Discussion Materials Prepared For
Colgate University
Investment Banking
February 19, 2011
Notice to Recipient
Confidential
“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial
banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other
investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer and member of FINRA and SIPC, and, in other jurisdictions, locally registered entities.
Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed.
These materials have been prepared by one or more subsidiaries of Bank of America Corporation for the client or potential client to whom such materials are directly addressed and delivered
(the “Company”) in connection with an actual or potential mandate or engagement and may not be used or relied upon for any purpose other than as specifically contemplated by a written
agreement with us. These materials are based on information provided by or on behalf of the Company and/or other potential transaction participants, from public sources or otherwise
reviewed by us. We assume no responsibility for independent investigation or verification of such information (including, without limitation, data from third party suppliers) and have relied
on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance prepared by or
reviewed with the managements of the Company and/or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been
reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, with respect to estimates and forecasts obtained from public sources,
represent reasonable estimates). No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be
relied upon as, a representation, whether as to the past, the present or the future. These materials were designed for use by specific persons familiar with the business and affairs of the
Company and are being furnished and should be considered only in connection with other information, oral or written, being provided by us in connection herewith. These materials are not
intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to, any transaction or other matter. These materials do not constitute an offer or
solicitation to sell or purchase any securities and are not a commitment by Bank of America Corporation or any of its affiliates to provide or arrange any financing for any transaction or to
purchase any security in connection therewith. These materials are for discussion purposes only and are subject to our review and assessment from a legal, compliance, accounting policy and
risk perspective, as appropriate, following our discussion with the Company. We assume no obligation to update or otherwise revise these materials. These materials have not been prepared
with a view toward public disclosure under applicable securities laws or otherwise, are intended for the benefit and use of the Company, and may not be reproduced, disseminated, quoted or
referred to, in whole or in part, without our prior written consent. These materials may not reflect information known to other professionals in other business areas of Bank of America
Corporation and its affiliates.
Bank of America Corporation and its affiliates (collectively, the “BAC Group”) comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives
trading, foreign exchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing
and strategic advisory services and other commercial services and products to a wide range of corporations, governments and individuals, domestically and offshore, from which conflicting
interests or duties, or a perception thereof, may arise. In the ordinary course of these activities, parts of the BAC Group at any time may invest on a principal basis or manage funds that invest,
make or hold long or short positions, finance positions or trade or otherwise effect transactions, for their own accounts or the accounts of customers, in debt, equity or other securities or
financial instruments (including derivatives, bank loans or other obligations) of the Company, potential counterparties or any other company that may be involved in a transaction. Products
and services that may be referenced in the accompanying materials may be provided through one or more affiliates of Bank of America Corporation. We have adopted policies and guidelines
designed to preserve the independence of our research analysts. These policies prohibit employees from offering research coverage, a favorable research rating or a specific price target or
offering to change a research rating or price target as consideration for or an inducement to obtain business or other compensation. We are required to obtain, verify and record certain
information that identifies the Company, which information includes the name and address of the Company and other information that will allow us to identify the Company in accordance, as
applicable, with the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) and such other laws, rules and regulations as applicable within and outside the United States.
We do not provide legal, compliance, tax or accounting advice. Accordingly, any statements contained herein as to tax matters were neither written nor intended by us to be used and
cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on such taxpayer. If any person uses or refers to any such tax statement in promoting,
marketing or recommending a partnership or other entity, investment plan or arrangement to any taxpayer, then the statement expressed herein is being delivered to support the
promotion or marketing of the transaction or matter addressed and the recipient should seek advice based on its particular circumstances from an independent tax advisor.
Notwithstanding anything that may appear herein or in other materials to the contrary, the Company shall be permitted to disclose the tax treatment and tax structure of a transaction
(including any materials, opinions or analyses relating to such tax treatment or tax structure, but without disclosure of identifying information or, except to the extent relating to such tax
structure or tax treatment, any nonpublic commercial or financial information) on and after the earliest to occur of the date of (i) public announcement of discussions relating to such
transaction, (ii) public announcement of such transaction or (iii) execution of a definitive agreement (with or without conditions) to enter into such transaction; provided, however, that if
such transaction is not consummated for any reason, the provisions of this sentence shall cease to apply. Copyright 2010 Bank of America Corporation.
Investment Banking
Discussion Materials Prepared For Colgate University
Table of Contents
1. Overview of Investment Banking
2. Role of an Analyst
3. Questions?
Appendix
A. Analyst Success Factors
B. Valuation Basics
C. Interview Skills and Preparation
Overview of Investment Banking
Overview of Investment Banking
So What Do Investment Bankers Do?

