Investment Bank Reputation - Case Study Example

Investment Bank Reputation and the Price and Quality of Underwriting Services Table of Contents Investment Bank Reputation and the Price and Quality of Underwriting Services 1 Case 1 1 How liable they are 1 Proposals in context of Investment banks 2 Case 2 – 3 Part 1 3 Deal 1: 3 Deal 2: 4 Deal 3: 4 Part 2 5 Article Summary 5 Ethical or not 6 Governmental prevention 6 References: 6 Case 1 How liable they are Investment banks are engaged by organizations when it wants to raise capital from the market. The investment banks are specialist in underwriting the securities or bonds as they analyze these and come at a value which these could command in the market. They also reduce the risk for the borrower i.e. the companies raising capital by lowering the transaction cost of the issuing entity. One of the most important roles that these investment banks perform is to give a proper valuation of the issue which is being launched by the issuer through prudent and honest analysis of the particular debt bond or equity. The general public depends on them for their own understanding of the issue price and forming their opinion about it. If the investment banks put less valuation then the issuing entity would loose out on receiving a fair value from the market for its issues. On the other hand dishonest or overvaluation might make it possible for the firm to gather more money initially but after a certain point of time when the actual value creation ability of the business becomes evident, the investing public and other investing entities loose faith in the investment bankers as well as the whole market system. In fact this kind of wrong valuation could threat the markets existence as different participating entities loose faith. One of the crucial points in this context is that the incentives the investment banks receive is positively correlated to the quantum of proceeds the issuer gets for his issue, equity or debt/bond. Therefore the investment banks can have their own incentive perspective in mind while underwriting debts or securities as a higher valuation would ensure that they earn more while a lower valuation would attract lesser investors as a result of which the issuer would not be willing to invest more. Moreover reputed investment firms like J.P. Morgan Chase or Citigroup have the leeway of overpricing an issue i.e. giving a dishonest analysis of the quality of the issue as their reputation is not challenged by the general public and investing community as such. So if they had overvalued the issues of Enron or Worldcom, they would not have been caught at first. Only after a longer span of time when the actual business condition of the companies would have come forth, the investing community would have understood. Therefore it is not unfeasible to accuse these investment firms in wrong doing and more so in the era of subprime crisis which has also seen lack of corporate governance in big investment firms and their greed. The scenario which prevails ensures that the information provided by the investing banks are believed and investment decisions are also taken based on them. So if a company like Enron fail it could point towards the over valuation or dishonest analysis on the part of the investment banks. Proposals in context of Investment banks Though it is widely assumed that an investment banks or an accountant primary asset is the reputation they have, yet it is not hard to believe that they might risk it favor of earning high dollars and getting more incentives from the issuer. Therefore it is recommended that the federal government ensure that: i. The governmental monitoring agency functions more diligently and scrutinizes each and every issue which an investment bank is underwriting. ii. For this to be true the government must ensure that these investment bank’s boards have proper representation from the government’s finance department. iii. Moreover no investment bank should be allowed to participate in underwriting issues of the same business entity/issuer for two consecutive issues otherwise a mutual relationship which would develop between the two which could lead to insider dealings and dishonest analysis. iv. Also the government representatives on the investment bank’s board should be changed every year t prevent them from being bought by the banking behemoths. v. The government should ensure that it has a separate financial entity with required level of federal authority to randomly check and scrutinize information boons and databases of the issuer as well as the corresponding investment banks.