Praise for Investment Banking
"This book will surely become an indispensable guide to the art of buyout and M&A valuation, for the experienced investment practitioner as well as for the non–professional seeking to learn the mysteries of valuation."
David M. Rubenstein, Co–Founder and Co–CEO, The Carlyle Group
"Investment Banking provides a highly practical and relevant guide to the valuation analysis at the core of investment banking, private equity, and corporate finance. Mastery of these essential skills is fundamental for any role in transaction–related finance. This book will become a fixture on every finance professional′s bookshelf."
Thomas H. Lee, President, Lee Equity Partners, LLC, Founder, Thomas H. Lee Capital Management, LLC
"The two Joshes present corporate finance in a broad, yet detailed framework for understanding valuation, balance sheets, and business combinations. As such, their book is an essential resource for understanding complex businesses and capital structures whether you are on the buy–side or sell–side."
Mitchell R. Julis, Co–Chairman and Co–CEO, Canyon Partners, LLC
"As a new generation of students prepare to enter Wall Street, a sound technical foundation is more essential now than ever. Rosenbaum and Pearl have drawn from their broad deal experience and extensive network to create the best valuation and deal guidebook in the world."
Alan C. "Ace" Greenberg, Vice Chairman Emeritus, JP Morgan Chase & Co., Former CEO (′78–′93) and Chairman of the Board (′85–′01), Bear Stearns, Author, The Rise and Fall of Bear Stearns and Memos from the Chairman
"Investment banking requires a skill set that combines both art and science. While numerous textbooks provide students with the core principles of financial economics, the rich institutional considerations that are essential on Wall Street are not well documented. This book represents an important step in filling this gap."
Josh Lerner, Jacob H. Schiff Professor of Investment Banking, Harvard Business School, Coauthor, Venture Capital and Private Equity: A Casebook
"Valuation is the key to any transaction. Investment Banking provides specific step–by–step valuation procedures for LBO and M&A transactions, with lots of diagrams and numerical examples."
Roger G. Ibbotson, Professor in the Practice of Finance, Yale School of Management Chairman and CIO, Zebra Capital Management, LLC, Founder and Advisor, Ibbotson Associates, a Morningstar Company
"Investment Banking provides fresh insight and perspective to valuation analysis, the basis for every great trade and winning deal on Wall Street. The book is written from the perspective of practitioners, setting it apart from other texts."
Gregory Zuckerman, Special Writer, The Wall Street Journal, Author, The Greatest Trade Ever
Table of Contents
Additional Resources xiiiAbout 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
Bloomberg Appendix 75
Chapter 2: Precedent Transactions Analysis 83
Summary of Precedent Transactions Analysis Steps 84
Step I. Select the Universe of Comparable Acquisitions 87
Screen for Comparable Acquisitions 87
Examine Other Considerations 88
Step II. Locate the Necessary Deal–Related and Financial Information 90
Public Targets 90
Private Targets 93
Summary of Primary SEC Filings in M&A Transactions 93
Step III. Spread Key Statistics, Ratios, and Transaction Multiples 96
Calculation of Key Financial Statistics and Ratios 96
Calculationof Key Transaction Multiples 102
Step IV. Benchmark the Comparable Acquisitions 106
Step V. Determine Valuation 106
Key Pros And Cons 107
Illustrative Precedent Transaction Analysis for ValueCo 108
Step I. Select the Universe of Comparable Acquisitions 108
Step II. Locate the Necessary Deal–Related and Financial Information 108
Step III. Spread Key Statistics, Ratios, and Transaction Multiples 111
Step IV. Benchmark the Comparable Acquisitions 119
Step V. Determine Valuation 121
Bloomberg Appendix 122
Chapter 3: Discounted Cash Flow Analysis 125
Summary of Discounted Cash Flow Analysis Steps 126
Step I. Study the Target and Determine Key Performance Drivers 130
Study the Target 130
Determine Key Performance Drivers 130
Step II. Project Free Cash Flow 131
Considerations for Projecting Free Cash Flow 131
Projection of Sales, EBITDA, and EBIT 133
Projection of Free Cash Flow 135
Step III. Calculate Weighted Average Cost of Capital 141
Step III(a): Determine Target Capital Structure 142
Step III(b): Estimate Cost of Debt (rd) 143
Step III(c): Estimate Cost of Equity (re) 144
Step III(d): Calculate WACC 148
Step IV. Determine Terminal Value 148
Exit Multiple Method 149
Perpetuity Growth Method 149
Step V. Calculate Present Value and Determine Valuation 151
Calculate Present Value 151
Determine Valuation 153
Perform Sensitivity Analysis 155
Key Pros and Cons 156
Illustrative Discounted Cash Flow Analysis for ValueCo 157
