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Matthew Krantz. Investment Banking For Dummies
Investment Banking For Dummies® To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Investment Banking For Dummies Cheat Sheet” in the Search box. Table of Contents
List of Tables
List of Illustrations
Guide
Pages
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Getting Started with Investment Banking
Introducing Investment Banking
What Investment Banking Is
The role investment banking plays
How investment banking differs from traditional banking
The services investment banks provide
How investment banks are organized
The current lay of the investment banking land
Types of investment banking operations
How investment banks get paid
DISSECTING AN INVESTMENT BANKING OPERATION: USING GOLDMAN SACHS AS AN EXAMPLE
How Investment Banking Is Done
Finding the financial statements
Understanding the importance of financial statements and ratios
Zeroing in on past transactions
Seeing the value of fixed income
Turning Into an Investment Banking Pro
Putting the discounted cash flow analysis to work
Seeing how leverage becomes a force in investment banking
Pinpointing buyout targets
Putting Investment Banking to Work
Staying in compliance with the rules
Looking beyond the published financial statements
Making adjustments to financial statements for comparability
The Purpose of Investment Banking: What Investment Bankers Do
Putting the For-Sale Sign on Corporate America
Mergers and acquisitions
Why companies buy other companies
The advantages of building versus buying
Pitfalls of ill-conceived mergers
Leveraged buyouts
How leverage changes the nature of a deal and a firm
Why leverage is used
The pros and cons to debt in deal making
PRIVATE EQUITY: NOT THE TICKET TO RICHES
Private business sales
Appreciating the rationale of private sales
Seeing where private transactions are the best choice
Understanding the unique traits of private deals
Initial public offerings
The lifecycle of a company: When going public makes sense
The role of the investment banker in IPOs
What matters in an IPO
Helping Investors Decide Whether to Buy or Sell
The importance of research
Sell-side and buy-side analysts
How an analyst’s research can make money for investors
What do the analysts do?
What recommendations are and why they are important
How the sell side interacts with the buy side
How sell-side analysts make money for the investment bank
Digging Into the Role of the Trading Desk
Why investment banks are into trading
How investment banks turn pennies into billions
The type of analysis used in trading operations
How Investment Bankers Sell Companies
Getting Companies Ready for Sale on Public Markets
Meeting the requirements to make an IPO happen
Writing the prospectus
Summary
Risk factors
Industry data and other metrics
Use of proceeds
Capitalization
Financial data
Management’s discussion and analysis of financial condition
Business
Management
Executive pay
Related-party transactions
Principal and selling shareholders
Underwriting
Legal matters
Supporting the IPO: Making success last
Holding the insiders hostage with lockups
Quiet periods
Follow-on and secondary offerings
What are unicorns?
Seeing What Sell-Side Analysts Do
The goals of the sell-side analyst
What investors look to sell-side analysts for
Spreading the word: Disseminating sell-side research
THE DANGERS OF CONFLICTS
Examining a Sample Research Report
What to look for in the document
The main sections of a research report
Ways to look beyond the “buy” or “sell”
How Investment Banking Is Used in Mergers and Acquisitions
Come Here Often? The Basics of Mergers and Acquisitions
Kinds of mergers
Horizontal mergers
Vertical mergers
Conglomerate mergers
Why companies merge instead of simply growing organically
For synergy
For speed
For increased market power
To gain access to foreign markets
Because of the management’s own interests
To diversify
For tax considerations
For greater control
To capitalize on untapped borrowing capacity
Firms that make attractive acquisition targets
How companies identify firms to merge with
DOING M&A BUFFETT-STYLE
The nature of the merger: Friendly or hostile?
