Investment Banking

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1. selecting the universe of comparable companies - cc

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before identify certain companies, have solid understanding of the target. Should only select one once you have your target

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public target - information

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10k, sec filings, consensus research estimates, equity and fixed income research reports, press releases, earnings call transcripts, investor presentations, corporate websites

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private targets - information

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provide a greater challenge to locate information, corporate data, corporate websites, sector research reports, news runs, trade journal`

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business profile

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sector, product & services, customers, end market, distribution channels, geography

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financial profile

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size (market valuation), growth profile, Return on investment, credit profile

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screen for comparable companies after target's base business & financial characteristics understood

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10ks, proxy statement, investor presentations, credit rating agency reports, equity research reports, BICS codes

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Locate necessary financial information - CC

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valuation driven on both historacl performance LTM and expected future performance (consensus estimate)

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10k

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annual audited report

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10Q

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quarterly unaudited report - most recent quarter and YTD period

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8k

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occurance of material corporate event or change

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proxy statement

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contains material information regarding matters shareholders are expected to vote on

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research reports - equity research

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provides individual analyst estimates of future company performance for future quarters and future 2 or 3 year period. helpful sector and market info

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consensus estimates - equity research

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widely used by bankers as the basis for calculating forward-looking trading multiples in trading comps

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press releases and news runs

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include earnings announcements, declaration of dividends, and management changes, M&A and capital market transactions

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Step 3: spread key statistics, ratios, and trading multiples - CC

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once necessary financial info for each of the comparables has been located, it is entered into an input page which in turn feeds into the output sheet that ultimately benchmarks the comps

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equity value (size)

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current share price* fully diluted shares outstanding

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Fully diluted shares outstanding - TSM

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basic shares outstanding + "in the money options and warrants" + "in-the-money" convertibles

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Shares from "in-the-money" options

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Current price > exercise price

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Net new shares from options -TSM

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shares from I-T-M options - shares repurchased from options proceeds

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option proceeds - TSM

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in the money options* eercise price

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shares repurchased from options proceeds - TSM

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options proceeds/current share price

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FDSO -TSM

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net new shares + basic shares outstanding

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convertible securities

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can be converted into another security. Convertible securities may be convertible bonds or preferred stocks that pay regular interest and can be converted into shares of common stock

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equity linked securities

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the final payout is based on the return of the underlying equity, which can be a single stock, basket of stocks, or an equity index.

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Fully diluted shares outstanding - if converted

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Incremental shares + Net new shares from options + basic shares outstanding

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incremental shares - if converted

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amount outstanding/conversion price

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net share settlement

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issuer permitted to satisfy the face (or accredited) value of an in-the-money convert with at least a portion of cash upon conversion - results in less share issuance

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net share settlement - point

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serves to limit the dilutive effect of conversion by affording the issuer TSM accounting treatment

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Total conversion value - NSS

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incremental shares* current share price

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Excess over par value - NSS

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total conversion value - par value of amount outstanding

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incremental shares - NSS

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excess over par value/ current share price

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enterprise value

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sum of all ownership interest in a company and claims on its assets from both debt and equity holders

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Enterprise value - calculating

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equity value + total debt + preferred stock + noncontrolling interest - cash and cash equivalents

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Key financial data

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Sales, Gross profit, EBITDA, EBIT, NI

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growth and credit profile

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leverage, debt-to-total capitalization, coverage

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leverage

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Debt/EBITDA - how many years of a company's cash flows are needed to repay debt

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debt-to-total capitalization

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Debt(debt+preferred stock+non-controlling interest int+equity) - higher d-t-t-c means higher debt levels and risk of financial distress

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LTM financial data

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prior fiscal year + current stub - Prior stub

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calenderization of financial data

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(month # * (FYA))/12 + (12 - Month#)*(NFY sales))/12

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Step 4: benchmark the comparable companies - CC

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comparing the target with comparable universe on the basis of key financial performance metrics - size, profitability, growth, returns, and credit strength

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step 5: determine valuation - CC

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trading multiples serve as basis for deriving an appropriate valuation range for the target. Typically select the tightest most appropriate range. must determine which period financial data is most relevant

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1: select unverse of comparable acquisitions - PA

