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Transcript of IBD Introduction
Brigham Young University
Introduction to Investment Banking
March 7, 2006
Presentation to:
Table of ContentsAgenda
I. Introduction
II. Investment Banking Overview
III. Role of An Analyst
IV. Recruiting Process
V. Investment Banking Interviews
VI. Lehman Brothers Overview
_____________________________________________________________
Appendices
A. Basic Finance / Valuation Workshop
B. Suggested Reading Material / Resources
Introduction
Introduction
We are pleased to be able to speak with you about investment banking, and the steps and considerations involved in landing a job in this industry
Presenters are Brigham Young University alumni and members of Lehman Brother’s BYU recruiting team
– Colin Cropper, Vice President, Global Mergers & Acquisitions (BYU Class of 1996)
– Tyler Willardson, Analyst, Global Technology Mergers & Acquisitions (BYU Class of 2004)
Although we work for Lehman Brothers, this presentation is meant to be generally applicable to all investment banking firms
Introduction
1
Investment Banking Overview
Investment Banking OverviewInvestment Banking Overview
Investment Banking Corporate Structure
Lehman Brothers
PrivateEquity
Investment Banking
FixedIncome Equities
IndustryGroups Sales
ProductGroups Trading
GeographicGroups Research
Investment Management
Asset Management
PrivateInvestment
Management
2
Investment Banking Overview
Capital Markets – Sales, Trading & Research (Equity and Fixed Income)
– Distributes new (primary) security issues to institutional investors/clients
– Transacts blocks of previously issued (secondary) securities through private placement or negotiation
– Maintains markets for securities already distributed
– Provides research on securities, companies, industries and economies
Investment Management Services
– Provides investment and financial advisory services
– Focuses on high net worth individuals and mid-sized institutional investors
Investment Banking
– Provides strategic, financial and valuation advisory services
– Raises capital through the issuance of securities
– Advises companies in merger & acquisition and restructuring transactions
– Offers specialized products and services to meet the needs of corporate and government clients
Investment Banking Overview
Functional Areas of a Typical Investment Bank
3
Investment Banking Overview
Provide strategic, financial and valuation advisory services
– Use industry knowledge, expertise and contacts to advise senior executives and boards of directors
– Identify and assess strategic opportunities
– Interpret market information and enhance shareholder value
– Provide general valuation services (e.g., segment analysis, break-up valuations, fairness opinions)
Raise capital through the issuance of securities
– Act as intermediary between issuers and investors
– Provide access to equity and fixed income capital (e.g., investment grade, bank, high yield, preferred stock)
– Create specialized securities and derivatives (e.g., convertibles, trust preferred securities, warrants)
Investment Banking Overview
What is Investment Banking?
4
Investment Banking Overview
Advise companies in merger & acquisition and restructuring transactions
– Sell-side assignments (represent client in the sale of its company or some of its assets)
– Buy-side assignments (represent potential acquirers and negotiate transactions)
– Hostile take-over defense/advisory
Offer specialized products and services that satisfy the needs of corporate and government clients
– Private equity (e.g., Merchant Banking, Real Estate, Venture Capital, other)
– Privatization
– Monetization
– Asset-backed securities
Investment Banking Overview
What is Investment Banking?
5
Investment Banking OverviewInvestment Banking Overview
Issue of Securities
Client InvestorsSales Force– Equity– Fixed Income
Research– Equity– Fixed Income
Capital Markets– Equity– Fixed Income
Industry Group
Investment Bank
Investment Banking Capital Markets(Sales, Trades & Research)
Investment Advice
Chinese W
all
Ongoing financingdialogue
Specific ExecutionAdvice
6
Investment Banking OverviewInvestment Banking Overview
M&A Transactions
Client Potential M&APartner
M&A Group
Industry Group
Chinese Wall
Research– Equity– Fixed Income
Feedback on possible marketreaction and “story”*
___________________________* Research involvement requires officially bringing analyst over the wall.
Specific Execution Advice
Ongoing Strategic Dialogue
7
Investment Banking Overview
Develop wide range of skills (finance, strategy, marketing, etc.)
