introduction to investment banking - wcm | western...

Educational: November 29th

Introduction to Investment Banking

Disclaimer

This presentation was prepared exclusively for the benefit and use of the members of Western Capital Markets(“WCM”) for the purpose of teaching and discussing financial and investment matters. This presentation is proprietaryto WCM .

The information and any analyses contained in this presentation are taken from, or based upon, information obtainedfrom the WCM Executive Team or from publicly available sources. Any information taken from external literature isappropriately referenced. The completeness and accuracy of this presentation cannot be assured by WCM.

To the extent projections and financial analyses are set forth herein, they may be based on estimated financialperformance prepared by WCM and are intended only to suggest reasonable ranges of results. Any calculations orvalue ranges indicated herein are preliminary and should not be construed as opinions of WCM or their individualmembers as to value, fair market value, or target prices at which a transaction would be considered fair from a financialpoint of view and must not be relied upon or disclosed as constituting such a document or opinion.

WCM does not take liability for any inaccurate information, and is not liable for any investment advice. Before actingon any information, from WCM or external sources, you should contact a Certified Financial Advisor.

Commercial banking is often referred as "deposit taking, credit giving activity".

Commercial banks' main business is collecting money from families and corporations and lending them to

borrowers.

Description

Investment banks deal with a more complex set of operations: listing of firms on stock exchanges (IPOs), advisory in M&A deals and corporate restructurings, trading, and

asset management.

Accepting deposits, Lending money, Issuing bank cheques, Cash management,

Treasury managementServices

Capital Markets (IPOs, SEOs, Private Placements), M&A, Restructurings, Trading

and Brokerage, Asset Management

Retail clients, Small Corporate Clients, Medium and Large Corporate Clients

ClientsHNWI, Medium and Large Corporations,

Institutional Investors, Hedge Funds, Private Equity Funds

The two types of banking institutions

Commercial vs. Investment Banks

Commercial Banking Investment Banking

Universal banks engage in both commercial and investment banking

operationsDescription

A pure investment bank is involved with investment banking services only. It does

not do "deposit taking, credit giving"Universal banks are able to sell more

products to their clients, offering a one stop shop for all banking services

Competitive Advantage

Specialization, focus, and historical relationships; Superb services offered to

clientsJ.P. Morgan Chase, HSBC, Credit Suisse, Societe Generale, BNP Paribas, Barclays,

Bank of America Merrill LynchExamples Goldman Sachs, Moelis & Company, Lazard

One stop shop or a specialized shop?

Universal vs. Pure Investment Banks

Universal Banks Pure Investment Banks

Conflicts of Interest

A Universal Bank (A) has financed company C

Another firm is interested in acquiring

Company C

Company C hires Bank A as an advisor for the

deal

– Bank A knows of Company C’s monetary

situation and is worried about their loan

– Help Company B acquire Company C

– Create conflict of interest with advisory

fees

Chinese Wall: Preventing Conflicts of Interest

Private SidePublic Side

• Individuals• Pension Funds• Insurance

Companies• Asset Managers• Corporate Treasuries• Sovereign Wealth

Funds

• Corporations• Governments• Municipalities

Providers of CapitalInvestment Banking

Chinese Wall: Separates Trading and Banking Divisions

Chinese Wall

Sales & Trading

Research

Users of Capital

Public sidePrivate side

Strategic advisorySecurities underwriting

The two main divisions in Investment Banking


Capital Markets: Financing medium and large corporations

Capital markets are markets for buying and

selling equity and debt instruments

– Companies need these services when they

are about to go public or want to issue

debt that will be sold to the public

Works with companies that are to be listed

When a company is listed its shares will be

sold to public investors and they will be able

to determine who will run the business and

who will sit on the Board of Directors

Issuing Equity (ECM)

On average, bonds are much easier to price

compared to equity, mainly because every

company that issues a bond has a credit

rating - an opinion about its creditworthiness

that is expressed by independent credit

agencies

Issuing Debt (DCM)

Category Product Type Description Type of Investors

Equity Offerings

1 Initial Public Offerings The first time when a company’s stock is offered to the publicPrivate Investors & Sophisticated Investors

