LECTURE 1: INVESTMENT BANKING
1. Mergers & Acquisitions (M&A)
- LBO (Leveraged Buyout): is one company's acquisition of another company using a significant
amount of borrowed money (leverage) to meet the cost of acquisition
- MBO (Management Buyout): is the internal management of the company instead of outsiders
that try to buy out the control of the company
2. Investment Bank & Commercial Bank
- Investment bank: a financial institution that raises capital, trades securities, and manages
corporate mergers and acquisitions. They work for, and profit from, companies and governments,
by raising money through issuing and selling securities in capital markets (both equity and debt)
insuring bonds (e.g. selling credit default swaps), and providing advice on transactions such as
mergers and acquisitions. A majority of investment banks offer strategic advisory services for
mergers, acquisitions, divestiture, or other financial services for clients, such as the trading of
derivatives, fixed income, foreign exchange, commodity, and equity securities.
3. Functions of Investment Bank
- Intermediaries between providers & users of capital
-> For example, in an IPO process, the bank connects the suppliers of capital (new investors) to the
company going public. Banks also serve a wide range of clients
- Raise capital: help companies and governments and their agencies to raise money by issuing and
selling securities in the primary market. They assist public and private corporations in raising funds in
the capital markets (both equity and debt)
- Portfolio management
- M&A: providing strategic advisory services for mergers and acquisitions
● IPO Launching
IPO launching – Launching an IPO cannot be done without the investment banks. An IPO or initial public
offering is a way through which private corporations raise capital by issuing their shares to the public. By
issuing SME IPO’s, they gather public attention which in turn helps companies to not just create capital
but also build branding. Going public is important for any company and therefore they select a wealthy
investment bank based on a few merits: quality of work, reputation, experience, and more. The
foremost thing an investment bank does is draft a financial statement for the IPO which comes in an
underwriting agreement. Then, the next thing is that it files a financial statement with the SEC. The
investment bank now waits to get the approval of the SEC. Once the offer comes, it sets an offer price.
After issuing the shares, the investment bank starts an aftermath stabilization analysis and monitors the
performance of shares in the public market. The investment bank then receives a commission for its
service from the organization
● Underwriting
Underwriting is a process where bankers sell stocks or bonds to investors so that they raise capital. For
instance, a corporation takes on financial risk for a fee.
The first process of underwriting comes in when the investment bank first makes a prospectus with a
price range. On seeing the price range, investors finalize a firm price. In the next process, a book of
demand is built where the prices that are already set are cleared. Finally, the funds are allocated. Here,
we call it a firm’s commitment
● Merger and Acquisition
If a company wants to do a merger, firstly it goes to an investment bank. The investment bank. An
investment bank needs to perform several things during merger and acquisition:
Investment banks help in raising funds for the merger company
Investment banks deliver the best strategy for the merger
These banks first analyze the merging company, gather all the necessary information, find out its actual
value, and present it to you
● Risk Management
Investment banks also help in minimizing the risks associated with the business. A business is associated
with many risks such as business risk, investment risk, compliance risk, legal risk, operational risks, and
more. Investment banks here figure out all these risks, try to minimize them, and find out how they will
affect the bank. Market risk is the most important factor an investment bank needs to figure out. For
that, they need to keep an eye on critical factors such as credit risks. Investment banks set up a strong
team whose major job is to do a risk assessment
● Research the Stock Market
Research is the primary objective for any job and so is investment banks. That’s the reason investment
banks do thorough stock market research such as analyzing a company’s performance, reading the
financial statements, and more. Also, they always keep an eye on the stock market which in turn helps
you make a profit by giving advisory services such as sales and trade. Investment banks perform various
stock market research such as fixed income research, qualitative research, equity research,
macroeconomic research
● Merchant Banking
Some investment banks offer merchant banking services in several areas such as financials, legal,
marketing, and managerial divisions
+ Merchant banks do several things
+ Raising capital for a client
+ Project management
+ Lease services
+ Maintaining and Managing Public Issues of a company.
+ Special assistance to small companies and entrepreneurs
● Investment Banking Groups
Within investment banking, we serve many clients and play many roles. Most investment banking
groups are typically structured into product and coverage groups.
4. Activities of Investment Bank
❖Front office activities involve direct interaction with the public by working directly with clients or by
trading on behalf of an individual or a corporate client. Sales, trading, research, and M&A jobs are all
considered part of the front office.
❖Middle office activities, just like their name implies, are situated between the investment bank’s
client-facing activities and its more behind-the-scenes work. These jobs include compliance and risk
management.
