Don't ruin a good today by thinking about a bad yesterday. Let it go. Anonymous
Idea Transcript
Joshua Rosenbaum, Joshua Pearl
Investment banking Valuation, leveraged buyouts, and mergers & acquisitions
About the Authors
xiii
Foreword
xv
Acknowledgments
xvii
Supplemental Materials
xxi
INTRODUCTION Structure of the Book Part One: Valuation (Chapters 1-3) Part Two: Leveraged Buyouts (Chapters 4 & 5) Part Three: Mergers & Acquisitions (Chapter 6) ValueCo Summary Financial Information
1 2 3 5 6 6
PART ONE Valuation CHAPTER 1 Comparable Companies Analysis Summary of Comparable Companies Analysis Steps Step I. Select the Universe of Comparable Companies Study the Target Identify Key Characteristics of the Target for Comparison Purposes Screen for Comparable Companies Step II. Locate the Necessary Financial Information SEC Filings: 10-K, 10-Q, 8-K, and Proxy Statements Equity Research Press Releases and News Runs Financial Information Services Summary of Financial Data Primary Sources Step III. Spread Key Statistics, Ratios, and Trading Multiples Calculation of Key Financial Statistics and Ratios Supplemental Financial Concepts and Calculations Calculation of Key Trading Multiples Step IV. Benchmark the Comparable Companies Benchmark the Financial Statistics and Ratios Benchmark the Trading Multiples
Step V. Determine Valuation Valuation Implied by EV/EBITDA Valuation Implied by P/E Key Pros and Cons Illustrative Comparable Companies Analysis for ValueCo Step I. Select the Universe of Comparable Companies Step II. Locate the Necessary Financial Information Step III. Spread Key Statistics, Ratios, and Trading Multiples Step IV. Benchmark the Comparable Companies Step V. Determine Valuation
49 50 50 52 53 53 54 55 65 69
CHAPTER 2 Precedent Transactions Analysis Summary of Precedent Transactions Analysis Steps Step I. Select the Universe of Comparable Acquisitions Screen for Comparable Acquisitions Examine Other Considerations Step II. Locate the Necessary Deal-Related and Financial Information Public Targets Private Targets Summary of Primary SEC Filings in M&A Transactions Step III. Spread Key Statistics, Ratios, and Transaction Multiples Calculation of Key Financial Statistics and Ratios Calculation of Key Transaction Multiples Step IV. Benchmark the Comparable Acquisitions Step V. Determine Valuation Key Pros and Cons Illustrative Precedent Transaction Analysis for ValueCo Step I. Select the Universe of Comparable Acquisitions Step II. Locate the Necessary Deal-Related and Financial Information Step III. Spread Key Statistics, Ratios, and Transaction Multiples Step IV. Benchmark the Comparable Acquisitions Step V. Determine Valuation
95 98 105 106
CHAPTER 3 Discounted Cash Flow Analysis Summary of Discounted Cash Flow Analysis Steps Step I. Study the Target and Determine Key Performance Drivers Study the Target Determine Key Performance Drivers Step II. Project Free Cash Flow Considerations for Projecting Free Cash Flow Projection of Sales, EBITDA, and EBIT Projection of Free Cash Flow Step III. Calculate Weighted Average Cost of Capital Step III(a): Determine Target Capital Structure Step III(b): Estimate Cost of Debt (rd)
Step III(c): Estimate Cost of Equity (rc) Step IH(d): Calculate WACC Step IV. Determine Terminal Value Exit Multiple Method Perpetuity Growth Method Step V. Calculate Present Value and Determine Valuation Calculate Present Value Determine Valuation Perform Sensitivity Analysis Key Pros and Cons Illustrative Discounted Cash Flow Analysis for ValueCo Step I. Study the Target and Determine Key Performance Drivers Step II. Project Free Cash Flow Step III. Calculate Weighted Average Cost of Capital Step IV. Determine Terminal Value Step V. Calculate Present Value and Determine Valuation
Leveraged Buyouts CHAPTER 4 Leveraged Buyouts Key Participants Financial Sponsors Investment Banks Bank and Institutional Lenders Bond Investors Target Management Characteristics of a Strong LBO Candidate Strong Cash Flow Generation Leading and Defensible Market Positions Growth Opportunities Efficiency Enhancement Opportunities Low Capex Requirements Strong Asset Base Proven Management Team Economics of LBOs Returns Analysis - Internal Rate of Return Returns Analysis - Cash Return How LBOs Generate Returns How Leverage is Used to Enhance Returns Primary Exit/Monetization Strategies Sale of Business Initial Public Offering Dividend Recapitalization LBO Financing: Structure LBO Financing: Primary Sources Bank Debt
High Yield Bonds Mezzanine Debt Equity Contribution LBO Financing: Selected Key Terms Security Seniority Maturity Coupon Call Protection Covenants CHAPTER 5 LBO Analysis Financing Structure Valuation Step I. Locate and Analyze the Necessary Information Step II. Build the Pre-LBO Model Step II(a): Build Historical and Projected Income Statement through EBIT Step II(b): Input Opening Balance Sheet and Project Balance Sheet Items Step II(c): Build Cash Flow Statement through Investing Activities Step III. Input Transaction Structure Step III(a): Enter Purchase Price Assumptions Step III(b): Enter Financing Structure into Sources and Uses Step III(c): Link Sources and Uses to Balance Sheet Adjustments Columns Step IV. Complete the Post-LBO Model Step IV(a): Build Debt Schedule Step IV(b): Complete Pro Forma Income Statement from EBIT to Net Income Step IV(c): Complete Pro Forma Balance Sheet Step IV(d): Complete Pro Forma Cash Flow Statement Step V. Perform LBO Analysis Step V(a): Analyze Financing Structure Step V(b): Perform Returns Analysis Step V(c): Determine Valuation Step V(d): Create Transaction Summary Page Illustrative LBO Analysis for ValueCo Transaction Summary Income Statement Balance Sheet Cash Flow Statement Debt Schedule Returns Analysis Assumptions Page 1—Income Statement and Cash Flow Statement Assumptions Page 2—Balance Sheet Assumptions Page 3—Financing Structures and Fees
PART THREE Mergers & Acquisitions CHAPTER 6 M&A Sale Process Auctions Auction Structure Organization and Preparation Identify Seller Objectives and Determine Appropriate Sale Process Perform Sell-Side Advisor Due Diligence and Preliminary Valuation Analysis Select Buyer Universe Prepare Marketing Materials Prepare Confidentiality Agreement First Round Contact Prospective Buyers Negotiate and Execute Confidentiality Agreement with Interested Parties Distribute Confidential Information Memorandum and Initial Bid Procedures Letter Prepare Management Presentation Set up Data Room Prepare Stapled Financing Package Receive Initial Bids and Select Buyers to Proceed to Second Round Second Round Conduct Management Presentations Facilitate Site Visits Provide Data Room Access Distribute Final Bid Procedures Letter and Draft Definitive Agreement Receive Final Bids Negotiations Evaluate Final Bids Negotiate with Preferred Buyer(s) Select Winning Bidder Render Fairness Opinion Receive Board Approval and Execute Definitive Agreement Closing Obtain Necessary Approvals Financing and Closing Negotiated Sale