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search for M&A databases (factset, bloomberg), history of both target and CC, preliminary proxy statement, equity/fixed income research reports

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market conditiosn

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business and economic environment as well as prevailing state of capital markets at time of given transaction - directly affect availability & cost of acquisition financing and influences price an acquirer is willing or able to pay

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Deal dynamics

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was the acqurer a strategic buyer or financial sponsor

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strategic buyer

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can traditionally pay higher purchase prices than financial sponsors due to potential ability to realize synergies (longer term focus)

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financial sponsors

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do not have synergies - want to be in and out in 5 years (short term) - private equity firms

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buyers and seller's motivations for the transaction

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time, money, desperation, interest, boredom - all factors that affect the purchase price

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purchase consideration - all stock transactions

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tend to result in lower valuation than all cash as target shareholders retain equity interest in combined entity - get equity interest - triggers a receipt of shares

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purchase considerations - all cash transaction

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target shareholder's require more upfront compensation as they are unable to participate in value creation opportunities that result from combing the two companies - purchase of cash triggers a taxable event

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nature of the deal - friendly

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premium is typicall but both sides collectively participate in upside over time

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nature of the deal - hostile

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may also produce higher purchase price -

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auction process vehicle

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auctions are designed to maximize competitive dynamics with goal of producing best offer

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negotiated sale vehicle

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negotiate the terms of the issue, as opposed to having multiple underwriting groups competitively bidding on the issue to establish its terms

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2. locate necessary deal-related and financial information

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invariably easier for transactions involving public targets due to SEC disclosure requirements - may safeguard info for competitive reasons and only disclose info that is required by law or regs

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Public target information - PA

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Proxy statement for one-step merger transition (PREM 14A or DEFM 14A) - may need to pre-deal shares outstanding to fund the purchase consideration if over 20% is issued

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Schedule To

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when they offer to buy shares direclty from targets shareholders

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Schedule 14D-9

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contains recommendations from the target's board of directors to the target's shareholders on how to respond to the tender offer - file within 10 business days with recommendation to shareholders

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Schedule 13E-3

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must be filed by publicly-traded company when they become "private" - in support of actual fairness opinions

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Schedule 8-k PA

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acquisition required to be reported if assets, income, or value of target comprises 10% or greater of acquirers

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Equity and Fixed income research - PA

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including info on proforma adjustment and expected synergies

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private target info - PA

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not required to publicly file documentation - public debt securities issued may have to disclose - less formal sources

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equity value - PA

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based on the announced offer price per share as opposed to closing price on a given day

Offer share price*FDSO at given offer price

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private companies - equity value - PA

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Enterprise value - any assumed/refinanced debt

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in-the-money options and warrants for PA

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converted at weighted average strike prices regardless of whether they are exercisable or not

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Form consideration

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can affect the target shareholder's perception of the value embedded in the offer

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all cash transaction - PA

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makes an offer to purchase all or a portion of the target's shares outstanding for cash - cleanest form of currency

Equity value = cash offer price/share*FDSO

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Stock for stock transaction - fixed exchange ratio

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offer price per share moves in line with the underlying share price of the acquirer regardless of share price movement.

acquirer takes the risk

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fixed exchange ratio calculation

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offer price per share = (exchange ratio*acquirers share price)

equity value = (exchange ratio*Acquirer;'s share price)* targets FDSO

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stock-for-stock - floating exchange ratio

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set dollar amount/share that the acquirer has agreed to pay with the # of shares fluctuating in accordance with the movement in acquirers share price. # of shares to be exchanged is based on avg of acquirers share price for a specified time period prior to transaction closed - acquirer takes risk

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Cash portion of the offer

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acquirer offers combo of cash and stock. fixed value per share for target shareholders. Stock portion of the offer can be set according to either a fixed or floating exchange ratio.