– Team and project management
Interact with senior management
– Deal directly with CEO/CFO and senior management
– Transactions undertaken are often high profile, company altering events
Work with highly talented peers
– Learn from those around you
Able to take on responsibility early
– Steep learning curve
Industry expertise or breadth of knowledge across industries
– Can specialize in an industry (e.g., Industrials, Technology, Healthcare, etc.) or a product group (e.g., M&A, Leveraged Finance or High Yield, Debt Capital Markets, Equity Capital Markets, etc.) that covers many industries
Wall Street deal flow
– Long-term growth in industry expected to continue
– Breadth of different types of transactions and experiences
Investment Banking Overview
Reasons to Consider a Career in Investment Banking
8
Investment Banking Overview
Investment Banking vs. Sales, Trading & Research
– More team and project-oriented, longer-term assignments
– More strategic rather than market-oriented
– More exposure to valuation, accounting, tax and corporate finance issues
– Skills more transferable outside the industry
Investment Banking vs. Industry and Management Training Programs
– More training and development along a wide range of general business skills (finance and capital markets; tax, accounting and legal; negotiation; marketing; and how to create transaction opportunities)
– More responsibility at an earlier stage
– Faster career track
– More exposure to senior management and board members
– Greater interaction with leading industry players, better opportunity to develop network
– Greater intensity
Investment Banking Overview
Career Comparisons
9
Investment Banking Overview
Investment Banking vs. Consulting
Like consultants, investment bankers provide strategic advice to their clients
– For example, investment bankers advise clients on how to survive in a changing industry
• Optimize operating and stock price performance by divesting non-core business units
• Capitalize on synergies or unrecognized value by acquiring other companies or assets
However, unlike consultants, investment bankers also provide financial advice to their clients
– Investment bankers present their clients with alternatives to reduce the client’s cost of capital or to help the client obtain a stronger balance sheet
– In simple terms, investment bankers efficiently match capital providers with capital users
While transactions are conceived at a “strategic” level, execution requires detailed analysis and a thorough understanding of the financial, accounting and tax profile of the client
More immediate, visible results to your advice – transactions executed in shorter time period and the “market” provides an immediate opinion on your advice
Investment Banking Overview
Career Comparisons
10
Investment Banking Overview
Investment Banking vs. Start-ups
More infrastructure support
– Training and development
– Substantial resources available to get the job done
More defined career path, although still in an entrepreneurial environment
– Merit-based system
– Team approach
Less career risk
– As with a start-up, you work plenty of hours, but certainty of reward is much greater
Many start-ups look to investment banks for direction
– Opportunity to review and evaluate numerous business plans
Investment Banking Overview
Career Comparisons
11
Role of An Analyst
Role of An AnalystRole of An Analyst
The Hierarchy
Role
Managing Director
SVP /Vice President
Analyst
Years in Industry
Associate
Client RelationshipsStrategic Thinking
Knowledge of IndustryExecution / Expertise
Day to DayExecution
10+
3½ to 10
1 to 3½
2 to 3 year program
12
Role of An Analyst
Industry Coverage
Preparation of presentations (e.g., new business pitches, board books)
Comparable company / transactions analysis
Create company profiles
Perform industry research
Equity / Debt / Convertible Offerings
Assemble marketing materials to win the mandate, perform initial valuation work
Conduct due diligence through site visits, interviews and extensive industry research
Draft prospectus with company management, lawyers and accountants
Prepare documentation for internal commitment committee process
Produce marketing materials for the company’s management team to present to investors to sell the transaction
Develop a target of likely investors and coordinate sales effort with capital markets and sales force
Perform final valuation work, price the offering
Role of An Analyst
13
Role of An Analyst
M&A
Valuation analysis
– Comparable company / transactions analysis
– Discounted cash flow
– LBO analysis
– Sum-of-the-parts
Prepare marketing / presentation materials (e.g., teasers, information memos, board books, committee memos)
Attend management presentations / negotiate transaction terms
Conduct / host due diligence sessions
Draft / edit legal documents (e.g., exclusivity, fairness opinions, engagement letters, purchase agreements)
Work with product specialists (e.g., leveraged finance) to refine capital structure issues
Winning the Mandate
– Develop strategic analysis and rationale for acquisition
– Present a thorough analysis of potential acquisition candidates to client
