There is substantial overlap between the worlds of corporate finance and investment banking. Most elements of corporate finance are used in the daily operations of investment banks. The general field of corporate finance relates to optimizing a company’s capital structure, primarily via continual analysis of the financial securities that the company uses to fund its operations. Investment banks use the same models and theories and apply their knowledge and experience to help client companies maximize returns based on corporate finance decision-making.
Most of the basic principles of corporate finance revolve around fulfilling three basic functions: capital investing, financing and capital structure issues. Investing decisions involve financial modeling demonstrating the viability of potential investments, both with respect to specific projects and to bigger-picture investments such as acquisitions. Financing decisions involve analyzing various factors to determine whether to use debt or equity financing and to what extent. Capital structure optimization refers to the company’s overall use of debt and equity financing but also practices such as dividend issuances, stock buybacks and mergers and acquisitions. Investment bankers are well-versed in all of these matters.
Investment banking is extremely competitive and there are far more positions in general corporate finance than in investment banking, largely because investment banking represents one niche area within corporate finance. Investment banks typically recruit the brightest prospects from Ivy League schools, as well and medical doctors and engineers who work more effectively with biopharmaceutical and high-technology clients. Investment banking is viewed as an elite business activity, although competition from hedge funds, private equity firms and Silicon Valley has caused investment banking to lose some of its luster.
Corporate finance involves financial analysis, forecasting and planning, business development and mergers and acquisitions. Professionals in corporate finance and in investment banking may both expect to generate models such as discounted cash flow analyses, capital asset pricing models, comparable security analyses and other complex financial analyses. Corporate finance involves more use of net present value analyses to make cost-benefit decisions regarding specific projects a company is considering undertaking. Investment bankers employ these models for underwriting securities offerings for clients, analyzing tender offers and providing fairness opinions on pending acquisitions. Most large private companies have merger and acquisition departments that identify and value targets for acquisitions, which is extremely similar to the investment banking function.
Investment banking services referred to as corporate finance work consist of merger and acquisition advisory work. This includes issuing fairness opinions, advising on buy- and sell-side transactions and leveraged buyouts, and advising activist shareholders and companies defending themselves from hostile takeovers. Investment bankers work closely with members of senior management in identifying targets for purchases, or potential suitors, structuring and negotiating transactions and arranging financing to fund merger-related activities. The largest Wall Street firms make use of top sell-side analysts when pitching this type of work. These are the analysts that issue buy, sell and hold recommendations and that have high levels of industry expertise.