Tools Used to Analyze the M&A Deal
The role of the buy-side M&A advisor
Identifying potential acquisition targets
Performing due diligence
Valuing the company
Negotiating the terms of the deal
Closing the deal
SHARK REPELLENT
The role of the sell-side M&A advisor
Preparing the company for sale
Marketing the firm
Why Many M&A Deals Go Wrong
Misplaced incentives
Faulty analysis
Overstated synergies
Culture wars
The winner’s curse: Overpaying
How Investment Banking Is Used in Leveraged Buyouts
In This Corner: Introducing the Players
Investment banks
Big institutions
Management
Stock and bond investors
Aiming for the Right Targets in a Leveraged Buyout
Identifying companies that can work in a leveraged buyout
Appreciating the power of cash flow
Coming to terms with the return analysis: Internal rate of return
Finding the Exit
Setting a target for exit in time
Considering how the exit will happen
Initial public offering
Sale to a strategic buyer
Another leveraged buyout
Digging In: Performing Investment Banking
Finding the Data: Documents and Reports
Finding What You Need on the Securities and Exchange Commission’s Website
What types of information you can find
The key types of documents
Annual report (10-K)
Quarterly report (10-Q)
Proxy statement (DEF 14A)
Prospectus (S-1)
Interim report of material events (8-K)
How to use EDGAR to pinpoint information
WATCH OUT, EDGAR — SOCIAL MEDIA IS HERE
Getting Data in a Format You Can Work With
Assembling the tools you need
Importing financial information into Excel
Copying and pasting EDGAR data
Importing directly into Excel
Using your smartphone to pull in data
Getting in tune with interactive data
Paying Attention to the Non-Financial Information
Monitoring news streams for investment banking ideas
Monitoring the macro economy
Monitoring the news
Monitoring the filings
Quickly processing information with aggregators
Keeping tabs on mergers and acquisitions
Tracking the IPO market
Watching corporate profits
Doing research on the key players in a deal
Making Sense of Financial Statements
Income Statements
THE TRUE DRIVERS OF BUSINESS
Locating the areas of interest to investment bankers
Tweaking the statement with different assumptions
Looking at financials in a new way: Pro-forma results
Finding out all about net operating profit after tax
Finding investment banking opportunities
Balance Sheets
Finding your way around the key parts
Getting to know the assets
Finding out about the liabilities
Understanding the equity
Understanding a company’s financial strength
Common sizing analysis
Comparing debt to equity
Studying book value
Locating pitfalls and opportunities
Statement of Cash Flows
Seeing why the cash flow statement is so important in deal making
Understanding the key parts of the document
Cash flows provided from (used by) operating activities
Cash flows provided from (used by) investing activities
Cash flows provided from (used by) financing activities
Calculating free cash flow
Proxy Statements
Learning about the key players in a deal
Identifying the management team’s incentives
Analyzing management pay packages
Perfecting the Financial Ratios for Investment Banking
Valuation Multiples: Assessing How Much the Company Is Worth
Investors’ favorite valuation tool: P/E ratio
Going old school with price-to-book
Putting a price on profitability
FAMOUS FAN OF BOOK VALUE: WARREN BUFFETT
Liquidity Multiples: Checking Companies’ Staying Power
Deciphering debt to equity
Getting up to speed with the quick ratio
Interpreting interest coverage
Profitability Ratios: Seeing How a Company’s Bottom Line Measures Up
Why gross margin isn’t so gross after all
Income from continuing operations: Looking at profit with a keen eye
Keying into profits with net margin
Efficiency Ratios: Knowing How Well the Company Is Using Investors’ Money
Finding out about return on assets
Digging into return on capital
Uncovering company secrets with return on equity
Calculating a company’s growth rate
Sizing Up the Industry
Performing an Industry Analysis
Understanding why industry analysis is important
Creating a comparison universe
Digging into the Global Industry Classification Standard
Seeing who companies say their rivals are
Checking out the peers from which boards of directors set CEO pay
Adjusting the industry comparison universe
Unearthing Company Trends and Common sizing the Financial Statements
Comparing growth rates
Looking at an example: Dell
Interpreting the results
Measuring trends next to industry
So did it go? A healthier Dell goes public
Comparing leverage
Comparing various profit margins
How a Company Stacks Up: Comparing the Key Ratios
Sizing up valuation
P/E
EV/EBITDA
Comparing total debt-to-equity
Sizing up companies on their efficiency
Industry ratios
Understanding Stocks and Focusing on Past Transactions
Introducing Stock
Characteristics of stock
Types of stock
Understanding stock pricing
Finding Past Transactions
Tracking the stock market
Studying private deals
Looking at pre-IPO marketplaces
Examining buyouts
Analyzing Past Transactions
Knowing what the market will bear
Knowing when the market is distorted
Tabulating key ratios for past deals
Understanding the pitfalls
Applying Investment Banking to Fixed Income
Introducing Bonds
LEVERAGING YOUR WAY TO THE TOP
Identifying the Various Types of Bonds
Convertible bonds
Callable bonds
Puttable bonds
Floating-rate bonds
Zero-coupon bonds
Knowing Their Place: The Position of Bondholders
WHAT HAPPENS TO BONDHOLDERS IN MERGERS AND ACQUISITIONS?
