Investment Banking, valuation and M&A

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n the constantly evolving world of ﬁ nance, a

solid technical foundation is an essential tool

for success. Due to the fast-paced nature of

this world, however, no one has been able to

take the time to properly codify the lifeblood

of the corporate ﬁ nancier’s work—namely,

valuation. Rosenbaum and Pearl have responded

to this need by writing the book that they wish

had existed when they were trying to break into

Wall Street.

Investment Banking: Valuation, Leveraged

Buyouts, and Mergers & Acquisitions is a highly

accessible and authoritative book that focuses on

the primary valuation methodologies currently

used on Wall Street—comparable companies,

precedent transactions, DCF, and LBO analysis.

These methodologies are used to determine

valuation for public and private companies

within the context of M&A transactions, LBOs,

IPOs, restructurings, and investment decisions.

Using a step-by-step how-to approach for each

methodology, the authors build a chronological

knowledge base and deﬁ ne key terms, ﬁ nancial

concepts, and processes throughout the book.

They also provide a comprehensive overview

of the fundamentals of LBOs and an organized

M&A sale process.

In the aftermath of the subprime mortgage crisis

and ensuing credit crunch, the world of ﬁ nance

is returning to the fundamentals of valuation and

critical due diligence. This involves the use of

more realistic assumptions governing approach

to risk as well as a wide range of value drivers.

While valuation has always involved a great deal

of “art” in addition to time-tested “science,” the

artistry is perpetually evolving in accordance

with market developments and conditions. In

this sense, this book is particularly topical—in

addition to detailing the technical fundamentals

behind valuation, the authors infuse practical

judgment skills and perspective to help guide

the science.

Investment

Banking

JOSHUA ROSENBAUM

JOSHUA PEARL

FOREWORD BY JOSEPH R. PERELLA

ROSENBAUM

PEARL

Investment Banking

Valuation, Leveraged Buyouts,

and Mergers & Acquisitions

JOSHUA PEARL has structured and ex-

ecuted numerous leveraged loan and high

yield bond ﬁ nancings, as well as LBOs and

restructurings, for Deutsche Bank’s Leveraged

Finance Group. Previously, he worked at A.G.

Edwards in the Investment Banking Division.

Pearl has also designed and taught corporate

ﬁ nance training courses. He received his BS

in Business from Indiana University’s Kelley

School of Business.

JOSHUA ROSENBAUM is an Executive

Director at UBS Investment Bank in the Global

Industrial Group. He advises on, structures, and

originates M&A, corporate ﬁ nance, and capital

markets transactions. Previously, he worked

at the International Finance Corporation, the

direct investment division of the World Bank.

He received his AB from Harvard and his MBA

with Baker Scholar honors from Harvard

Business School.

Praise for

Investment Banking

“Investment Banking provides a highly practical and relevant guide to the valuation analysis at

the core of investment banking, private equity, and corporate ﬁ nance. Mastery of these essential

skills is fundamental for any role in transaction-related ﬁ nance. This book will become a ﬁ xture

on every ﬁ nance professional’s bookshelf.”

—Thomas H. Lee, Pr

esident, Lee Equity Partners,

LLC

Founder, Thomas H. Lee Capital Management, LLC

“This book will surely become an indispensable guide to the art of buyout and M&A valuation,

for the experienced investment practitioner as w

ell as for the non-professional seeking to learn

the mysteries of valuation.”

—Da

vid M. Rubenstein, Co-Founder and Managing Director, The Carlyle Group

“As a practitioner of hundr

eds of M&A and LBO transactions during the last twenty

years, I recommend this book to advisors, ﬁ

nanciers, practitioners, and anyone seriously

interested in investment transactions. Rosenbaum and Pearl have created a comprehensive and

thoughtfully written guide covering the core skills of the successful investment professional,

with particular emphasis on valuation analysis.”

—Josh Harris, Managing Partner

Apollo Management, LP

“Valuation is the key to any transaction. Investment B

anking provides speciﬁ c step-by-step valua-

tion procedures for LBO and M&A transactions, with lots of diagrams and numerical examples.”

— Roger G. Ibbotson,

Professor in the Practice of Finance, Yale School of Management

Chairman and CIO, Zebra Capital Management, LLC

Founder and Advisor, Ibbotson Associates, a Morningstar Company

“Investment banking requires a skill set that combines both art and science. While numerous

textbooks provide students with the cor

e principles of ﬁ nancial economics, the rich institutional

considerations that are essential on Wall Street are not well documented. This book represents

an important step in ﬁ lling this gap.”

— Josh Lerner

Jacob H. Schiff Professor of Investment Banking, Harvard Business School

Coauthor,

Venture Capital and Private Equity: A Casebook

“Rosenbaum and Pearl have written the ultimate nuts-and-bolts guide for valuation. It is the

book that every business student should study and every investment banker should use.”

— Steven M. Davidoff, Associate Professor, University of Connecticut School of Law

The Deal Professor,

The

New York Times

$80.00 USA/$96.00 CAN

Jacket Photograph: © David Pollack/Corbis

Portraits: Noli Novak

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FM JWBT063-Rosenbaum March 18, 2009 15:37 Printer Name: Hamilton

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FM JWBT063-Rosenbaum March 18, 2009 15:37 Printer Name: Hamilton

Investment

Banking

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FM JWBT063-Rosenbaum March 18, 2009 15:37 Printer Name: Hamilton

Founded in 1807, John Wiley & Sons is the oldest independent publishing com-

pany in the United States. With ofﬁces in North America, Europe, Australia, and

Asia, Wiley is globally committed to developing and marketing print and electronic

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The Wiley Finance series contains books written speciﬁcally for ﬁnance and

investment professionals as well as sophisticated individual investors and their

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For a list of available titles, please visit our Web site at www.WileyFinance.com.