❖Back office activities are far from the trading floors of the investment bank. They might not be as
glamorous, but they are just as important to its business. Back office jobs include settlements,
payment processing, technology support, and human resources
5. Functions of Investment Bankers (Slide 20-38)
-> Investment banks offer protection to both corporations issuing securities and investors buying
securities. For corporations, investment bankers offer information on when and how to place their
securities in the market. The corporations do not have to spend on resources with which it is not
equipped. To the investor, the responsible investment banker offers protection against unsafe securities.
The offering of a few bad issues can cause serious loss to its reputation, and hence loss of business.
Therefore, investment bankers play a very important role in issuing new security offerings.
6. Principal Businesses of Investment Bank (Slide 18-19)
7. Distribution Models (Slide 40)
❖ Negotiated Purchase (Slide 41)
-> A method is negotiated for determining the price the investment banker & his syndicate will pay for
the securities.
❖ Competitive Bid Price (Slide 42)
-> The firm does not directly select the investment banker. The investment banker that underwrites &
distributes the issue is in effect chosen by an auction process. Confined to 3 situations by legal issues (1)
railroad issues (2) public utility issues (3) state & municipal bond issues.
❖ Commission / Best Efforts Basis (Slide 43)
-> The securities are not underwritten. The investment banker attempts to sell the issue in return for a
fixed commission on each security sold. Unsold securities are returned to the corporation.
❖ Privileged Subscription (Slide 44)
LECTURE 2: MERGERS & ACQUISITIONS (M&A)
1. Motivations for Business Combination (Slide 2)
-> The motives for M&A activity can be derived from many sources like the synergies, information,
diversification, etc. Among these, synergy creation is the most important and common motivation.
Mostly, the synergy's ultimate purpose is to enhance the revenue and to reduce the costs that might be
gained by the combination of two companies. There are usually four main sources of synergies
generated from M&A transactions.
2. Types of synergies (Slide 3)
● Operating synergy:
- Emphasize the advantages from leveraging operating resources across related business which improve
the profitability and efficiency. This type of synergies typically emerges from economies of scale,
economies of scope, know-how transferring, and utilization maximizing
- Example:
+ Supply Chain Efficiencies: Similar to information technology, if either company has access to better
supply chain relationships, there may be cost savings that the merged firm can take advantage
+ Research and Development: Either firm may have had access to research and development efforts
that, when applied to their counterpart firm, allow for better development or room to cut costs in
production without sacrificing quality. For example, one firm may have been developing a cheaper alloy
that could be used in the production of an automobile the other firm produces
+ Patents: If the acquirer used to pay the target firm a fee for access to its patent, a merger may transfer
the right of that patent to the acquirer, thus eliminating that expense
● Financial synergy:
- Focus on financial benefit resulted from the capital cost reduction, financial flexibility, tax advantages,
and risk reduction
+ Acquirers can use target’s debt capacity to increase its debt capacity or borrowing capacity or employ
target’s FCF => the company becomes less risky and has more choices of raising capital => cost of
borrowing from banks or issuing bonds will be lower.
+ Increasing the debt capacity helps to reduce taxes due to tax shield
+ Improved Sales and Marketing: Better distribution sales and marketing channels may allow the
merged firm to save on costs that were being expensed by each individual firm when they were
separate
+ Lower Salaries and Wages: The merged companies won’t need two CEOs…
● Corporate management synergy:
- Consists of advantages coming from leveraging management resources which help to increase the
profitability of the company. It could have resulted from diverse managerial activities with three kinds of
classification: corporate functional capabilities, corporate organization capabilities, and corporate
strategic capabilities.
+ Obtaining quality staff or additional skills, knowledge of the industry or sector and other business
intelligence. For instance: a business with good management and process systems will be useful to a
buyer who wants to improve their own.
+ Reducing redundant human capital. For example: 2 accounting departments become 1 after M&A
● Market power synergy:
- Concentrate on the advantages created by the conglomerate power making the competition reduced.
The market power synergies are presented by the predatory pricing, bundling, complementary buying
and selling deals. This type of synergy contributes great advantage to the company but it is difficult to
realize in practice.
- For example: after combination, the company becomes larger and have greater market power that can
negotiate better with the suppliers, set up the better price for its products and services
3. Mergers & Acquisitions (Slide 12)
Are used as one of the most popular business strategies for the growth and development of
corporations. As the phrase M&A appears together, many people perceive that merger and acquisition
have the same meaning. But in fact, their definitions are slightly different. According to Shim & Okamura
(2011), a merger is defined as the integration of two or more firms into one legal entity while acquisition
is different in the sense that the target firm is not integrated into the acquirer but becomes its
subsidiary and does not disappear as a business entity. Another definition is that merger refers to the
combination of two previously separate organizations of similar size or position and their operations
into one. Acquisition refers to a transaction in which an acquiring firm uses capital (stock, debt, or cash)
to buy another company of smaller size in terms of market value (Faulkner et al, 2012)
4. M&A in Vietnam (Slide 5)
-> Prior to the year 2007, the total number of M&A transactions did not exceed 50 each year. However,
from 2008 to 2013, both the quantity and the value of M&A deals have increased remarkably. The
market saw 1,184 M&A deals carried out with a total value of 17.4 billion USD in this six-year period.