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offer price per share - cash + stock

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cash offer per share + (exchange ratio*acquirer's share price)

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enterprise value - PA

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equity value + total debt + preferred stock + non controlling interest - cash & cash eqivalents

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Equity value - PA

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(unaffected share price + premium paid)*FDSO

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premiums paid

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incremental dollar amount per share that the acquirer offers relative to the target's unaffected share price as a percentage - only relevant for public companies

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synergies

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expected cost savings, growth opportunities, and other financial benefits that occur as a result of the combination of two businesses - tangible value to acquirer in form of future cash and earnings above/beyond what can be achieved by target on stand-alone basis

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4. benchmark comparable acquisitons - PA

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recently consummated deal involving a direct competitor with a similar financial profile is typically more relevant than an older transaction from a different point in the business or credit cycle

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Determine valuation PA

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multiples of selected comparable acquisitions universe are use to derive an implied valuation range for the "target" relying on "mean" and median multiples - focus on 2-3 best transactions

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red flag for precedent transactions

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when implied valuation range is significantly lower than the range derived using comparable companies

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key multiples driving valuation - PA

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enterprise value to LTM EBITDA and Equity value to net income

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glass-steagall act (banking act of 1933)

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separated commercial banking from investment banking -restricting the range of products banks could offer - didn't prohibit commercial banks from underwriting and dealing in securities from outside US

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Gramm-leach-billey act of 1999

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repealed last vestiges of glass-steagall, leading to rise of 'universal bank' - commercial banks had already largely entered the fixed income business as corporation's dependence on bank loans had decreased over time

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dodd-frank act of 2010

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reined in mortgage practices and derivatives trading and curbed proprietary trading. monitors the financial stability of major firms whose failure could have a major negative impact on the economy (firms deemed too big to fail)

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Fiduciary rule (April 10th, 2017)

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requiring brokers to act in a clients best interest when providing retirement advice as opposed to meeting 'suitability standard'

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follow-on offerings - or - Seasoned Equity offerings (SEO)

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Raise capital for companies already listen on a stock exchange Offering of a stock already listed

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Initial Public Offering

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Raise capital for a company that is not listed

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Primary offering

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Stock is sold by the company itself

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Secondary offering

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Stock is sold by existing shareholders

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Filing date

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Day company submits registration statement with SEC

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Effective Date

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Date at which SEC opines that full disclosure is included in prospectus

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banker

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Gets the mandate (official order to do something)

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Corporate Finance

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Participates in due diligence, develop marketing material, writes MD&A, organizes road show, and provides valuation analysis

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Equity Capital Markets Team

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Manages relationship with other underwriters, gives opinion on price, timing and distribution of stock, and provides aftermarket support

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Equity institutional Sales

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Take care of the relationships with potential investors

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Equity traders

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Needed for market support - provide post deal market support

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Sell-side analysts

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Attend due diligence session, participate in customer calls, provide valuation opinions, reviewing the prospectus, and providing feedback on due diligence disclosure.

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Auctions

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Shares are offered for sale on a predetermined schedule to several competing potential buyers In an auction neither the issuer nor the underwriters can choose either the stock’s price or its investors

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Single price (uniform price)

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All winning bidders pay the lowest price regardless of the prices they bid (often used for IPOS)

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Discriminatory (dutch) auction

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Winning bidders pay the amount they bid

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Fixed price offering

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Certain number of shares are offered to retail investors at a present price, which is generally identical to the price offered to institutional investors without any consideration for the demand - TEND to result in high level of underpricing

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Book Building

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The bank marketing the IPO gets to know the price investors intend to offer and the volume of the security they are interested in

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Bought Deal (or firm commitment)

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The issuer sells its securities outright to the undderwriter, who then resells the securities to dealers and or the general public

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Direct Public Offering

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Can sell its shares directly to the public without the help of underwriters

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Best Efforts

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Banks agree only to do their best to sell shares to the public More common for IPOs then SEOs and more common still for very small IPOs

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Spinning

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Allocating IPO shares to an executive in a company in exchange for the company’s future investment-banking business

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Laddering

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Tactics to support aftermarket prices and boost aftermarket demand Underwriters require that investors agree to purchase additional shares in the aftermarket at specified prices.

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Quid pro quo arrangements

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Investment banks allocate hot IPOs to their favored customers in return for commission business

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Flipping (not illegal)

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Buys shares at the offering price and resells them as soon as trading begins Most profitable in a hot IPO market, when price often rises dramatically above the offering price on the first day

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Issuer directed securities (not illegal)

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Amounts of stock that the issuer reserves for its employees and friends The amount of issuer-directed securities bear a “reasonable relationship” to the total amount offered and that the favored purchasers be “directly related to the conduct of the issuer’s business”