Investment Banking Focus Notes

Investment Banking FOCUS NOTES provides a comprehensive, yet streamlined, review of the basic skills and concepts discussed in Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions, Second Edition. The focus notes are designed for use both as a companion to the book, as well as on a standalone basis. Investment Banking focuses on the primary valuation methodologies currently used on Wall Street—namely, comparable companies analysis, precedent transactions analysis, DCF analysis, and LBO analysis—as well as detailed M&A analysis from both a sell-side and buy-side perspective. Our focus notes seek to help solidify knowledge of these core financial topics as true mastery must be tested, honed, and retested over time.

Joshua Rosenbaum is a Managing Director at UBS Investment Bank in the Global Industrial Group. He originates, structures, and advises on M&A, corporate finance, and capital markets transactions. Previously, he worked at 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.

Joshua Pearl is an investment analyst at Brahman Capital Corp. Previously, he structured and executed leveraged loan and high yield bond financings, as well as leveraged buyouts and restructurings as a Director at UBS Investment Bank in Leveraged Finance. 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.

Introduction viii

Chapter 1: Comparable Companies Analysis 1

Overview of Comparable Companies Analysis 3

Step I: Select the Universe of Comparable Companies 4

Step II: Locate the Necessary Financial Information 7

Step III: Spread Key Statistics, Ratios, and Trading Multiples 9

Step IV: Benchmark the Comparable Companies 27

Step V: Determine Valuation 33

Key Pros and Cons 38

Chapter 2: Precedent Transactions Analysis 39

Overview of Precedent Transactions Analysis 41

Step I. Select the Universe of Comparable Acquisitions 42

Step II. Locate the Necessary Deal-Related and Financial Information 46

Step III. Spread Key Statistics, Ratios, and Transaction Multiples 49

Step IV. Benchmark the Comparable Acquisitions 64

Step V. Determine Valuation 66

Key Pros and Cons 67

Chapter 3: Discounted Cash Flow Analysis 69

Overview of Discounted Cash Flow Analysis 71

Step I. Study the Target and Determine Key Performance Drivers 73

Step II. Project Free Cash Flow 75

Step III. Calculate Weighted Average Cost of Capital 91

Step IV. Determine Terminal Value 106

Step V. Calculate Present Value and Determine Valuation 112

Key Pros and Cons 118

Chapter 4: Leveraged Buyouts 119

Overview of Leveraged Buyouts 121

Key Participants 122

Characteristics of a Strong LBO Candidate 127

Economics of LBOs 132

Organization and Preparation 209

First Round 218

Second Round 229

Negotiations 236

Closing 241

Negotiated Sale 246

Chapter 7: Buy-Side M&A 247

Overview of Buy-Side M&A 248

Buyer Motivation 250

Acquisition Strategies 254

Form of Financing 259

Deal Structure 264

Buy-Side Valuation 273

Merger Consequences Analysis 278

Index 295

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