F I N G Y A A N S E S S I O N 1 : I B D

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Investment BankingShashank More

F I N G Y A A N S E S S I O N 1

and present

F I N G Y A A N S E S S I O N 1 : I B D

Structure of an I-bank

Source: GS Sumer Internship presentation 2006

PUBLIC COMPANIES

Clients Seeking Capital Intermediary Directing / Facilitating the Flow of Capital Investors With Capital

MERCHANTBANKING

• Traditional Private Equity Fund

• Real Estate Private Equity Fund

• Infrastructure Fund

INVESTMENT MANAGEMENT(Private Wealth / Asset Management)

INVESTMENT BANKING

AdvisoryGroups

§ Country Teams

§ Industry Teams

FinancingGroup

§ Debt Product Groups

§ Equity Product Groups

§ Derivatives

MARKETS

• Sales

• Trading &Strategy

• GSS/PrimeBrokerage

• SSG

GLOBAL INVESTMENT RESEARCH

EXECUTIVE OFFICE

Operations, Technology & Finance

*Including Services

Human Capital Management

Legal/Management Compliance Controls

GOVERNMENT & AGENCIES

PRIVATE COMPANIES

INSTITUTIONALINVESTORS

GOVERNMENTS& AGENCIES

RETAIL INVESTORS

Chinese Wall

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Work done by IBD Team Relationship Development Acquisition Strategy IPO Advisory Sale Advice Execution of M&A Debt advisory

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Recent Trend Debt Restructuring to avoid bankruptcy

Global Expansion by Firms

Structured Products that aid fund raising for deals

Participation by Private Equity and VC Firms

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Types of Valuations Market Based (# of shares outstanding * Share Price) Comparables Method (Very common in IPOs)

P/E , P/B , EV/EBITDA, EV/EBIT Sum of the Parts Valuation

Most often method used in M&A today Cash Flow based Valuations

Used in Manufacturing Industries

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FCF based Valuation

• EV (Enterprise Value) = Equity Value + Net Debt• Net Debt = ST and LT loans – Operating Cash – Liquid

and short term investments

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Sector Preparation• Detailed sector analysis of at least 2 sectors• Choose common sectors• Imp. points to think over:

– What has been happening in the sector? – Where is the sector headed? – FDI norms in the sector. – Which stocks in the sector are over valued? Avg P/E– Stocks to buy in the sector? – Which company should come out with an IPO? – What M&A opportunities are there? – Evaluative parameters of the sector. E.g. EV/Reserves, ARPU, Avg. cost per

seat mile

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Deal Preparation

• All the deals of the sector that you are preparing• Major historic deals and all recent deals• Questions

– Why did the deal happen?– Did it make strategic sense?– Value of the deal– Transaction multiples– Was it over valued?– What happened after the deal got executed?

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Key Industry Infrastructure Real Estate Steel Mining Metals (Aluminum) Banks and Financial Services Automobile Telecom Airlines Spirits Business Retail IT & BPO Services

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Steel Industry Major Deals

Mittal Arcelor Tata Corus Essar Steel acquired a Canadian firm

Parameter for Evaluation: EV/Tonne Why did Mittal buy Arcelor? (Image makeover) Did Tata Steel over-pay? What is Tata Steel doing with Corus? Other important issues:

How is raw material sourced?

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Banks & Financial Services Major Deals

Nationalization of RBS India: ICICI BOR Deal

Events out of the credit crisis BASEL III Norms (How is it better than the previous norms?

Should BASEL be made a regulation?)• Parameter: Geographical Spread, CASA: Current Account Savings

Account, Advances Growth, Gross NPA ratio, Net NPA/Net advances, RWA/Total Assets, Cost / Income Ratio, Cost of Funds, NIM-Net Interest Income/(Average Interest Bearing assets),

• Capital Adequacy ratio-need to raise capital• CARMEL Model

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Telecom Major Deals

Idea Cellular - Spice Hutch – Vodafone Unitech-Telenor, Swan- Etisalat NTT Docomo-Tata teleservices Bharti-Zain Deal

Parameters: Revenue=Subscribers x ARPU (ARPU is more for Airtel and Vodafone because old post paid urban customers) Revenue = RPM x MOU Spectrum availability (900 Mhz, 1800 MHz) EVA/No. of subscribers

Common Questions: After the huge price war, where do you see the industry headed? Details of 3G Spectrum allocation. Was it overpriced? Why did Hutch Sell? What was the value that Vodafone saw? What is tax issue that

Vodafone is facing now? What are the tax hiccups they face with the Indian revenue authorities?

Possible mergers is a very relevant question for this sector

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Bharti MTN deal• $24-billion cash-and-share swap deal which will have over 200

million subscribers and $20 billion in annual revenues• Bharti to buy 49% of MTN for $14 billion MTN, to acquire 33%

of Bharti for about $10 billion• Merged entity to be the world’s third-largest mobile phone

operator by subscribers that would straddle Africa, Asia and the Middle East.

