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Investment Banking. Valuation, Leveraged Buyouts, and Mergers and Acquisitions. Edition No. 2. Wiley Finance

  • ID: 2330965
  • Book
  • July 2013
  • 496 Pages
  • John Wiley and Sons Ltd

Investment Banking, UNIVERSITY EDITION is a highly accessible and authoritative book written by investment bankers that explains how to perform the valuation work at the core of the financial world. This body of work builds on Rosenbaum and Pearl’s combined 30+ years of experience on a multitude of transactions, as well as input received from numerous investment bankers, investment professionals at private equity firms and hedge funds, attorneys, corporate executives, peer authors, and university professors.

This book fills a noticeable gap in contemporary finance literature, which tends to focus on theory rather than practical application. It focuses on the primary valuation methodologies currently used on Wall Street - comparable companies, precedent transactions, DCF, and LBO analysis - as well as M&A analysis. The ability to perform these methodologies is especially critical for those students aspiring to gain full-time positions at investment banks, private equity firms, or hedge funds. This is the book Rosenbaum and Pearl wish had existed when we were trying to break into Wall Street.

Written to reflect today’s dynamic market conditions, Investment Banking, UNIVERSITY EDITION skillfully: 

  • Introduces students to the primary valuation methodologies currently used on Wall Street
  • Uses a step-by-step how-to approach for each methodology and builds a chronological knowledge base
  • Defines key terms, financial concepts, and processes throughout
  • Provides a comprehensive overview of the fundamentals of LBOs and an organized M&A sale process
  • Presents new coverage of M&A buy-side analytical tools - which includes both qualitative aspects, such as buyer motivations and strategies, along with technical financial and valuation assessment tools
  • Includes a comprehensive merger consequences analysis, including accretion/(dilution) and balance sheet effects
  • Contains challenging end-of-chapter questions to reinforce concepts covered 

A perfect guide for those seeking to learn the fundamentals of valuation, M&A , and corporate finance used in investment banking and professional investing, this UNIVERSITY EDITION - which includes an instructor’s companion site - is an essential asset. It provides students with an invaluable education as well as a much-needed edge for gaining entry to the ultra-competitive world of professional finance.

