INVESTMENT BANKING

Viney Sawhney
sawhney@fas.harvard.edu
Introduction Course Description
This course is the study of investment banking beginning with strategic planning and financial
management; moving to the analysis, financing and valuation of investment opportunities; and
finishing with the study of corporate governance and ethical issues faced by investment bankers. This
course examines the primary functions of investment banking such as mergers & acquisitions
(M&A), leveraged buyouts (LBO) and corporate restructuring.
These topics will be explored from the perspective of the corporations survival and desire for
continued prosperity and expansion. Corporate restructuring and internally redeploying resources to
activities within the business with more attractive growth potential is an internal method to attain
growth. The application of the investment banking activities through external mergers & acquisitions
and leveraged buyouts is often a quicker more powerful way to expand and grow the corporation. The
examination of these internal and external activities is the focus of this course.
Course objectives
The main objective of the course is to provide students with the necessary theoretical and conceptual
tools used in investment banking. This course will provide an introduction and general understanding
of investment banking activities and the mechanics and financial analysis required to value, negotiate
and successfully close transactions.
The course will provide the intellectual framework used in the investment banking process: financial
analysis, valuation and the mechanics of deal structuring. Other learning objectives include analysis
and valuation in M&A and LBO settings and understanding the sources of capital in the context of
these transactions. The final objective of this course is to show how corporate governance, ethics and
legal considerations factor into investment banking deals.
Appropriate for Students Pursuing:
This course is appropriate for students who are pursuing a career in investment banking or an
internship in the investment banking division of a financial firm. This course is also suitable for
students who have a general knowledge of corporate finance and who wish to broaden their
understanding of finance by applying financial concepts and techniques to analyze activities and
transactions in the realm of investment banking.
Main Topics
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Investment banking activities

Financial statement analysis
Application of valuation mechanics and techniques
Financial modeling and comprehensive valuation analysis
M&A
LBOs
Deal mechanics
Corporate restructuring
Corporate defense
Legal and ethical and governance issues in investment banking settings

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Course Evaluation
The grading of the course will be based on the following weighting scheme:
20% Class Participation
30% Quizzes
20% Mid-term Project (Team Environment)
30% Final Project (Team Environment)

The course will be taught in the form of lectures and case studies intended for in class discussion
together with interactive discussion of current events based on articles from financial news
media. Each student will be part of a study group made up of at least three members. Weighting
for class participation will be derived from individual quizzes and class discussion of case studies
and financial articles. In addition, class exercises, on an individual / team basis, shall be assigned
for select sessions.
Teaching Method
This course will have a number of different dimensions including:
Lectures
Industry and background notes
Case Analysis
Interactive discussion of current events
Group Presentations
Guest speakers
Course Textbook
Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to Investment Banking, copyright
2006 by Jerilyn Castillo and Peter McAniff; Circinus Business Press, a division of The Circinus
Group LLC
Required reading
Daily reading of leading financial newspapers is required for the interactive class discussions
of current events and for the in-class quizzes.

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SCHEDULE
Session 1:

Fundamentals of Investment Banking

a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapter 1
b. Note: History of Investment Banking, by Ashish Nanda, Thomas J. DeLong,
Lynn Villadolid Roy
HBS Publication Date: Jan 16, 2002, Prod. #: 902168-PDF-ENG
c. Case: Investment Banking in 2008 (A): Rise and Fall of the Bear, by David
P. Stowell, Evan Meagher
HBS Publication date: Mar 06, 2009. Prod. #: KEL378-PDF-ENG
Bear Stearns, the 85-year-old investment bank, which had survived the Great
Depression, the savings and loan crisis, and the dot-com bust, imploded as a
result of the subprime housing crisis. Less than eighteen months after trading
at an all-time high of $172.61 per share, Bear had little choice but to accept a
humiliating Federal Reserve-sanctioned bailout offer, and the legendary
investment bank ceased to exist. Analysis of the fall of Bear Stearns facilitates
an understanding of the difficulties affecting the entire investment banking
industry: high leverage, overreliance on short-term financing, excessive risk
taking on proprietary trading and asset management desks, and myopic senior
management all contributed to the massive losses and loss of confidence. The
impact on the global economy was of epic proportions.
d. Case: Supplement: Investment Banking in 2008 (B): A Brave New World,
by David P. Stowell, Evan Meagher
HBS Publication Date: Mar 6, 2009, Prod #: KEL380-PDF-ENG
Lehman Brothers, one of the five largest investment banks in the US, had grown
increasingly reliant on its fixed income trading and underwriting division,
which served as the primary engine for its strong profit growth. This case
covers the period from the sale of Bear Stearns to JP Morgan to the conversion
into bank holding companies by Goldman Sachs and Morgan Stanley, including
the Lehman Brothers bankruptcy and the sale of Merrill Lynch to Bank of
America. The case explains the new global paradigm for the investment banking
industry, including increased regulation, fewer competitors, lower leverage,
reduced proprietary trading, and potentially-reduced profits.

