Introduction 1
About This Book 1
Foolish Assumptions 3
Icons Used in This Book 3
Beyond the Book 4
Where to Go from Here 4
Part 1: Getting Started With Investment Banking 5
Chapter 1: Introducing Investment Banking 7
What Investment Banking Is 8
The role investment banking plays 8
How investment banking differs from traditional banking 10
The services investment banks provide 11
How investment banks are organized 12
The current lay of the investment banking land 14
Types of investment banking operations 15
How investment banks get paid 15
How Investment Banking Is Done 17
Finding the financial statements 18
Understanding the importance of financial statements and ratios 18
Zeroing in on past transactions 18
Seeing the value of fixed income 19
Turning Into an Investment Banking Pro 19
Putting the discounted cash flow analysis to work 19
Seeing how leverage becomes a force in investment banking 20
Pinpointing buyout targets 20
Putting Investment Banking to Work 21
Staying in compliance with the rules 21
Looking beyond the published financial statements 21
Making adjustments to financial statements for comparability 22
Chapter 2: The Purpose of Investment Banking: What Investment Bankers Do 23
Putting the For-Sale Sign on Corporate America 24
Mergers and acquisitions 25
Leveraged buyouts 27
Private business sales 29
Initial public offerings 32
Helping Investors Decide Whether to Buy or Sell 36
The importance of research 36
What do the analysts do? 37
Digging Into the Role of the Trading Desk 38
Why investment banks are into trading 39
How investment banks turn pennies into billions 40
The type of analysis used in trading operations 40
Chapter 3: How Investment Bankers Sell Companies 43
Getting Companies Ready for Sale on Public Markets 44
Meeting the requirements to make an IPO happen 45
Writing the prospectus 47
Supporting the IPO: Making success last 51
Seeing What Sell-Side Analysts Do 53
The goals of the sell-side analyst 54
What investors look to sell-side analysts for 55
Spreading the word: Disseminating sell-side research 55
Examining a Sample Research Report 57
What to look for in the document 57
The main sections of a research report 58
Ways to look beyond the "buy" or "sell" 59
Chapter 4: How Investment Banking Is Used in Mergers and Acquisitions 61
Come Here Often? The Basics of Mergers and Acquisitions 62
Kinds of mergers 62
Why companies merge instead of simply growing organically 63
Firms that make attractive acquisition targets 66
How companies identify firms to merge with 67
The nature of the merger: Friendly or hostile? 68
Tools Used to Analyze the M&A Deal 70
The role of the buy-side M&A advisor 70
The role of the sell-side M&A advisor 75
Why Many M&A Deals Go Wrong 76
Misplaced incentives 76
Faulty analysis 77
Overstated synergies 78
Culture wars 78
The winner's curse: Overpaying 78
Chapter 5: How Investment Banking Is Used in Leveraged Buyouts 81
In This Corner: Introducing the Players 82
Investment banks 83
Big institutions 84
Management 85
Stock and bond investors 86
Aiming for the Right Targets in a Leveraged Buyout 87
Identifying companies that can work in a leveraged buyout 88
Appreciating the power of cash flow 89
Coming to terms with the return analysis: Internal rate of return 90
Finding the Exit 91
Setting a target for exit in time 92
Considering how the exit will happen 92
Part 2: Digging In: Performing Investment Banking 95
Chapter 6: Finding the Data: Documents and Reports 97
Finding What You Need on the Securities and Exchange Commission's Website 98
What types of information you can find 98
The key types of documents 99
How to use EDGAR to pinpoint information 100
Getting Data in a Format You Can Work With 105
Assembling the tools you need 105
Importing financial information into Excel 107
Getting in tune with interactive data 109
Paying Attention to the Non-Financial Information 110
Monitoring news streams for investment banking ideas 110
Quickly processing information with aggregators 112
Doing research on the key players in a deal 114
Chapter 7: Making Sense of Financial Statements 115
Income Statements 116
Locating the areas of interest to investment bankers 118
