Investment Banking
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The investment banking industry in the United States is comprised of fewer than 2,000 companies, with combined annual revenue of about $110 billion. Some major companies include Morgan Stanley, Goldman Sachs, Lehman Brothers, Bank of America, and Bear Stearns. Investment banking is a heavily concentrated industry, with the largest fifty firms holding ninety percent of the market.
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.
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. 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 requires 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 in support to support internal operations, from acquisitions and mergers to formulating trading positions in the world, U.S., 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.
As stated before, global investment banking have a combined annual revenue of approximately $110 billion. This was up 14% on the previous year, but 7% below the 2000 peak. The recovery in the global economy and capital markets resulted in an increase in M&A activity, which has been the primary source of investment banking revenue in recent years. Credit spreads are tightening and intense competition within the field has ensured that the banking industry is on its toes.
The US was the primary source of investment banking income in 2005, with 51% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 31% of the total, slightly up on its 30% share a decade ago. Asian countries generated