(Fang L. H., August 2002). Case 2 – Part 1 Deal 1: Clemens College is acquired by Lincoln Educational Services Corporation. Lincoln Educational Services Corporation has acquired Clemens College by paying $2.8 million in cash. The deal is an all cash deal but it is subject to adjustments in post closing period. Lincoln Educational Services Corporation provides career oriented courses for post-secondary students. In fact it is one of the leading players in this area. Both high school graduates and also working people can avail their courses in areas of it, hospitality, automotive technology, business and health sciences. It started in the year 1946 and has expanded into seventeen states and has forty two campuses. It operates under ten brands and has an average enrollment of more than 20000 students in its various courses since its inception. Clemens college provides hospitality management courses and has regional accreditation. Earlier Lincoln Educational Services Corporation had acquired Baran Institute of Technology and its four schools and Clemens College was the fifth one. Earlier Lincoln Educational Services Corporation’s strategy over the long term period is to give its students the opportunity to pursue higher degree courses which would be beneficial in terms of the job market. It wants to leverage the Clemens College acquisition through giving its Connecticut based student the opportunity to gain a regionally accredited degree in the field of hospitality and culinary and also wants to broaden this opportunity to students all over the country by taking it online (Lincoln Educational Services Corporation Completes the Acquisition of Clemens College, April 2009 ; Learning, the Future of Deals:  Lincoln Educational Services Acquires Baran Institute of Technology, January 2009). Deal 2: Clean Harbors Inc. from Norwell Massachusetts, US would buy Canada based Eveready Inc. which is a provider of industrial and oilfield services. Total size of the deal is $167 million in cash and stocks plus absorption of debt worth $220 million i.e. $387 million. The deal is a mixture of cash, stock and debt assumption. Clean Harbors Inc. would be paying $ 167 million in total and also go for assumption of Eveready Inc’s debt. Clean Harbors Inc. would pay & 49 million in which corresponds to $2.64 a share. Also it would pay the reaming in through 2.4 million shares which amount to $118 million. It would also absorb $220 million of Eveready’s debt. Clean Harbors Inc. is into environmental services. Its operations are divided into two segments namely technical and site services. The technical service segment deals in collection, treatment, transport and disposing off various industrial and also non industrial waste materials. The site services business deals in onsite industrial equipment maintenance disposing off hazardous waste materials. Eveready Inc. deals in servicing of oil and gas, pulp paper, power generation as well as manufacturing industry verticals Eveready has its operation in refineries based in Europe, Asia and South America over and above the North American market. Therefore this deal would give Clean Harbors the opportunity to expand and explore into these markets. Clean Harbors has one for a mixture of cash, stocks and debt absorption so that this does not put extra pressure on its cash position and company is quite confident of leveraging the newer markets, revenue from which would justify this deal. (Clean Harbors to acquire Eveready in $167M deal, April 2009; Business Summary, 2009; About Us, 2009). Deal 3: McAfee the maker of antivirus and security software has acquired Secure Computing, a firm specializing in network security hardware, software and services. McAfee has acquired Secure computing for approximately $465 million. McAfee has paid cash for a certain number of shares at $5.75 per share which has taken the total value of the equity to $418million. It has also redeemed the outstanding shares of the preferred stocks of Secure computing by paying $85 million through cash. MacAfee is holds a leading position in protection of network violation and end-point security where as Secure Computing has its expertise in the area of web and email security. Basically the deal gives McAfee the opportunity of providing a 360 ° protection and security service to its clients and individuals. In fact this acquisition has helped McAfee in boosting its top-line growth and has shown a 33% growth in y-o-y profit for the first quarter (Alva. M., April 2009 ; McAfee acquires Secure Computing news, November 2008 ; ) Part 2 Article Summary Due to the prevalent credit crisis which emanated from the US subprime crisis and the current economic slowdown world over mergers as well as acquisition activities have dwindled considerably. With the collapse of big investment banks and financial houses, not many institutions are in a mood or position to finance large merger deals anymore. This could be a time