Investment Banking : Valuation, Leveraged Buyouts, and Mergers and Acquisitions

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 5/4/2009
  • Publisher: Wiley
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Written by two investment bankers, Investment Banking is centered on the primary valuation methodologies currently used on Wall Street, namely Comparable Companies Analysis, Precedent Transactions Analysis, Discounted Cash Flow Analysis, and Leveraged Buyout Analysis. These methodologies are used to determine valuation for public and private companies, most notably for mergers & acquisitions transactions, leveraged buyouts, and initial public offerings. They also form the cornerstone for valuing companies on a standalone basis, including an assessment of whether a given public company is overvalued or undervalued. Using a step-by-step "how to" approach for each methodology, Josh R. and Josh P. build a chronological knowledge base and define key terms, financial concepts, and processes throughout the book. The authors also provide context for the various valuation methodologies through a comprehensive overview of the fundamentals of LBOs and an organized M&A sale process, including key participants, financing sources, strategies, and legal and marketing documentation.In the aftermath of the subprime mortgage crisis and the ensuing credit crunch, the world of finance is returning to the fundamentals of valuation and critical due diligence for acquisition and investment opportunities. This involves the use of more realistic assumptions governing approach to risk as well as a wide range of valuation drivers such as expected future company financial performance, discount rates, multiples, leverage, and terms. While valuation has always involved a great deal of "art" in addition to time-tested "science," the artistry is constantly evolving in accordance with market developments and conditions. In this sense, this book is particularly topical in addition to detailing the technical fundamentals behind valuation, the authors infuse practical judgment skills and perspective to help guide the science.

Author Biography

Joshua N. Rosenbaum (New York, NY) is an Executive Director in UBS Investment Bank’s Global Industrials Group. He received his BA from Harvard University and his MBA, with Baker Scholar honors, from the Harvard Business School.

Joshua D. Pearl (New York, NY) is an Associate in Deutsche Bank’s Leveraged Finance Group, where he was also previously an Analyst. He received his BS in Business Administration from Indiana University’s Kelley School of Business.