Understanding Bond Pricing
Introducing the concept of present value
ADDING DOLLARS AT DIFFERENT POINTS IN TIME: MIKE TROUT ISN’T MAKING AS MUCH AS HE THINKS HE IS
Relating yield to maturity and price
WHAT DETERMINES THE YIELD TO MATURITY?
Playing the spread: How different factors affect bond prices
Considering bond sensitivity to changes in interest rates
The coupon rate effect
The term to maturity effect
Duration
Tracking the Bond Market
FINDING BOND PRICING DATA
Debt or Equity: How a Company Chooses
Taking Investment Banking to the Next Level
Doing a Discounted Free Cash Flow Analysis
Gearing Up for Discounted Free Cash Flow
Computing free cash flow
Forecasting free cash flow
SPREADSHEET ANALYSIS
Calculating the Weighted Average Cost of Capital
Understanding why the weighted average cost of capital is so important
Measuring the cost of debt and equity
Cost of debt capital
Cost of equity capital
Understanding the capital asset pricing model
Beta is the measure of risk
Applying the CAPM
Postscript on CAPM
Going for Terminal Value
Knowing the perpetuity growth formula
Applying the constant growth formula
Applying the two-stage growth model
Stress-testing the results
Valuing a Share of Stock
Structuring a Leveraged Buyout
Seeing How Leveraged Buyouts Are Structured
The types of financing
Bank debt
REVOLVING CREDIT
TRADITIONAL TERM LOANS
Junk bonds
THE HISTORY OF THE JUNK BOND: WHEN JUNK BECAME “GOLDEN”
Mezzanine debt
Equity
Understanding seniority and maturity
Building a Leveraged Buyout Model
Creating a pro forma model
Risk of the LBO
Market conditions
Deciding on methods of financing
Seeing how the results work out
The importance of taxes in a leveraged buyout
What can go right and what can go wrong
Determining the Strength of a Company’s Return on Equity
Understanding the Importance of Return on Equity
What return on equity shows
Pros and cons of return on equity versus other profitability measures
Gross profit margin
Operating profit margin
Net profit margin
How return on equity can help guide an investment banking deal
Using a DuPont Analysis
THE HUMBLE BEGINNINGS OF THE DuPont ANALYSIS
The three-factor DuPont method
Putting it all together
The five-factor DuPont method
Operating profit margin
Effect of non-operating items
Tax effect
Putting it all together
Interpreting the Results
Cola wars
What the numbers mean
Looking past the numbers for insight
Telling companies how to react to the numbers
Applying Investment Banking
Knowing the Rules
The History of Regulation of Investment Banking
The goals of investment banking regulation
Why the rules of today are the result of days past
How regulations have shaped the investment banking industry
The Ins and Outs of Modern Investment Banking Rules
The types of rules imposed on investment banking
Illegal insider trading
Market manipulation
Information flow
How investment banking rules changed after the financial crisis
The Rules on Analysts
Why rules were needed
The not-so-delicate balancing act analysts play
What disclosure and compliance are required
Why Simply Making Rules Isn’t Enough
How Some Companies Lie, Cheat, and Steal Their Way to the Top
Did You Really Sell That? When Companies Aggressively Report Revenue
Don’t let the sun go down on me
The truth?