-> Foreign M&A accounted for 70% of the total number of deals that occurred in 2013 (Stoxplus, 2013),
while this number was just 45% in 2009 (PricewaterhouseCoopers, 2010). Moreover, Vietnam is the
leading country in ASEAN having the largest number of M&A transactions with Japanese corporations,
about 69 deals since 2010 (M&A Forum, 2014)
5. Approaches of Merger (Slide 8-10)
● Absorption
● Consolidation
6. Types of Mergers (Slide 13-18)
● Horizontal transaction
● Vertical transaction
● Market extension merger
● Product extension merger
● Conglomerate transaction
7. Acquisition (Slide 19)
8. Takeovers & Reasons for takeovers (Slide 21)
9. M&A process
● 3 Prerequisites
● A failed deal
- Pfizer and Allergan collapse -> Government regulation
- Vietinbank and Nova Scotia
● Failure start at (Slide 52)
- Process failure
- Commercial failure
● Successful M&A program steps (Slide 40-44)
- Manage pre-acquisition phase
- Screen candidates -> Screen target, Screen criteria
- Value remaining candidates
- Negotiate
- Mana post integration
● Key to success
- Soft issue
- Hard issue
LECTURE 3: COMPARABLE COMPANIES ANALYSIS (TRADING COMPS)
1. Definition
Is process used to evaluate the value of a company using the metrics of other businesses of similar size
in the same industry. Comparable company analysis operates under the assumption that similar
companies will have similar valuation multiples, such as EV/EBITDA. This method reflects <current=
valuation based on prevailing market conditions and sentiment
2. Why Use Trading Comps?
- Comps are relatively easy to perform, and the data for them is usually relatively widely available
(provided that the comparable companies are publicly traded). Additionally, assuming that the
market is efficiently pricing the securities of other companies, Comps should provide a reasonable
valuation range, while other valuation methods such as DCF are dependent upon an entire array of
assumptions.
- These factors make Comps one of the most widely used valuation techniques in practice. Investment
bankers, sell-side research analysts, private equity investors, and other market analysts all use
Comps. They do have their disadvantages, however.
3. Advantage & Disadvantage of Trading Comps
4. Steps to Analyze
5. The sources of information to study the target company
❖ Public company
- Concensus -> analysis coverage/ skewed valuation
- SEC filings (reports), earnings announcements, investor presentations, equity research reports,press
releases,...
- The target’s annual report, 10-K (especially the section on competition), prospectus, and web site
- Proxy statements in which the target compares its stock price performance with a that of peers
- Analyst research reports
- S&P tearsheet, Value Line, and Moody’s company reports
- Bloomberg
- Recent news
- SIC code lookup
❖ Private company: corporate websites, sector research reports, news runs, and trade journals for
basic company data, or based on a public competitor having similar characteristics
LECTURE 4: PRECEDENT TRANSACTIONS ANALYSIS (TRANSACTION COMPS)
Definition (Slide 2)
Steps (Slide 3-12)
- Step 3 (Slide 7)
Enterprise value (EV) (target) = Equity value + Preferred stock + Non-controlling interest + (Total
debt – Cash and cash equivalents)
Offer price per share = Unaffected share price + Premium paid
● All-cash transaction
● Stock-for-stock transaction
a) Fixed exchange ratio
- The number of acquirer’s shares received by the target is constant (determined by the exchange ratio)
Ex: A acquires (mua lại) B, with a fixed exchange ratio is 0.5
A agrees to exchange one half share of its stock for every one share of B. If B has 1,000 shares
outstanding Shareholders of B receive 500 shares of A
- The offer price per share depends on the acquirer’s share price
Offer price per share = exchange ratio x the acquirer’s share price
Ex: If the exchange ratio is 0.5. Acquirer’s share price is $40
offer price per share = 20
Equity value (target) = offer price per share x fully diluted shares outstanding (target)
- Both acquirer & target company share the risk (opportunity) Fixed exchange ratio is more commonly
used than float exchange ratio
b) Float exchange ratio
- The offer price per share is set (even though that value is not in cash)
Ex: A acquires B. A agrees to pay $40 in stock of A for every one share of B
- The number of shares exchanged fluctuates, i.e. depends on the acquirer’s share price
Ex: Assume that the A’s share price is $10. For every share of B, shareholders of B receive ? shares
- Target’s shareholders are certain about the value received. The acquirer assumes the full risk of a
decline in its share price
● Cash and stock transaction
Key transaction multiples (Slide 8)
Diluted EPS = Net income / Diluted shares outstanding
Offer price per share-to-LTM EPS = Offer price per share / LTM Diluted EPS
Equity value-to-LTM Net income = Equity value / LTM NI
Premium Paid (Slide 9)
% premium paid = (Offer price per share – Unaffected share price) / Unaffected share price
Synergies-adjusted multiple (Slide 10)
Enterprise value / (LTM EBITDA + Synergies)
Deal Dynamics (Slide 5)
-> Target’s shareholders can share in the upside (growth and realizing synergies) and obtain a control
premium at a later date through a future sale of the company
● Deal Considerations
- Transaction Rationale: What was the transaction rationale from both the buyer’s and seller’s
perspectives?