I can sum up what we do in two words and one picture: Ari Gold

We don’t create anything and we don’t buy anything; we just sell things that aren’t ours to begin with


If the business world were like Entourage, bankers would be the agents, private equity firms and large companies
would be the studios, and companies would be the actors and movies
And If You Haven’t Seen Entourage…
– Think of investment bankers like real estate agents but for companies instead of houses
– Just as a real estate agent introduces buyers and sellers of property, bankers introduce buyers and sellers of
companies and try to make a deal happen
– And just like real estate agents, the only thing at stake is our time – we have no money invested on either side

But What Will You Do as an Analyst or Associate?
– The above is the “high-level” view of what investment bankers do
– As a junior banker, you’re more like Lloyd: you grab coffee for Ari and take care of his grunt work
____________________
Source: MergersAndInquisitions.com.
1
Overview of Investment Banking
The Basics
Users of Capital:
Corporations
Governments
Municipalities
Providers of Capital:
Individuals
Pension Funds
Insurance Companies
Asset Managers
Corporate Treasuries
WALL STREET
2
Overview of Investment Banking
Functions of an Investment Bank
Sell equity and debt
securities, provide
research
PRIVATE CLIENT
Advice
Financial planning
Buy/sell securities
INVESTMENT BANKING
CAPITAL MARKETS
SALES & TRADING
RESEARCH
Corporate Finance Services Strategic
Advisory
Underwrite and Place Securities
Sell equity and debt
securities, provide
research
ASSET MGMT
Sell equity and debt
securities, provide
research
CORPS
GOVTS
MUNIS
Individuals
Invest indirectly by buying mutual funds,
insurance policies, etc.
3
Institutions
Overview of Investment Banking
Mergers & Acquisitions Transaction
INVESTMENT BANKING
Advise
Cooperate to
originate
and/or finance
transaction
and guide and
understand
market
reaction
Negotiate
CORP
CLIENT
TARGET
Communicate
Cooperate to
finance
transaction
and
understand
market
reaction
SHAREHOLDERS OF EACH COMPANY
SALES & TRADING
RESEARCH
Communicate
Strategize
4
CAPITAL MARKETS
Overview of Investment Banking
Debt or Equity Transaction
CAPITAL MARKETS
Advise
Constant
contact in
origination
and execution
CORP
CLIENT
RESEARCH
Roadshow
$$$$
Originate
Advise
Due diligence
I. BANKING
SALES
SYNDICATE
TRADING
5
WALL STREET
Overview of Investment Banking
How It All Works Together
Seeking advice from
bankers as well as
access to permanent and
working capital. Include
Global Fortune 500
companies, as well as
sovereigns,
municipalities, and
sponsors, who operate
globally.
Separates private side of GBAM activities (left side) from public side
of activities (right side). Compliance and legal ensure flow of
information between the two sides does not occur.
Information
Wall
Equity
Research
Consists of global
institutional firms such as
mutual funds, pension
funds, hedge funds,
sovereign wealth funds,
and central banks, as
well as financial
institutions and corporate
clients.
Equity
Capital
Markets
Issuers
Corporate &
Investment
Banking
Syndicate
Sales and
Trading
Investors
Debt
Capital
Markets
Bankers are the relationship owners
of issuing clients and sponsors.
Investment Bankers typically work
with CEOs & Boards as an advisor
on firm strategy (M&A, divestiture)
and Capital Raising. Corporate
Bankers typically work with CFOs
and Treasurers on working capital,
treasury, and risk management
solutions.
Fixed Income
Research
Form the capital raising function within the bank.
Understands current market environment for capital
and structures deals such that issuers are gaining the
cheapest access to capital while investors are
earning a fair return for respective risks. Origination
and structuring of securities occurs here.
6
Research prepares independent
views on Equity, Fixed Income,
and Macro markets, valued by
investing clients as well as internal
Sales & Trading teams. Sales
interfaces with institutional clients
to provide access to the bank’s
trading and product platform.
Trading maintains market making
activity in numerous equity, credit,
rates, FX, commodity, and
mortgage securities.
Role of an Analyst
Role of an Analyst
Investment Banking at Bank of America Merrill Lynch
Global Corporate &
Investment Banking
(“GCIB”)
Product Focus
Mergers &
Acquisitions
(“M&A”)

