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The No. 1 guide to investment banking and valuation methods, including online tools

In the constantly evolving world of finance, a solid technical foundation is an essential tool for success. Until the welcomed arrival of authors Josh Rosenbaum and Josh Pearl, no one had taken the time to properly codify the lifeblood of the corporate financier's work-namely, valuation, through all of the essential lenses of an investment banker. With the release of Investment Banking, Second Edition: Valuation, Leveraged Buyouts, and Mergers & Acquisitions, Rosenbaum and Pearl once again have written the definitive book that they wish had existed when they were trying to break into Wall Street. The Second Edition includes both the technical valuation fundamentals as well as practical judgment skills and perspective to help guide the science. This book focuses on the primary valuation methodologies currently used on Wall Street: comparable companies analysis, precedent transactions analysis, discounted cash flow analysis, and leveraged buyout analysis. With the new fully revised edition, they have added the most comprehensive, rigorous set of intuition-building and problem-solving ancillaries anywhere-all of which promised to become essential, knowledge enhancing tools for professionals, and professors and students.

For those who purchase this edition of the book, there are options to purchase the Valuation Models separately (9781118586167), and to also consider purchase of the Investing Banking Workbook (9781118456118) and Investment Banking Focus Notes (9781118586082) for further self-study.

Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions

Additional Resources xiii

About the Authors xv

Foreword xvii

Acknowledgments xix

INTRODUCTION 1

Structure of the Book 3

Part One: Valuation (Chapters 1-3) 3

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

Part Three: Mergers & Acquisitions (Chapters 6 & 7) 6

ValueCo Summary Financial Information 8

PART ONE: Valuation 11

CHAPTER 1: Comparable Companies Analysis 13

Summary of Comparable Companies Analysis Steps 14

Step I. Select The Universe of Comparable Companies 17

Study the Target 17

Identify Key Characteristics of the Target for Comparison Purposes 18

Screen for Comparable Companies 22

Step II. Locate The Necessary Financial Information 23

SEC Filings: 10-K, 10-Q, 8-K, and Proxy Statements 24

Equity Research 25

Press Releases and News Runs 26

Financial Information Services 26

Summary of Financial Data Primary Sources 27

Step III. Spread Key Statistics, Ratios, and Trading Multiples 28

Calculation of Key Financial Statistics and Ratios 28

Supplemental Financial Concepts and Calculations 42

Calculation of Key Trading Multiples 47

Step IV. Benchmark the Comparable Companies 50

Benchmark the Financial Statistics and Ratios 50

Benchmark the Trading Multiples 50

Step V. Determine Valuation 51

Valuation Implied by EV/EBITDA 52

Valuation Implied by P/E 52

Key Pros and Cons 54

Illustrative Comparable Companies Analysis for ValueCo 55

Step I. Select the Universe of Comparable Companies 55

Step II. Locate the Necessary Financial Information 56

Step III. Spread Key Statistics, Ratios, and Trading Multiples 57

Step IV. Benchmark the Comparable Companies 69

Step V. Determine Valuation 74

Bloomberg Appendix 75

Chapter 2: Precedent Transactions Analysis 83

Summary of Precedent Transactions Analysis Steps 84

Step I. Select the Universe of Comparable Acquisitions 87

Screen for Comparable Acquisitions 87

Examine Other Considerations 88

Step II. Locate the Necessary Deal-Related and Financial Information 90

Public Targets 90

Private Targets 93

Summary of Primary SEC Filings in M&A Transactions 93

Step III. Spread Key Statistics, Ratios, and Transaction Multiples 96

Calculation of Key Financial Statistics and Ratios 96

Calculationof Key Transaction Multiples 102

Step IV. Benchmark the Comparable Acquisitions 106

Step V. Determine Valuation 106

Key Pros And Cons 107

Illustrative Precedent Transaction Analysis for ValueCo 108

Step I. Select the Universe of Comparable Acquisitions 108

Step II. Locate the Necessary Deal-Related and Financial Information 108

Step III. Spread Key Statistics, Ratios, and Transaction Multiples 111

Step IV. Benchmark the Comparable Acquisitions 119

Step V. Determine Valuation 121

Bloomberg Appendix 122

Chapter 3: Discounted Cash Flow Analysis 125

Summary of Discounted Cash Flow Analysis Steps 126

Step I. Study the Target and Determine Key Performance Drivers 130

Study the Target 130

Determine Key Performance Drivers 130

Step II. Project Free Cash Flow 131

Considerations for Projecting Free Cash Flow 131

Projection of Sales, EBITDA, and EBIT 133

Projection of Free Cash Flow 135

Step III. Calculate Weighted Average Cost of Capital 141

Step III(a): Determine Target Capital Structure 142

Step III(b): Estimate Cost of Debt (rd) 143

Step III(c): Estimate Cost of Equity (re) 144

Step III(d): Calculate WACC 148

Step IV. Determine Terminal Value 148

Exit Multiple Method 149

Perpetuity Growth Method 149

Step V. Calculate Present Value and Determine Valuation 151

Calculate Present Value 151

Determine Valuation 153

Perform Sensitivity Analysis 155

Key Pros and Cons 156

Illustrative Discounted Cash Flow Analysis for ValueCo 157

Step I. Study the Target and Determine Key Performance Drivers 157

Step II. Project Free Cash Flow 157

Step III. Calculate Weighted Average Cost of C