-> Overpaying is a common occurrence in M&A, so the outcome of the deal should be assessed
- Buyer Profile: Was the acquirer a strategic or a financial buyer?
-> Strategic acquirers can afford to pay a greater control premium than financial buyers because
strategics can benefit can synergies
- Sale Process Dynamics: How competitive was the sale process?
-> The more competitive the sale process, i.e. the more buyers that are serious about acquiring
the target, the greater the likelihood of a higher premium
- Auction vs. Negotiated Sale: Was the transaction an auction process or negotiated sale?
-> In most cases, a sale structured as an auction will result in a higher purchase price
- M&A Market Conditions: What were the market conditions at the time when the deal closed?
-> If the credit markets are healthy (i.e. if access to debt to partially fund the deal or share price is
relatively easy), then the buyer is more likely to pay a higher price
- Transaction Nature: Was the transaction hostile or friendly?
-> A hostile takeover tends to increase the purchase price, as either side does not want to be on
the losing end
- Purchase Consideration: What was the purchase consideration (e.g. all-cash, all-stock, mixture)?
-> A transaction in which the purchase consideration was stock rather than cash is more likely to
be valued less than an all-cash transaction since the shareholder can benefit from the potential
upside post-deal
- Industry Trends: If the industry is cyclical (or seasonal), did the transaction close at a high or low
point in the cycle?
-> If the transaction occurred at an unusual time (e.g. cyclical peak or bottom, seasonal swings),
there can be a material impact on pricing
Output & Test Conclusion (Slide 13)
Advantages & Disadvantages (Slide 14-15)
- While this type of analysis benefits from using publicly available information, the amount and quality
of the information relating to transactions can sometimes be limited. This can make drawing
conclusions difficult. This difficulty can be compounded when trying to account for differences in the
market conditions during previous transactions compared to the current market. For example, the
number of competitors may have changed or the previous market could have been in a different part
of the business cycle
- While every transaction is different, and thus makes direct comparisons difficult, precedent
transaction analysis does help provide a general assessment of the market’s demand for a particular
asset and an approximate valuation of the asset. Despite this, this certain type of assessment is more
of a generalization since there are so many variabilities to take into account such as competitor size
or advantage, market demand, business cycle, and more intricate considerations like exchange rates
for import/export companies and geopolitical effects on companies such as those affected by
quantitative easing measures or productions caps
Discuss 1: The precedent transactions analysis method provide a higher multiples range than the
comparable companies analysis method
Discuss 2:
a) In the precedent transaction analysis, how do deal dynamics affect the purchase price of an M&A?
Discuss 3: Strategic buyer vs Financial sponsor: Who can pay higher purchase price?
-> Strategic buyer > Financial sponsor
Discuss 4: Compare Precedent Transactions Analysis & Comparable Companies Analysis
Both methods are a form of relative valuation, where the company in question is being compared to
other businesses to derive its value. However, “comps” are current multiples that can be observed in
the public markets, while “precedents” include a takeover premium and took place in the past
The main similarities are:
● Relative valuation
● Use multiples (EV/Revenue, EV/EBITDA)
● Hard to find perfectly comparable companies
● Shows what a presumably rational investor/acquirer is willing to pay (observable)
The main differences are:
● Takeover premium (included in precedents – not in comps)
● Timing (precedents quickly become old– comps are current)
● Available information (difficult to find for precedents– readily available for comps)
Discuss 5: DCF Analysis & Precedent Transactions
Discounted Cash Flow (DCF) analysis is a form of an intrinsic valuation performed by building a financial
model in Excel. Unlike relative methods, it does not take into account what any other businesses are
worth.
Financial modeling is a much more detailed and totally customized way to value a business. A financial
forecast is made for the company by building up its revenue drivers, margins, cost structure, capital
expenditures, and balance sheet items to determine its unlevered free cash flow
LECTURE 5: DISCOUNTED CASH FLOW
Definition
Steps
Advantages & Disadvantages
Compare this valuation method with the first two methods
Discuss 1:
