Corporate Finance 101
Table of
Contents
01
02
03
04
Introduction
Capital
Markets
Business
Valuation
Mergers &
Acquisitions
05
06
07
Debt
Financing
Equity
Financing
Careers
Introduction
Investment
Banking
Investment
Management
Tim Vipond
CEO
Corporate Finance Institute
Corporate
Development &
Strategy
Corporate
Finance
Session objectives
Capital Markets
Business Valuation
Mergers & Acquisitions
• Understand the key aspects of
investment banking (M&A advisory
and underwriting)
• Describe the difference between
valuing a business using equity
and enterprise value multiples
• Understand the steps in the
acquisition process, synergies, and
transaction steps
• Outline the corporate funding life
cycle.
• Outline how a business can be
valued using discounted cash flow
• Evaluate an appropriate financing
structure for an acquisition
Equity Financing
• Outline the various types of equity
finance
• Understand the role of private
equity funds
Debt Financing
• Describe different types of debt
financing, outline the impact of
leverage on returns, repayment
options
Capital Markets
Who are the players in corporate finance?
Public
accounting
firms
Bonds or shares
$
“Sell side”
$
Contacts
Contacts
“Buy side”
Fund
Manager
$
Corporates
Banks
Institutions
Investors
Capital
What do capital markets do?
Secondary
markets
Wants
to sell
Wants
to buy
Stock
exchange/
OTC
Fund
Investment bank
Manager
Sales, trading
and research
Investment bank
Sales, trading
and research
Fund
Manager
Investment banks help facilitate the trade in shares and bonds.
The business life cycle
LAUNCH
$
GROWTH
SHAKE
-OUT
MATURITY DECLINE
Life cycle
extension
Sales
Cash
Profit
Time (years)
The corporate funding life-cycle
Level of risk
Debt funding
Sales
Business risk
Launch
Growth
Maturity
Decline
Stage of the firm life cycle
Corporate finance
The term corporate finance typically covers two key areas:
M&A advisory
Underwriting
Assisting in the negotiation and structuring
of a merger/acquisition
Raising capital through selling stocks or
bonds to investors (e.g. IPO)
Underwriting advisory services
Planning
Timing and demand
Issue structure
•
Identify investor themes
•
Hot or cold issue market
•
Domestic or international
•
Investment rationale
•
Supported by positive news-flow
•
Institutional investor focus
•
Is IPO the
•
Investor appetite
•
Retail investor focus
•
best option
•
•
Offer for sale
•
Size of float and lock-up issues
Precedents and benchmark
offerings
•
Intermediaries offer
•
Introduction
•
Preliminary view on investor
demand
•
Investor experience
Types of underwriting
Types of underwriting commitment:
Firm Commitment
Best Efforts
All-or-none
The underwriter
agrees to buy the
entire issue and
assume full financial
responsibility for
any unsold shares.
Underwriter
commits to selling
as much of the issue
as possible at the
agreed-on offering
price, but can return
any unsold shares
to the issuer
without financial
responsibility.
If the entire issue
cannot be sold at
the offering price,
the deal is called off
and the issuing
company receives
nothing.
Underwriting - the book building process
Prospectus
with price
range
Institutional
investor
commitment
@ firm price
Book of
demand
built
Price is
set to
ensure
clearing
Allocation
Underwriting - the road show
The roadshow is an opportunity for management to convince investors
of the strength of the business cases
Areas that are critical include:
Management
structure,
governance and
quality
Strategy, both
tactical and
long-term
Funding
requirements
and purpose:
Cash in versus
cash out
A thorough
analysis of the
industry/sector
Key
competitors
Key
risks
Pricing the issue
Key issues in pricing
Price stability
Buoyant after market
Depth of investor base
Access to market
Pricing the issue
After market
price
performance
Under-pricing
Under-pricing
There are two costs associated with a flotation:
Reduces the risk of equity overhang
Ensures after market is buoyant, but
There is a temptation for the advising bank to under-price the issue - why?
Reduces the risk of equity
overhang.
Ensures after market is buoyant,
but
this fails to make the best possible
returns for the current owners and
could lead to profit-taking and
hence volatility.