2Seasoned Public Offerings

SEOs are transactions in which firms that are already listed raise additional equity capital

Private Investors & Sophisticated Investors

3 Private PlacementsRaising equity without offering it to the wide public, but to selected sophisticated investors only

Sophisticated Investors

Debt Offerings

1 Bond OfferingsIssuance of bonds by public authorities, credit institutions, companies and supranational organizations


2 SecuritizationReceivables under some form (credits, rents, leases) are packaged together and sold as a security to investors


3 Loan Syndication A group of banks (rather than a single bank) providing a loan Financial Institutions

Capital Markets: A detailed description

Why Companies Go Public: Reasons behind owners decision to list the company

Exit for founders &

Management compensation

Finance Growth

Be able to buycompanies

withstock

Signal for strongmarket position

Stock Exchangelisting

What Investors Look For: Different types of investor profiles

Risk Profile

Market position

Strong FCF

Modestvaluation

Growth potential

Projections

Strong leadership

Success stories

Institutionalinvestors

HedgeFunds

Retailinvestors

Different Profiles

Pricing of an IPO: Factors that determine the price of a company that is going public

Economic Environment

Growth Perspectives

DCF Valuation

Roadshow Feedback

Trading of Comparables

Bond Offerings: The reasons why large companies prefer bond financing

Diversification of financing

sources & Tax deductible

Finance Growth

Lower Cost of Debt & Less Covenants

Signal for strongmarket position

Issuing a Bond

Comparison of Debt Offerings

Debt Offerings

Bond offerings

• Large Market

• Lower cost of debt

• Not many covenants

SecuritizationLoan

Syndication

• Source of financing

• Cleaner balance sheet

• Less risk exposure

• Suitable for larger quantities of debt

• Certification effect

• No complex filings

Advisory: Serve clients in M&A transactions and Restructuring procedures

Advisory is a division that employs

individuals with significant experience in

Corporate Finance

They are able to serve clients for M&A and

Corporate Restructuring

When a company buys another company’s

shares or assets

The target company ceases to exist after the

transaction, as it is merged into the buying

company

Mergers & Acquisitions (M&A)

These services are necessary when a firm is

unable to service its debt and is in danger of

going bankrupt

Some companies can have operating

difficulties - problems with their core business

Restructuring

Acquiring Another Company: Understanding the rationale behind M&A deals

Deal with overcapacity & Eliminate competition

Synergies & Product-line

extension

Acquire R&D/Patents& Gain access

to new distribution

channels

Increase supply-chain

power & Acquire key

personnel

Why acquire another

company?

Deal Lifecycle and Buyers: Types of M&A deals throughout life

Development Growth Maturity Decline

• Start-up companies are often acquired for their innovative ideas or quality team

• Start-up firms rarely acquire other firms

• Growth firms become very attractive for potential acquirers

• Defensive M&A of smaller firms

• Firms in this stage often merge in order to deal with overcapacity

• Companies with declining revenues are often purchased by healthier competitors

Payment Options in M&A Deals: Different ways to pay when buying a company

Financial LiabilitiesCash

Enterprise value-/+

Net Debt

Special Treatment of • Pension Obligations• Tax Liabilities• Litigations• Overdue payables

Equity paid with:• Cash• Stock• Deferral- “Vendor

Loans”, “Earn Outs”

Type of Payment Cash Stock Earn-Out

Advantages

Does not dilute

ownership

Crystal Value for seller

Aligns the interests of new

and old ownership

No need for financing

Aligns the interests of new

and old ownership

Helps bridge expectations

Disadvantages If cost of debt is high, could be heavy

No upside from future performance

Dilutes ownership

Subject to valuation

Seller needs to monitor the

firm post closing

Seller depends on Buyer’s

management

Financial vs. Corporate Buyers

Type of Buyer Financial Buyer Corporate Buyer

Focus in the transaction• Focus on cash flows, and

capital gainsUnlock synergies

Investment Horizon • 3-5 years • Long term

Type of deal• Full Acquisition• Consortia

• Full Acquisition• Merger• Joint Venture

Leverage in the transaction • High • Medium

Management Involvement• Following the company

through Board representatives

• Integration of the Management of the two companies

Valuation focus• Multiples• Cash flows• Cost of Capital

• Synergies• Growth• Long-term view

Investment Banking Competitive Landscape

Bulge Bracket

Boutique

Middle Market

Low HighCapabilities

Value Type Theoretical Basis Practical Application

Market

Comparable Companies Analysis (Trading Comps)

