Investment Banking

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

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The No. 1 guide to investment banking and valuation methods, including online tools In the constantly evolving world of finance, a solid technical foundation is an essential tool for success. Until the welcomed arrival of authors Josh Rosenbaum and Josh Pearl, no one had taken the time to properly codify the lifeblood of the corporate financier?s work?namely, valuation, through all of the essential lenses of an investment banker. With the release of Investment Banking, Second Edition: Valuation, Leveraged Buyouts, and Mergers & Acquisitions, Rosenbaum and Pearl once again have written the definitive book that they wish had existed when they were trying to break into Wall Street. The Second Edition includes both the technical valuation fundamentals as well as practical judgment skills and perspective to help guide the science. This book focuses on the primary valuation methodologies currently used on Wall Street: comparable companies analysis, precedent transactions analysis, discounted cash flow analysis, and leveraged buyout analysis.
With the new fully revised edition, they have added the most comprehensive, rigorous set of intuition-building and problem-solving ancillaries anywhere?all of which promised to become essential, knowledge enhancing tools for professionals, and professors and students. For those who purchase this edition of the book, there are options to purchase the Valuation Models separately (9781118586167), and to also consider purchase of the Investing Banking Workbook (9781118456118) and Investment Banking Focus Notes (9781118586082) for further self-study.
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Product details

  • Hardback | 464 pages
  • 182 x 261 x 30mm | 1,030g
  • New York, United States
  • English
  • 2nd Edition
  • color Illustrations
  • 1118656210
  • 9781118656211
  • 47,178

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A timely update to the global best-selling book on investment banking and valuation

In the constantly evolving world of finance, a solid technical foundation is an essential tool for success. Due to the fast-paced nature of this world, however, no one has been able to take the time to properly codify the lifeblood of the corporate financier's work--namely, valuation. Rosenbaum and Pearl have responded to this need by writing the book that they wish had existed when they were trying to break into Wall Street.

Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions, Second Edition is a highly accessible and authoritative book that focuses on the primary valuation methodologies currently used on Wall Street--comparable companies, precedent transactions, DCF, and LBO analysis--as well as M&A analysis. These methodologies are used to determine valuation for public and private companies within the context of M&A transactions, LBOs, IPOs, restructurings, and investment decisions. 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. They also provide a comprehensive overview of the fundamentals of LBOs and an organized M&A sale process, including a data room index from Intralinks, as well as merger consequences analysis.

In the aftermath of the subprime mortgage crisis and ensuing credit crunch, the world of finance is returning to the fundamentals of valuation and critical due diligence for M&A, capital markets, and investment opportunities. This involves the use of more realistic assumptions governing approach to risk as well as a wide range of value drivers. While valuation has always involved a great deal of "art" in addition to time-tested "science," the artistry is perpetually evolving in accordance with market developments and conditions. As a result, Rosenbaum and Pearl have updated the widely adopted first edition of their book with respect to both technical valuation fundamentals as well as practical judgment skills and perspective. The authors have also added a comprehensive and highly technical chapter on buy-side M&A analysis.

Furthermore, the authors address the importance of rigorous analysis based on trusted and attributable data sources. In this book, they highlight several datasets and investment banking tools from Bloomberg, a leading provider of business and financial data, news, research, and analytics.
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Back cover copy

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
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Table of contents

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
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About Joshua Rosenbaum

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.
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720 ratings
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