Want to know what are merchant banks and how do they work? Discover what merchant banks are and how they operate in this informative guide.
Merchant
banks are premium
financing institutions that specialize in providing services to businesses.
They are regarded as the financial intermediaries between a commercial bank and
its business clients in the United
States. Leading merchant banks in the United States include J.P.
Morgan (JPM), Goldman Sachs (GS), merchant services bank of America and
Citigroup (C).
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Merchant Banks in the United States
Merchant banks are premium
financing institutions that specialize in international trade and provide various
services to multinational corporations. Normally, the service rendered
by merchant banks in the United States include issue
management, portfolio management, credit syndication, acceptance credit,
counsel on mergers and acquisitions, insurance, issuing advisories, etc. Their services are not meant for
general public, but for corporate clients and wealthy individuals. They collect
fees for rendering the services to their well-to-do clients. Though they work
like investment banks, merchant banks
focus more on services that are tailor-made for the international clients based
in the United States like
multinational companies and wealthy individuals who do businesses in more than
one country.
Merchant Bank Services in the United States
Merchant banks provide different services, including
financial and advisory services, to help the corporate clients and wealthy
high-net-worth individuals who conduct their businesses. The fees determined
the banks depend on the volume of the work done for their clients.
- Raising Fund: Merchant banks
may work with the clients who are not large enough to raise funds on their own
from public through Initial Public Offering (IPO) in the United States stock exchange. They are classified as non-depository
premium financing institutions that
provide capital to companies in the form of share ownership. They are
considered as the fund raisers for the companies that do not have means to
mobilize fund to finance their businesses. The merchant bank in the United States also provides advice on
corporate matters to the firms in which it invests.
2. Financing and Loans: Merchant
banks do the international financing and underwriting, which include real
estate, trade financing and foreign investment. If required, they also issue
Letter of Credit (LoC) on the behalf of their clients who are investing in another
country. These premium financing
institutions in the United States help
the corporate clients to issue securities for financing through private
investment, which requires less regulatory disclosure. They later sell these
securities to sophisticated investors to raise more money for the clients.
banks finance business operations and manage currency exchanges for the
companies that work in different countries. When a company plans to make
purchase in a foreign country, it seeks the help of a premium financing bank to transfer the funds required to make the
purchase using letter of credit.
- Advisories: The merchant banks
provide corporate advisory services such as Making of Public Issue & Issue
Management, Project Counseling & Pre-investment Studies, Corporate
Restructuring, Capital Structuring & Restructuring, Loan Syndication, and
Liaison with Foreign Collaborators and making preparations for Joint Ventures,
etc. These corporate advisories help the United
States-based business enterprises to run more efficiently and achieve maximum
potential while diversifying their portfolios. The advisories issued by the premium financing merchant bank also
help the clients to effectively manage their financial and other resources. - Underwriting: The merchant bank’s
underwriting service involves analyzing the risk of buying securities from an
issuer and selling them to suitable investors to earn a profit for the client
companies or businesses. These services are crucial for the companies that go
for Initial Public Offerings in the United
State stock exchanges. - Merger and Acquisitions (M & A): Merchant
Banks also play a crucial role in merger and acquisitions as financial
intermediaries. Working as financial intermediaries, the premium financing institutions advise both sellers and buyers on
deal structure, its evaluation, and other aspects of this transaction. - Private Equity: Merchant
bankers invest fund in private companies with the help of private equity
funds. This service involves buying a stake in a company and working with its
top management to improve its operations. These premium financing bankers eventually sell the stake in the company
after its refurbishment for a profit. - Venture Capital: These premium
financing banks also invest in startups through venture capital funds. This activity involves taking more risks in
exchange for large returns later after the startups establish themselves in
their chosen niche. - Wealth Management: This service is given by merchant banks to high-net-worth-individuals and their families in
the United States for a fee. It
includes tax planning, investment management, estate planning, and other
services. - Corporate
Finance: Merchant banks may offer debt and equity financing, risk
restructuring, and risk management to help its corporate clients. - Project
Counseling: Merchant
banks prepare projects, decide the financing patterns to fund the cost,
analyze the project report with the financial institutions on behalf of the
corporate clients. The premium financing
institution also helps the clients to fill up the applications with required
information to obtain the requisite approval from the financial institutions
after getting the United States government
approval. - Portfolio
Management:
Portfolio means the investment in different types of securities such as shares,
bonds, or debentures issued by different companies. The merchant bankers help the businesses to choose proper combination
of these securities to maximize returns with minimum risks. - Restructuring
Strategies: These premium financing banks help the
clients to successfully restructure different activities, such as mergers,
acquisitions and takeovers by acting as the intermediaries for negotiations
with other companies.
