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

by Rosenbaum, Joshua; Pearl, Joshua; Perella, Joseph R.

• ISBN13: 9780470442203
• ISBN10: 0470442204
• Edition: 1st
• Format: Hardcover
• Copyright: 2009-05-04
• Publisher: Wiley

Summary

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 Authors	p. xiii
Foreword	p. xv
Acknowledgments	p. xvii
Supplemental Materials	p. xxi
Introduction	p. 1
Structure of the Book	p. 2
Valuation (Chapters 1-3)	p. 3
Leveraged Buyouts (Chapters 4 & 5)	p. 5
Mergers & Acquisitions (Chapter 6)	p. 6
Value Co Summary Financial Information	p. 6
Valuation
Comparable Companies Analysis	p. 11
Summary of Comparable Companies Analysis Steps	p. 12
Select the Universe of Comparable Companies	p. 15
Study the Target	p. 15
Identify Key Characteristics of the Target for Comparison Purposes	p. 16
Screen for Comparable Companies	p. 20
Locate the Necessary Financial Information	p. 21
SEC Filings: 10-K, 10-Q, 8-K, and Proxy Statements	p. 21
Equity Research	p. 23
Press Releases and News Runs	p. 24
Financial Information Services	p. 24
Summary of Financial Data Primary Sources	p. 24
Spread Key Statistics, Ratios, and Trading Multiples	p. 25
Calculation of Key Financial Statistics and Ratios	p. 27
Supplemental Financial Concepts and Calculations	p. 39
Calculation of Key Trading Multiples	p. 44
Benchmark the Comparable Companies	p. 48
Benchmark the Financial Statistics and Ratios	p. 48
Benchmark the Trading Multiples	p. 48
Determine Valuation	p. 49
Valuation Implied by EV/EBITDA	p. 50
Valuation Implied by P/E	p. 50
Key Pros and Cons	p. 52
Illustrative Comparable Companies Analysis for ValueCo	p. 53
Select the Universe of Comparable Companies	p. 53
Locate the Necessary Financial Information	p. 54
Spread Key Statistics, Ratios, and Trading Multiples	p. 55
Benchmark the Comparable Companies	p. 65
Determine Valuation	p. 69
Precedent Transactions Analysis	p. 71
Summary of Precedent Transactions Analysis Steps	p. 72
Select the Universe of Comparable Acquisitions	p. 75
Screen for Comparable Acquisitions	p. 75
Examine Other Considerations	p. 75
Locate the Necessary Deal-Related and Financial Information	p. 77
Public Targets	p. 78
Private Targets	p. 80
Summary of Primary SEC Filings in M&A Transactions	p. 81
Spread Key Statistics, Ratios, and Transaction Multiples	p. 81
Calculation of Key Financial Statistics and Ratios	p. 81
Calculation of Key Transaction Multiples	p. 89
Benchmark the Comparable Acquisitions	p. 92
Determine Valuation	p. 93
Key Pros and Cons	p. 94
Illustrative Precedent Transaction Analysis for ValueCo	p. 95
Select the Universe of Comparable Acquisitions	p. 95
Locate the Necessary Deal-Related and Financial Information	p. 95
Spread Key Statistics, Ratios, and Transaction Multiples	p. 98
Benchmark the Comparable Acquisitions	p. 105
Determine Valuation	p. 106
Discounted Cash Flow Analysis	p. 109
Summary of Discounted Cash Flow Analysis Steps	p. 110
Study the Target and Determine Key Performance Drivers	p. 114
Study the Target	p. 114
Determine Key Performance Drivers	p. 114
Project Free Cash Flow	p. 115
Considerations for Projecting Free Cash Flow	p. 115
Projection of Sales, EBITDA, and EBIT	p. 116
Projection of Free Cash Flow	p. 118
Calculate Weighted Average Cost of Capital	p. 124
Determine Target Capital Structure	p. 125
Estimate Cost of Debt (rd)	p. 126
Estimate Cost of Equity (re)	p. 127
Calculate WACC	p. 131
Determine Terminal Value	p. 131
Exit Multiple Method	p. 132
Perpetuity Growth Method	p. 132
Calculate Present Value and Determine Valuation	p. 134
Calculate Present Value	p. 134
Determine Valuation	p. 135
Perform Sensitivity Analysis	p. 137
Key Pros and Cons	p. 139
Illustrative Discounted Cash Flow Analysis for ValueCo	p. 140
Study the Target and Determine Key Performance Drivers	p. 140
Project Free Cash Flow	p. 140
Calculate Weighted Average Cost of Capital	p. 146
Determine Terminal Value	p. 151