Session 2:

Financial Statement Analysis

a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapters 2 & 3
b. Note: Financial Statement Analysis, by David F. Hawkins
HBS Publication Revision Date: Nov 24, 2010, Prod. #: 195177-PDF-ENG
This industry and background note covers basic financial analysis techniques.
c. Note: Financial Statement Analysis Identify the Industry
The second half of the class will be dedicated to an exercise that will be
distributed in the classroom and completed in a team environment.

INVESTMENT BANKING
Session 3:

The Role of Valuation

a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapters 8, 9 & 10
b. Note: Business Valuation and the Cost of Capital, by Timothy Luehrman
HBS Publication Date: Nov 20, 2009 Prod. #: 9210037-PDF-ENG
c. Case: Encana Corporation: The Cost of Capital, by James E. Hatch; Larry
Wynant; Ken Mark
HBS Publication Rev. Date: Jun 18, 2010. Prod. #: 907N02-PDF-ENG
Through the mechanics of applying the Capital Asset Pricing Model
(CAPM) and the Weighted Average Cost of Capital (WACC) formula this
case provides an opportunity to learn: 1) the theory underlying the concept
of the cost of capital; 2) the nature and estimation of the risk premium; 3)
how to estimate the cost of capital for various sources of funding; 4) the
factors determining the weights to be employed in computing the cost of
capital, and 5) how the cost of capital is used in investment decisions.

Session 4:

Discounted Cash Flow Analysis Applied to Valuation

a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapter 11
b. Case: Baidu.com, Inc.: Valuation at IPO, by George Foster, Joseph
Piotroski, Ning Jia, Martin Haemmig, Sara Gaviser Leslie, Jennie Tung
Publication date: Feb 05, 2009. Prod. #: A197-PDF-ENG
Since its official launch in January 2000, Baidu.com, Inc. quickly grew to
become the leading Internet search engine in China, and on August 5, 2005
Baidu registered to go public on the NASDAQ Stock Market. Financial
statements and Discounted Cash Flow (DCF) techniques will be applied to
value this high-growth company.

Session 5:

Financial Modeling and Comprehensive Valuation Analysis

a. Note: An Introduction to Cash Flow Valuation Methods, by Richard S.
Ruback HBS Publication date: Rev Jan 16, 1995. Prod. #: 295155-PDFENG
b. Case: Mercury Athletic: Valuing the Opportunity, by Timothy A. Luehrman,
Joel L. Heilprin
HBS Publication date: Rev June 20, 2011. Prod. #: 4050-PDF-ENG
In January 2007, West Coast Fashions, Inc., a large designer and marketer
of branded apparel, announced a strategic reorganization that would result
in the divestiture of their wholly owned footwear subsidiary, Mercury
Athletic. John Liedtke, the head of business development for Active Gear, a
mid-sized athletic and casual footwear company, saw the potential
acquisition of Mercury as a unique opportunity to roughly double the size of
his business. The case uses the potential acquisition of Mercury Athletic as a
vehicle to teach students basic DCF (discounted cash flow) valuation using
the weighted average cost of capital (WACC).

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Session 6:

Mergers & Acquisitions

a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapters 5 and 14
b. Case: The Merger of Hewlett-Packard and Compaq (A): Strategy and
Valuation, by Robert F. Bruner, Anna Buchanan
Publication Revision Date: Nov 19, 2009. Prod. #: UV3981-PDF-ENG
In 2002, a money manager is considering how to vote shares in HewlettPackard on the proposal to merge with Compaq. The case presents
information about the strategic and financial motivations of the merger.
Included are completed valuations of both HP and Compaq and detailed
summaries of the leading advocate (Carly Fiorina) and critic (Walter
Hewlett). The case allows students to develop their skills in valuation in an
M&A setting, including valuation the prospective synergies in the deal.

Session 7:

Leveraged Buyout Analysis

a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapter 12
b. Case: BCE Inc.: In Play, by Stephen R. Foerster, Heather Tobin
Publication date: Jan 25, 2010. Prod. #: 909N18-PDF-ENG
BCE Inc. (BCE), one of Canada's leading telecommunications companies,
had struggled under its weak stock price performance and low valuation
relative to its comparable peers, and faced increasing pressure from its
largest shareholder, the powerful Ontario Teachers' Pension Plan. This
case provides students with an opportunity to: Assess comparable trading
multiples and consider why the target company may be trading at a discount
or premium to its comparable peers; Apply discounted cash flow analysis
and precedent transaction analysis to determine the value of an acquisition
target; Gain a broader understanding of the leveraged buyout (LBO)
process and consider its advantages and disadvantages.

Session 8:

Midterm - Exam
The mid-term will be a team project based on a case study in conjunction with
the relevant text book chapter readings, the session lecture notes and the cases
covered in the first seven sessions.

