Inside an Investment Bank

Week 1: Post Lecture Additional Notes

INVESTMENT BANKING TODAY Click on the photo to watch the WSJ video 5 Years After the Financial Crisis

Source: http://youtu.be/BACldJRk058 INVESTMENT BANKING TRANSACTIONS 1. IPO (Initial Public Offering) An IPO is the first time that a private company can sell its shares to the general public Most companies go public in order to raise capital, get acquisition currency, and market themselves The IPO Process Bankers prepare materials to meet with the company and pitch for the business Afterwards, the company selects banks for book runner and co-manager roles, based on its relationships with them and their pitches After an initial kick-off meeting, all the bankers, accountants, and lawyers involved do a lot of due diligence on the company to make sure that their registration statements are accurate Common tasks include: o Customer Calls: This is probably the most interesting task, because sometimes you hear interesting things from customers that youd never learn about otherwise o Industry / Market Due Diligence: You research the market, speak with experts, and figure out where it might be headed in the future The company files an S-1 Registration with the SEC then holds a pre-IPO analyst meeting where the company teaches bankers and investors how to sell the company

Management then goes on a Road Show to meet with various people to market the company and get feedback from investors on the price range of shares A pricing meeting is held to discuss the price of shares based on demand received from the Road Show and market indicators Shares are then allocated to investors and the stock begins trading on the stock market Source: http://www.hyperink.com/The-Initial-Public-Offeringipoprocess-Got-FacebookShares-b755748B453a19 2. M&A (Mergers & Acquisitions) M&A refers to the consolidation of companies A merger is a combination of two companies to form a new company An acquisition is the purchase of one company by another in which no new company is formed Sell-Side M&A Deals These happen when a client comes to you and says, We want to sell our company for a profit can you help us? They may know who they want to sell to while other times they need help to determine who to sell to Another common motivation to sell could be, Help! Were about to go bankrupt can you save us before we go belly-up? - This is called a distressed sale and technically an M&A deal. Buy-Side M&A Deals In these deals, the client comes to you and says, We want to buy a company. Can you help us do it / help us finance it? Sometimes they know exactly what they want to buy, or are already in discussions with the seller; other times they arent sure and want bankers to research different options Sources: http://www.investopedia.com/terms/m/mergersandacquisitions.asp http://www.mergersandinquisitions.com/investment-banking-groups-mergersacquisitions/ 3. Spinoff A spin-off is when a division of a company or organization becomes an independent business Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks In most cases, the parent company or organization offers support doing one or more of the following: o Investing equity in the new firm o Being the first customer of the spin-off (helps to create cash flow)

o Providing incubation space (desk, chairs, phones, Internet access, etc.) o Providing services such as legal, finance, technology, etc. All the support from the parent company is provided with the explicit purpose of helping the spin-off grow Source: http://en.wikipedia.org/wiki/Corporate_spin-off 4. Capital Raising Large corporations could not grow to their present sizes without being able to find innovative ways to raise money or capital to finance expansion Corporations have different methods for obtaining capital which include: o Issuing Bonds o Issuing Preferred Stock o Selling Common Stock o Borrowing o Using profits Investment bankers advice companies on the best ways to raise capital Sales & Trading executes the issuing and borrowing of bonds and stock Source: http://economics.about.com/od/smallbigbusiness/a/corp_capital.htm WORK PRODUCT CREATED BY BANKERS Comps Comparable companies analysis or comps show how companies in are doing against their competitors. They usually include the share price, price to earnings ratio, EBITDA and other financial metrics. Bankers use comps to ultimately determine a target companys value based on its peers in the industry.

Source: http://stuffinvestmentbankerslike.blogspot.com/2008/06/comps.html http://www.streetofwalls.com/articles/investment-banking/recruitinginterviewing/comparative-company-analysis/

Profiles Bankers use company profiles show potential acquisition targets to clients. They may include a company description, historical financials, forecasts, a management description, share price performance and current news.

http://www.docstoc.com/docs/36226172/Saudi-Investment-Bank-Company-Profile--Aug-31-2011 Modeling A financial model is a quantitative representation of financial information. While most financial models focus on valuation, some are meant to quantify and predict risk, portfolio performance, or general economic trends within and industry or region.

Source: http://www.ibtraining.com/financial-modeling.php http://ibinstitute.in/ValuationTechniques.aspx