The Fuel of Capitalism
“Money-hungry, strung-out, financial-savages”
These are usually the thoughts of the average investor when describing the qualities of investment banking and bankers. Quite honestly, before I was exposed to the vast world of finance and economics, I too would describe investment banking in such a low regard. I would watch movies such as The Wolf of Wall Street, and feel validated in my thoughts about investment banking. Now, was The Wolf of Wall Street a great movie? Absolutely, it’s one of my favorite movies, but it leaves a lot to be desired in truly portraying the practicality and overall importance of investment banking in our economy. The movie is accurate in showing the typical highs and lows of an investment banker during the 80s, but what the movie doesn’t articulate is that behind the piles of cash and party lifestyle, there is actually hard, dedicated, and vastly important work in the fine print of an investment banking job description. To adequately describe to you the importance of investment banking, allow me to paint you a picture. Picture the American economic system (capitalism) as a 2017 Ford F-150. Now, imagine that this Ford F-150 is big, spacious, comes complete with all the new latest software and technology, and most importantly, it’s the most reliable “car” in the global economy. Sounds great, right? Now imagine, you have this wonderful new Ford F-150, but you’re stranded in the middle of the desert with your gas tank on E. You have this wonderful, shiny, new car, but no gas to fuel it.
Investment banking is the fuel of capitalism.
In today’s society, and honestly, throughout history, human progress requires two things: great ideas and capital. But often times, the same people with the world-changing ideas aren’t the same people with the world-dominating piles of cash. Thus, investment banking was born. Investment banking emerged during the medieval merchant-trade era and has transformed to be one of the most important economic facilitators today. Investment banking has been mankind’s solution to pairing capital with entrepreneurship and creating a fascinating and dynamic relationship.
Most of what investment bankers do is done in the shadows of the financial system. The majority of their work involves interacting with top-level executives, orchestrating major deals, and doing industry research. Rarely are they in the spotlight (for the right reasons). But, if there’s an area where investment bankers get to shine and flex their financial prowess, it’s through the process of an initial public offering (IPO) or the development of a merger or acquisition (M&A).
The announcement of an IPO is one of the very few times that the average investor is able to see the importance that investment banking plays in our economy. The IPO remains the pinnacle of success for a company in its early life. It signifies that a young company believes that it has a compelling enough product or service to attract outside investors and compete in the global marketplace. Even still, most of the hard work that goes into the process of an IPO is done in the shadows. Behind the breaking news headlines, investment bankers spend months before and after the IPO compiling data to make sure that everything is filed correctly with the SEC, investors are adequately interested, and the company that they are filling for is satisfied with their services. Most importantly, the investment banker must underwrite or price the IPO as sufficiently as possible to make sure the IPO doesn’t “break” or close below its initial price. As simple as it sounds, the process of an IPO is very delicate, time consuming, and extremely quantitative. The process is so intense, that usually everything is finalized the night before the stock is set to go public.
The development of a potential merger or acquisition is also very exciting and news-worthy attention for investment banking. Whenever companies want to merge or acquire one another, they seek the expert advice of an investment bank. The primary responsibility of an investment bank during an M&A process is to create value and growth and to make sure a reasonable price tag is set for all parties involved. To put this into context, allow me to paint you another picture. Imagine a marriage between two people. Typically, there was the meeting stage, dating stage, and then eventually a wedding, where two people come together to become a “whole.” The concept of a marriage can be compared to the concept of synergy, where the whole is greater than the sum of its parts. Put simply, when two or more people or organizations combine their efforts, they can accomplish more together than they can separately. In a business sense, M&A’s are conducted under the premise that some form of synergy exists in the deal being made. Companies don’t acquire or merge with one another just because it’s fun, but to expand product lines and services, penetrate new markets, or wipe out the competition. Now, imagine the investment banker playing all three hats of matchmaker, pre-marriage counselor, and the priest at the altar. The banker is responsible for all the background research and analysis of both companies, making sure both management parties are willing and able to work together, and ultimately tasked with making sure both parties agree to the deal on the table and sign on the dotted lines. Like some marriages, not all M&A deals last forever, and thus the banker also has to wear the hat of the divorce lawyer or counselor and either restructure, sell off, or buyout certain divisions of a company that isn’t necessary for the company to move forward.
Hopefully I’ve done a good enough job to dissuade you from thinking that investment banking only consists of money-hungry, strung-out, financial savages. Just remember, investment banking, at the core of its existence, helps to create and sustain wealth in our economy. By being the ultimate matchmakers between capital, strategic management, and entrepreneurship, the 99%ers are given the opportunity to link our wealth to the growth and profits of companies like Facebook, Google, Amazon, Apple, and thousands of others. For that, we should thank investment bankers and the industry as a whole for being those money-hungry, strung-out, financial savages that give our economy the fuel it needs to continually drive forward.