The Global Banking Business

Giddy Global Banking: Review I/1 Global Banking & Capital Markets REVIEW I Prof. Ian Giddy Stern School of Business, New York University What is G...
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Giddy

Global Banking: Review I/1

Global Banking & Capital Markets REVIEW I Prof. Ian Giddy Stern School of Business,

New York University

What is Global Banking and Capital Markets?

The International Financial Markets uMoney

and foreign exchange; derivatives; international bonds & equities; loan trading

l The

Global Banking Business

uLending;

trading and transactions; underwriting; M&A; project financing; asset management; advisory services; etc

Copyright ©1999 Ian H. Giddy

International Financial Markets 2

Giddy

Global Banking: Review I/2

What are the Global Financial Markets?

l

The Foreign Exchange Market

l

Domestic and International Money Markets Domestic and International Capital Markets The Derivatives International Equity and M&A Using the Global Capital Markets: Global Banking Strategy and Implementation

l l l l

Copyright ©1999 Ian H. Giddy

International Financial Markets 3

Where the Eurocurrency Market Fits In

US Domestic Market

Eurodollar Market

Euro-Commercial Paper Market

Copyright ©1999 Ian H. Giddy

German Domestic Market

EUR0CURRENCY MARKET

Euro-Deutsche Mark Market Foreign Exchange Market Euro-Yen Market

Euro-Floating Rate Note Market

Japanese Domestic Market

Straight Eurobond Market

International Financial Markets 4

Giddy

Global Banking: Review I/3

Interest Rate Linkages in the International Money Market Two stories to tell: l Domestic vs. Euro l Eurocurrency A vs. Eurocurrency B Domestic Market A

Treasury Bill

Treasury Bond

The Euromarkets

Bank Deposit

Corporate Bond

Euro Deposit Market

Euro Bond Market

Euro Deposit Market

Euro Bond Market

Domestic Market B

Bank Deposit

Corporate Bond

Copyright ©1999 Ian H. Giddy

Treasury Bill

Treasury Bond

International Financial Markets 5

Global Banking: Products and Customers Prof Ian Giddy Stern School of Business New York University

Giddy

Global Banking: Review I/4

Products or Customers?

Corporate Finance

Sales Customer-Driven Innovation

Capital Markets Copyright ©1999 Ian H. Giddy

International Financial Markets 7

Products offered

Client-Arena-Product Matrix

Markets covered Clients served Copyright ©1999 Ian H. Giddy

International Financial Markets 8

Giddy

Global Banking: Review I/5

Products Credit products l Trading and positioning l Risk management products l Financial engineering and structured finance l Underwriting and distribution l Asset management l Retail and private client services l Transactions services l

Copyright ©1999 Ian H. Giddy

International Financial Markets 9

Client-Arena-Product Matrix

Products offered

Build versus buy?

Markets covered Clients served Copyright ©1999 Ian H. Giddy

International Financial Markets 10

Giddy

Global Banking: Review I/6

Client-Arena-Product Matrix

Products offered

Example: SBC and US bank equity

Markets covered Clients served Copyright ©1999 Ian H. Giddy

International Financial Markets 11

Client-Arena-Product Matrix

Products offered

Sell? (NatWest)

Markets covered Clients served Copyright ©1999 Ian H. Giddy

International Financial Markets 12

Giddy

Global Banking: Review I/7

NatWest Bank? NatWest Bank Clients Corporations Government Institutions Products Securities custody Asset Management Private Equity Insurance Lending Deposits Securitization/Structured and Project Finance Equity underwriting Bond underwriting Mergers and Acquisitions Credit cards Trading - Money market - FX and derivatives - Interest rate derivatives - Bonds - Securitized products - Futures Mortgages Stock brokerage Corporate Advisory Private Banking

x x x x x x

x x

x

x

x x

x x x x x x x

High net worth Retail

x

x x

x x x

x

x

x x x x x x x x

x x x

Copyright ©1999 Ian H. Giddy

International Financial Markets 13

To Succeed, Analyse the Industry Structure SUBSTITUTES

SUPPLIERS

CUSTOMERS COMPETITIVE ADVANTAGE

BARRIERS TO ENTRY

Copyright ©1999 Ian H. Giddy

International Financial Markets 14

Giddy

Global Banking: Review I/8

Product Profitability Cycle

Excess returns

Time Copyright ©1999 Ian H. Giddy

International Financial Markets 15

New Financial Products: Economics of Financial Innovation Certain kinds of market imperfections allow hybrids to flourish l But innovation are readily copied; so only certain kinds of firms can profit from innovations. l There is a product cycle and profitability cycle of innovations. l