Step I. Study the Target and Determine Key Performance Drivers 157
Step II. Project Free Cash Flow 157
Step III. Calculate Weighted Average Cost of Capital 164
Step IV. Determine Terminal Value 169
Step V. Calculate Present Value and Determine Valuation 171
Bloomberg Appendix 176
PART TWO: Leveraged Buyouts 183
Chapter 4: Leveraged Buyouts 185
Key Participants 187
Financial Sponsors 187
Investment Banks 188
Bank and Institutional Lenders 190
Bond Investors 191
Target Management 191
Characteristics of a Strong LBO Candidate 192
Strong Cash Flow Generation 193
Leading and Defensible Market Positions 193
Growth Opportunities 194
Efficiency Enhancement Opportunities 194
Low Capex Requirements 194
Strong Asset Base 195
Proven Management Team 195
Economics of LBOs 196
Returns Analysis Internal Rate of Return 196
Returns Analysis Cash Return 197
How LBOs Generate Returns 197
How Leverage Is Used to Enhance Returns 198
Primary Exit/Monetization Strategies 202
Sale of Business 202
Initial Public Offering 203
Dividend Recapitalization 203
Below Par Debt Repurchase 203
LBO Financing: Structure 204
LBO Financing: Primary Sources 207
Bank Debt 207
High Yield Bonds 211
Mezzanine Debt 213
Equity Contribution 214
LBO Financing: Selected Key Terms 217
Security 217
Seniority 217
Maturity 219
Coupon 219
Call Protection 220
Covenants 221
Term Sheets 224
LBO Financing: Determining Financing Structure 227
Bloomberg Appendix 232
Chapter 5: LBO Analysis 235
Financing Structure 235
Valuation 235
Step I. Locate and Analyze the Necessary Information 238
Step II. Build the Pre–LBO Model 238
Step II(a): Build Historical and Projected Income Statement through EBIT 239
Step II(b): Input Opening Balance Sheet and Project Balance Sheet Items 242
Step II(c): Build Cash Flow Statement through Investing Activities 244
Step III. Input Transaction Structure 247
Step III(a): Enter Purchase Price Assumptions 247
Step III(b): Enter Financing Structure into Sources and Uses 249
Step III(c): Link Sources and Uses to Balance Sheet Adjustments Columns 251
Step IV. Complete the Post–LBO Model 256
Step IV(a): Build Debt Schedule 256
Step IV(b): Complete Pro Forma Income Statement from EBIT to Net Income 265
Step IV(c): Complete Pro Forma Balance Sheet 268
Step IV(d): Complete Pro Forma Cash Flow Statement 270
Step V. Perform LBO Analysis 272
Step V(a): Analyze Financing Structure 272
Step V(b): Perform Returns Analysis 274
Step V(c): Determine Valuation 278
Step V(d): Create Transaction Summary Page 279
Illustrative LBO Analysis for ValueCo 280
Bloomberg Appendix 290
PART THREE: Mergers & Acquisitions 293
Chapter 6: Sell–Side M&A 295
Auctions 296
Auction Structure 299
Organization and Preparation 299
Identify Seller Objectives and Determine Appropriate Sale Process 299
Perform Sell–Side Advisor Due Diligence and Preliminary Valuation Analysis 301
Select Buyer Universe 301
Prepare Marketing Materials 302
Prepare Confidentiality Agreement 305
First Round 306
Contact Prospective Buyers 306
Negotiate and Execute Confidentiality Agreement with Interested Parties 306
Distribute Confidential Information Memorandum and Initial Bid Procedures Letter 306
Prepare Management Presentation 308
Set up Data Room 309
Prepare Stapled Financing Package 311
Receive Initial Bids and Select Buyers to Proceed to Second Round 311
Valuation Perspectives Strategic Buyers vs. Finacial Sponsors 312
Second Round 313
Conduct Management Presentations 313
Facilitate Site Visits 314
Provide Data Room Access 314
Distribute Final Bid Procedures Letter and Draft Definitive Agreement 315
Receive Final Bids 316
Negotiations 320
Evaluate Final Bids 320
Negotiate with Preferred Buyer(s) 320
Select Winning Bidder 320
Render Fairness Opinion 321
Receive Board Approval and Execute Definitive Agreement 321
Closing 322
Obtain Necessary Approvals 322
Shareholder Approval 322
Financing and Closing 324
Negotiated Sale 325
Bloomberg Appendix 327
Chapter 7: Buy–Side M&A 331
Buyer Motivation 332
Synergies 333
Cost Synergies 334
Revenue Synergies 334
Acquisition Strategies 335
Horizontal Integration 335
Vertical Integration 335
Conglomeration 336
Form of Financing 337
Cash on Hand 338
Debt Financing 338
Equity Financing 339
Debt vs. Equity Financing Summary Acquirer Perspective 340
Deal Structure 340
Stock Sale 340
Asset Sale 343
Stock Sales Treated as Asset Sales for Tax Purposes 346
Section 338 Election 346
338(h)(10) Election 346
Buy–Side Valuation 348
Football Field 349
Analysis at Various Prices 352
Contribution Analysis 353
Merger Consequences Analysis 355
Purchase Price Assumptions 355
Balance Sheet Effects 360
Accretion/(Dilution) Analysis 365
Acquisition Scenarios I) 50% Stock / 50% Cash; II) 100% Cash; and III) 100% Stock 368
Illustrative Merger Consequences Analysis for the BuyerCo / ValueCo Transaction 373
Bloomberg Appendix 394
Afterword 397
Bibliography and Recommended Reading 399
Index 405