Tweaking the statement with different assumptions 119
Finding investment banking opportunities 120
Balance Sheets 121
Finding your way around the key parts 122
Understanding a company's financial strength 124
Locating pitfalls and opportunities 126
Statement of Cash Flows 127
Seeing why the cash flow statement is so important in deal making 127
Understanding the key parts of the document 127
Calculating free cash flow 130
Proxy Statements 131
Learning about the key players in a deal 131
Identifying the management team's incentives 132
Analyzing management pay packages 133
Chapter 8: Perfecting the Financial Ratios for Investment Banking 135
Valuation Multiples: Assessing How Much the Company Is Worth 136
Investors' favorite valuation tool: P/E ratio 137
Going old school with price-to-book 137
Putting a price on profitability 138
Liquidity Multiples: Checking Companies' Staying Power 140
Deciphering debt to equity 141
Getting up to speed with the quick ratio 142
Interpreting interest coverage 142
Profitability Ratios: Seeing How a Company's Bottom Line Measures Up 143
Why gross margin isn't so gross after all 144
Income from continuing operations: Looking at profit with a keen eye 144
Keying into profits with net margin 145
Efficiency Ratios: Knowing How Well the Company Is Using Investors' Money 146
Finding out about return on assets 147
Digging into return on capital 148
Uncovering company secrets with return on equity 149
Calculating a company's growth rate 150
Chapter 9: Sizing Up the Industry 153
Performing an Industry Analysis 154
Understanding why industry analysis is important 154
Creating a comparison universe 155
Adjusting the industry comparison universe 158
Unearthing Company Trends and Common sizing the Financial Statements 159
Comparing growth rates 160
Comparing leverage 163
Comparing various profit margins 165
How a Company Stacks Up: Comparing the Key Ratios 166
Sizing up valuation 167
Comparing total debt-to-equity 169
Sizing up companies on their efficiency 170
Industry ratios 170
Chapter 10: Understanding Stocks and Focusing on Past Transactions 171
Introducing Stock 172
Characteristics of stock 173
Types of stock 174
Understanding stock pricing 175
Finding Past Transactions 176
Tracking the stock market 177
Studying private deals 177
Looking at pre-IPO marketplaces 179
Examining buyouts 179
Analyzing Past Transactions 180
Knowing what the market will bear 180
Knowing when the market is distorted 180
Tabulating key ratios for past deals 182
Understanding the pitfalls 184
Chapter 11: Applying Investment Banking to Fixed Income 185
Introducing Bonds 186
Identifying the Various Types of Bonds 188
Convertible bonds 188
Callable bonds 189
Puttable bonds 189
Floating-rate bonds 189
Zero-coupon bonds 190
Knowing Their Place: The Position of Bondholders 190
Understanding Bond Pricing 192
Introducing the concept of present value 192
Relating yield to maturity and price 195
Playing the spread: How different factors affect bond prices 196
Considering bond sensitivity to changes in interest rates 197
Tracking the Bond Market 200
Debt or Equity: How a Company Chooses 202
Part 3: Taking Investment Banking to the Next Level 205
Chapter 12: Doing a Discounted Free Cash Flow Analysis 207
Gearing Up for Discounted Free Cash Flow 208
Computing free cash flow 210
Forecasting free cash flow 211
Calculating the Weighted Average Cost of Capital 212
Understanding why the weighted average cost of capital is so important 213
Measuring the cost of debt and equity 214
Understanding the capital asset pricing model 217
Going for Terminal Value 220
Knowing the perpetuity growth formula 220
Applying the constant growth formula 221
Applying the two-stage growth model 222
Stress-testing the results 223
Valuing a Share of Stock 224
Chapter 13: Structuring a Leveraged Buyout 227
Seeing How Leveraged Buyouts Are Structured 228
The types of financing 228
Understanding seniority and maturity 235
Building a Leveraged Buyout Model 236
Creating a pro forma model 236
Deciding on methods of financing 238
Seeing how the results work out 239
The importance of taxes in a leveraged buyout 240