Copyright ©1999 Ian H. Giddy

International Financial Markets 16

Giddy

Global Banking: Review I/9

Financial Innovations: What to Look For Reallocating risk l Increasing liquidity l Reducing “agency costs” l Reducing transactions costs l Reducing issuers’ or investors’ taxes l Circumventing regulations l Circumventing internal constraints l

Copyright ©1999 Ian H. Giddy

International Financial Markets 17

Battle Mountain Gold

Forward Prices for Gold $450 $425 $400

$300/oz = Cost of Production

Copyright ©1999 Ian H. Giddy

Each year, BMG chooses to produce if P>300 defer if P Value of A + Value of B + Cost of transaction] l

Synergy u

l

Gain market power u

l

Eg Martell takeover by Seagrams to match name and inventory with marketing capabilities Eg Atlas merger with Varity. (Less important with open borders)

Discipline u u

Eg Telmex takeover by France Telecom & Southwestern Bell (Privatization) Eg RJR/Nabisco takeover by KKR (Hostile LBO)

l

Taxes

l

Financing

u

u

Eg income smoothing, use accumulated tax losses, amortize goodwill Eg Korean groups acquire firms to give them better access to within-group financing than they might get in Korea's undeveloped capital market

Copyright ©1999 Ian H. Giddy

International Financial Markets 29

Fallacies of Acquisitions Size (shareholders would rather have their money back, eg Credit Lyonnais) l Downstream/upstream integration (internal transfer at nonmarket prices, eg Du Pont/Conoco, Pru/Bache) l Diversification into unrelated industries (Kodak/Sterling Drug) l

Copyright ©1999 Ian H. Giddy

International Financial Markets 30

Giddy

Global Banking: Review I/16

Using The Restructuring Framework ($ Millions of Value) $1,000 $ 25 Current perceptions Gap: “Premium” $ 975

$ 300

Company value as is

Current Market Price

1

$ 635 Maximum restructuring opportunity

2

5 Restructuring Framework

Strategic and operating opportunities

Potential value with internal improvements

Financial engineering opportunities

4

3 Disposal/ Acquisition opportunities

$ 1,275

Optimal restructured value

$ 1,635

$ 10

Eg Increase D/E

Potential value with internal and external improvements $ 1,625

$ 350 Copyright ©1999 Ian H. Giddy

International Financial Markets 31

Mergers and Acquisitions: Summary

l Mergers

& Acquisitions l Divestitures l Strategic Alliances Concept: Is a business worth more within our company, or outside it? Copyright ©1999 Ian H. Giddy

International Financial Markets 32

Giddy

Global Banking: Review I/17

Martell -- The Conclusion

Copyright ©1999 Ian H. Giddy

International Financial Markets 33

M&A Advisory Services: 1. Role of the Seller's Advisor l l l

l l l l l

l l

Develop list of buyers Analyze how different buyers would evaluate company Determine value of the company and advise seller on probable selling price range Prepare descriptive materials showing strong points Contact buyers Control information process Control bidding process Advise on the structure of the transaction to give value to both sides Ensure all nonfinancial terms are settled early Smooth postagreement documentation

Copyright ©1999 Ian H. Giddy

International Financial Markets 34

Giddy

Global Banking: Review I/18

M&A Advisory Services: 2. Role of Buyer's Advisor l l l l l l l l l l l l

Thoroughly review target & subs Advise on probable price range Advise on target's receptiveness Evaluate target's options and anticipate actions Devise tactics Consider rival buyers Recommend financial structure and plan financing Advise on initial approach and follow-up Function as liason Advise on the changing tactical situation Arrange the purchase of shares through a tender offer Help arrange long term financing and asset sales

Copyright ©1999 Ian H. Giddy

International Financial Markets 35

Alliance Capital Trends in the business? l Global business? l Continue “active growth” management? l Competition? l Fees? l