Lucy, You Got Some ’Splainin’ to Do: When Companies Understate Their Expenses
What a waste
Crazy like a fox
Missed It by That Much: When Companies Overstate Their Financial Position
Those pesky pensions: The epidemic of firms understating pension liabilities
We are the world
Keeping Investors Off-Balance
Enron’s special purpose
A mountain of a scandal
Swap meet
What Should an Investment Banker Do?
Understanding Alternative Investments and Asset Management
Knowing Your Alternatives
Hedge funds
SOPHISTICATED = SOMEONE WHO MAKES BANK
Venture capital
Commodities
DIVERSIFICATION 101
Real estate
Currencies and cryptocurrencies
Digging Into Asset Management
Attracting investors to asset management
Creating asset management tools
Stock mutual funds
Bond mutual funds
Exchange-traded funds
Managing Potential Conflicts with Clients
How asset management can cause conflicts
Let’s put lipstick on this pig
Mom likes me best
BREAKING DOWN THE FIREWALL
Say it ain’t so?
How to eliminate and manage conflicts
Build a wall
Place restrictions
Ensure compliance
Disclose potential conflicts of interest
Establish a code of ethics
Trying Your Hand at Investment Banking with a Case Study
Setting the Scene
The acquirer
The target
Considering the Options
Identifying the options
Looking at financing
Creating the Analysis
An analysis of the financial statements
Income statements
Balance sheets
Structuring a Deal
Form of acquisition
Creating pro forma statements
Success or Failure
The Part of Tens
Ten of the Biggest Debacles in Investment Banking History
The Dot-Com Boom and Bust
Tainted Research Scandals
Enron and the Accounting Scams
The Mortgage Debacle and Collapse of Lehman
The Flash Crash
The London Whale at JPMorgan Chase and Barings Bank
Long-Term Capital Management
Bankruptcy in Jefferson County, Alabama
IPO Allocations with CSFB
Bad Mergers and Acquisitions Like AOL Time Warner
Ten Ways to Improve a Discounted Cash Flow Analysis
Financial Analysis Isn’t Physics
Show Your Sensitive Side
Monte Carlo Isn’t Just for High Rollers
What Can Go Wrong Will Go Wrong
It’s Tough to Make Predictions, Especially about the Future
The Investor of Today Doesn’t Profit from Yesterday’s Growth
Garbage In, Garbage Out
Rates Are Falling — It’s a Better Deal!
Read Your Putt from Several Angles
The Weighting Is the Hardest Part
Ten (Or So) of the Best Online Resources for Investment Bankers
Bloomberg
Reuters
Standard & Poor’s
Renaissance Capital and IPOScoop.com
The Securities and Exchange Commission
Moody’s
MarketSmith
Index Fund Advisors
Morningstar
Bureau of Labor Statistics
Department of Commerce
Federal Reserve
Trefis
Where Investment Banking Came From
The Roots of Investment Banking
Evolving out of traditional banks
The Renaissance of banking
Banking starts to spread to Britain
The rise of the bill of exchange
IOUs turn into a medium of monetary exchange
The rise of key British banking powerhouses
Banking Catches On in the United States
The development of modern investment banking
How investment banks were threatened by banks
The financial crisis of 2007 changes everything
The fall of Bear Stearns and Lehman Brothers
More shotgun weddings in finance
Investment banks stay alive by becoming … banks
Index. Numerics
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
Y
Z
About the Authors
Dedication
Acknowledgments
WILEY END USER LICENSE AGREEMENT