Working of Merchant Banks in the United States
Merchant Bankers offer a combination of financial and
consultancy services to its corporate clients. Its consultancy services are on
marketing, financial, legal and managerial matters. Basically, the premium financing institution helps a
business entity to start a business by raising funds for its business
operations, provides guidance to expand, diversity, and modernize the business.
If requested by the client, it helps in restructuring the business with intend
of improving its profitability and efficiency of its resource usage. The United States-based banker helps sick
units to revive their fortunes by the way of financing and giving economic
knowhow. The startups get the financial assistance, expert mentoring, and
registration services from this type of bank. It also helps the companies to buy
and sell shares at the stock exchange. With the prior consent, they privately
place the corporate securities in front of a preferred group of investors or
institutions to help getting maximum corpus for expanding or diversifying the
business.
The merchant banker would enter into a
negotiation with the owners of the company that is going to be taken over by
its client based in the United States.
It strikes a deal with the prospective franchisees that are going to run the
client’s business on behalf of its client. The client business then approaches
the merchant banker to get the financial source and advice from it before
proceeding for the deal. The premium
financing banker will then suggest the type of financing required to fund
the project and ask the prospective franchisees to pay the capital to the
client company.
When a company based
in the United States wants to buy a
corporate entity in France, it would hire the services of the merchant banker
for getting an expert advice on the way to structure the transaction, find
finances, and do the underwriting. Similarly, the sellers in France would
receive a Letter of Credit issued by the merchant
bank hired by the United States-based
company as the payment for purchase. The premium
financing institution also helps the United
States-based company to work through the regulatory and legal issues
required to do business in France. This is true for the corporate entities that
want to take over a foreign company as part of a deal.
Comparison between Merchant Banks and
Commercial Banks in the United States
There are certain
subtle differences between the merchant
banks and commercial banks working in the United
States. The key differences are mentioned below in the form of a table for
the benefit of the readers.
|
|
Merchant Bank |
Commercial Bank |
|
1. 1. |
The bank provides a wide range of services to |
The bank provides basic banking functions to |
|
2. 2. |
The financial institution is accessible to |
The financial institution is accessible to |
|
3. 3. |
The primary earning is from fees that are |
The primary earning is from the interest of |
|
4. 4. |
The economic impact is on large corporations |
The economic impact is on the economy of a |
|
5. 5. |
The risk exposure is more as it deals with |
The risk exposure for the customers is |
|
6. 6. |
The nature of loan given by it is |
The nature of the loan given by it is |
|
7. 7. |
The role of merchant bank is that of |
The role of a commercial bank is that of |
Benefits for the Corporate Clients
The merchant banks offer access to capital markets, expertise in
dealing with financial products and services, and valuable advice on business
transactions. The premium financing
banks can provide advice on mergers and acquisitions, restructuring, risk
assessment, and project financing. They can also offer a wide range of services,
such as underwriting, issuing of securities, asset management, and portfolio
management to help the clients in the United
States to manage their businesses. They have a network of contacts spread
over the globe that they can use to help their clients find the appropriate
investing opportunities. The financial institutions provide advice on the
transactions and tailor-make their services for their clients on a wide range
of financial matters, from capital-raising to foreign exchange risk management.