Table of Contents

About the Authorsp. xiii
Forewordp. xv
Acknowledgmentsp. xvii
Supplemental Materialsp. xxi
Introductionp. 1
Structure of the Bookp. 2
Valuation (Chapters 1-3)p. 3
Leveraged Buyouts (Chapters 4 & 5)p. 5
Mergers & Acquisitions (Chapter 6)p. 6
Value Co Summary Financial Informationp. 6
Comparable Companies Analysisp. 11
Summary of Comparable Companies Analysis Stepsp. 12
Select the Universe of Comparable Companiesp. 15
Study the Targetp. 15
Identify Key Characteristics of the Target for Comparison Purposesp. 16
Screen for Comparable Companiesp. 20
Locate the Necessary Financial Informationp. 21
SEC Filings: 10-K, 10-Q, 8-K, and Proxy Statementsp. 21
Equity Researchp. 23
Press Releases and News Runsp. 24
Financial Information Servicesp. 24
Summary of Financial Data Primary Sourcesp. 24
Spread Key Statistics, Ratios, and Trading Multiplesp. 25
Calculation of Key Financial Statistics and Ratiosp. 27
Supplemental Financial Concepts and Calculationsp. 39
Calculation of Key Trading Multiplesp. 44
Benchmark the Comparable Companiesp. 48
Benchmark the Financial Statistics and Ratiosp. 48
Benchmark the Trading Multiplesp. 48
Determine Valuationp. 49
Valuation Implied by EV/EBITDAp. 50
Valuation Implied by P/Ep. 50
Key Pros and Consp. 52
Illustrative Comparable Companies Analysis for ValueCop. 53
Select the Universe of Comparable Companiesp. 53
Locate the Necessary Financial Informationp. 54
Spread Key Statistics, Ratios, and Trading Multiplesp. 55
Benchmark the Comparable Companiesp. 65
Determine Valuationp. 69
Precedent Transactions Analysisp. 71
Summary of Precedent Transactions Analysis Stepsp. 72
Select the Universe of Comparable Acquisitionsp. 75
Screen for Comparable Acquisitionsp. 75
Examine Other Considerationsp. 75
Locate the Necessary Deal-Related and Financial Informationp. 77
Public Targetsp. 78
Private Targetsp. 80
Summary of Primary SEC Filings in M&A Transactionsp. 81
Spread Key Statistics, Ratios, and Transaction Multiplesp. 81
Calculation of Key Financial Statistics and Ratiosp. 81
Calculation of Key Transaction Multiplesp. 89
Benchmark the Comparable Acquisitionsp. 92
Determine Valuationp. 93
Key Pros and Consp. 94
Illustrative Precedent Transaction Analysis for ValueCop. 95
Select the Universe of Comparable Acquisitionsp. 95
Locate the Necessary Deal-Related and Financial Informationp. 95
Spread Key Statistics, Ratios, and Transaction Multiplesp. 98
Benchmark the Comparable Acquisitionsp. 105
Determine Valuationp. 106
Discounted Cash Flow Analysisp. 109
Summary of Discounted Cash Flow Analysis Stepsp. 110
Study the Target and Determine Key Performance Driversp. 114
Study the Targetp. 114
Determine Key Performance Driversp. 114
Project Free Cash Flowp. 115
Considerations for Projecting Free Cash Flowp. 115
Projection of Sales, EBITDA, and EBITp. 116
Projection of Free Cash Flowp. 118
Calculate Weighted Average Cost of Capitalp. 124
Determine Target Capital Structurep. 125
Estimate Cost of Debt (rd)p. 126
Estimate Cost of Equity (re)p. 127
Calculate WACCp. 131
Determine Terminal Valuep. 131
Exit Multiple Methodp. 132
Perpetuity Growth Methodp. 132
Calculate Present Value and Determine Valuationp. 134
Calculate Present Valuep. 134
Determine Valuationp. 135
Perform Sensitivity Analysisp. 137
Key Pros and Consp. 139
Illustrative Discounted Cash Flow Analysis for ValueCop. 140
Study the Target and Determine Key Performance Driversp. 140
Project Free Cash Flowp. 140
Calculate Weighted Average Cost of Capitalp. 146
Determine Terminal Valuep. 151
Calculate Present Value and Determine Valuationp. 153
Leveraged Buyouts
Leveraged Buyoutsp. 161
Key Participantsp. 163
Financial Sponsorsp. 163
Investment Banksp. 164
Bank and Institutional Lendersp. 165
Bond Investorsp. 166
Target Managementp. 167
Characteristics of a Strong LBO Candidatep. 168
Strong Cash Flow Generationp. 169
Leading and Defensible Market Positionsp. 169
Growth Opportunitiesp. 169
Efficiency Enhancement Opportunitiesp. 170
Low Capex Requirementsp. 170
Strong Asset Basep. 171
Proven Management Teamp. 171
Economics of LBOsp. 171
Returns Analysis - Internal Rate of Returnp. 171
Returns Analysis - Cash Returnp. 172
How LBOs Generate Returnsp. 173
How Leverage is Used to Enhance Returnsp. 174
Primary Exit/Monetization Strategiesp. 176
Sale of Businessp. 177
Initial Public Offeringp. 177
Dividend Recapitalizationp. 177
LBO Financing: Structurep. 178
LBO Financing: Primary Sourcesp. 180
Bank Debtp. 180
High Yield Bondsp. 184
Mezzanine Debtp. 186
Equity Contributionp. 187
LBO Financing: Selected Key Termsp. 188
Securityp. 188
Seniorityp. 189
Maturityp. 190
Couponp. 190
Call Protectionp. 191
Covenantsp. 192
LBO Analysisp. 195
Financing Structurep. 195
Valuationp. 195
Locate and Analyze the Necessary Informationp. 198
Build the Pre-LBO Modelp. 198
Build Historical and Projected Income Statement through EBITp. 199
Input Opening Balance Sheet and Project Balance Sheet Itemsp. 201
Build Cash Flow Statement through Investing Activitiesp. 203
Input Transaction Structurep. 206
Enter Purchase Price Assumptionsp. 206
Enter Financing Structure into Sources and Usesp. 208
Link Sources and Uses to Balance Sheet Adjustments Columnsp. 209
Complete the Post-LBO Modelp. 215
Build Debt Schedulep. 215
Complete Pro Forma Income Statement from EBIT to Net Incomep. 222
Complete Pro Forma Balance Sheetp. 224
Complete Pro Forma Cash Flow Statementp. 226
Perform LBO Analysisp. 230
Analyze Financing Structurep. 230
Perform Returns Analysisp. 232
Determine Valuationp. 235
Create Transaction Summary Pagep. 236
Illustrative LBO Analysis for ValueCop. 238
Transaction Summaryp. 238
Income Statementp. 238
Balance Sheetp. 238
Cash Flow Statementp. 238
Debt Schedulep. 238
Returns Analysisp. 238
Assumption Page 1-Income Statement and Cash Flow Statementp. 238
Assumption Page 2-Balance Sheetp. 238
Assumption Page 3-Financing Structures and Feesp. 238
Mergers & Acquisitions
M&A Sale Processp. 251
Auctionsp. 252
Auction Structurep. 255
Organization and Preparationp. 257
Identify Seller Objectives and Determine Appropriate Sale Processp. 257
Perform Sell-Side Advisor Due Diligence and Preliminary Valuation Analysisp. 257
Select Buyer Universep. 258
Prepare Marketing Materialsp. 259
Prepare Confidentiality Agreementp. 261
First Roundp. 262
Contact Prospective Buyersp. 262
Negotiate and Execute Confidentiality Agreement with Interested Partiesp. 263
Distribute Confidential Information Memorandum and Initial Bid Procedures Letterp. 263
Prepare Management Presentationp. 264
Set up Data Roomp. 264
Prepare Stapled Financing Packagep. 265
Receive Initial Bids and Select Buyers to Proceed to Second Roundp. 267
Second Roundp. 270
Conduct Management Presentationsp. 271
Facilitate Site Visitsp. 271
Provide Data Room Accessp. 271
Distribute Final Bid Procedures Letter and Draft Definitive Agreementp. 272
Receive Final Bidsp. 276
Negotiationsp. 276
Evaluate Final Bidsp. 277
Negotiate with Preferred Buyer(s)p. 277
Select Winning Bidderp. 277
Render Fairness Opinionp. 277
Receive Board Approval and Execute Definitive Agreementp. 278
Closingp. 278
Obtain Necessary Approvalsp. 278
Financing and Closingp. 280
Negotiated Salep. 281
Bibliography and Recommended Readingp. 283
Indexp. 289
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