Investment Banking
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Industry Overview
The investment banking industry in the US is comprised of fewer than 2,000 companies, with combined annual revenue of about $110 billion. Major companies include Morgan Stanley, Goldman Sachs, Lehman Brothers, and Bear Stearns. Investment banking is heavily concentrated: the largest 50 firms hold 90 percent of the market.
Competitive Landscape
Demand is driven by economic activity that results in company mergers, acquisitions, or public financing. The profitability of an investment bank depends on its ability to accurately assess both the value of a business transaction and the readiness of the market to buy the attendant debt or equity. Big firms have an advantage because large customer transactions require firms with substantial financial resources. Small investment banks can compete by participating in syndications and operating in regional markets or specialized industries. Although labor-intensive, the industry produces very high value: average annual revenue per employee at large firms is close to $1 million.
Products, Operations & Technology
The primary revenue sources of the investment banking industry are from the placement of new debt and equity issues with public and private investors, and the fees associated with mergers and acquisitions (M&A). Investment banks also purchase new debt and equity issues for their own accounts, acting as the market "maker," and actively trade other financial instruments. Most investment banks are active securities and currency traders and also provide asset management services for wealthy clients and retirement and investment funds. Thirty percent of industry revenue comes from merger and acquisition fees and associated stock transactions; 15 percent from helping corporations and governments issue bonds; 20 percent from active trading in financial instruments; and 10 percent from interest income.
The industry assembles and supplies the capital required by businesses to expand, merge, and acquire other businesses. Investment banks are intermediaries between corporations issuing new debt and equity securities and investors that buy the securities. An investment bank underwrites new securities by buying them from the issuing company at a negotiated price, then reselling them to its investor base, other investment banks, and the investing public. It may act as the ‘maker’ of the market for the new securities, facilitating trades between buyers and sellers. Investment banks perform a variety of other financial services, such as merger and acquisition advice and market analysis.
The major investment banks have a research staff that performs the risk, economic, and financial analysis used to support internal operations, from acquisitions and mergers to formulating trading positions in world, US, and regional markets. The profitability of an investment bank is directly related to the quality of its research analysis. Big investment banks employ a large number of salespeople, analysts, and traders in a network of offices, and may operate a trading "floor." Smaller banks operate out of regular offices. Labor is the chief operating expense.
Investment banks use cutting-edge communication and computing technology to support their operations. Dedicated, fully redundant, high-speed networks interconnect all major offices (domestic and foreign). Computing facilities and critical data are distributed among operations and backup sites. Backup facilities can be placed in service automatically in real-time without loss of data. Within a few days of 9/11, trading and support operations resumed when the markets reopened using backup facilities without loss of customer data.