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Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd Edition

Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd Edition

  • Author:
  • Publisher: John Wiley & Sons
  • ISBN: 9781119867876
  • Published In: January 2022
  • Format: Hardback , 512 pages
  • Jurisdiction: International ? Disclaimer:
    Countri(es) stated herein are used as reference only
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    An essential, all-in-one guide to investment banking and valuation, complete with downloadable models – this new edition reflects valuable contributions from Nasdaq and the global law firm Latham & Watkins LLP plus access to the online valuation models and course.

    The thoroughly revised Third Edition of Investment Banking: Valuation, LBOs, M&A, and IPOs (Book + Valuation Models) delivers the most current discussion of valuation and deal-making fundamentals essential to the work of investment bankers, private equity professionals, hedge fund investors, corporate lawyers, executives, and students. Drawing on over four decades of combined experience in investment banking and investing, authors Joshua Rosenbaum and Joshua Pearl explain how to perform the valuation work and financial analysis at the core of Wall Street – comparable companies, precedent transactions, DCF, LBO, M&A analysis...and now IPO analytics and valuation. Using a step-by-step, how-to approach for each methodology, the authors build a chronological knowledge base and define key terms, financial concepts, and processes throughout the book.

    Now, over 10 years after the release of the first edition, the book is more relevant and topical than ever. The book has sold over 250,000 copies and is used in over 200 universities globally. It has become a go-to resource for investment banks, private equity, investment firms, and corporations undertaking M&A transactions, LBOs, IPOs, restructurings, and investment decisions. While the fundamentals haven't changed, the environment must adapt to changing market developments and conditions. As a result, Rosenbaum and Pearl have updated their widely-adopted book accordingly, turning the latest edition into a unique and comprehensive training package.

  • Additional 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

    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

  • JOSHUA ROSENBAUM is a Managing Director and Head of the Industrials & Diversified Services Group at RBC Capital Markets, where he also serves on the Management Committee for the U.S. Investment Bank. He originates, structures, and advises on M&A, corporate finance, and capital markets transactions. Previously, he worked at UBS Investment Bank and the International Finance Corporation, the direct investment division of the World Bank. He received his AB from Harvard and his MBA with Baker Scholar honors from Harvard Business School. He is also the co-author of The Little Book of Investing Like the Pros.

    JOSHUA PEARL is the Founder and Chief Investment Officer of Hickory Lane Capital Management, a long/short equity asset manager. He focuses on public equity investments and special situations utilizing a fundamentals-based approach. From 2011-2020, he served as a Managing Director and Partner at Brahman Capital. Previously, he structured high yield financings, leveraged buyouts, and restructurings as a Director at UBS Investment Bank. Prior to UBS, he worked at Moelis & Company and Deutsche Bank. He received his BS in Business from Indiana University’s Kelley School of Business. He is also the co-author of The Little Book of Investing Like the Pros.

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