finance - the science of building, selling & buying perpetuities

FINANCE: THE SCIENCE OF BUILDING, SELLING & BUYING PERPETUITIES

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Michael Herlache MBA

Doctor of Business Administration Candidate

VP, M&A at AltQuest Group

Finance The Science of Building, Selling & Buying

Perpetuities


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For my wife, Svitlana, whom is my treasure.


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About the Author:


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Contents

PERPETUITY SCIENCE:

Part I: Perpetuity Methodology

FOUNDATIONS OF VALUATION:

Part II: Tracking Value (Accounting)

Part III: Analyzing Value (Finance)

Part IV: Modeling Value

BUILD-SIDE:

Part V: How to Build a Perpetuity?

Part VI: Perpetuity Analysis

Part VII: Perpetuity Management

SELL-SIDE:

Part VIII: How to Sell a Perpetuity?


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Part IX: The Middle Market

Part X: M&A Multiples

Part XI: Investment Banking Coverage Methodology

Part XI: M&A Origination Methodology

Part XII: Mandate/Target Matching Methodology

Part XIII: Deal Structuring

Part XIV: M&A Process

Part XV: Firm Building & Management

Part XVI: Deliverables & Coverage

BUY-SIDE:

Part XVII: How to Buy a Perpetuity?


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CASES:

Part XVIII: Cases


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Preface


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Perpetuity Science


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The Perpetuity Scientist vs. The Functional Specialist

Build-Side:

Sell-Side:


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Buy-Side:


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Part I:

Perpetuity Methodology


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Chapter 1:

What is a Perpetuity?


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Standard of Living: Perpetuities

The Goal

How to Get the Goal

Perpetuity

I. Building Perpetuities

II. Buying Perpetuities

III. Selling Perpetuities

The Lab of Perpetuities

Excel

Demand for Perpetuities


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Types of Perpetuities


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Risk (discount rate) on the following page:


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Return:


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Growth:


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Margins (Cash flow):


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Multiples:


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Business: The Science of the Perpetuity

Introduction to Business

The Corporation’s Goal

What is Intrinsic Value?

How to Become Wealthy?


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FOUNDATIONS OF

VALUATION


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Part V:

Tracking Value

(Accounting)


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Chapter 6:

Tracking Value with Accounts

Value

Accounts and Accounting

Accounts, Accounting & Excel

Account Filings & Public Data

Account Statements: P&L


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Account Statements: Balance Sheet

Account Statements: Statement of Cash Flows


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Part VI:

Analyzing Value with

Models (Finance)


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Chapter 7: Analyzing Value with Models

Analyzing Value

From Accounts to Models


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Modeling

Modeling in Excel

Analysis of Account Statements


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Part VII:

Modeling Value


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Chapter 8: Finance with Excel

Finance with Excel

Excel Concepts Needed for Finance

Express Decisions with Excel


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Using a Financial Model for Decision Making: The Investment Decision


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Using a Financial Model for Decision Making: The Financing Decision


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Wealth Maximizing Decisions

Cash is King

Cash Flow Definition (FCF)

Role of the Finance Professional

Capital Markets

Capital Markets and Information


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Multiple Investment and Financing Decisions: Portfolio

Modeling a Strategic Alternative

Finance: Exchanging Value Through Time


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Cost of Capital

Finding a Value in a Financial Model

Financing Alternatives: Loan Amortization


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Analyzing the Strategic Alternative: Sensitivity Table

The Financing Alternative: Nominal vs. Real Cost

Strategic Alternatives Analysis

Cash Flows and Risk

Cost of Capital and Opportunity Cost

The Discount Rate


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Value of Equity

Sources & Uses

Accounting Statements: Statement of Cash Flows

Valuation Methods: Total Enterprise Value (TEV) vs. DCF

Accounting Value vs. Finance Value

FCF and DCF

Portfolio Analysis and the Capital Asset Pricing Model (CAPM)


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Ex Ante vs. Ex Post Returns

Portfolio Returns and The Efficient Frontier


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The Efficient Frontier and the Optimal Portfolio

Security Market Line & CAPM

Security Market Line & Investment Performance

Security Market Line & Investment Performance


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Risk Adjusted Performance

CAPM & Investment Performance

Excess Return


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Beta & R^2

Alpha and Efficient Markets

CAPM and the Cost of Capital

Valuing Securities in Efficient Markets


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Chapter 9: Financial Statement Modeling

Financial statement modeling best practices:

Financial Modeling Steps:


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BUILD-SIDE


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Part I:

How to Build a Perpetuity?


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Perpetuity Science & The Perpetuity Scientist

Stage of the Perpetuity:


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Chapter 31: How to Build a Benefit Stream?

Reasoning to Platform

Existing Platform to New Value Theme


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Platform vs. Mod

The Value of Technology & Science

The Consumption Process & Growth Hacking


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Chapter 32: How to De-Risk a Benefit Stream?


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Part VIII:

Perpetuity Analysis


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Market Analysis


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Value Chain Analysis

Gap Analysis

Product/Platform Analysis


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Chapter 10: How to Be a CEO?


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Chapter 10: How to Be a Consultant?