Leveraged
Finance
Financial
Sponsors
Equity
Capital
Markets
(“ECM”)
Debt
Capital
Markets
(“DCM”)
Industry Focus
Private
Equity
Consumer
&
Retail
(“C&R”)
Media &
Telecom
(“M&T”)
Healthcare
Energy &
Power
(“E&P”)
Real Estate
Technology
Financial
Institutions
(“FIG”)
Global
Industrials
(“GIG”)
Typically a two to three year commitment as an Analyst with potential to remain with the firm depending on
performance
7
Role of an Analyst
Banking Hierarchy

Managing
Director
What does everyone else do?



Director
Vice
President

Directors and Managing Directors manage the teams, go to meetings, and do lots of strategic
thinking/negotiating
VPs draw up pages and do strategic thinking; lots of meetings/presentation
Associates check the analyst’s work and tries to do VP-level work, occasionally presenting at
meetings
What does an analyst do?

An analyst is the numbers and graphics maven
–
Quantitative analysis (standalone operating models, merger models, LBO models, discounted
cash flows, specialty models)
–
Industry research
–
Prepare presentations and pitches (board meetings, fairness opinions, management
presentations, conference materials)
–
Conduct due diligence and process results
–
Organize roadshows for marketing transactions with corporate clients
Associate
Analyst
8
Role of an Analyst
Your Role as An Analyst
Financial
Analysis
Industry
Research
Presentation
Preparation
Transaction
Execution
Client Support

Financial Statement
Analysis

Competitive
Analyses

Drafting and
Editing

Drafting
Documents

Acquisition Project
Support

Comparable
Company Analysis

Background
Description

Graphic Design

Due Diligence

Strategic Studies

Presentation
Support

Marketing Material
Preparation

Special Projects

Roadshow
Logistics

Financial Forecasts
and Projections

Modeling

Briefing Materials
9
Role of an Analyst
Valuation Methodologies
Valuation
Methodologies
Publicly Traded
Comparable
Companies Analysis
Comparable
Transactions Analysis
Discounted
Cash Flow Analysis
Leveraged
Buyout/Recap Analysis

"Public Market
Valuation"

"Private Market
Valuation"

"Intrinsic" value of
business

Value to a
financial/LBO buyer

Value based on
market trading
multiples of
comparable
companies

Value based on
multiples paid for
comparable
companies in sale
transactions

Present value of
projected free cash
flows

Value based on debt
repayment and return
on equity investment


Applied using
historical and
prospective multiples

Incorporates both
short-term and longterm expected
performance

Does not include a
control premium
Includes control
premium

Risk in cash flows
and capital structure
captured in discount
rate
10
Other

Liquidation analysis

Break-up / Sum-ofthe-Parts (SOTP)
analysis

Historical trading
performance

Expected IPO
valuation

EPS impact
(accretion / dilution
analysis)

Dividend discount
method
Role of an Analyst
Core Competencies / Qualities
STRATEGIC THINKING
Business Knowledge:
– Basic knowledge of products
and sectors
– Knowledge of relevant tools,
techniques and processes
BUSINESS RESULTS
PEOPLE LEADERSHIP
PERSONAL EFFECTIVENESS
Analytical Ability:
– Demonstrate strong
quantitative abilities
– Rapidly process and
synthesize information and
identify key issues
Corporate Citizenship:
– Timely participation in
mandated training programs
– Comply with policies and
procedures
– Actively participate in efforts
to improve institution and its
reputation
Character:
– Behave in a way that leads
others to trust you
– Calm and focused under
pressure
– Demonstrate respect for
individuals
Innovation & Creativity:
– Seek creative approaches to
efficiently and effectively
perform analytical tasks
Change Leadership:
– Continually seek to do things
better
Strategic Vision:
– Grasp macro factors
impacting relevant industry
and/or product
– Understand overall goals of
transactions
Client Relationships:
– Understand overall goals
and nature of specific client
relationships
– Responsive in supporting
client needs
Adaptability:
– Strive to better understand
concepts and improve on
areas of weakness
– Genuine interest in learning
Execution:
– Deliver required outputs on
time and at required quality
and accuracy
– Effectively work on several
projects without sacrificing
quality or service
Collaboration:
– Work well with others and
share ideas
Talent Building:
– Participate in recruiting and
training activities
Communication:
– Communicate effectively in
formal and informal settings
– Proactively communicate
and manage expectations
Courage:
– Confidence to speak up on
issues
Decisiveness:
– Demonstrate good judgment
– Seek out necessary
expertise to ensure decisions
are made rapidly
Energy & Drive:
– Demonstrate personal
commitment to the work
– Demonstrate positive attitude
11
Questions?
Questions?
Resources

Books
– The Vault Career Guide to Investment Banking – should be your bible if you’re interviewing
– The Accidental Investment Banker: Inside the Decade that Transformed Wall Street by Jonathan Knee –
one man’s foray into investment banking; gives a good history and overview through the lens of his
experience
– Barbarians at the Gate By Bryan Burrough and John Helyar – story of the landmark LBO of RJR Nabisco
– Liars Poker: Rising Through the Wreckage on Wall Street By Michael Lewis – called “essential reading for a
prospective investment banker interested in the sales and trading side”

Online
– www.mergersandinquisitions.com – amusing yet insightful answers to every question you ever had about
investment banking and the finance world
– www.wallst-training.com/resources.html – overviews of more technical concepts, great for interview prep
– dealbook.nytimes.com – goings on in the investment banking world
– www.dealbreaker.com – Perez Hilton for investment bankers

Other: NYTimes, Wall Street Journal, The Economist, Financial Times, etc.
12
Appendix
Analyst Success Factors
Analyst Success Factors
A Great Analyst is Someone Who…

Tries to step into the shoes of the rank above

Has a positive attitude

Is eager to learn

Is reliable

Is responsible

Is accessible (carries Blackberry at all times, communicates well and on time)

Is proactive

Is resourceful

Asks insightful questions

Has an inquiring mind and is a thorough thinker

Is efficient, organized, has great attention to detail, and is self-sufficient/independent

Willing to do grunt work to highest standard

Leverages off peers and other analysts

Accepts the unpredictability of the schedule (don’t feel victimized by hours works and does not flaunt hours worked)

Needs little sleep, has great sense of humor!

