Brigham Young University: Introduction To Investment Banking

Presentation to:
Brigham Young University
Introduction to Investment Banking
March 7, 2006
Table of Contents
Agenda
I. Introduction
II. Investment Banking Overview
III. Role of An Analyst
IV. Recruiting Process
V. Investment Banking Interviews
VI. Lehman Brothers Overview
_____________________________________________________________
Appendices
A. Basic Finance / Valuation Workshop
B. Suggested Reading Material / Resources
Introduction
Introduction
Introduction
We are pleased to be able to speak with you about investment banking, and the steps and considerations involved in
landing a job in this industry
Presenters are Brigham Young University alumni and members of Lehman Brother’s BYU recruiting team
– Colin Cropper, Vice President, Global Mergers & Acquisitions (BYU Class of 1996)
– Tyler Willardson, Analyst, Global Technology Mergers & Acquisitions (BYU Class of 2004)
Although we work for Lehman Brothers, this presentation is meant to be generally applicable to all investment
banking firms
1
Investment Banking Overview
Investment Banking Corporate Structure
Lehman Brothers
Investment Investment Fixed

Equities
Management Banking Income
Private
Industry
Investment Sales
Groups
Management
Asset Product
Trading
Management Groups
Geographic
Private Research
Groups
Equity
2
Functional Areas of a Typical Investment Bank

Capital Markets – Sales, Trading & Research (Equity and Fixed Income)
– Distributes new (primary) security issues to institutional investors/clients
– Transacts blocks of previously issued (secondary) securities through private placement or negotiation
– Maintains markets for securities already distributed
– Provides research on securities, companies, industries and economies
Investment Management Services
– Provides investment and financial advisory services
– Focuses on high net worth individuals and mid-sized institutional investors
Investment Banking
– Provides strategic, financial and valuation advisory services
– Raises capital through the issuance of securities
– Advises companies in merger & acquisition and restructuring transactions
– Offers specialized products and services to meet the needs of corporate and government clients
3
What is Investment Banking?

Provide strategic, financial and valuation advisory services
– Use industry knowledge, expertise and contacts to advise senior executives and boards of directors
– Identify and assess strategic opportunities
– Interpret market information and enhance shareholder value
– Provide general valuation services (e.g., segment analysis, break-up valuations, fairness opinions)
Raise capital through the issuance of securities
– Act as intermediary between issuers and investors
– Provide access to equity and fixed income capital (e.g., investment grade, bank, high yield, preferred stock)
– Create specialized securities and derivatives (e.g., convertibles, trust preferred securities, warrants)
4
What is Investment Banking?

Advise companies in merger & acquisition and restructuring transactions
– Sell-side assignments (represent client in the sale of its company or some of its assets)
– Buy-side assignments (represent potential acquirers and negotiate transactions)
– Hostile take-over defense/advisory
Offer specialized products and services that satisfy the needs of corporate and government clients
– Private equity (e.g., Merchant Banking, Real Estate, Venture Capital, other)
– Privatization
– Monetization
– Asset-backed securities
5
Issue of Securities
Investment Bank
Investment Banking Capital Markets

(Sales, Trades & Research)
Research Investment Advice

Ongoing financing – Equity
dialogue – Fixed Income
Chinese Wall
Industry Group
Sales Force
Client – Equity Investors
– Fixed Income
Capital Markets
– Equity
– Fixed Income
Specific Execution
Advice
6
M&A Transactions
Feedback on possible market

reaction and “story”* Research
– Equity
– Fixed Income
Chinese Wall
Ongoing Strategic
Dialogue
Industry Group
Potential M&A
Client
Partner
M&A Group
Specific Execution
Advice
___________________________
* Research involvement requires officially bringing analyst over the wall.
7
Reasons to Consider a Career in Investment Banking

