Tuesday, 8th December 2009
The final part in The Gateway Guide to Investment Banking. This time we look at what it’s like to work in an investment bank and the work of an analyst…
Doing the job
OK. So now you know what it takes to get the job. What you will be doing once you start?
What will you actually do on a day-to-day basis? The following is a guide to life in the day of a M&A Analyst…
The Work of the Bank
First, a refresher of The Big Picture…
The services that the Bank provides to its client include the following: -
- Sell-side mandate – selling a company whole, or undertaking a partial sale of subsidiaries or divisions – called divestitures
- Buy-side mandate – helping a company acquire another company or division
- Fairness opinion – advising shareholders or debt-holders on the fairness of an offer to buy or sell, with the lead advisory role often held by another bank
- Strategic Review – a wholesale review of a company’s strategic position and its options in the market; the results of the review might to be recommend M&A or corporate finance activity.
In addition, although not strictly M&A work, but occasionally undertaken by M&A practitioners: –
- Restructuring – it means providing advice to companies on refinancing and rationalising its capital structure, for example by refinancing its debt or swapping debt for equity or vice versa; it is more corporate finance work, and could result in recourse to the equity or debt capital markets.
Finally, the rest of the Investment Banking Division will be involved in capital markets work. However, it is key not to categorise this as M&A work:
- Equity Capital Markets – helping a company to float for the first time on a public stock exchange, via an Initial Public Offering (“IPOâ€) or a company that has already floated return to the market to raise additional funds through a secondary offering or rights issue
- Debt Capital Markets – helping a company raise debt finance through a variety of different means, including regular loans, bond issues, syndicated offerings, securitisations, structured or project finance.
While all work falls into three categories…
- Origination / Marketing – work that contributes to the Bank winning a mandate for a transaction
- Execution /Transaction work – work that contributes to executing or completing a transaction that has been mandated
- Developing in-house knowledge – developing proprietary knowledge that might be useful for origination or execution work in the future.
…there is not always a clear distinction between when the origination phase ends and the execution phase begins because the Bank’s advisory relationships with its clients are a continuum.
The Work of the Analyst
Company Research
The research is most likely to be of companies, but also be of investment funds or individuals.
Research on companies could include: –
- Financial and operational performance, both historic and future, analysed by: Product; Geography; Office locations.
- Competitor analysis
- Porter’s Five Forces Analysis
- Possible takeover targets / acquirers
- Brokers commentaries and price targets
- News commentary
- Share price performance, including annotated share price graphs
- Historic valuation
- Trading / comparable multiples
- Shareholder register
- Board / management profiles
Research of individuals might analyse their suitability for an appointment to the Board, or in their capacity as an investor or shareholder, their actions in precedent M&A situations.
Other research might analyse precedent situations, such as what other companies have done historically in the same situation in other M&A deals as a client or target. Such situations could include a deal (looking at due process or management or shareholder reactions), disputes or what happens to share prices after profit warnings.
The Analyst could also analyse the work of other banks, monitor press coverage of clients or relevant events.
Most of this research will be written up into powerpoint slides to be incorporated into “Books†– to be presented to an external audience such as the client or a potential investor.
Modelling Financials
As a starting point for likely further valuations modelling work, the Analyst will model the Company’s financial projections. The input numbers will be derived from management or from external analysts, brokers or consultants.
The Analyst may reorganise the forecasts into the most useful format to be used for subsequent valuations work.
The Analyst will almost certainly produce profit and loss and cashflow forecasts, and may or may not produce a balance sheet. Income and expenditure information could be split by any number of variables including product, operating division, office location, geography etc.
The above work will be done in Excel. The model will include presentational output tables and graphs that will be copied into powerpoint slides for incorporation into Books as necessary.
Modelling Valuations
Different valuations models are undertaken to provide answers to different questions about target or acquiring companies or offers. These questions include the following:–
- What is the market’s view of the current value of the target
- How much is the target worth to us?
- What is the value of any synergies produced by the merger of the target with the client company?
- How much should we offer / pay for the target?
- How should we finance the acquisition of the target?
- How much might offer bidders potentially bid for the target, if (a) strategic i.e. industry buyer? (b) private equity i.e. financial buyer?
- What will be the effect on our share price of buying the target, for a certain price, for a certain combination of finance?
There are various modelling methodologies that are either specifically geared to answer one of the above questions, or transcend a number of them.