Is always presentable and well-groomed
13
Analyst Success Factors
Your Report Card (Formal)
I. Business Acumen

Clearly understands the needs and complexity of the business they are serving

Develops a compelling sense of purpose and direction

Basic knowledge of products and sectors

Knowledge of relevant tools, techniques and processes
II. Quantitative/Technical Skills

Demonstrates strong quantitative ability

Rapidly processes and synthesizes information and identifies key issues

Delivers required output on time and at required quality and accuracy levels

Effectively works on several activities without sacrificing quality or service

Clear attention to detail
III. Leadership/Attitude

Collaborates well with others and shares ideas

Exhibits corporate citizenship; participates in mandated training programs, compiles with firm policies

Communicates effectively in formal and informal settings; proactive in managing expectations

Demonstrates good judgment and decision making capabilities

Has a positive attitude and strong commitment to the work

Behaves in a way that leads others to trust them

Is calm and focused under pressure

Works well amidst ambiguity

Results oriented
14
Analyst Success Factors
Things to Implement on the First Day



Attitude

Display a sense of urgency and be enthusiastic about everything you do

Demonstrate a positive attitude and be willing to learn as much as you can
Inspire Confidence

FIRST IMPRESSIONS ARE LASTING!!!

Be available (check voicemails and emails; let people know where you are; call in when you are out)

Be accurate (CHECK YOUR WORK)

Be reliable

Have an opinion
Career Development

Be proactive and introduce yourself to the members of the group

Establish a regular dialogue with your staffer

–
What types of projects/sectors have you worked on?
–
What types of projects/sectors would you like get more exposure to?
Establish a regular dialogue with your mentor
15
Analyst Success Factors
Take Ownership

Know the Objective




Why is the team working on this project? What’s the goal for the bank? What’s the history with the client? What’s the
angle?
Demonstrate Basic Knowledge of the Company / Industry

Know key financial data (revenue, EBITDA, equity value, enterprise value, trading multiples, etc.)

Read a few research reports on your company to get up to speed

Who are the major competitors and end markets?
Focus on Quality Control

Read work that comes in from other groups. Check it.

Read the details that senior people don’t have time to read (that’s how you get invited to meetings)
Train Yourself

Never delegate something that you can’t do yourself

Study every piece of analysis that crosses your desk until you understand it

Pick your way through the model

Seek out and study precedents

Read training manuals
16
Analyst Success Factors
Communication



Email

Run spell check (set email to run auto check)

Check the attachment before hitting send

Be careful of “Reply to All” (especially for distribution lists)

Use a professional tone / be conservative (e-mail can be interpreted differently)

NO PERSONAL EMAILS
STOP
Voicemail

Sending: Organize thoughts beforehand and get to the point

Receiving: Check voicemail often
Meetings

Always consider logistics in advance (building access, dial-in numbers, conference room reservations)
17
Analyst Success Factors
Organization

Actively Manage Your Time





Map out all of the steps of task at hand
–
Estimate the time it will take to complete each step
–
Communicate the schedule / allow teammates to plan accordingly
Budget time for associates to review and give comments before distributing to broader team
Manage Conflicts Early

Communicate time conflicts early and often – most conflicts can be managed

Don’t decide yourself what’s more important
Keep Lists

Write everything down (first casualty of fatigue is memory)

Review and prioritize your lists daily

Read your list often during the day
Organize As You Go

Don’t push it off until later

Keep your desk and projects organized and easily accessible

Save copies of all e-mails
18
Valuation Basics
Valuation Basics
Firm Value vs. Equity Value
Enterprise Value
Equity Value
Equity Value
=
=
=

Market value of all capital invested in a business
(often referred to as "enterprise value," “firm value” or "asset value")

The value of the total enterprise: market value of equity + net debt

Market value of the shareholders' equity
(often referred to as "offer value" or “market value”)

The market value of a company's equity (shares outstanding x current stock price)

Firm value - net debt
Enterprise
Value
=
19
Net Debt
+
Equity Value
Valuation Basics
Airline Public Comparables
($ in millions, except per share amounts)
Public comparables give a useful understanding of the company’s strengths and weaknesses against a peer group
Adj.
Price as of
Company
Legacy Majors
Delta Air Lines
United Continental
AMR Corp.
US Airways
Alaska Air Group
Hawaiian Airlines
1/20/2011
$11.61
24.18
7.53
10.25
61.25
7.50
Market
FactSet Consensus
(2)
Enterprise
Adj. EV / EBITDAR
2011E
2012E
(1)
Value
Value
$9,304.8
8,334.8
2,644.1
1,936.6
2,365.8
388.6
$23,523.8
19,606.9
13,558.7
9,140.8
3,684.8
1,143.4
Average
Median
Low Cost Carriers
Southwest Airlines
JetBlue Airways
AirTran
Allegiant
$12.79
6.49
7.47
47.13
$9,555.4
2,058.8
1,119.8
909.1
$10,955.9
5,135.5
3,431.1
833.7
Average
Median
Price / Earnings
2011E
2012E
5-Year
Growth
Rate (3)
4.7x
3.3
5.1
4.5
3.8
3.1
4.5x
3.0
4.8
4.3
3.6
2.8
5.4x
5.1
NM
4.3
8.6
7.6
4.6x
4.8
9.5
3.8
8.4
7.2
3.0%
3.0%
7.5%
3.0%
9.0%
6.7%
4.1x
4.1
3.8x
4.0
6.2x
5.4x
6.4x
6.0x
5.4%
4.8%
4.6x
5.8
7.2
5.1
4.0x
5.6
7.2
4.5
14.4x
13.0
18.6
11.8
13.5x
14.0
19.4
9.7
8.3%
20.0%
9.8%
10.3%
5.7x
5.4
5.3x
5.0
14.5x
13.7
14.2x
13.8
12.1%
10.0%
____________________
(1) Enterprise Value = Market Value of Equity + Short-term Debt + Long-term Debt + Preferred Equity + Minority Interest - Cash and Marketable Securities.
(2) Estimates obtained from Wall Street research and calendarized when necessary.
(3) Earnings estimates and EPS growth obtained from FactSet Fundamentals and calendarized when necessary.
20
(3)
Valuation Basics
Recent Aerospace Sector Acquisition Transactions
Acquisition comparables give a useful understanding of where the deal “fits” compared to similar transactions
18.0x
15.3x
14.0x
16.0x
6.2x
Vought Aircraft/Triumph Group
General Dynamics/Jet Aviation
BE Aerospace/Honeywell Aerospace
Hawker FBOs/BBA Aviation
Firth Rixson/Oak Hill
Sequa/Carlyle
ARINC/Carlyle
ACTS/KKR & Sageview
Mercury Air Centers/MacQuarie
Standard Aero/DAE
McKechnie/JLL Partners
K&F/Meggitts
CMC Electronics/Esterline
Smiths/General Electric
Aviation Technologies/Transdigm
Cherry Aerospace/PCP
Argo-Tech/Eaton
21
Raytheon Aircraft/GS Capital, Onex
SR Tech/Mubadala, DAE, Istithmar
Avio/Cinven
Aviall/Boeing
Evans & Sutherland/Rockwell Collins
Darchem/Esterline
Doncasters/Dubai Int'l Capital
Argo-Tech/Greenbriar, Vestar
Perkin Elmer Aerospace/Eaton
Cobham Aerospace/Eaton
Special Metals/PCP
C&D Aerospace/Zodiac
Snecma/Sagem
K&F/Aurora Capital
Integrated Aerospace/Smiths
Kongsberg Maritime/Nordic Capital
PSI Group/ATK
Dunlop DM/Meggitt
Dunlop ERO/Carlyle
Agusta Westland/Finmeccanica
Sponsor
Strategic
____________________
Source: Company filings and Wall Street research.
(1) Transaction announced in March 2010 and still not closed.
2010
2009
2008
2007
2006
2005
2004
9.5x
7.0x
7.3x
8.0x
9.0x 9.0x
8.6x
8.0x
7.6x
10.6x
(1)
11.9x
11.0x
10.4x
9.4x
9.3x
9.5x
10.0x
10.9x
14.7x
13.8x
12.9x
12.6x
12.6x
12.0x12.3x12.5x
11.8x11.9x
11.5x
11.4x
11.0x
11.0x
10.7x
10.6x
9.3x
8.5x 8.5x
12.0x
LTM EBITDA
Multiple
6.0x
4.0x
2.0x
0.0x
Valuation Basics
DCF Analysis
Summary of Analysis

A Discounted Cash Flow Analysis (“DCF”) establishes the “intrinsic value” of the operating assets of a business

A DCF is an analysis which represents the present value of each of the (1) free cash flows of the business over
the projection period and (2) terminal value
– Free Cash Flows (“FCF”): Cash flows available to all providers of the capital to the business
– Terminal value: Portion of the total value of the business beyond the specific forecast period


Given the central role of long-term assumptions in the DCF, the results of a DCF should be presented as a
range of values as opposed to a single point estimate
DCF is more flexible than other valuation approaches in terms of its ability to incorporate the unique
attributes of a business, but it is also very sensitive to estimates of cash flow, terminal value and discount rate
Advantages
Disadvantages

Provides an objective framework for assessing risk
and cash flows to estimate value

Extremely sensitive to cash flow projections which
may be unrealistic

Requires users to analyze key drivers of value


May be used when no “pure play” comparable
companies are available
Terminal value may be distorted by incorrect
estimations of either long-term cash flow or
reasonable terminal multiples

Validity of the discount rate depends of assumptions
for beta and the market risk premium
22
Valuation Basics
DCF - Methodology
Forecast Free
Cash Flow

Identify components of
free cash flow

Develop historical
perspective
Estimate
Terminal Value

Determine best way to
estimate terminal value

Exit multiple

Perpetuity
Estimate
Cost of Capital

Develop target capital
structure

Estimate cost of equity
(CAPM)

Determine forecast
assumptions and
scenarios

Exit multiples implied
by comparable
acquisitions

Estimate cost of nonequity sources of
capital

Decide forecast
horizon, typically 5 to
10 years

Perpetuity growth rate
should be consistent
with inflation
predictions

Determine appropriate
tax rate

Prepare forecast


Derive an Implied
Valuation Range

Calculate present value
of operating assets by
discounting cash flows
and terminal value to
present

Adjust value to reflect
other assets (e.g. cash)
and liabilities (e.g.
debt) to result in value
of equity

Perform sensitivity
analyses

Interpret results within
decision context
Calculate WACC
Examine terminal value
contribution to analysis
23
Valuation Basics
DCF - Calculating Free Cash Flow
Unlevered Free Cash Flow

Unlevered Free Cash Flow is the cash generated:



Illustrative Unlevered FCF Calculation
By all of the operating assets employed in the
business
Before the effects of financing (i.e. unlevered)
Thus, FCF represents the cash available to be
distributed to all providers of capital
Less:
Equals:
(–)
(=)
EBIT
Cash Taxes
Net Operating Profit After Tax (NOPAT)
Add:
(+)
(+)
Depreciation & Amortization
Other noncash charges
Less:
(-)
(-)
(=)
Capex
Change in net working capital
Unlevered Free Cash Flow
Equals:
Why Unlevered Free Cash Flow vs. Discounted Earnings…


Near term, cash flow can differ substantially from accounting earnings

Capex vs. depreciation

Non-cash items included in earnings
Earnings are more easily manipulated than cash flow

Provisions / accruals

Revenue recognition policies

Inventory accounting (LIFO vs. FIFO)

Off-balance sheet financing and special purpose vehicles
24
Valuation Basics
LBO Analysis
A leveraged buyout occurs when a financial sponsor acquires a controlling interest in a company's equity
and where a significant percentage of the purchase price is financed through leverage. The cash flow is
used to de-lever the company increasing the implied equity value.