– Formulate financing and capital structure to support the acquisition
Role of An Analyst
14
Role of An AnalystRole of An Analyst
Lehman Brothers advised Carlyle on the $800 million acquisition of United ComponentsTransaction Overview
On April 25, 2003, The Carlyle Group entered into a definitive agreement to acquire the vehicle replacement parts business of UIS, Inc., renamed United Components, Inc. (“UCI”), for an aggregate purchase price of $800 millionThe transaction was financed through: (i) $415 million in Senior Secured Credit Facilities, which included a $65 million revolving credit facility; (ii) $230 million of Senior Subordinated Notes; and (iii) $260 million of cash equity from The Carlyle GroupLehman Brothers acted as Financial Advisor to The Carlyle Group and as a Joint Book-Running Manager for UCI’s offering of $230 million of 9 3/8% Senior Subordinated Notes due 2013 and Joint Lead Arranger on UCI’s $415 million Senior Secured Credit Facility
Company Overview
UCI is uniquely positioned as one of North America’s largest and most diversified companies servicing the vehicle replacement parts market, or the aftermarketThe Company designs, manufactures, and distributes filtration products, fuel and cooling systems, engine management systems, driveline components, and lighting systems to the automotive, trucking, marine, mining, construction, agricultural and industrial vehicle markets UCI’s customer base consists of the largest and fastest growing companies servicing the aftermarket, including Advance Auto Parts, AutoZone, CARQUEST, Mighty, NAPA and Valvoline
Superior Execution
The $230 million 9 3/8% Senior Notes offering priced at the tight end of price talk and inside pre-roadshow price expectationsThe offering was well oversubscribed and the Notes traded strongly on the break, despite a significant amount of automotive offerings accessing the high yield market at the same timeDemand for the Senior Credit Facilities exceeded supply by more than two times and resulted in a 50 bps reduction to the LIBOR spread
$230,000,000 9 3/8% Senior Subordinated
Notes due 2013
This transaction demonstrated Lehman Brothers’ dedication to an important financial sponsor client
as well as our ability to successfully execute on a short timetable
Closed June 20, 2003
Joint Book-Running Manager
$415,000,000 Senior Credit Facilities
15
Role of An AnalystRole of An Analyst
Transaction Summary
On November 18, 2005, Cisco Systems announced that it would acquire Scientific-Atlanta for $6.9 billion ($5.3 billion enterprise value)
Under terms of the agreement, Cisco will pay $43.00 per share in cash in exchange for each issued and outstanding share of Scientific-Atlanta common stock
The per share consideration represents a 3.7% premium to Scientific-Atlanta’s closing price on November 17, 2005 and a 17.4% premium over Scientific-Atlanta’s 30-day average price. Adjusting for rumors about the sale of the company, the consideration represents a premium of 27.9% over Scientific-Atlanta’s pre-leak closing price on October 27, 2005 and a premium of 22.4% over its pre-leak 30-day average price
Implied transaction multiples based on consensus estimates(1): 12.0x CY05 EBITDA and 10.9x CY06 EBITDA; 26.0x CY05 P/E and 22.8x CY06 P/E
The transaction is subject to shareholder and regulatory approvals
The transaction is expected to close during the first quarter of 2006
___________________________1. Source: IBES consensus estimates as of 11/17/05.
Pending
has agreed to acquire
The undersigned acted as financial advisor to the Board of Directors of Scientific-Atlanta in
this transaction
$6.9 billion
Named one of The Daily Deal’s “Deals of the Year” for 2005
16
Recruiting Process
The Recruiting Process
Get to know the investment banks
– Attend company presentations and Investment Banking Club events
– Talk to former summer analysts
– Network with alumni
Become knowledgeable about the industry and keep up with current business events
– Read The Wall Street Journal, The Financial Times, The Economist, etc.
Refine your resume to highlight the appropriate areas
– Quantitative aptitude
– Leadership
– Initiative
– High academic performance (GPA / ACT or SAT)
– Relevant work experience
Recruiting Process
Timeline of Investment Banking Recruiting for Full-time and Summer Positions
All Year
17
The Recruiting Process
Organize informational interviews
– Be professional and well prepared before contacting people
– Be proactive
Begin preparing for interviews
– ‘Vault Guide to Finance Interviews’ (see www.vault.com)
Send cover letters and resumes (December)
Refine your story and practice mock interviews
– Know the three central questions (Why investment banking? Why this firm? Why you?)
Recruiting Process
Timeline of Investment Banking Recruiting for Summer Positions (Junior Year)
October to January
Interviews
January and February
18
The Recruiting Process
Organize informational interviews
– Be professional and well prepared before contacting people
– Be proactive
Refine your story and practice mock interviews
– Know the three central questions (Why investment banking? Why this firm? Why you?)