The IPO pricing process
IPO
discount
Indicative maximum
Pricing
range
10 to 15%
Full value
Indicative minimum
• Relative valuation
• Absolute valuation
Business Valuation
Session objective
By the end of this session you will be able to:
Describe the difference between valuing a business using equity and enterprise value multiples
Outline how a business can be valued using discounted cash flow
Tools and techniques for valuing a business
Valuing a business for acquisition
Public company
comparatives
Precedent transactions
Discounted
cash flow
Equity multiples
Stand-alone valuation
Enterprise value multiples
Synergies
Enterprise value vs. equity value
Market value
of debt
EV/EBIT
EV/EBITDA
EV/Sales
Enterprise
value
Market value
of equity
(market
capitalization)
Price/Earnings
Price/Book
Price/Cash flow
Unlocking the drivers of value
We can use the DCF growing perpetuity formula to unlock the drivers
of value:
Business strategy
Sales & marketing
Cost structure
Asset utilization
Present value
=
Organic growth?
Growth through
acquisition?
Free cash flow x (1 + growth)
Cost of capital - growth
Availability
Risk
Current capital
Macro factors
Organic growth?
Growth through
acquisition?
Drivers of value and price in more detail
Intrinsic Value
•
•
•
•
•
EBITDA, expected growth
Capital requirements
Capital structure
Cost of capital
Income tax position
Synergies & Strategic Value
•
•
•
•
•
•
•
Economies of scale
Diversification
Eliminate competition
Entry into new markets
Mgmt & employees
Income tax synergies
Related costs, timing & risks
Industry
Life cycle
Structural changes
Competitive behaviour
Barriers to exit/entry
Price
Company
Market share and position
Technology
Competitive advantages
Brand name
Transaction Structure
•
•
•
•
•
•
•
Consideration
Asset vs. Share
Merger or joint venture
IPO
Break-up or spin-off
Financial or M&A market conditions
Regulation
Price versus Value
•
•
•
•
•
•
Deal costs
Process, packaging and presentation
Negotiating positions
Knowledge and information
Motivations
Legal or other restrictions
Discounted cash flow valuation overview
Free cash flow
FV
x
1
(1+i)n
$100
x
1
1.10
$100
x
1
1.102
$100
x
1
1.103
$100
x
1
1.104
$100
x
1
1.105
$300*
x
1
1.105
186
PV
91
83
75
68
62
2015
2016
2017
2018
2019
Value of the firm = $565 million
* Value of FCF beyond 2019
Terminal
value
Cost of capital
Assets
Net debt
% net debt
x
Cost of debt
=
Contribution
Market
value
of equity
% equity
x
Cost of equity
=
Contribution
Cost of capital
Widget example
$32bn
14%
x
3.5%
=
0.5%
$193bn
86%
x
9%
=
7.7%
$225bn
8.2%
Mergers & Acquisitions
Session objectives
Outline the steps in the acquisition process
Explain the difference between strategic versus financial buyers
Identify hard and soft synergies
Value financial synergies
Outline transaction costs
10 step acquisition checklist
10
9
8
7
6
5
4
3
2
1
Acquisition
Criteria
Acquisition
Strategy
Acquisition
Planning
Searching
for Target
Valuing &
Evaluating
Due
Diligence
Negotiation
Implementation
Financing
Purchase &
Sales Contract
Rival bidders
The vast majority of acquisitions are competitive or potentially competitive.
Companies normally have to pay a “premium”.
Companies normally have to offer more than rival bidders
To pay more than rival bidders, the company needs to be able to do more with the acquisition than the other
bidders.
Strategic versus financial buyers
Strategic buyers
Financial buyers
Horizontal or vertical expansions
Private equity
Involves identifying and delivering operating synergies
Leverage for maximum equity returns
Hard synergies - cost synergies
Soft synergies – revenue synergies
Leverage and financial buyers
ABC Co.
XYZ Co.