Precedent Transactions Analysis

Intrinsic Discounted Cash Flow (DCF) Analysis

Company Valuations are Based on Internal or External Valuation methods

Company Valuation Methods

Find a pre-existing market

Compare to the price of other apple trees being

sold

Count the apples and estimate their value

Value an Apple tree…

Case Study

Discounting Future Cash Flows: The investor perspective

Investment Divestment

Dividends

Return on Investment

Dividends are a function of future Cash Flows

Divestment price is a function of future Cash Flows

Future Cash Flows of the investment

Investment

Primary Goal?

Common Enterprise Value Multiples

Comparables: Value of a firm can be standardized using a mix of industry-specific multiples

Enterprise Value /

Access Lines/Fibre Miles/Route Miles Telecommunications

EBITDAX Natural Resources

EBITDAR Casinos, Restaurants and Retail

Square Footage Real Estate and Retail

Industry

Total Beds Healthcare

Common Equity Value Multiples

Comparables: Value of a firm can be standardized using a mix of industry-specific multiples

Equity Value /

Book Value Financial Institutions

Tangible Book Value Financial Institutions

Funds From Operations “FFO” Real Estate

Discretionary Cash Flow Natural Resources

Industry

Comparable Company Analysis

x`

Industry Comparables Market Cap (USD) LTM Net Debt Price/Book Value Forward P/E EBIT Margin % Net Income Margin %

Gemalto (GTO-NL) 6,252 375 12.9 x 14.6 x 12.20% 5.71%

Fortinet (FTNT) 6,274 -985 8.3 x 44.7 x 1.20% 0.55%

Qualys (QLYS) 1,317 -214 5.8 x 46.1 x 15.70% 9.84%

Barracuda Networks (CUDA) 1,304 -162 NM 47.2 x 0.70% 0.67%

FireEye (FEYE) 2,438 -193 NM NM -75.10% -81.76%

Average 9.0 x 38.2 x -9.06% -13.00%

VASCO Data Security, Inc 743 -184 4.9 x 27.7 x 13.00% 9.29%

Business Model Comparables Market Cap (USD) LTM Net Debt Price/Book Value Forward P/E EBIT Margin % Net Income Margin %

Imperva Inc. (IMPV) 1,714 -255 9.5 x NM -23.20% -23.75%

Silver Spring Networks (SSNI) 721 -113 NM 67.1 x 18.10% 15.67%

Monotype Imaging Holdings (TYPE) 868 -110 13.0 x 21.4 x 23.10% 12.57%

Qiwi Plc (QIWI) 956 -264 7.0 x 13.0 x 26.60% 26.95%

Average 9.8 x 33.8 x 11.15% 7.86%


Overall Median 1317.3 -193 8.9 x 44.7 x 12.20% 5.71%


Maxium 6273.7 374.5 13.0 x 67.1 x 26.60% 26.95%

75th Percentile 2438.3 -113.1 12.1 x 46.6 x 18.10% 12.57%

Median 1317.3 -193 8.9 x 44.7 x 12.20% 5.71%

25th Percentile 955.8 -255.2 7.3 x 18.0 x 0.70% 0.55%

Football Field Summary

50.00 60.00 70.00 80.00 90.00 100.00

COMPS EV/EBITDATransactions

LBO

DCF with synergies

DCF

COMPS EV/EBITDA 2015

Equity research

52 week range

Price Range

No one spends other people’s money as carefully as they spend their own.

—Milton Friedman

Leveraged Buyouts: Quick overview

Typical LBO Capital Structure

Purchase Price

The two main divisions in Investment Banking


introduction to investment banking - wcm | western...

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