What can go right and what can go wrong 240
Chapter 14: Determining the Strength of a Company's Return on Equity 243
Understanding the Importance of Return on Equity 244
What return on equity shows 245
Pros and cons of return on equity versus other profitability measures 247
How return on equity can help guide an investment banking deal 249
Using a DuPont Analysis 250
The three-factor DuPont method 251
The five-factor DuPont method 253
Interpreting the Results 255
Cola wars 255
What the numbers mean 256
Looking past the numbers for insight 256
Telling companies how to react to the numbers 257
Part 4: Applying Investment Banking 259
Chapter 15: Knowing the Rules 261
The History of Regulation of Investment Banking 262
The goals of investment banking regulation 262
Why the rules of today are the result of days past 262
How regulations have shaped the investment banking industry 263
The Ins and Outs of Modern Investment Banking Rules 264
The types of rules imposed on investment banking 264
How investment banking rules changed after the financial crisis 267
The Rules on Analysts 270
Why rules were needed 270
The not-so-delicate balancing act analysts play 271
What disclosure and compliance are required 272
Why Simply Making Rules Isn't Enough 274
Chapter 16: How Some Companies Lie, Cheat, and Steal Their Way to the Top 277
Did You Really Sell That? When Companies Aggressively Report Revenue 278
Don't let the sun go down on me 279
The truth? 280
Lucy, You Got Some 'Splainin' to Do: When Companies Understate Their Expenses 282
What a waste 282
Crazy like a fox 283
Missed It by That Much: When Companies Overstate Their Financial Position 284
Those pesky pensions: The epidemic of firms understating pension liabilities 284
We are the world 288
Keeping Investors Off-Balance 289
Enron's special purpose 290
A mountain of a scandal 292
Swap meet 293
What Should an Investment Banker Do? 295
Chapter 17: Understanding Alternative Investments and Asset Management 297
Knowing Your Alternatives 298
Hedge funds 298
Venture capital 301
Commodities 302
Real estate 303
Currencies and cryptocurrencies 305
Digging Into Asset Management 306
Attracting investors to asset management 306
Creating asset management tools 307
Managing Potential Conflicts with Clients 309
How asset management can cause conflicts 310
How to eliminate and manage conflicts 312
Chapter 18: Trying Your Hand at Investment Banking with a Case Study 315
Setting the Scene 316
The acquirer 316
The target 317
Considering the Options 317
Identifying the options 318
Looking at financing 318
Creating the Analysis 319
An analysis of the financial statements 320
Structuring a Deal 322
Form of acquisition 323
Creating pro forma statements 324
Success or Failure 326
Part 5: The Part of Tens 327
Chapter 19: Ten of the Biggest Debacles in Investment Banking History 329
The Dot-Com Boom and Bust 330
Tainted Research Scandals 331
Enron and the Accounting Scams 332
The Mortgage Debacle and Collapse of Lehman 333
The Flash Crash 333
The London Whale at JPMorgan Chase and Barings Bank 334
Long-Term Capital Management 334
Bankruptcy in Jefferson County, Alabama 335
IPO Allocations with CSFB 336
Bad Mergers and Acquisitions Like AOL Time Warner 337
Chapter 20: Ten Ways to Improve a Discounted Cash Flow Analysis 339
Financial Analysis Isn't Physics 339
Show Your Sensitive Side 340
Monte Carlo Isn't Just for High Rollers 341
What Can Go Wrong Will Go Wrong 342
It's Tough to Make Predictions, Especially about the Future 342
The Investor of Today Doesn't Profit from Yesterday's Growth 343
Garbage In, Garbage Out 344
Rates Are Falling - It's a Better Deal! 345
Read Your Putt from Several Angles 346
The Weighting is the Hardest Part 346
Chapter 21: Ten (Or So) of the Best Online Resources for Investment Bankers 349
Bloomberg 350
Reuters 350
Standard & Poor's 350
Renaissance Capital and IPOScoop.com 351
The Securities and Exchange Commission 351
Moody's 351
MarketSmith 352
Index Fund Advisors 352
Morningstar 352
Bureau of Labor Statistics 353
Department of Commerce 353
Federal Reserve 354
Trefis 354
Appendix: Where Investment Banking Came From 355
Index 361