Send cover letters and resumes
Recruiting Process
Timeline of Investment Banking Recruiting for Full-time Positions (Senior Year)
August and September
Interviews
September to November
19
The Recruiting Process
Demonstrated excellence (in multiple dimensions)
– High academic performance (GPA / ACT or SAT)
– Leadership
– Self motivator
– Communication skills
– Team skills
Positive attitude / enthusiasm
Presence / professionalism
Commitment to learning
In general, firms are looking for people who have done their homework
– Those who understand the industry and can differentiate among the firms
Recruiting Process
What Investment Banks are Looking For
20
The Recruiting Process
Do you have the characteristics to make a good investment banker? Be prepared to relate anecdotes that illustrate these qualities:
Recruiting Process
Personal Fit
Does your personality fit well with the bank’s culture?
– Team oriented culture vs. one that favors individual achievers
– Meeting and talking to people at the various banks will give you a good idea
– Remember, you will be spending a lot of time with these people so it’s best to find an environment in which you are comfortable
– Hardworking
– Motivated
– Willing to take initiative
– Detail oriented
– Team player
– Aggressive
– Handle stress well / thick skinned
– Quantitative
– Personable
– Flexible
– Sound judgment
– Articulate
21
The Recruiting Process
In addition to obvious geographic and market position characteristics, firms have other differing qualities
Know how the firms are internally structured
– All have some type of industry and product groups
– Every firm has a different approach to group placement
Know how the firms perceive themselves
– What are their strengths, what are recent significant transactions?
– How do they view their own culture?
– What are employee demographics?
Try to come to some conclusion regarding firm culture and personal fit
– Meet as many people as you can
Recruiting Process
Know How to Differentiate Among the Firms, Both for Interviewing and for Your Own Firm Selection Process
22
Investment Banking Interviews
Investment Banking InterviewsInvestment Banking Interviews
Interview Process and Format
Round
1Round
2
In-person / phone interview – usually 30 minutes
Usually 3 or 4 back-to-back interviews with more senior bankers
Short case studies may be presented – focused on both technical skills and management / leadership skills
The Interview Format
Introductory remarks and get to know you (resume review)
Why did you choose your school?
Why Investment Banking? Why this firm?
What is the role of an analyst?
Technical questions
Wrap-up and Q&A
23
Investment Banking Interviews
Be able to provide a succinct answer as to why you want to be an investment banker
– Will be different for each person
– Your resume should tell much of the story
Be familiar with the firm’s history and some of its recent transactions
– Demonstrate a broader understanding of the industry
Be prepared to answer questions such as
– Who else are you talking to? (be specific)
– How would you compare firm A with firm B?
• Strength of businesses
• Culture
– Are you interviewing outside of investment banking? Why?
Most importantly, show that you have done your homework
Investment Banking Interviews
Commitment to the Industry and the Firm
24
Investment Banking Interviews
Finance Accounting
Discounted Cash Flow Analysis
– Free cash flow
– Terminal value
– WACC
Comparable Company Analysis
– Enterprise vs. equity value multiples
Comparable Transaction Analysis
– Enterprise vs. equity value multiples, premium analysis
CAPM
Basic
– Income Statement
– Balance Sheet
– Cash Flow Statement
Intermediate
– Purchase accounting
– Cash EPS
– Deferred taxes
Advanced
– Pension accounting
– Recap accounting
– LBO accounting
Technical QuestionsInvestment Banking Interviews
Before the interview, you should be familiar and comfortable with the following concepts:
25
Investment Banking Interviews
Resume
– Ensure your resume highlights the key competencies required by investment banks
– Include only what you are comfortable talking about and know it by heart
– Be able to expand upon each bullet point
– Be able to clearly explain why you made certain choices (e.g., college, major, internships)
– Don’t overlook the additional information section – it can provide good insight into who you are
Answering tough or unexpected questions
– Take a moment to think about your answer – a well thought out answer is better than a fast answer
– Be direct in your answer and stand by your reasoning
– Remain composed and balanced
Personal impact is important
– Body language, composure, volume
– Always look the interviewer in the eye and use his / her name
– Relax and try to learn from the interview
Investment Banking Interviews
Interviewing Tips
26
Lehman Brothers Overview
Our people are our greatest asset. Lehman Brothers’ professionals are driven to challenge themselves and take an active role in shaping their careers. They are deeply committed to our business philosophy and motivated to contribute to the Firm’s clients early in their careers
We operate on a “One Firm” philosophy that emphasizes integration and teamwork across all businesses worldwide. Working together as “One Firm” enables us to deliver a full range of products and services to our clients in a seamless manner
Lehman Brothers’ rich history and tradition provide a strong foundation as we continue to expand our franchise with a focus on high-margin business areas (e.g., M&A, equities, leveraged finance and private equity investing)
Our strategy is client-driven. Providing the highest level of service to our clients is the core of our business strategy
Founded in 1850, Lehman Brothers is one of Wall Street’s premier investment banking firms. Our market leadership and global presence provide us with access to the most significant issuers and investors around the globe
Strategy
Future
Culture
People
Franchise
Lehman Brothers OverviewWho We Are
Lehman Brothers Overview
27
5/2/94 4/18/96 4/3/98 3/22/00 3/8/02 2/24/04 2/10/060
5,000
10,000
15,000
20,000
25,000
Price Volume
Volume Traded Lehman Brothers Holdings Inc.
