Investment Banking Notes

Investment Banking Notes: LBO analysis is used to help craft a viable financing structure for the target on the basis of its cash flow generation, debt repayment, credit statistics and investment returns over the projected period. M&A – most transactions require financing on the part of the acquirer through the issuance of debt and/or equity. Sell-side M&A; from an analytical perspective a sell-side assignment requires a comprehensive valuation of the target using those methodologies discussed in this book. I.e. whether to run a broad or targeted auction or pursue a negotiated sale. Generally, an auction required more upfront organization, marketing, process points, and resources than a negotiated sale with a single party. Analysis at various prices – AVP and contribution analysis. AVP, also known as a valuation matrix, displays the implied multiplies paid at a range of transaction values and offer prices. Contribution analysis analyses the financial ‘contributions’ made by the acquirer and target to the pro forma entity prior to any transaction adjustments. The impact on earnings in known as the accretion/(dilution) analysis, while the impact on credit statistics is known as balance sheet effects. COGS – Cost of Goods Sold D&A – Depreciation & Amortization SG&A – Selling, General & Administrative Valuations – ‘comparable comps’ is based on the premise that similar companies provide a highly relevant reference point for valuing a given target due to the fact that they share key business and financial characteristics, performance drivers and risk. The core of this analysis involves selecting a universe of comparable companies for the target (“comparable universe”) – trading multiples are then calculated for the universe, which serve as the basis for extrapolating a valuation range for the target, which is calculated by applying the selected multiples to the targets relevant financial statistics. Multiples include: - Enterprise value to earnings before in taxes, depreciation and amortization (EV/EBITDA) Price to earnings (P/E) Earnings per share (EPS) While P/E is most widely known outside of wall street – multiples based on EV/EBITDA are most widely used by bankers because they are independent on capital structure and other factors unrelated to business operations (i.e. differences in tax regimes and certain accounting policies). Comparable companies’ analysis is designed to reflect ‘current’ valuation based on prevailing market conditions and sentiment. As such, in many cases it more relevant than intrinsic value analysis, such as discounted cash flow analysis. At the same time, market trading levels may be subject to periods of irrational investor sentiment that skew valuation either too high or too low. Comparable Company Analysis Steps – 1. 2. 3. 4. 5. Select the universe of comparable companies Locate the necessary financial information Spread key stats, ratios and trading multiples Benchmark the comparable companies Determine valuation 1. Select the universe of comparable companies – generally found from internally and then a closer subset identified – however, if starting from scratch a survey of the target’s public competitors is generally a good place to start identifying potential comparable companies. 2. Locate the necessary financial information – once the initials comparables universe is determined, the bankers locate the financial information necessary to analyse the selected comparable companies and calculate (“Spread”) key financial statistics, ratios, and trading multiples. The primary data for calculating these metrics is compiled from various sources, including a company’s SEC filings, consensus research estimates, equity research reports and press releases – all available via Bloomberg. 3. Spread key stats, ratios and trading multiples – the banker is now prepared to spread key stats, ratios and trading multiples for the comparables universe. Involves calculating market valuation measures such as enterprise value and equity value, as well as key income statement items, such as EBITDA and net income. A variety of ratios and other metrics measuring profitability, growth, returns, and credit strength are also calculated at this stage. As part of this process, the banker needs to employ various financial concepts and techniques, including the calculation the last twelve months (LTM) financial stats and calendarization or company financials, and adjustments for non-recurring items. 4. Benchmark the comparable companies - The next level of analysis requires an indepth examination of the comparable companies in order to determine the target’s relative ranking and closest comparables. Usually by presenting in spreadsheet format. 5. Determine valuation – the trading multiples of the comparable companies serve as the basis for deriving a valuation range for the target. Typically starting by using the means and medians for the relevant trading multiples (e.g. EV/EBITDA) as the basis for extrapolating an initial range.