The three classic valuations models are as follows: –
- Discounted Cashflow Analysis (“DCFâ€) – discounting the free cashflows produced by a company or project at the opportunity cost of its capital; the purpose is to determine the Net Present Value (“NPVâ€) of the target
- Comparable Companies Analysis (“Compsâ€) – applying multiples of value drivers to the target company drawn from comparable companies; such value drivers include Price / Earnings (P/E), and EV / EBITDA, as well as industry specific drivers; the purpose is to determine the market value of the target
- Precedent Transaction Analysis – similar to Comps but where multiples are derived from previous completed deals where companies similar to the target have been acquired; again the purpose is to determine a market-tested value of the target; the key difference between the Comparables Companies and the Precedent Transactions Analyses is that the latter will contain a control premium that a buyer has paid.
In addition: -
- Sum of the Parts (“SOTPâ€) – uses any combination of the first three methodologies to value an overall company, by applying specific valuations to individual subsidiaries or operating divisions; the purpose is to derive a valuation for a target where a blanket valuation across its whole would fail to take account of materially different financial or operational issues when analysed at a subsidiary or divisional level
Four other models answer specific questions: –
- Premium Analysis – in the same vein as Precedent Transactions; where precedent transactions are analysed to calculate the percentage premiums that were offered to acquire companies vis a vis their share price or valuation prior to the announcement of offers to acquire them; the purpose is to find out what premium might have to be paid to acquire the target by referring to previous deals and the current market climate
- In Price Analysis – analyses the weighted average price that an investor has bought into the shares of the target company in order to see at what price they might be minded to sell
- Impact Analysis / Merger Model – analyses the impact of the client company combining (i.e. merging) with its target and shows the effect on its financial performance and capital structure; the purpose of this model is to determine whether the merger is accretive or dilutive to earnings per share (“EPSâ€) and the effect on its financing covenants
- Leveraged Buy-out (“LBOâ€) model – analyses a private-equity buy-out where a high level of leverage (i.e. debt financing) is used to buy the target; the model shows the cashflows produced by the target (without discounting them to account for the time value of money, as is done in a DCF) then uses the cashflows to meet interest payments and repay debt; the purpose of this model is to see how much a private-equity buyer could afford to pay for the target company; this model will usually be run even if the buyer is not a private equity house, because an industry acquirer will need to be able to pay a price that would beat one that might come from the private equity community; the model can uncover the maximum price that can be paid, assuming the company borrows a certain amount of debt and will show the internal rate of return that a private equity buyer will earn over the life-time of its investment.
The above work will be done in Excel, copied into powerpoint slides for incorporation into Books as necessary.
Client Management / Transaction Process Management
The Analyst will also get involved in producing the documentation that will regulate the relationship between the Bank and the client and in the various legal and administrative processes that are required by the law, relevant codes or precedents to complete a deal.
- Engagement letters – producing the document that regulates the Bank’s relationship and engagement with the client – specifically what fees will be paid and when
- Confidentiality and Non-Disclosure Agreements
- Compliance Documentation – ensuring the deal and the Bank’s work comply with the FSA and City Code
- Information Memoranda – producing a document that acts a teaser to the market to garner interest in the Bank’s client; for example, for a sell-side mandate, the Bank will produce a short document that summarises the client’s business and sends it to prospective buyers
- Organising then observing conference calls and meetings – communication with the client, its other advisers and all the various counter-parties takes a lot of time; the Analyst will arrange these and usually listen in or observe, take minutes etc.
- Due Diligence – this could be a subject in itself
- Creation of a data room or virtual data room – making available documents, including reports and accounts, shareholders register, debt debentures and covenants, meeting minutes etc. for review by the various parties and advisers in a deal
- Arranging and attending the closing dinner, ordering the tombstones.
Internal Administration, Business Development and Training
As a junior member of the Bank’s staff, the Analyst will spend time on a variety of other tasks that help the Bank’s work. This will include: attending recruitment events to hire other staff; training and personal development.
Article written by and used with permission from The Gateway.
Guest Blogger Sarah – Merry Christmas
We are delighted to introduce the latest member of the RateMyPlacement team – Pipsqueak the meerkat.
As we creep closer to Christmas, those of you who started your placement in September will hopefully be beginning to feel more settled at work with a few months under your belt.
Even if you’ve done an internship, these questions can still be unsettling. Allow me, then, to help you conquer the fear of these unknowns. The points below cover what you need to understand, and how you can make sure you do understand.
A question that comes up time and time again from students I meet on campus is ‘how do I get through the assessment centre?’ Some might say it’s worrying that these students, who are studying at some of the UK’s top-rated universities, aren’t confident about their prospects: they’re bright, have great academics, and in some cases, brilliant work experience to offer a potential employer as well. Isn’t that enough? When it comes to assessment centres, unfortunately not. Just because you’ve got great exam results, it doesn’t mean you will walk it when it comes to an assessment centre.
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