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FM JWBT063-Rosenbaum March 18, 2009 15:37 Printer Name: Hamilton

Investment

Banking

Valuation, Leveraged Buyouts,

and Mergers & Acquisitions

JOSHUA ROSENBAUM

JOSHUA PEARL

John Wiley & Sons, Inc.

iii

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

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in

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Library of Congress Cataloging-in-Publication Data:

Rosenbaum, Joshua, 1971–

Investment banking : valuation, leveraged buyouts, and mergers & acquisitions /

Joshua Rosenbaum, Joshua Pearl.

p. cm. — (Wiley ﬁnance series)

Includes bibliographical references and index.

ISBN 978-0-470-44220-3 (cloth)

1. Investment banking. 2. Valuation. 3. Leveraged buyouts. 4. Consolidation and

merger of corporations. I. Pearl, Joshua, 1981– II. Title.

HG4534.R67 2009

332.6’6068—dc22

2008049819

Printed in the United States of America.

10987654321

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FM JWBT063-Rosenbaum March 18, 2009 15:37 Printer Name: Hamilton

To my wife, Margo, for her unwavering love and support.

—J.R.

To the memory of my grandfather, Joseph Pearl, a Holocaust

survivor, for his inspiration to persevere and succeed.

—J.P.

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Contents

About the Authors xiii

Foreword xv

Acknowledgments xvii

Supplemental Materials xxi

INTRODUCTION 1

Structure of the Book 2

Part One: Valuation (Chapters 1–3) 3

Part Two: Leveraged Buyouts (Chapters 4 & 5) 5

Part Three: Mergers & Acquisitions (Chapter 6) 6

ValueCo Summary Financial Information 6

PART ONE

Valuation

CHAPTER 1

Comparable Companies Analysis 11

Summary of Comparable Companies Analysis Steps 12

Step I. Select the Universe of Comparable Companies 15

Study the Target 15

Identify Key Characteristics of the Target for Comparison

Purposes 16

Screen for Comparable Companies 20

Step II. Locate the Necessary Financial Information 21

SEC Filings: 10-K, 10-Q, 8-K, and Proxy Statements 21

Equity Research 23

Press Releases and News Runs 24

Financial Information Services 24

Summary of Financial Data Primary Sources 24

Step III. Spread Key Statistics, Ratios, and Trading Multiples 25

Calculation of Key Financial Statistics and Ratios 27

Supplemental Financial Concepts and Calculations 39

Calculation of Key Trading Multiples 44

Step IV. Benchmark the Comparable Companies 48

Benchmark the Financial Statistics and Ratios 48

Benchmark the Trading Multiples 48

vii

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viii CONTENTS

Step V. Determine Valuation 49

Valuation Implied by EV/EBITDA 50

Valuation Implied by P/E 50

Key Pros and Cons 52

Illustrative Comparable Companies Analysis for ValueCo 53

Step I. Select the Universe of Comparable Companies 53

Step II. Locate the Necessary Financial Information 54

Step III. Spread Key Statistics, Ratios, and Trading Multiples 55

Step IV. Benchmark the Comparable Companies 65

Step V. Determine Valuation 69

CHAPTER 2

Precedent Transactions Analysis 71

Summary of Precedent Transactions Analysis Steps 72

Step I. Select the Universe of Comparable Acquisitions 75

Screen for Comparable Acquisitions 75

Examine Other Considerations 75

Step II. Locate the Necessary Deal-Related and Financial Information 77

Public Targets 78

Private Targets 80

Summary of Primary SEC Filings in M&A Transactions 81

Step III. Spread Key Statistics, Ratios, and Transaction Multiples 81

Calculation of Key Financial Statistics and Ratios 81

Calculation of Key Transaction Multiples 89

Step IV. Benchmark the Comparable Acquisitions 92

Step V. Determine Valuation 93

Key Pros and Cons 94

Illustrative Precedent Transaction Analysis for ValueCo 95

Step I. Select the Universe of Comparable Acquisitions 95

Step II. Locate the Necessary Deal-Related and Financial

Information 95

Step III. Spread Key Statistics, Ratios, and Transaction Multiples 98

Step IV. Benchmark the Comparable Acquisitions 105

Step V. Determine Valuation 106

CHAPTER 3

Discounted Cash Flow Analysis 109

Summary of Discounted Cash Flow Analysis Steps 110

Step I. Study the Target and Determine Key Performance Drivers 114

Study the Target 114

Determine Key Performance Drivers 114

Step II. Project Free Cash Flow 115

Considerations for Projecting Free Cash Flow 115

Projection of Sales, EBITDA, and EBIT 116

Projection of Free Cash Flow 118

Step III. Calculate Weighted Average Cost of Capital 124

Step III(a): Determine Target Capital Structure 125

Step III(b): Estimate Cost of Debt (r

) 126

Investment Banking, valuation and M&amp;A

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Investment Banking, valuation and M&A