Copyright ©1999 Ian H. Giddy

International Financial Markets 36

Giddy

Global Banking: Review I/19

Portfolio Performance Evaluation How well did the portfolio do? l How do we adjust for risk, to compare different managers? l Why? l

u Risk u Timing u Asset

allocation u Security selection

Copyright ©1999 Ian H. Giddy

International Financial Markets 37

Global Brivate Banking Key Issues to be Addressed Personal, family, business and political/economic context l Personal Investment Portfolio l Personal Retirement Plans l Insurance l Estate Planning l Businesses l

Copyright ©1999 Ian H. Giddy

International Financial Markets 38

Giddy

Global Banking: Review I/20

Private Banking

Individual Solutions Translation by our Specialists

Your Needs

Private Financial Planning

Overview

Account Management

Liquid assets and securities

Real Estate

Relationship-Manager

Partnerships Fine Arts Transfer of Wealth

Real Estate Advice

Structured Finance

Matching your Needs with our Expertise

Art Consulting Estate- and Trust Management

Copyright ©1999 Ian H. Giddy

International Financial Markets 39

Optimizing asset structure and tax minimization opportunities entrepreneurship

estate

retirement

Assets accumulated

financial portfolio

Proceeds from selling the business

real estate investment

?

pension plan health insurance

create Copyright ©1999 Ian H. Giddy

enjoy

share

transfer International Financial Markets 40

Giddy

Global Banking: Review I/21

Global Private Banking Client needs l Provision of services to meet needs l Where does the bank excel? l

l

Add value to the relationship by building from asset management to family financial planning and family-owned investment banking services

Copyright ©1999 Ian H. Giddy

International Financial Markets 41

After Glass-Steagall Insurance

Retail

Universal Banking?

Wholesale

Asset Management Copyright ©1999 Ian H. Giddy

International Financial Markets 42

Giddy

Global Banking: Review I/22

Citigroup Buy? Sell? Hold? l What’s unusual about the deal? l Will the combination produce net positive economic value? l From where? Who will get it? l How long before gains realized? l Risks that the deal will fall through? l

Copyright ©1999 Ian H. Giddy

International Financial Markets 43

Valuation: The Key Inputs l

A publicly traded firm potentially has an infinite life. The value is therefore the present value of cash flows forever. t =∞ CFt Value= ∑ t t =1(1+r)

l

Since we cannot estimate cash flows forever, we estimate cash flows for a “growth period” and then estimate a terminal value, to capture the value at the end of the period: t =N CFt Terminal Value Value= ∑ + t (1+r)N t =1 (1+r)

Copyright ©1999 Ian H. Giddy

International Financial Markets 44

Giddy

Global Banking: Review I/23

Models of Valuation Choose a Cash Flow

Dividends Expected Dividends to Stockholders

Cashflows to Equity

Cashflows to Firm

Net Income

EBIT (1- tax rate) - (1- δ) (Capital Exp. - Deprec’n) - (Capital Exp. - Deprec’n) - Change in Work. Capital - (1- δ) Change in Work. Capital = Free Cash flow to Equity (FCFE) = Free Cash flow to Firm (FCFF) [δ = Debt Ratio]

& A Discount Rate

Cost of Equity

Cost of Capital WACC = ke ( E/ (D+E))

• Basis: The riskier the investment, the greater is the cost of equity. • Models: CAPM: Riskfree Rate + Beta (Risk Premium)

+ kd ( D/(D+E)) kd = Current Borrowing Rate (1-t) E,D: Mkt Val of Equity and Debt

APM: Riskfree Rate + Σ Betaj (Risk Premiumj): n factors & a growth pattern

Stable Growth

Two-Stage Growth g

g

| t

Three-Stage Growth g

High Growth

Stable

| High Growth Transition

Copyright ©1999 Ian H. Giddy

Stable

International Financial Markets 45

Products offered

Client-Arena-Product Matrix: Citigroup

Markets covered Clients served Copyright ©1999 Ian H. Giddy

International Financial Markets 46

Giddy

Global Banking: Review I/24

Complementarity and Cross-Selling Insurance

Retail

Citigroup?

Wholesale

Asset Management Copyright ©1999 Ian H. Giddy

International Financial Markets 47