INVESTMENT BANKING
Session 9:

Acquisition Currency
a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapter 15
Acquisition currency highlights some of the issues facing acquirers in
deciding how to structure a proposed transaction. An acquirer able to offer
cash would, if opting to use stock as acquisition currency instead, probably
use a "fixed value" measure, with an exchange ratio that floats and an
acquisition price that stays the same.
b. Case: Proposed Merger of Perdigao and Sadia, by Deborah Terayama,
James E. Hatch
Publication Date: Apr 23, 2012. Prod # W12892-PDF-ENG
In April 2009, Perdigo was contemplating the acquisition of Sadia and a
merger of the two companies. The intended share-swap transaction between
two of Brazil's biggest food companies would allow Perdigo to
dramatically grow its domestic and international market share, and become
one of the world's largest players in the food production industry, while
driving up profit margins by benefiting from synergies.

Session 10: Investment Banking Deal Mechanics

a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapter 20
This session examines due diligence, the legal agreement, corporate
acquisitions, merger transactions, tender offers and proxy contests.
b. Case: Preparing for the Google IPO: A Revolution in the Making?
By Didier Cossin, Dinos Constantinou
HBS Publication date: Nov 26, 2004. Prod. #: IMD185-PDF-ENG
In 2004, Google announced that it was launching its long-awaited IPO. This
case examines the unconventional auction format of the IPO of the world's
most popular search engine, the role of investment banks in the IPO process,
and the implications for corporate governance and stock valuation of a dualclass share structure.
Session 11: Corporate Restructuring
a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapter 22
b. Case: Kmart, Sears, and ESL: How a Hedge Fund Became One of the
World's Largest Retailers, by David P. Stowell, Paul Stowell
HBS Publication date: Aug 16, 2005. Prod. #: KEL133-PDF-ENG
Case examines a number of compelling issues related to Kmart's bankruptcy,
restructuring, and rebirth under the control of ESL, a large hedge fund. The
case focuses on the role of investment bankers and the increasingly important
position that hedge funds and LBO funds have carved out in the M&A market
Two deals are covered: the first deal illustrates the decision-making process
for a financial buyer, including the downside protection of Kmart's real estate

INVESTMENT BANKING
holdings; the second deal represents a traditional strategic acquisition.
Furthermore, this case illustrates the innovative use of real estate as a
"hedge" for ESL in the event that the retail combination does not produce the
required results.
Session 12: Corporate Defense
a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapter 23
b. Case: Ben and Jerrys Homemade, Darden School of Business 2003 #UV0273
Case examines issues of asset control for Ben & Jerry's Homemade, Inc.,
during the takeover offers by Chartwell Investments, Dreyer's Grand,
Unilever, and Meadowbrook Lane Capital in January 2000. Case provides
a unique opportunity to discuss the implications of a nontraditional
corporate orientation and review Ben & Jerry's strong social consciousness
and the takeover-defense mechanisms that maintain management's control
on company assets.
Session 13: Credit and Financing Credit Analysis and Sources of Capital
a. Text: Castillo, Jerilyn J and McAniff, Peter J., Practitioners Guide to
Investment Banking, Circinus Business Press 2006, Chapter 24s & 25
Credit risk analysis is one of the most important factors in determining what
sources of capital are available to a company. This section covers when and
why credit analysis is applied and discusses: rating agencies, credit ratings,
methods of credit analysis and credit ratio notching.
Sources of Capital examines short term, senior long-term and subordinated
debt; common and preferred equity; public vs. private capital and private
placements
b. Case: Texas Pacific Group. J. Crew, 2007, HBS Case #9-808-017
Case describes Texas Pacific Groups (TPG) purchase and operation of J.
Crew, the catalog and specialty clothing retailer and highlights the issues
involved in financing the transaction and operational challenges of turning
around and running the business. Case also details the improvements in the
business and then the retrenchment, leaving the business facing a significant
debt payment coming due. TPG must decide whether to sell the business and
get out whole, or develop and execute a successful strategy going forward.
Session 14: Corporate Governance
a. Corporate social responsibility, corporate governance, and financial
performance: Lessons from finance, by Robert Neal, Philip L. Cochran
HBS Publication date: Nov 15, 2008. Prod. #: BH304-PDF-ENG
Corporate social responsibility looks at how firms treat their stakeholders. All
too often, the corporate social responsibility literature focuses on customers,
employees, and the natural environment, but rarely on shareholders. The

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focus of this article is the impact of the firm on its shareholders as expressed
through its corporate governance practices.
b. Case: Accounting Fraud at WorldCom, by Robert S. Kaplan, David Kiron
Publication Date: Apr 29, 2004. Prod. #: 104071-PDF-ENG
Case enables a full discussion of the pressures that led executives and
managers to cook the books, the boundary between earnings smoothing
and fraudulent reporting, the role for internal control systems and internal
audits to detect and prevent accounting fraud, the expectations about
governance processes performed by external auditors and the board of
directors, and the pressures and consequences when middle managers
follow orders they know are wrong.
Session 15: Final - Team Presentations
The final exam will be a study group activity. Each team will be assigned a case
study, and the final exam will comprise a written analysis of the assigned case in
conjunction with the relevant text book chapter readings, the session lecture notes
and the cases covered in the sessions.