$0
$25
$50
$75
$100
$125
$150
$7,707
$11,576
$14,176
$0
$4,000
$8,000
$12,000
$16,000
2000 2004 2005
$mm
$1,775
$2,369
$3,260
$0
$1,000
$2,000
$3,000
$4,000
2000 2004 2005
$mm
___________________________1. Source: Company press releases.2. Employee base reflects acquisition of Neuberger Berman in 2003.
Lehman Brothers Overview
Lehman Brothers: Share Price Performance (1994-Current)
Strong Momentum (1)
CAGR=13% CAGR=13%
Net Revenue Net Income
Recent Accolades“Best Investment Bank” “...Lehman Brothers has cemented its position as a top-tier full-service investment bank, one that is as confident as an equity house and M&A adviser as it has been in fixed income”
“...one of the purest investment banks, has become more formidable in almost every market it contests”“…Lehman Brothers’ Success Illustrates the Benefits of Strong Management”
“Lehman Brothers: ‘Big-Shot’ Bank of the Year for Role in Cingular, Sprint and Kmart Transactions”
Named IFR U.S. Equity House and Structured Equity House of the year in 2005
Lehman Brothers – Best In Class Independent Investment Bank
(shares in 000s)
Percentage Ownership Employee Base
Employee Base and Ownership (2)
0%
10%
20%
30%
40%
1994 20050
7,000
14,000
21,000
28,000
Employee Base Employee Ownership
28
Lehman Brothers’ Premier Global Finance FranchiseLehman Brothers’ equity and equity-linked franchise continues to garner recognition
Performance Recognition
“From the integration of debt and equity capital markets, to the inclusion of derivatives, tax and accounting specialists, Lehman
Brothers has been a trailblazer in shaping the modern form of capital markets in the U.S.”
- International Financing Review, December 2005
2005 U.S. Equity House of the Year
Leading Equity Sales and Trading Platform
Lehman Brothers Overview
2005 U.S. Structured Equity House of the Year
“From … sales and trading, and ultimately to capital markets solutions, the bank’s measured approach
was a valuable resource in 2005...”
- International Financing Review, December 2005
Leadership Across Products(1)
2005 Institutional Sales
#1#2
2005 NYSE Trading
#1#1
2005 NASDAQ Trading
#1#1
IPOs Common Stock Convertibles
Rank Bookrunner
2005 Market Share
1 Goldman Sachs 15.4%
2 Citigroup 13.5%
3 Lehman Brothers 11.7%
4 JP Morgan 10.7%
5 Morgan Stanley 10.4%
Rank Bookrunner
2005 Market Share
1 Morgan Stanley 12.5%
2 Citigroup 12.5%
3 Lehman Brothers 10.7%
4 Goldman Sachs 10.6%
5 Merrill Lynch 9.0%
Rank Bookrunner
2005 Market Share
1 Citigroup 11.3%
2 Goldman Sachs 10.9%
3 Morgan Stanley 10.2%
4 Lehman Brothers 9.4%
5 Credit Suisse 8.2%
___________________________1. Source: Bloomberg.
29
M&A Announced League TablesLehman Brothers Overview
Global Announced M&A Through March 5, 2006
Announced DealsValue ($bil) Rank Market
ShareNumber of
Deals
Lehman Brothers 247.4 1 41% 41Goldman Sachs & Co 247.1 2 41% 52JP Morgan 228.1 3 38% 62Citigroup 219.0 4 37% 39Merrill Lynch 203.1 5 34% 50BNP Paribas SA 144.5 6 24% 19UBS 139.6 7 23% 53Deutsche Bank AG 116.8 8 20% 33Morgan Stanley 115.6 9 19% 29Evercore Partners 99.9 10 17% 7
Industry Total 598.8 100% 4,717
30
Top 20 Global M&A Announced Transactions in 2006
___________________________Note: Shading indicates transactions in which Lehman Brothers acted as Financial Advisor. Lehman clients are in bold.Source: Thomson / SDC and Lehman Brothers. Through 3/5/06.