Acquisition funded mostly with debt

"Leverage" of 3.0 to 5.0x EBITDA

Smaller amount of equity (typically, 30-40% — 60-70% Debt)
Value created primarily through "deleveraging"

Strong cash flows need to service debt

Viable "exit strategy" in 3-5 years

Common sources of debt financing

Bank debt (senior)
– Term loans and revolving credit facility


High yield bonds (subordinated)
Generally supplies a "floor valuation"

What can a " financial sponsor" afford to pay?

Targets often underperforming or "out of favor" companies
25
Valuation Basics
LBO - Capital Structure Alternatives
Components of Capital
Senior Debt


Revolving
Term
Senior/sub notes
Discount notes

Usually secured/most restrictive covenants

Amortizing 5- to 8-year tenor

30%–50% of total
capital

First in line at liquidation


LIBOR + 200–400

Lowest coupon

Typically supplied by an investment/commercial bank or mezzanine fund

Riskier debt/typically unsecured
Sample inputs

Primarily bullet structures

25%–35% of total
capital

Typical tenor is 10-year


T + 350–650

High coupon

Typically supplied by an investment or commercial bank or a mezzanine fund (often sponsoraffiliated)

Multiple forms: Convertible debt, exchangeable debt, convertible preferred stock, PIK securities
and warrants

Expected IRR in the 15%–20% range

Typically supplied by a financial sponsor
5–8 years
7–10 years
Mezzanine Securities
Sample inputs




Sub. Debt (conv.)
Preferred stock
PIK
Typically supplied by an investment or commercial bank
Sample inputs
Subordinated Debt






0%–35% total capital
High teens/low 20s
7–10+ years
Warrants
Common Equity

Highest risk/cost of capital
Sample inputs

Sometimes "stapled" to high-yield paper to attract broader investor group

20%–40% of total
capital

Minimum annual returns >20%


20%–30% IRR
5–7 year horizon
26
Interview Skills and Preparation
Interview Skills and Preparation
Overview

Interview is the most important element in the job search process

Opportunity for you to determine if investment banking and, more specifically, if “XYZ Bank” is a good “fit”

General Pointers

Be prepared: Know as much about the investment bank and position as possible

Know yourself

Be honest

Have a positive attitude

Demonstrate interest

Professionalism

Practice

Ask good and relevant questions
27
Interview Skills and Preparation
What Investment Banks Typically Desire in an Analyst

Strong communication skills (written and oral)

Motivation, enthusiasm, knowledge of firm and industry

Accomplishment (academic as well as personal)

Teamwork, group skills, respect for individuals

Strong work ethic and integrity

Quantitative/technical skills

Self-confidence and positive attitude

Time management skills, ability to multi-task

Creativity

Personality (sense of humor, cheerfulness and flexibility in new situations)
28
Interview Skills and Preparation
General Takeaways


Do your own due diligence

Do you like the type of work required of a successful analyst?

Are you comfortable with the lifestyle? (long hours, stressful at times, multi-tasking)

How do you feel about New York city or other locations? (NYC is expensive, crowded)

Cultural fit of investment bank? (group dynamics, diversity, individuality, professionalism)

Opportunities? (training program, responsibilities, deal flow, international, transaction mix)
Be prepared

Talk with friends, family, professors, recruiters, and schedule office visits and externships

Read annual reports, research, recruiting literature, articles and Web site

List differences between firms and key criteria for making your own decision

Understand what investment banks do and your role in the process

Understand yourself, what motivates you, your strengths and weaknesses and be able to articulate those
points

Practice interviewing – thinking it and speaking it can be entirely different

Make the decision for yourself, not someone else – and avoid the “herd mentality”

Relax, trust yourself, and have fun!
29