special term or
sometimes even as a buzzword with not fully understood meaning,
but for us, what I mean here is the following.
Well, first of all,
now, there are many more international investors.
30 years ago or even 20 years ago,
China was still a great country with a lot of potential,
but it was not at an area that would produce big investors.
Only recent 20 years,
it has grown fundamentally and has become a huge player in capital markets too,
and there are many other stories like that.
And you can always say, well, you know,
most largest investment banks,
they have offices everywhere.
Not only New York and London,
but those also in Hong Kong,
in Shanghai, in Frankfurt,
and some other places.
But oftentimes, it is important to
maybe get some other players involved and make a syndicate of investment bankers.
Because sometimes, local players might have a better understanding of the market,
even the better than the understanding of the same office of the big investment bank.
And the fact that whoever can induce greater demand,
is worthwhile sharing the future profit with.
Just because if you have a higher demand then you reduce the pricing,
then the issue is more successful.
And therefore, everyone is happy.
And it has become a good practice for larger investment banks
to sometimes get into syndicates.
And it's not only that I does the bank XYZ sort of the whole issue,
there is there is a group of big players and we share our profits and
commission just because this has become a normal practice.
That is more profitable because next time,
I will get invited to another pool.
And that is just because like I said before,
that the key advantage of an investment bank as an intermediary,
is not only and sometimes not primarily the fact that they have experienced personnel,
that they are advanced in terms of valuation,
that they can nicely transmit information,
but that behind them,
there are these bags with cash.
And clearly, if you have more players involved,
then all of them have a crowd of these investors behind them.
And now, if you have a syndicate,
then basically you are combining these pools of potential investors,
and that in itself plays a key role.
That is why, it's like I said,
it's become a normal practice to enter into syndicates.
And whenever this is really a high volume transaction,
then the issuer in the very process,
it negotiates with many biggest investment banks and they form a syndicate right away.
So we're now wrapping up the story of the underwriting because we've analyzed
its core ideas and we've seen that it
is the story that is closely linked to our good old friend, private information.
And now in the next episode,
we will talk about other activities of investment banks,
and specifically, trading and innovation.
Konstantin KontorDirector and Professor of Finance and Strategy