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Part IX:

Perpetuity Management


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Chapter 15: Perpetuity Management

The Purpose of the Company

How Companies Create Value

Strategy & Finance


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Valuation Drivers

The Role of the CEO


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Perpetuity Management

Valuation


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Perpetuity Management with Discounted Cash Flows

Growth or Restructuring

Perpetuity Management Process


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Measuring Value Added: ROIC vs. Market Return

Measuring Value Added: Economic Profit & NPV

Valuation in the Public Markets

Real Markets & Financial Markets

Perpetuity Planning & Control (i.e. Management)


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Value Metrics

Perpetuity Planning & Control (i.e. Management) in Practice

Value Metrics: Market Value Added & Total Return to Shareholders

Value Metrics: DCF vs. Earnings Multiple


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Cash Flow

Perpetuity Management Capability

Perpetuity Lifecycle


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Chapter 16: Valuation Methodologies

1. Public Company Valuation

2. Comp Companies –


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3. Precedent Transactions


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4. Discounted Cash Flow (DCF)


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Notes:


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Chapter 17: Framing Valuation


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Chapter 18: The Market for Perpetuities


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SELL-SIDE


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Part X:

How to Sell a Perpetuity?


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Chapter 19:

Investment Banking


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Notes:


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Traditional Investment Bank Responsibilities:

Junior Banker:

Mid Banker:

Senior Banker:


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Chapter 20:

How to Become an Investment

Banker Methodology


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Getting Started in Investment Banking


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Part XI:

The Middle Market


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Chapter 21:

The Middle Market

Overview of Middle Market


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Part XII:

M&A Multiples


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Chapter 22:

M&A Multiples


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Part XII:

Investment Banking

Coverage Methodology


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Chapter 29:

Investment Banking Coverage

Methodology


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Chapter 30: Index Building & Benchmarking


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Chapter 31: Financial Data Sources


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Chapter 32: Industry or Sector Newsletter


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Chapter 34: Industry or Sector Report


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Chapter 35: Rolodex Building


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Part XIII:

M&A Origination

Methodology


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Chapter 23:

M&A Origination Methodology


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Step 1: Database Utilization & Emails Collected

Step 2: Email Inquiry

Step 3: Offer & Price Inquiry


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Step 4: Phone Call Request (by Sellers) or Meeting Request


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Step 5: Phone Call or Meeting


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Step 6: Add Backs Calculated and Teaser Created

Step 7: Contact Buyer List & Deal Put on M&A Marketplaces

Step 8: NDAs Signed with Buyers

Step 9: Teaser with Name Given to Buyer

Step 9: Teaser with Name Given to Buyer


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Step 10: IOI from Buyer

Step 11: Buyer Seller Meeting

Step 12: Purchase Agreement Given to Seller

Step 13: Signed Purchase Agreement with Different Terms

Step 14: Enter Due Diligence

Step 15: Complete Due Diligence

Step 16: Closing & Checks Cut


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Chapter 24:

Mandate/Target Matching

Methodology


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Chapter 25:

Deal Structuring


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Part XIV: M&A Process


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Chapter 26:

M&A Process

From Origination to M&A Execution

Building the Buyer Shortlist


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The Teaser

The NDA

Teaser With Name of Business & Financials

The CIM


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The IOI (Indication of Interest)

The Buyer/Selling Meeting

The LOI (Letter of Intent)


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Due Diligence

The Purchase Agreement

Pitchbook Table of Contents (exploring strategic alternatives to win a

mandate):

Sell side after winning the mandate:


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Confidential Information Memorandum (CIM) Table of Contents:

M&A Banker’s Role: M&A banker is hired to run a process:


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Auction Process:

Controlled Sale:

Targeted High Level Solicitation:

Closed Negotiation:

Presentation and Packaging

Buyer Qualification:

Marketing:


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Pitching:

Bake Off to Win Mandate:

The Pitchbook to Win Business:


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Part XV: Investment Bank

Management


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Chapter 27:

How to Build a Boutique Investment

Bank


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How to Advise on Strategic Alternatives?


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Chapter 27:

Running the Boutique Investment

Bank


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Part XVI: Investment

Banking Deliverables


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Chapter 28:

Investment Banking Deliverables


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Chapter 36: Adjusted EBITDA


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Chapter 37: Valuation


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Chapter 38: Teaser


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Chapter 39: CIM (Confidential Information

Memorandum)


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Chapter 39: Purchase Agreement


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BUY-SIDE


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Part XVII:

How to Buy a Perpetuity?


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Chapter 40:

The Principle of Investing


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Chapter 41:

How to Become the Next Warren

Buffett


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Chapter 42:

The Operating Model


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Chapter 43:

Financial Buyer aka Private Equity

(LBO)


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Leveraged Buyout (LBO) Analysis:

Notes:

Construction of LBO Model


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Reverse LBO:

PE transaction rationale:

Credit officer meeting:

PE work:


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PE interview:


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Chapter 44:

Strategic Buyer aka Corporation

(Merger)

Merger Analysis:

Notes:

Merger Modeling


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Dilution is proforma decrease in EPS. What causes dilution?

Collars:


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Chapter 45:

Perpetuity Science & Portfolio

Theory


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Chapter 45:

How to Start a LMM Search Fund

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