to explore and rethink about the efficacy of mergers to start with as a strategic tool. Management of companies should delve deeper into questions like whether the proposed merger would deliver better performance in terms of EPS, growth, market share or customer satisfaction. It has been seen that most of the managers go for these mergers in order to increase the size of the company rather than focusing on value creation which in ideal situations should be the primary objective of the management. The not so perfect system of incentives could be behind this rush for mergers as well as acquisitions. The bigger the size of the firm becomes the bigger the chances of higher EPS, growth or revenue; or this is at least what many managers think. As their incentives are bead on these aforementioned parameters, they push for these deals to be done. Another culprit is the M&A investment banking community as they also gain in terms of advisory fees in case of big mergers and their misjudged valuations have caused pain to many business entities and also resulted the general public loosing faith in the system. But ultimately whether to go for a proposed merger or deal should only be based on the premise of whether it would create value for the stake holders of the business and should not be based on a n incentive perspective, after all proper corporate governance standards and proper value judgment is good for all (Capron L. and Kaiser k., February 2009). Ethical or not No, it is not correct for big organizations to continuously acquire smaller rivals. More than ethics it is a question of maintain a condition of ‘competition’ in the market which is healthy for all the stake holders, from the business as well as the customers. If there are no rivals then it becomes a monopoly and the customers loose in this kind of scenario as they have to pay huge price for a product or service. Nor does the acquiring firm have any urge to offer improved products or services. Governmental prevention Yes the Government should step in to prevent some mergers. For example in context of a deal like Google and Doubleclik it was evident form the very beginning that it would create a monopoly situation in the online advertising market in favor of Google as even before the merger Google was controlling a lion’s share of the said market. Google ploy in entering the Banner Ads online market through buying out Doubleclick at an humongous price of $3.1 billion would only ensured that it became the undisputed king of the online advertising market; it was already a leader in small online text ads and now this acquisition has given it a even bigger and stronger foothold. This is almost a monopoly and should not be tolerated and the Government should have intervened at the point when the news started floating in the media circles regarding its probability (Holahan C., April 2007). References: Fang L. H., August 2002, Investment Bank Reputation and the Price and Quality of Underwriting Services, Yale University, [Online], retrieved May 23, 2009, from http://icf.som.yale.edu/pdf/reputation_1102.pdf Lincoln Educational Services Corporation Completes The Acquisition Of Clemens College, April 2009, Press release, Yahoo Finance, [Online], retrieved May 23, 2009, from http://finance.yahoo.com/news/Lincoln-Educational-Services-prnews-15046490.html?.v=1 Learning, the Future of Deals:  Lincoln Educational Services Acquires Baran Institute of Technology, January 2009, M&A Alerts, [Online], retrieved May 23, 2009, from http://www.maadvisor.net/maalerts/01-23-09/alert_main01-23-09.html Clean Harbors to acquire Eveready in $167M deal, April 2009, Yahoo Finance, [Online], retrieved May 23, 2009, from http://finance.yahoo.com/news/Clean-Harbors-to-acquire-apf-15066297.html?.v=1 Business Summary, 2009, Clean Harbors Inc., Yahoo Finance, [Online], retrieved May 23, 2009, from http://finance.yahoo.com/q/pr?s=CLH About Us, 2009, [Online], retrieved May 23, 2009, from http://www.evereadyinc.com/about/ McAfee acquires Secure Computing, November 2008, [Online], retrieved May 23, 2009, from http://www.domainb.com/companies/companies_m/McAfee/20081119_McAfee.html Alva. M., April 2009, Acquisition Boosts Top-Line Growth At Computer Security Company, [Online], retrieved May 23, 2009, from http://finance.yahoo.com/news/Acquisition-Boosts-TopLine-ibd-15095500.html?.v=1 Capron L. and Kaiser k., February 2009, Does Your M&A Add Value? , Managing in a Downturn, Financial Times, [Online], retrieved May 23, 2009, from http://www.ft.com/cms/s/0/7bfb1e10-f256-11dd-9678-0000779fd2ac.html?nclick_check=1 Holahan C., April 2007, Google's DoubleClick Strategic Move, BusinessWeek, [Online], retrieved May 23, 2009, from http://www.businessweek.com/technology/content/apr2007/tc20070414_675511.htm Read More