Date AnnouncedDeal Size
($bil) Target Acquiror Region Industry
1 3/5/2006 $82.1 BellSouth Corp AT&T Americas Telecomunications
2 2/21/2006 56.7 Endesa SA E ON AG Europe Natural Resources
3 2/25/2006 44.8 Gaz de France Suez SA Europe Natural Resources
4 1/27/2006 23.8 Arcelor SA Mittal Steel Co NV Europe Industrial
5 2/6/2006 17.5 Portugal Telecom SGPS SA Sonae SGPS SA Europe Telecomunications
6 1/23/2006 17.4 Albertsons Inc Investor Group Americas Consumer/Retail
7 1/25/2006 14.9 BOC Group PLC Linde AG Europe Industrial
8 1/16/2006 12.5 VNU NV Investor Group Europe Media
9 2/27/2006 11.3 KeySpan Corp National Grid PLC Americas Natural Resources
10 2/2/2006 10.8 Banca Nazionale del Lavoro SpA BNP Paribas SA Europe FIG
11 2/3/2006 9.6 KT&G Corp Investor Group Asia Consumer/Retail
12 2/15/2006 9.5 Merrill Lynch Invest Managers BlackRock Inc Americas Financial Institutions
13 2/21/2006 6.2 Australian Gas Light Co Alinta Ltd Asia Natural Resources
14 1/24/2006 6.1 Pixar Walt Disney Americas Media
15 1/31/2006 5.8 TIM Celular SA TIM Participacoes SA Americas Telecomunications
16 2/13/2006 5.5 ZAO Kyivstar GSM Vimpelcom OJSC Europe Telecomunications
17 2/6/2006 5.4 Westinghouse Electric Co LLC Toshiba Corp Americas Technology
18 1/27/2006 5.2 Dofasco Inc ThyssenKrupp AG Americas Industrial
19 1/3/2006 5.0 Engelhard Corp BASF AG Americas Industrial
20 1/10/2006 4.7 GTECH Holdings Lottomatica SpA Americas Technology
Lehman Brothers Overview
31
Lehman Brothers Overview
Duration
– 8-week program beginning on two different start dates
Group Placement
– Driven by Summer Analyst preference and group requirements
Training
– Training for the summer is one week and includes an accounting and finance overview, comparable company and transaction analysis, financial modeling and use of various software programs
– Helps you get to know the firm and review basic tasks you will be asked to perform over the summer
– Presentations by the industry and product groups to raise your interest and awareness about what they do
Lehman Brothers Overview
Investment Banking Summer Analyst Program
32
Appendices
Basic Finance / Valuation Workshop
Valuation – Introduction
The purpose of this workshop is to provide you with Investment Banking finance and valuation basics
– Methodologies
– Contexts for valuation work
– Comparable Company Analysis
– Comparable Transaction Analysis
– Discounted Cash Flow
– Leveraged Buyout Analysis
Basic Finance / Valuation Workshop
33
Valuation – Methodologies
Estimated Range ofValue for Target
A public market valuation assigned on the basis of certain key ratios, or “market trading multiples” of Net Income, EBIT, EBITDA or Sales for comparable public companies
Comparable Company Analysis (“Comps”)
Basic Finance / Valuation Workshop
A control transaction valuation assigned on the basis of multiples of Net Income, EBIT, EBITDA or Sales for comparable companies which have recently been acquired. If the target is public, the premium paid is also relevant
Comparable Transaction Analysis (“Deals”)
Value that a financial buyer would pay based upon the maximum amount of debt appropriate for the target company and the required return on private equity funds
Leveraged Buyout Analysis (“LBO”)
The value of future free cash flows discounted to the present at an appropriate discount rate or the weighted average cost of capital
Discounted Cash Flow Analysis (“DCF”)
34
Illustrative Football Field AnalysisBasic Finance / Valuation Workshop
$22.50
$24.00
$22.00
$20.00
$24.50
$27.00
$26.00
$24.00
$15 $20 $25 $30 $35
LBO Analysis
DCF Analysis
Transaction Comparables
Trading Comparables
35
Deciding whether a company is undervalued and should repurchase shares
Positioning and timing the sale of client securities to maximize proceeds
Determining the potential public market value of a private company
Advising a client on how to best and most fairly reallocate the value of the company to creditors and shareholders
Advising the shareholders as to the fairness, from a financial point of view, of a price to be paid or received
Advising a client on how much should be received as consideration for the sale of stock or assets
Advising a client on what price to pay
Sell-Side M&A
Fairness Opinion
Restructuring
Add-on Financing
Buy-Side M&A
Initial Public Offering
Contexts for Valuation WorkBasic Finance / Valuation Workshop
Share Repurchase
36
Comparable Company AnalysisComparable Company Analysis
Basic Finance / Valuation Workshop
The Comparable Company Analysis is one of several techniques used to determine a range of values for a specific company, the “target” company
The equity of fundamentally similar, or “comparable” companies tends to be valued on a relatively consistent basis by the public markets
– Broadly speaking, if Widget Company A competes in the same industry as Widget Company B, using a similar business model, the equity markets are likely to value the two businesses in a relatively consistent manner
By analyzing certain key ratios and operating data for each of the companies in the comparable universe, it is possible to estimate how the public equity markets would value the target. Typical benchmarks include multiples of net income and book value (equity value multiples) and multiples of Sales, EBITDA and EBIT (enterprise value multiples).