Net income = $10
Net income = $10
Return on equity = 20%
Return on equity = 50%
Debt
$50
Assets
Assets
$100
$100
Equity
$50
Debt
$80
Equity
$20
Analyzing acquisitions
Involves identifying and delivering operating synergies
Hard synergies  cost synergies
$1 of cost saving = $1 of profit
Soft synergies  revenue synergies
$1 of revenue synergy  $1 of profit
cost savings from
revenue enhancing activities
economies of scale
cross selling
factory overhead reduction
Geographic expansion
corporate overhead reduction
Acquisition valuation process
1. Value the target as
stand-alone
Enterprise value
•
•
•
•
Sales growth
EBIT margin
Operating tax
Movement in
working capital
• Capital expenditure
2. Value synergies
• Sales (volume & price)
• EBIT margin
o Product mix
o Overhead reductions
• Operating tax
o Tax efficiency
o Tax losses
• Working capital
• Capital expenditure
o Fully invested
Best practice acquisition analysis
1
2
3
4
5
Financial
synergies
Transaction
costs
6
Soft
synergies
Hard
synergies
Stand-alone
enterprise
value
7
Value created
Net
synergies
Standalone value
Consideration
(price paid)
Issues to consider when structuring a deal
Contract
Antitrust
Transaction
environment
Market
conditions
Business
plan
Structuring
environment
Deal
Accounting
Securities
Preferred
finance
Transaction
character
Corporate
Law
Tax
Competing
bidders
Financing for mergers, buyouts, & acquisitions
Senior debt
Subordinated debt
Equity
Debt structuring
Two basic types of loans
Revolving Facilities (“Revolver”)
•
Typically used for general corporate
purposes (“GCP”) including working
capital financing and liquidity (commercial
paper backup).
•
Multiple drawdown/repayment until the
contracted maturity date.
•
Drawn / Undrawn.
•
Amount available may be subject to a
sub-limit, such as a borrowing base on
receivables and/or inventory.
Non – Revolving Facilities (“Term Loan”)
•
Generally provided for a specific purpose
such as an acquisition, capital
expenditures, or a recapitalization.
•
After a drawdown(s) and (full or partial)
repayment is made the credit/loan is not
available to draw down again.
•
Drawn.
Pricing debt
Pricing is a function of risk where lenders focus on risk/return metrics when they
decide to provide a loan.
Loan pricing has several components
Spreads (also called margin) – the
margin added to a publicly quoted base
rate of interest the “floating rate”) such
as Prime, US Base Rate, LIBOR or
Bankers Acceptances (eg.
LIBOR+150bps)
Rate (eg. LIBOR)
+
Fees – upfront, arrangement,
underwriting, agency, ticking and
standby (or commitment / undrawn)
fees (eg. 50bps)
Spread / Margin
=
Drawn pricing
Debt repayment profiles
$
Mezzanine finance – high yield debt
Equal
amortizing
Balloon
repayment
Bullet
repayment
Bullet
repayment
5 years
Debt Financing
Session objectives
Describe different types of debt financing
Outline the impact of leverage on returns
Explain various debt repayment structuring options
Assessing debt capacity
Assessing debt capacity
Balance sheet measures
Cash flow measures
Level of EBITDA
Debt to equity
Total debt / EBITDA
Volatility and hence stability of EBITDA
Complications include
Senior debt / EBITDA
cyclicality
technology
entry
barriers
Acquisition
adjustment to
assets
goodwill
Cash interest cover
EBITDA-Capex interest cover
Senior debt overview
Revolver
Term loan B
Senior debt
Term loan A
Typically represents 50 percent of funding
2.0x to 3.0x EBITDA
2.0x interest coverage
Term loan C
Subordinated
debt
Equity
Typically provided by
Commercial
banks
Credit
companies
Insurance
companies
Senior debt capacity
Structuring a transaction
Revolving credit
1.0 x EBITDA but linked to current assets
Term loans
What can be amortized over five years
based on detailed projections?
A
Held by bank investors
Balloon term loan maturing after A
B
Held by non-bank institutional investors
C, D
As needed
Sub debt multiple
Total debt / EBITDA - senior debt / EBITDA
Equity required
Purchase price - total debt
The role of subordinated debt
Three to five years
Senior debt
Senior debt
Equity
IRR = 17%
Equity
Senior debt holders only provide so much
This funding structure fails to deliver an adequate return.
