What does an Investment Banking division do? Richard Taylor, head of UK Investment Banking at Bank of America Merrill Lynch, explains. Bank of America Corporation employs c. 285,000 staff in over 40 countries serving clients in over 150 countries around the world. Its Global Banking and Markets teams consistently rank in the top-tier industry league tables and the company has unrivalled global distribution power across the institutional and retail sectors.
Bank of America Merrill Lynch's Global Banking and Markets division serves more than 3,000 institutional investors, including asset managers, banks, hedge funds, insurance companies and pension funds, and more than 10,000 issuer clients, including middle market and large corporations, financial institutions and government entities around the world. The group consists of Global Corporate & Investment Banking, Global Markets and Global Corporate Banking. Aligned with these client-facing groups are Global Capital Markets, Global Research, and Global Banking, Markets and Wealth Management Technology and Operations.
What do you do in Investment Banking?
The Investment Banking division has two core functions. One is raising capital. We do that for companies, financial institutions (such as banks and private equity firms) but also on behalf of governments and government agencies. The other is providing strategic advice to those same institutions, for example on mergers and acquisitions, flotations, demergers, capital structure and general capital markets advice.
These are the core functions within what we call investment banking. But the term can also apply more broadly to the wider activities of the bank, which would include our equities and fixed income divisions. They're the bits that include a large dealing floor and sales and trading activities. The clients include institutional investors such as pension funds, insurance companies and hedge funds.
How do you raise capital for clients?
Put simply, a company can raise money in the form of equity or debt capital. Last year there were many examples of UK companies seeking to raise finance from the equity markets. Most of them used two mechanisms. One is called a 'rights issue' and the other is a 'placing'. In the case of a rights issue, such as the £13.5 billion fundraising by Lloyds Bank (on which we acted), the company gives existing shareholders the opportunity to subscribe to the new shares being issued at a discount to the prevailing price in exchange for injecting cash into the company. In a placing, you don't have to go to your existing shareholders; you can effectively place your shares with new investors. However, in the UK, a company can't issue shares greater than five percent of its current market capitalisation without offering them to existing shareholders first and so placings tend to be relatively small.
There are two main ways for a company to raise debt finance. It can either borrow money from the banks or issue bonds. In Europe, as a result of the financial crisis, the trend has been for companies to try to diversify away from bank financing. Historically, we are some way behind the U.S. in this respect. European companies would typically seek around 70 per cent bank finance and 30 per cent from the debt capital markets, whereas in the U.S., it was the other way round.
Will the weakness of the UK economy make it harder for clients to raise capital?
That's a good question. Last year we saw a substantial contraction in the output of the UK economy but the really interesting thing about 2009 was that when companies wanted to raise money, the capital markets worked. It became clear that institutional investors would rather provide extra funding than see companies forced to sell off assets at fire sale prices. Last year, most rights issues saw over 90 per cent acceptance levels from existing shareholders. Now, in 2010, most companies are still being cautious (one of my clients recently said 2010 will be a "slog"), reflecting concerns over the outlook for the wider economy. Many businesses are quite rightly still principally concentrating on controlling costs, generating cash and improving returns on assets, but there will also be strategic opportunities for some companies to improve their market positions through mergers and acquisition activity. My feeling is that it's still a bit too early for that to happen consistently on a large scale, but clearly some companies are already looking to see if they can take advantage of opportunities in the market. You only have to look at Kraft's acquisition of Cadbury. Kraft felt that the combination of the two companies made compelling strategic sense and they were prepared to make a very significant acquisition.
How has the Investment Banking division been affected by Bank of America's acquisition of Merrill Lynch in 2008 (which led to the creation of Bank of America Merrill Lynch)?
It has broadened the business for two main reasons. First, Bank of America is not only a large retail bank, it is also a very large corporate bank. It has a substantial balance sheet, which it wants to make available to its clients (i.e. it can lend them money). In particular, Europe and Asia Pacific are regions where Bank of America Merrill Lynch would like to expand its lending footprint. We can therefore offer clients products (sources of capital) which previously Merrill Lynch did not have access to. Second, we are able to cross-sell to legacy Bank of America and Merrill Lynch clients, offering them a far broader product suite than previously. Bringing together the financial resources of Bank of America with the strategic advisory and capital markets capabilities of Merrill Lynch presents a pretty formidable combination. So you can see that we have some tremendous opportunities as a result of the merger - two highly complementary franchises with minimal business overlap. And we've had some fantastic wins as a direct result of the merger
What do you look for in graduates?
In order to succeed in investment banking you need to have the right building blocks in place. Whether you're looking to join Bank of America Merrill Lynch as an analyst (i.e. straight out of university) or as an associate (if you've graduated from a business school), the first thing we look for is a strong academic record. It also helps if you have strong quantitative skills. That doesn't mean that you must have a maths or a science degree but you must be comfortable in dealing with numbers and problem solving. When you first join the organisation there's a strong focus on becoming familiar with financial models, company spreadsheets, etc. Those things can be taught but you must have a basic aptitude. The bank provides excellent training programmes so bright candidates shouldn't approach the job with any trepidation. We make sure you get the right training.
You must also be a good communicator. That's the other key skill which should not be underestimated. Much of the work we do is team orientated so you have to enjoy dealing and collaborating with people - and most importantly, of course, with clients. The best candidates will have all these skills plus a positive and engaging personality. That positivity is important. As a nation we can be a little downbeat and self-deprecating. It's a question of striking the right balance. Equally, clients don't want to deal with overly brash advisors - rather, it is better to be positive and motivated about serving their interests.
Finally, we also like our graduates to be proactive and not to be afraid of coming forward with ideas. Each member of the client team can make a real contribution; just because you may be the most junior member initially, there is absolutely no hierarchy to smart ideas!
Why do you think the Investment Banking division remains such a popular choice for graduates?
Fundamentally, the business is about dealing with the financial and strategic issues that companies face - that will always interest people. It also provides fantastic training. Of course, when we recruit people, we hope they will stay here for the long term. We invest a huge amount of time and effort in each new hire's professional and personal development. But if they do decide that they want to go off and do something else (and it does happen of course) their career here will stand them in good stead. Indeed, some of our clients are ex-colleagues.
It's obviously exciting to be involved in high profile deals and transactions. We work with some of the largest, most interesting clients in the world. The beauty of the work we do is that we are involved from a very early stage. You see the deal all the way through from concept to execution. One day you may see an idea you had on the front page of the Financial Times. That will always retain a certain appeal.