Note: Product cover images may vary from those shown

Instructor and Student Resources xiii

About the Authors xv

Foreword xvii

Acknowledgments xix

Introduction 1

Structure of the Book 3

Part One: Valuation (Chapters 1–3) 3

Part Two: Leveraged Buyouts (Chapters 4 & 5) 5

Part Three: Mergers & Acquisitions (Chapters 6 & 7) 6

ValueCo Summary Financial Information 8

Part One Valuation 11

Chapter 1 Comparable Companies Analysis 13

Summary of Comparable Companies Analysis Steps 14

Step I. Select The Universe of Comparable Companies 17

Study the Target 17

Identify Key Characteristics of the Target for Comparison Purposes 18

Screen for Comparable Companies 22

Step II. Locate The Necessary Financial Information 23

SEC Filings: 10-K, 10-Q, 8-K, and Proxy Statements 24

Equity Research 25

Press Releases and News Runs 26

Financial Information Services 26

Summary of Financial Data Primary Sources 27

Step III. Spread Key Statistics, Ratios, and Trading Multiples 28

Calculation of Key Financial Statistics and Ratios 28

Supplemental Financial Concepts and Calculations 42

Calculation of Key Trading Multiples 47

Step IV. Benchmark the Comparable Companies 50

Benchmark the Financial Statistics and Ratios 50

Benchmark the Trading Multiples 50

Step V. Determine Valuation 51

Valuation Implied by EV/EBITDA 52

Valuation Implied by P/E 52

Key Pros and Cons 54

Illustrative Comparable Companies Analysis for ValueCo 55

Step I. Select the Universe of Comparable Companies 55

Step II. Locate the Necessary Financial Information 56

Step III. Spread Key Statistics, Ratios, and Trading Multiples 57

Step IV. Benchmark the Comparable Companies 69

Step V. Determine Valuation 74

Chapter 1 Questions 75

Bloomberg Appendix 79

Chapter 2 Precedent Transactions Analysis 87

Summary of Precedent Transactions Analysis Steps 88

Step I. Select the Universe of Comparable Acquisitions 91

Screen for Comparable Acquisitions 91

Examine Other Considerations 92

Step II. Locate the Necessary Deal-Related and Financial Information 94

Public Targets 94

Private Targets 97

Summary of Primary SEC Filings in M&A Transactions 97

Step III. Spread Key Statistics, Ratios, and Transaction Multiples 100

Calculation of Key Financial Statistics and Ratios 100

Calculation of Key Transaction Multiples 106

Step IV. Benchmark the Comparable Acquisitions 110

Step V. Determine Valuation 110

Key Pros And Cons 111

Illustrative Precedent Transaction Analysis for ValueCo 112

Step I. Select the Universe of Comparable Acquisitions 112

Step II. Locate the Necessary Deal-Related and Financial Information 112

Step III. Spread Key Statistics, Ratios, and Transaction Multiples 115

Step IV. Benchmark the Comparable Acquisitions 123

Step V. Determine Valuation 125

Chapter 2 Questions 126

Bloomberg Appendix 131

Chapter 3 Discounted Cash Flow Analysis 135

Summary of Discounted Cash Flow Analysis Steps 136

Step I. Study the Target and Determine Key Performance Drivers 140

Study the Target 140

Determine Key Performance Drivers 140

Step II. Project Free Cash Flow 141

Considerations for Projecting Free Cash Flow 141

Projection of Sales, EBITDA, and EBIT 143

Projection of Free Cash Flow 145

Step III. Calculate Weighted Average Cost of Capital 151

Step III(a): Determine Target Capital Structure 152

Step III(b): Estimate Cost of Debt (rd) 153

Step III(c): Estimate Cost of Equity (re) 154

Step III(d): Calculate WACC 158

Step IV. Determine Terminal Value 158

Exit Multiple Method 159

Perpetuity Growth Method 159

Step V. Calculate Present Value and Determine Valuation 161

Calculate Present Value 161

Determine Valuation 163

Perform Sensitivity Analysis 165

Key Pros and Cons 166

Illustrative Discounted Cash Flow Analysis for ValueCo 167

Step I. Study the Target and Determine Key Performance Drivers 167

Step II. Project Free Cash Flow 167

Step III. Calculate Weighted Average Cost of Capital 174

Step IV. Determine Terminal Value 179

Step V. Calculate Present Value and Determine Valuation 181

Chapter 3 Questions 186

Bloomberg Appendix 191

Part Two Leveraged Buyouts 197

Chapter 4 Leveraged Buyouts 199

Key Participants 201

Financial Sponsors 201

Investment Banks 202

Bank and Institutional Lenders 204

Bond Investors 205

Target Management 205

Characteristics of a Strong LBO Candidate 206

Strong Cash Flow Generation 207

Leading and Defensible Market Positions 207

Growth Opportunities 208

Efficiency Enhancement Opportunities 208

Low Capex Requirements 208

Strong Asset Base 209