The Comparable Company Analysis is, by its nature, based on an analysis of currently public companies. Accordingly, the valuations received by the comparable universe do not typically reflect:
– The premium a buyer must pay for control of a company in an M&A transaction; or
– The discount the market may place on shares which are newly introduced in an initial public offering or the discount that is appropriate for a private company
37
Comparable Company AnalysisIdentifying Your Comparable Company Universe
Basic Finance / Valuation Workshop
A comparable peer group should possess the same fundamental business and financial attributes such that their public trading values represent a meaningful proxy from which to determine a value range for the target. Relevant attributes include: – Macroeconomic issues– Industry group– Business model– Geographic location– Business mix (products, markets, distribution channels)
In some cases it will be necessary to limit the universe to a smaller, more focused group of comparables. Factors to consider include:– Size (sales, value)– Operating history/philosophy
As a practical matter, in many cases a broad universe of directly comparable companies will not exist. In these situations the parameters of comparability will be widened to assemble a group of companies with sufficiently similar, albeit not ideal, characteristics
– Customers– Operations (production, processes, critical
inputs/components)– Financial characteristics (leverage, historical and
future growth, margins)
– Growth (organic vs. acquisitions)– Profitability– Ownership structure
Refining Your Comparable Company Universe
Expanding the View of Comparability
38
Comparable Transaction AnalysisComparable Transaction Analysis
Basic Finance / Valuation Workshop
The “Comparable Transaction Analysis” is based on the premise that the value of a company or an asset can be estimated by analyzing the prices paid by purchasers of ownership interests in reported comparable transactions
The analysis provides a history of selected transactions in one particular industry where acquired companies have relatively similar characteristics in terms of economic drivers such as business mix, size, customer base, distribution channels, industry dynamics, etc.
The purpose of the comparable transaction analysis is to derive pricing benchmarks based on the selected transactions. It compares the transaction values paid for selected companies to the respective companies’ financial results to determine transaction multiples. Typical benchmarks include multiples of net income and book value (equity value multiples) and multiples of Sales, EBITDA and EBIT (enterprise value multiples)
Transaction multiples define the prices that acquirers are willing to pay for companies in that industry in the context of a deal. By applying transaction multiples to financial results of the company being analyzed, it is possible to determine a range of value
In contrast to the “Comparable Company Analysis,” this approach is generally based upon multiples paid for control of a company (i.e., includes control premium)
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Comparable Transaction AnalysisImportance of Situational Understanding
Basic Finance / Valuation Workshop
A good understanding of the background and factors surrounding a transaction is necessary to extract meaningful conclusions from the analysis. In particular, specific deal circumstances are likely to have an impact on pricespaid, including:
– Nature of transaction (minority stake vs. control, incidence of other contractual arrangements, auction vs. negotiated sale)
– Attractiveness of the target company
– Relative needs of seller vs. buyer (i.e., a distressed seller may get a lower price)
– Identity of acquirer (strategic vs. financial, foreign vs. domestic)
– Underlying market conditions (state of M&A, equity, financing markets)
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Discounted Cash FlowDiscounted Cash Flow
Basic Finance / Valuation Workshop
The DCF analysis is based on the premise that ownership is essentially a claim on the cash flows generated by a firm’s assets
The method entails estimating the free cash flows (“FCF”) available to all investors (equity and debt holders) and discounting these cash flows back to the present using an appropriate cost of capital to arrive at a present value forthe assets
These assets may be financed in a multitude of different ways, but because the returns generated by these assets are available to all providers of capital, and to avoid distortions caused by a particular capital structure, the cash flows should be considered on an unlevered basis (i.e., free from financing considerations)
The company’s operational value (prior to adjustments for non-operating assets) can be broken down into two components:
– Present Value of free cash flows up to cut point for terminal (or continuing) value calculation;
– Present Value of terminal value
– Company value = PV(FCF) = ∑ FCFt / (1+r)t + TV / (1+r)n
The discount rate r is the Weighted Average Cost of Capital (“WACC”), which reflects the required returns by both debt and equity investors for investments with the same risk profile
The company’s operational value must be adjusted for non operating assets such as investments in unrelated subsidiaries, discontinued operations, hidden assets, contingent liabilities, etc.