Leverage and returns
Business projections
EBIT
Growth
Current
$m
Year 1
$m
Year 2
$m
Year 3
$m
Year 4
$m
Year 5
$m
1.00
10%
1.10
10%
1.21
10%
1.33
10%
1.46
10%
1.61
10%
Valuation analysis
Enterprise value (8 x EBIT)
Debt (4 x EBIT)
Equity value
Entry
$m
8.00
4.00
4.00
Exit
$m
12.88
4.00
8.88
Entry
$m
2.60
1.40
4.00
Exit
$m
5.77
3.11
8.88
Investment analysis
%
Private equity
Management
65
35
100
IRR %
17%
17%
Leverage and returns
Business projections
EBIT
Growth
Current
$m
Year 1
$m
Year 2
$m
Year 3
$m
Year 4
$m
Year 5
$m
1.00
10%
1.10
10%
1.21
10%
1.33
10%
1.46
10%
1.61
10%
Valuation analysis
Enterprise value (8 x EBIT)
Debt (6 x EBIT)
Equity value
Entry
$m
8.00
6.00
2.00
Exit
$m
12.88
6.00
6.88
Entry
$m
1.30
0.70
2.00
Exit
$m
4.47
2.41
6.88
Investment analysis
%
Private equity
Management
65
35
100
IRR %
28%
28%
Leverage and return
Senior debt
Senior debt
Equity
Three to five years
IRR = 28%
Equity
This amount of equity invested up front delivers an adequate return
There is a funding gap to fill
This is filled with the subordinated debt.
How much subordinated debt?
Subordinated debt holders will only supply so much debt.
Total debt / EBITDA ~ 5 to 6 times
xEBITDA / Cash interest ~ 2 times
Equity funding ~ 30% to 35%.
The appropriate financial structure has to be constructed within these constraints.
Types of subordinated debt
Increasing Increasing
subordination return
Subordinated debt
Senior debt
High yield bonds
Mezz warrantless
Increasing
dilution
Mezz warranted
PIK notes
Vendor notes
Equity
Subordinated
debt is used to
fill the funding
gap.
Mezzanine debt characteristics
Mezzanine is non-traded debt, which is subordinated to senior debt.
Bullet repaid
Pays a cash and accrued return
Can have equity warrants attached
Debt with warrants
Convertible loan stock
Convertible preference shares
Mezzanine returns
Contractual
return
Warrants
3% to 10%
of post exit
value
Accrued
interest
Cash pay
interest
Total
return
(IRR 14%
to 20%)
High yield bond characteristics
High yield bonds are traded debt, which are subordinated to senior debt.
Compared to mezzanine finance it typically…
Has a cheaper all in funding cost
Has greater covenant flexibility
Involves a deeper pool of
investors required to fund larger
transactions.
In return investors required:
Call protection
Registration which takes time to
bring to market.
Convertible preference shares
Credit ratings and high yield debt
Investment grade
• Low risk
• Low return
• Low fees
High yield
• High risk
• High return
• High fees
Moody’s
S&P
Fitch
DBRS
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBB-
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBB-
AAA
AA (high)
AA
AA (low)
A (high)
A
A (low)
BBB (high)
BBB
BBB (low)
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
-
BB+
BB
BBB+
B
BCCC+
CCC
CCCD
BB+
BB
BBB+
B
BCCC+
CCC
CCCD
BB (high)
BB
BB (low)
B (high)
B
B (low)
CCC (high)
CCC
CCC (low)
D
Mezzanine versus high yield bonds
Financial sponsors prefer mezzanine - why?
Senior lenders also prefer mezzanine - why?
Reliable availability vs. volatility of the high yield market
Mezzanine investors interests are more aligned with the
senior provider in a restructuring or in default
Ease of execution vs. road show requirements
Generally buy and hold investors
Flexibility of mezzanine vs. restrictive non-call nature of
high yield debt.
Easily identified and contacted in the event of default
More pre-disposed to restructuring than liquidation to
achieve recoveries.
Equity Financing
Session objectives
Outline the various types of equity finance
Explain the role of private equity funds
Design an appropriate exit strategy for a private equity firm
Types of equity
Senior debt
Typically represents 30 to 40 percent of funding
Private equity has 4 to 7 year exit strategy
Subordinated
debt
Management
Pref. shares
CCPPO shares
Ordinary shares
Equity
S/holder loans
Private
equity funds
Subordinated
debt holders
Investment
banks
What are private equity funds?
Private equity funds are pools of capital that invest in companies that represent an opportunity for a high rate
of return.
Private equity funds invest for limited time periods. Exit strategies include IPOs, selling to another private
equity firm, etc.
Private equity funds are typically split into two categories:
Venture capital funds typically invest in early stage or
expanding businesses that have limited access to
other forms of financing
Buyout of LBO funds typically invest in more mature
businesses, usually taking a controlling interest and
leveraging the equity investment with a substantial
amount of external debt. Buyout funds tend to be
significantly larger than venture capital funds.