• South African government keen on dual listing –Indian laws do not allow dual listing

• GDR issues with voting rights may fall under SEBI takeover code

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Coal and Iron Ore• Indian Power and mining companies scouting for raw

materials in Australia, Indonesia and South Africa• Look at major mines acquired by Indian companies abroad• Shift in industry practice from long term contracts to short

term contracts• Coal India IPO: • Multiples, EV/Reserves EV/Resources

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Airlines Major Deals

Kingfisher – Air Deccan Jet – Air Sahara

Parameters: Average fuel costs, average yield/passenger, average yield/kg, Passenger Load Factor, Number of Departures, revenue/passenger-km

What is the current industry scenario? Further Consolidation? Details regarding Jet & Kingfisher agreement/ Deccan buyback Details of Air India’s sovereign backed debt issue Details regarding changes in the loan structure for airline

industry How much impact does fuel prices make on the industry?

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Others:• Oil and Gas:

– Imperial Energy Corp Plc-ONGC– Reliance petroleum Ltd-Reliance Industries Ltd

• Pharma: Ranbaxy-Daiichi Sankyo, Piramal Abott (Why is pharma the source of many acquisitions?)

• Auto and auto ancillary: JLR-Tata Motors• Infrastructure and Engineering sector• Retail (Recent FDI controversies in Retail. Should the 74%

cap be raises?)• FMCG

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Primary Market

The market for new issue of securities.

Primary market issuers are bodies corporate, mostly companies under the Companies Act, 1956. Other bodies corporate are corporations owned pre-dominantly by the Government.

The main market for new issuances are Public Issues (IPOs and FPOs), Rights Issues and Private Placements.

The main constituents of the primary market are – Investors, Issuers, Instruments and intermediaries.

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Primary Market

Investors are in three categories – Institutional, HNI and Retail.

The main instruments that can be issued are pure equity (ordinary shares), pure debt such as NCDs/long term notes or bonds and convertibles. Convertibles can be debt convertibles such as PCDs/FCDs and equity convertibles such as warrants.

The main intermediaries associated with the primary market are merchant bankers, underwriters and brokers. The service providers are bankers, registrars, depository participants, couriers and printers.

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Institutional Investors

• Also known as Qualified Institutional Buyers (QIBs) as per regulations – – Multilateral, Bilateral and Domestic Financial Institutions

(MFIs/ DFIs)– Foreign Institutional Investors (FIIs)– Unregistered Foreign Investors (FDI Investors)– Foreign Venture Capital Investors (FVCIs)– Domestic Venture Capital Investors (VCs) – Domestic Mutual Funds (MFs)– Commercial Banks

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Non-Institutional Investors

High Networth Investors – These are investors who cannot be categorized either as Institutional or Retail – ◦ Non-banking Financial Companies◦ Capital Market Intermediaries (other than in issues wherein they are acting

in official capacity)◦ Investment companies, trusts, societies and other incorporated bodies◦ Partnership Firms◦ HUFs and Individuals

Retail Investors – ◦ Are those whose application in a public issue does not exceed Rs. 100,000

in value.◦ Any of the above category of investors under the HNI category can be a

retail investor if the application size does not exceed the above limit.

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Methods of Raising Funds

• IPO– Fixed Price Offer – also known as 100%

retail offer– Book Built Offer – price discovery

through book building FPO and Right Issues Qualified Institutional Placement

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Recent trends in Equity Capital Markets

• Large number of divestments• Near zero fees• Standard chartered issued India’s first ever IDR

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Depository Mechanism

Depository - security that represents ownership in a foreign security. Therefore they are negotiable securities in a foreign jurisdiction that represent a company’s publicly traded domestic equity.

An ADR is an American security that is issued through a public offering in the US which requires SEC registration.

A GDR is issued anywhere in the world through a public offer but only through private placement (Rule 144A) in the US.

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Underwriting• Contingent Obligation

• Underwriting Agreement and Commission

• SEBI (Underwriters) Rules 1993

• Devolvement– Tata Motors Rights Issue – JM Financial– Hindalco Right issue

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Fight for League Tables• Major banks are getting mandates at

near zero fees to get top spots in the league tables

• Evaluation criteria used by companies is 70% based on bid and 30% technical based on the presentation

• Coal India IPO total banker’s fees is expected to be around Rs. 12,000/- to be shared among 5 bankers

• Banker’s expense expected to go upto Rs. 25 crores

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Stages of fund raising• VC or seed investment

– Now even VCs have started to approach I-banks for advisory

– Evaluate individual more than company• PE investment

– If company does not wish to list to avoid regulatory compliance

• IPO– To gain visiblity– Have to abide by regulatory compliance– PE firms can invest as PIPE

• Delisting– Market is undervaluing the firm– Change in strategic objectives due to change in control

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Company specific preparation

• Know as much as possible about the bank you are interviewing

• Regions and areas of operation• Sector of expertise (This will give you a point of

discussion in the ppt and interview)• Scale in India• Major deals that it has been a part of

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Stock market specific questions

• Where is the stock market headed?• Are Indian companies overvalued? What is the

average P/E?• Which industries are you bullish on?• Which companies would you invest in?• Do you have a portfolio?• What is your criteria of choosing stocks?

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Preparation stuff• HR Questions

– Why IBD?– Why not Markets / Consulting?– Lifestyle management– Finance personality you are a fan of

• Other resources– Vault Guides– Text Books

• Corporate Finance, Macroeconomics, Valuation– Online News resources

• Bloomberg• http://online.wsj.com/public/page/news-mergers-acquisitions.html• http://www.marketwatch.com• http://money.cnn.com/news/deals/mergers/dealchart.html

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Thank You

Questions ???