The company’s equity value is obtained by deducting the value of the Company’s financial debt and other non-working capital debt
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Discounted Cash FlowDCF Process
Basic Finance / Valuation Workshop
Forecast Unlevered Free Cash Flows
Choose Discount Rate
Calculate Terminal Value
Discount FCFs and Terminal Value
Determine Firm Value
Subtract Net Debt and Adjust for Non-OperatingAssets and Liabilities
Determine Equity Value
Review Results
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Leveraged Buyout AnalysisWhat is an LBO?
Basic Finance / Valuation Workshop
A leveraged buyout (“LBO”) is an acquisition of a company in which a financial sponsor (e.g., private investor, LBO fund) invests a relatively small amount of equity (compared to the total purchase price) and uses leverage (debt or other source of financing) to fund the remainder of the consideration
– Debt is repaid with cash flows of the business acquired (conceptually similar to buying a house, renting it out and using the rent to pay the mortgage)
LBOs are used in numerous types of transactions and corporate finance situations, including:
– Take-privates, in which a public company goes from being owned and traded by a large number of public shareholders to one that is privately held by a small group of investors
– Buyouts of a subsidiary or division of a larger company by a group of investors
– Management buyouts, in which the acquisition is done by the company’s existing management group, often with the backing of a financial sponsor
– Recapitalizations (i.e., re-leveraging the company and paying a large dividend)
– Leveraged acquisitions by corporations
– JV LBOs, in which corporations and financial sponsors partner together to acquire a business in a leveraged transaction (corporations sometimes contribute assets); in most instances the JV structure permits the debt to be off-balance sheet for the corporation
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Leveraged Buyout AnalysisLeveraged Buyout Analysis
Basic Finance / Valuation Workshop
LBO Analysis is a valuation methodology that provides an indication of:
– The maximum price that a financial investor would be willing to pay for a business on a stand-alone basis (i.e., without any strategic value or synergies)
– The credit statistics and potential equity returns for the business at a given price
LBO Analysis is used for a number of purposes in various transactions
– Estimates the amount a financial buyer would be willing to pay for a business, helps to identify potential LBO opportunities
– Estimates the potential equity returns to the business, and provides sensitivity of the returns to growth, leverage, and valuation multiple expansion
– Highlights the effects of adding leverage to the business (e.g., recapitalization, take-private)
– Illustrates the debt capacity of business (based both on company specific credit criteria and capital market criteria)
In LBO Analysis, there are several assumption areas that need to be addressed (Note: it is often easiest to approach them in the following order)
– Develop operating projections
– Determine maximum leverage and capital structure parameters
– Determine the expected method of exit and most likely (and realistic) exit valuation multiples
– Establish return parameters
– Solve for the maximum price within the given criteria
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Suggested Reading Material / Resources
Covers technology industry finance. A good resource if you are interested in investment banking in this area
This daily publication covers developments within or impacting the investment banking industry
A leading industry publication which covers what is going on at leading firms in both fixed income, derivatives, currencies, commodities and equities
This magazine covers many recent trends on Wall Street and lists recent security issues
A leading global newspaper covering business and specialist financial information
The most widely read business periodical in the world
Financial Times
Investment DealersDigest
Financial Trader
Red Herring
Wall Street Journal
Daily Deal
Magazines and NewspapersSuggested Reading Material / Resources
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Tom Copeland, Tim Koller and Jack Murrin. Potent strategies for measuring and enhancing the bottom-line value of any company. How to do a valuation
Frank Fabozzi. The bible for any job involving fixed income sales, trading, underwriting or derivatives
Peter Bernstein. Modern financial theory
Aswath Damodaran
Capital Ideas
Handbook ofFixed Income
Valuation: Measuring and Managing the Value of Companies
Applied Corp. Finance: A User’s Manual
Books – Corporate Finance RelatedSuggested Reading Material / Resources
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