Page 208 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 14: Merchant Banking

Their knowledge in international finances make merchant banks specialists in dealing with Notes
multinational corporations.

14.2 Role

In the past the role of the merchant banker was to arrange the necessary capital and ensure that
the transaction would be implemented i.e. a financial intermediary facilitating the flow of
capital among the concerned parties. But today, a merchant banker plays multiple roles which
include those of an entrepreneur, a management advisor, an investment banker, and a transaction
broker.
This shows that the breadth and depth of a merchant bankers activity has changed over the
years.
A merchant bank deals with the commercial banking needs of international finance, long term
company loans, and stock underwriting. A merchant bank does not have retail offices where one
can go and open a savings or checking account. A merchant bank is sometimes said to be a
wholesale bank, or in the business of wholesale banking. This is because merchant banks tend to
deal primarily with other merchant banks and other large financial institutions.
The most familiar role of the merchant bank is stock underwriting. A large company that wishes
to raise money from investors through the stock market can hire a merchant bank to implement
and underwrite the process. The merchant bank determines the number of stocks to be issued,
the price at which the stock will be issued, and the timing of the release of this new stock. The
merchant bank files all the paperwork required with the various market authorities, and is also
frequently responsible for marketing the new stock, though this may be a joint effort with the
company and managed by the merchant bank. For really large stock offerings, several merchant
banks may work together, with one being the lead underwriter.
Merchant bankers offer customised solutions to solve the financial problems of their clients.
Advice is sought in areas of financial structuring. Merchant bankers study the working capital
practices that exist within the company and suggest alternative policies. They also advise the
company on rehabilitation and turnaround strategies, which would help companies to recover
from their current position. They also provide advice on appropriate risk management strategies
like hedging strategies.
These financial intermediaries arrange loans, for their clients, by analysing their cash flow
pattern, so that the terms of borrowing meet the clients cash requirements. They also offer
assistance in loan documentation procedures.
Merchant bankers assist the management of the client company to successfully restructure various
activities, which include mergers and acquisitions, divestitures, management buyouts, joint
venture among others. They also play a lead role to help companies achieve the objectives of
these restructuring strategies, the merchant banker participates in different activities at various
stages which include understanding the objectives behind the strategy (objectives could be
either to obtain financial, marketing, or production benefits), and help in searching for the right
partner in the strategic decision and financial valuation of the proposal.

14.3 Functions

Merchant Banks are popularly known as "issuing and accepting houses". They offer a package of
financial services. Unlike in the past, their activities are now primarily non-fund based. One of
the basic requirements of merchant banks is highly professional staff with skills and worldwide
contacts. The basic function of merchant banks is marketing corporate and other securities, that
is guaranteeing sales and distribution of securities.

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