Exit considerations
Is the structure
appropriate?
Is the business
strategy
appropriate?
What IRR will be
achieved?
How soon does
exit need to take
place?
Is the
management
team amenable
to exit?
What exit routes
are available?
Who are the
potential
acquirers?
Typical exit routes for private equity
Trade sale
Total exit
IBO
Share
repurchase
Flotation
Private
placement
Partial exit
Corporate
venturing
Corporate
restructuring
Shareholder loans
Shareholder loans are a means for private equity houses to invest sufficient equity into a buyout
situation, whilst still allowing management a significant equity stake.
Max debt
$30m
Enterprise
value $50m
Equity
$20m
Shareholder
loan - PIK
$16m
Private equity $2m
Management $2m
Preference shares
The ‘norm’ is for private equity to subscribe for preference shares which are:
Terms
Redeemable
Attract a fixed dividend
Have restricted voting
rights.
Preference shares are becoming less attractive as:
Issues
Change in tax
credits on
dividends
Not tax deductible like
interest
Even if company has cash,
payment may not be made if
lack of distributable reserves.
Equity ratchets
actual versus
projected
performance
repayment of
debt or
redemption of
preference
shares
Often used to
bridge
expectation gap
between investor
and investee.
Used to increase or decrease private equity or
management's shareholding
Corporate Finance Careers
Career map
Investment
Banking
Private
Equity
Equity
Research
Portfolio
Management
Sales &
Trading
Banks
(‘Sell side’)
Institutions
(‘Buy side’)
Research
Commercial
Banking
Public
Accounting
Due
Diligence
Corporate
Development
Corporates
Treasury
Transaction
Advisory
Audit
FP&A
Roles at banks
Banks
(‘Sell side’)
• Client facing / sales
component
• Capital Markets hire from
schools
• Retail hires at various points
• Long hours
• Competitive
• Quick career progression
Public
Accounting
Institutions
(‘Buy side’)
Corporates
• Mix of client or inward focus
• More internally focused
• Internally focused
• Hire from schools or from
other accounting firms
• Hire from banks
• Hire grad schools students
• Hire from banks, accounting
firms, institutions and
schools
• Long hours
• Hire across all entry points
• Competitive
• Less hours
• Quick career progression
• Competitiveness varies by
company
• Long / medium hours
• Competitive
• Clear career path
• Career progression varies
Prepping for a finance interview
You’re telling a story about yourself that will lead the interviewer to visualize you working in their firm.
Be clear on your story. Prep for your interview by identifying:
• The people and firms that you’ve researched and/or spoken to.
• The stocks you are following.
• The specific classes you’ve taken which relate to the job you’re interviewing for.
• Any related activities (case competitions, investment competitions, investment banking competitions, conferences).
• Any related awards or prizes you’ve won.
• The top 3 things that get you excited about this job.
Top five finance interview questions
Technical Questions
Behavioral Questions
Walk me through the three financial statements
Why do you want to work at this company?
How would you perform a valuation of a
business?
Describe a time you worked as a team / leadership /
what’s one of your weaknesses?
Explain the time value of money to me in simple
terms.
What makes you a good fit with our corporate
culture?
How would you build a financial model?
Top five career hacks
1
• Basic Advice
▪ Join an investment club (at university, or outside)
• Career Hack
▪ Start your own club
▪ Students: Ask the school to fund you
▪ Alumni: Use Meetup.com
Top five career hacks
2
• Basic Advice
▪ Network with finance professionals, alumni,
LinkedIn etc.
• Career Hack
▪ Enroll in the CFA so you can attend CFA events
and see CFA jobboard
Top five career hacks
3
• Basic Advice
▪ Follow the markets – subscribe to Bloomberg,
Google Finance, Seeking Alpha etc.
• Career Hack
▪ Publish articles on SeekingAlpha.com
▪ Free or Paid articles
Top five career hacks
4
• Basic Advice
▪ Participate in case competitions
• Career Hack
▪ Students: Enter NIBCC
▪ Alumni: Attend ModelOff
▪ Free exercises or attend the World
Championships
Top five career hacks
5
• Basic Advice
▪ Take online financial modeling and courses
• Career Hack
▪ Build a model for the company you want to work for
▪ Use the templates and knowledge from the online
courses
▪ Meet with people from the company to discuss, or
use it in an interview
www.corporatefinanceinstitute.com