Calculate Present Value and Determine Valuation	p. 153
Leveraged Buyouts
Leveraged Buyouts	p. 161
Key Participants	p. 163
Financial Sponsors	p. 163
Investment Banks	p. 164
Bank and Institutional Lenders	p. 165
Bond Investors	p. 166
Target Management	p. 167
Characteristics of a Strong LBO Candidate	p. 168
Strong Cash Flow Generation	p. 169
Leading and Defensible Market Positions	p. 169
Growth Opportunities	p. 169
Efficiency Enhancement Opportunities	p. 170
Low Capex Requirements	p. 170
Strong Asset Base	p. 171
Proven Management Team	p. 171
Economics of LBOs	p. 171
Returns Analysis - Internal Rate of Return	p. 171
Returns Analysis - Cash Return	p. 172
How LBOs Generate Returns	p. 173
How Leverage is Used to Enhance Returns	p. 174
Primary Exit/Monetization Strategies	p. 176
Sale of Business	p. 177
Initial Public Offering	p. 177
Dividend Recapitalization	p. 177
LBO Financing: Structure	p. 178
LBO Financing: Primary Sources	p. 180
Bank Debt	p. 180
High Yield Bonds	p. 184
Mezzanine Debt	p. 186
Equity Contribution	p. 187
LBO Financing: Selected Key Terms	p. 188
Security	p. 188
Seniority	p. 189
Maturity	p. 190
Coupon	p. 190
Call Protection	p. 191
Covenants	p. 192
LBO Analysis	p. 195
Financing Structure	p. 195
Valuation	p. 195
Locate and Analyze the Necessary Information	p. 198
Build the Pre-LBO Model	p. 198
Build Historical and Projected Income Statement through EBIT	p. 199
Input Opening Balance Sheet and Project Balance Sheet Items	p. 201
Build Cash Flow Statement through Investing Activities	p. 203
Input Transaction Structure	p. 206
Enter Purchase Price Assumptions	p. 206
Enter Financing Structure into Sources and Uses	p. 208
Link Sources and Uses to Balance Sheet Adjustments Columns	p. 209
Complete the Post-LBO Model	p. 215
Build Debt Schedule	p. 215
Complete Pro Forma Income Statement from EBIT to Net Income	p. 222
Complete Pro Forma Balance Sheet	p. 224
Complete Pro Forma Cash Flow Statement	p. 226
Perform LBO Analysis	p. 230
Analyze Financing Structure	p. 230
Perform Returns Analysis	p. 232
Determine Valuation	p. 235
Create Transaction Summary Page	p. 236
Illustrative LBO Analysis for ValueCo	p. 238
Transaction Summary	p. 238
Income Statement	p. 238
Balance Sheet	p. 238
Cash Flow Statement	p. 238
Debt Schedule	p. 238
Returns Analysis	p. 238
Assumption Page 1-Income Statement and Cash Flow Statement	p. 238
Assumption Page 2-Balance Sheet	p. 238
Assumption Page 3-Financing Structures and Fees	p. 238
Mergers & Acquisitions
M&A Sale Process	p. 251
Auctions	p. 252
Auction Structure	p. 255
Organization and Preparation	p. 257
Identify Seller Objectives and Determine Appropriate Sale Process	p. 257
Perform Sell-Side Advisor Due Diligence and Preliminary Valuation Analysis	p. 257
Select Buyer Universe	p. 258
Prepare Marketing Materials	p. 259
Prepare Confidentiality Agreement	p. 261
First Round	p. 262
Contact Prospective Buyers	p. 262
Negotiate and Execute Confidentiality Agreement with Interested Parties	p. 263
Distribute Confidential Information Memorandum and Initial Bid Procedures Letter	p. 263
Prepare Management Presentation	p. 264
Set up Data Room	p. 264
Prepare Stapled Financing Package	p. 265
Receive Initial Bids and Select Buyers to Proceed to Second Round	p. 267
Second Round	p. 270
Conduct Management Presentations	p. 271
Facilitate Site Visits	p. 271
Provide Data Room Access	p. 271
Distribute Final Bid Procedures Letter and Draft Definitive Agreement	p. 272
Receive Final Bids	p. 276
Negotiations	p. 276
Evaluate Final Bids	p. 277
Negotiate with Preferred Buyer(s)	p. 277
Select Winning Bidder	p. 277
Render Fairness Opinion	p. 277
Receive Board Approval and Execute Definitive Agreement	p. 278
Closing	p. 278
Obtain Necessary Approvals	p. 278
Financing and Closing	p. 280
Negotiated Sale	p. 281
Bibliography and Recommended Reading	p. 283
Index	p. 289
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