Investment Banking University of Colorado Rob Kaufman November 3, 2004.

Investment Banking

University of Colorado

Rob Kaufman

November 3, 2004

Investment Banking Agenda

• Overview of IB industry

• Perspectives on market risk

• Valuation perspective

• Case study: .com valuation

• Case study: Sell-side M&A

• Q&A

RWK Bio

Rob Kaufman• BA in Economics, Yale University (1981-85)• International Capital Markets, Goldman Sachs

(85-89)• MBA in finance, Harvard Business School (1989-

91)• Partner, Sierra International Partners (1991-

1995)• Partner, The Wallach Company (1995-1999)• CFO and CEO, netLibrary, Inc. (1999-2002)• Partner, Q Advisors LLC (2002-present)

Sales/Trading

• Public company research

• Stock brokers

• Retail/institutional sales coverage

Corp. Finance

• Corporate and municipal issuance of equity/debt

• Capital markets

Investment Banking

• Private placements

• Mergers and acquisitions

• LBOs, MBOs

Hybrid Securities

Overview of the I-Banking Industry







• Q&A

An attempt to define the expected return which

corresponds to investments at various levels of risk.

Perspectives on market risk

• The Risk/Reward Frontier• Required Rates of Return• Developing an appropriate

discount rate for an investment decision

Risk/Reward Relationship

An attempt to define the expected return which to corresponds investments at various levels of

risk

Risk/Reward Frontier

Low RISK

U.S. T-Bills

Low RISK High

U.S. T-Bills Seed-Stage VC


An attempt to define the expected return which to corresponds investments at various levels of

risk

Seed Stage Venture CapitalStart-up Venture CapitalEarly Stage Venture CapitalPrivate EquityMezzanine Debt“Junk” BondsSenior Debt Small Capitalization Equities Large Capitalization Equities U.S. T-Bills

High

RISK

Low


Expected Annual Returns

50%+40-

50%35-

45%25-

35%18-

25%14-

20%8-12%

14-18%10-

14%4-5 %

Seed Stage Venture CapitalStart-up Venture CapitalEarly Stage Venture CapitalPrivate EquityMezzanine Debt“Junk” BondsSenior Debt Small Capitalization Equities Large Capitalization Equities U.S. T-Bills

High

RISK

Low

Risk

Return

• Venture Capital

• U.S. T-Bills

• Large Cap Equities

• Small Cap Equities

• Senior Debt

• Mezzanine Debt

• Private Equity

Required Rates of Return







• Q&A

Valuation perspective

Why is valuation important?

• Fundamental to all boutique investment

banking work

• Private placements require premoney

valuation

• M&A work requires relative value of

acquirer/acquiree

• Financing of transactions requires

fundamental understanding of value

Methodologies• Public Comparable Analysis

• Control Transactions

• Discounted Cash Flow Analysis

Valuation perspective

Public Comparable Analysis

• Select publicly-traded comparable companies

• Analyze financial and operating performance

• Derive valuation multiples for minority positionbased on performance of comparables

• Adjust for size/liquidity discount and control premium

Control Transactions

• Collect historical transactions in SIC Codes

• Compute financial performance of targets

• Derive valuation multiples from disclosed information (multiple of sales, EBIT, EBITDA, NI)

• Adjust for size discount • Apply multiples to target

Discounted Cash Flow Analysis

• Develop financial model with aid of management

• Projected after-tax, free cash flows, discounted to present

• Terminal value calculated as a multiple of final year Operating Profit, discounted to present

• Appropriate discount rates applied to cash flows and terminal values

• Appropriate terminal value multiples applied to final year profit







• Q&A

Case study: .com valuation

Valuations gone haywire: 1998-2000

Case Study: netLibrary, Inc.

Case study: netLibrary, Inc.

The netLibrary Story• Founded 1998, three founders

• Raised $120+ million

• Grew to 520+ employees in March

2000

The netLibrary Story• Founded 1998, three founders

• Raised $120+ million

• Grew to 520+ employees in March 2000

• Reduced headcount to 122 in September

2001

• Sold in Chapter 11 for $10 million

• Zero capital returned to investors,

shareholders


Founding• Founded 1998, three founders

• Create an ASP model for reference

content

• Compete in $5+ billion market for

published content from leading

publishers into institutional libraries in

academic, public and corporate libraries

• Early support from University of

Colorado libraries and University Press

• Raised $5 million 8/98 Anschutz and

Sequel


Growth• Bring on CFO in February 1999

• Raising venture funds

• Requirements:

Executive Summary

PowerPoint

• Challenges

Too many interested parties

Valuation ramping too high/too

quickly


Funding• Venture funding

• Series A, $5 million at $5 million

premoney

• Series B, $25 million at $40 million

premoney

• Series C, $72 million at $225 million

premoney

• Series D, $15 million at $450 million

premoney

• Public offering

• CSFB/Merrill Lynch/JP Morgan

• Timing April 2000


Restructuring• Headcount reduction

• Focus on customers/publishers and

not investors

• Aggressive move toward EBITDA

positive

• Move toward sale of Company as

endgame, not IPO or organic growth


Lessons LearnedRunning the business

• Meet customer needs, not

investor/buyer needs (“Built to

Flip”)

• “Traditional” business

requirements apply

Financial

• Cost of capital higher valuation

needs to be earned

• Beware competing stage investors


netLibrary Epilogue• Investor conflict

• Series A/B aligned against Series

C/D

• Buyers identified (three @ $40-50

million)

• Conflict over the “cram down”

• Sale in Chapter 11 bankruptcy despite

cash in bank

• Currently 60+ employees, $20+ million

revenue and still EBITDA positive








• Q&A

Sale/Merger Characteristics

• Must possess strategic/financial value to buyer

• Established product/service and installed customer base

• Management team optional• Proprietary process or technology

preferred• Opportunity for moderate growth or

enhanced market share• Sufficient company size

Case study: Sell-side M&A

Advantages• Value could be the highest of

alternatives• Greatest liquidity of

Alternatives• Possibly tax-deferred

exchange• No Publicity if private

transaction• Complete exit from business• Moderately expensive

transaction costs

Disadvantages• Loss of Control• Management could be

dramatically affected• No “upside” for future

performance for 100% sale

• You could be unemployed

• Your company could lose its identity

Case study: Sell-side M&A

Case study: Gates Rubber Company

Facts• World’s leading manufacturer of rubber

hoses and belts with revenues of over $1.5 billion

• Family owned business• Desire for a tax deferred transaction• IBer had completed seven other

assignments for Gates






Assignment• Conduct a worldwide sale process to a

limited number of strategic buyers





Assignment• Conduct a worldwide sale process to a

limited number of strategic buyers

Result• Nine entities approached; three final

offers • Sold to Tomkins PLC for a package of

securities valued at $1.2 billion








• Q&A

Investment Banking

University of Colorado

Rob Kaufman

November 3, 2004

Investment Banking University of Colorado Rob Kaufman November 3, 2004.

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Transcript of Investment Banking University of Colorado Rob Kaufman November 3, 2004.