Proven Management Team 209

Economics of LBOs 210

Returns Analysis - Internal Rate of Return 210

Returns Analysis - Cash Return 211

How LBOs Generate Returns 211

How Leverage Is Used to Enhance Returns 212

Primary Exit/Monetization Strategies 216

Sale of Business 216

Initial Public Offering 217

Dividend Recapitalization 217

Below Par Debt Repurchase 217

LBO Financing: Structure 218

LBO Financing: Primary Sources 221

Bank Debt 221

High Yield Bonds 225

Mezzanine Debt 227

Equity Contribution 228

LBO Financing: Selected Key Terms 231

Security 231

Seniority 231

Maturity 233

Coupon 233

Call Protection 234

Covenants 235

Term Sheets 238

LBO Financing: Determining Financing Structure 241

Chapter 4 Questions 246

Bloomberg Appendix 249

Chapter 5 LBO Analysis 251

Financing Structure 251

Valuation 251

Step I. Locate and Analyze the Necessary Information 254

Step II. Build the Pre-LBO Model 254

Step II(a): Build Historical and Projected Income Statement through EBIT 255

Step II(b): Input Opening Balance Sheet and Project Balance Sheet Items 258

Step II(c): Build Cash Flow Statement through Investing Activities 260

Step III. Input Transaction Structure 263

Step III(a): Enter Purchase Price Assumptions 263

Step III(b): Enter Financing Structure into Sources and Uses 265

Step III(c): Link Sources and Uses to Balance Sheet Adjustments Columns 267

Step IV. Complete the Post-LBO Model 272

Step IV(a): Build Debt Schedule 272

Step IV(b): Complete Pro Forma Income Statement from EBIT to Net Income 281

Step IV(c): Complete Pro Forma Balance Sheet 284

Step IV(d): Complete Pro Forma Cash Flow Statement 286

Step V. Perform LBO Analysis 288

Step V(a): Analyze Financing Structure 288

Step V(b): Perform Returns Analysis 290

Step V(c): Determine Valuation 294

Step V(d): Create Transaction Summary Page 295

Illustrative LBO Analysis for ValueCo 296

Chapter 5 Questions 306

Bloomberg Appendix 311

Part Three Mergers & Acquisitions 313

Chapter 6 Sell-Side M&A 315

Auctions 316

Auction Structure 319

Organization and Preparation 319

Identify Seller Objectives and Determine Appropriate Sale Process 319

Perform Sell-Side Advisor Due Diligence and Preliminary Valuation Analysis 321

Select Buyer Universe 321

Prepare Marketing Materials 322

Prepare Confidentiality Agreement 325

First Round 326

Contact Prospective Buyers 326

Negotiate and Execute Confidentiality Agreement with Interested Parties 326

Distribute Confidential Information Memorandum and Initial Bid Procedures Letter 326

Prepare Management Presentation 328

Set up Data Room 329

Prepare Stapled Financing Package 331

Receive Initial Bids and Select Buyers to Proceed to Second Round 331

Valuation Perspectives - Strategic Buyers vs. Finacial Sponsors 332

Second Round 333

Conduct Management Presentations 333

Facilitate Site Visits 334

Provide Data Room Access 334

Distribute Final Bid Procedures Letter and Draft Definitive Agreement 335

Receive Final Bids 336

Negotiations 340

Evaluate Final Bids 340

Negotiate with Preferred Buyer(s) 340

Select Winning Bidder 340

Render Fairness Opinion 341

Receive Board Approval and Execute Definitive Agreement 341

Closing 342

Obtain Necessary Approvals 342

Shareholder Approval 342

Financing and Closing 344

Negotiated Sale 345

Chapter 6 Questions 347

Bloomberg Appendix 351

Chapter 7 Buy-Side M&A 355

Buyer Motivation 356

Synergies 357

Cost Synergies 358

Revenue Synergies 358

Acquisition Strategies 359

Horizontal Integration 359

Vertical Integration 359

Conglomeration 360

Form of Financing 361

Cash on Hand 362

Debt Financing 362

Equity Financing 363

Debt vs. Equity Financing Summary - Acquirer Perspective 364

Deal Structure 364

Stock Sale 364

Asset Sale 367

Stock Sales Treated as Asset Sales for Tax Purposes 370

Section 338 Election 370

338(h)(10) Election 370

Buy-Side Valuation 372

Football Field 373

Analysis at Various Prices 376

Contribution Analysis 377

Merger Consequences Analysis 379

Purchase Price Assumptions 379

Balance Sheet Effects 384

Accretion/(Dilution) Analysis 389

Acquisition Scenarios - I) 50% Stock / 50% Cash; II) 100% Cash; and III) 100% Stock 392

Illustrative Merger Consequences Analysis for the BuyerCo / ValueCo Transaction 397

Chapter 7 Questions 418

Bloomberg Appendix 423

Solutions to Selected Questions 425

Afterword 435

Bibliography and Recommended Reading 437

Index 443

Note: Product cover images may vary from those shown
Joshua Pearl
Joshua Rosenbaum
Note: Product cover images may vary from those shown