Develop wide range of skills (finance, strategy, marketing, etc.)
– Team and project management
Interact with senior management
– Deal directly with CEO/CFO and senior management
– Transactions undertaken are often high profile, company altering events
Work with highly talented peers
– Learn from those around you
Able to take on responsibility early
– Steep learning curve
Industry expertise or breadth of knowledge across industries
– Can specialize in an industry (e.g., Industrials, Technology, Healthcare, etc.) or a product group (e.g., M&A,
Leveraged Finance or High Yield, Debt Capital Markets, Equity Capital Markets, etc.) that covers many industries
Wall Street deal flow
– Long-term growth in industry expected to continue
– Breadth of different types of transactions and experiences
8
Career Comparisons
Investment Banking vs. Sales, Trading & Research
– More team and project-oriented, longer-term assignments
– More strategic rather than market-oriented
– More exposure to valuation, accounting, tax and corporate finance issues
– Skills more transferable outside the industry
Investment Banking vs. Industry and Management Training Programs
– More training and development along a wide range of general business skills
(finance and capital markets; tax, accounting and legal; negotiation; marketing; and how to create transaction
opportunities)
– More responsibility at an earlier stage
– Faster career track
– More exposure to senior management and board members
– Greater interaction with leading industry players, better opportunity to develop network
– Greater intensity
9
Career Comparisons
Investment Banking vs. Consulting
Like consultants, investment bankers provide strategic advice to their clients
– For example, investment bankers advise clients on how to survive in a
changing industry
• Optimize operating and stock price performance by divesting non-core business units
• Capitalize on synergies or unrecognized value by acquiring other companies or assets
However, unlike consultants, investment bankers also provide financial advice to their clients
– Investment bankers present their clients with alternatives to reduce the client’s cost of capital or to help the client
obtain a stronger balance sheet
– In simple terms, investment bankers efficiently match capital providers with capital users
While transactions are conceived at a “strategic” level, execution requires detailed analysis and a thorough
understanding of the financial, accounting and tax profile of the client
More immediate, visible results to your advice – transactions executed in shorter time period and the “market”
provides an immediate opinion on your advice
10
Career Comparisons
Investment Banking vs. Start-ups
More infrastructure support
– Training and development
– Substantial resources available to get the job done
More defined career path, although still in an entrepreneurial environment
– Merit-based system
– Team approach
Less career risk
– As with a start-up, you work plenty of hours, but certainty of reward is much greater
Many start-ups look to investment banks for direction
– Opportunity to review and evaluate numerous business plans
11
Role of An Analyst
Role of An Analyst
Role of An Analyst
The Hierarchy
Role Years in Industry
Managing Director 10+
Client Relationships
Strategic Thinking SVP /
3½ to 10
Knowledge of Industry Vice President
Execution / Expertise
Associate 1 to 3½
Day to Day
Execution
Analyst 2 to 3 year program
12
Role of An Analyst
Role of An Analyst
Industry Coverage
Preparation of presentations (e.g., new business pitches, board books)
Comparable company / transactions analysis
Create company profiles
Perform industry research
Equity / Debt / Convertible Offerings

Assemble marketing materials to win the mandate, perform initial valuation work
Conduct due diligence through site visits, interviews and extensive industry research
Draft prospectus with company management, lawyers and accountants
Prepare documentation for internal commitment committee process
Produce marketing materials for the company’s management team to present to investors to sell the transaction
Develop a target of likely investors and coordinate sales effort with capital markets and sales force
Perform final valuation work, price the offering
13
Role of An Analyst
Role of An Analyst
M&A
Valuation analysis
– Comparable company / transactions analysis
– Discounted cash flow
– LBO analysis
– Sum-of-the-parts
Prepare marketing / presentation materials (e.g., teasers, information memos, board books, committee memos)
Attend management presentations / negotiate transaction terms
Conduct / host due diligence sessions
Draft / edit legal documents (e.g., exclusivity, fairness opinions, engagement letters, purchase agreements)
Work with product specialists (e.g., leveraged finance) to refine capital structure issues
Winning the Mandate
– Develop strategic analysis and rationale for acquisition
– Present a thorough analysis of potential acquisition candidates to client
– Formulate financing and capital structure to support the acquisition
14
Role of An Analyst
Role of An Analyst
Lehman Brothers advised Carlyle on the $800 million acquisition of United Components
Closed June 20, 2003 Transaction Overview
On April 25, 2003, The Carlyle Group entered into a definitive agreement to acquire the
vehicle replacement parts business of UIS, Inc., renamed United Components, Inc. (“UCI”),
for an aggregate purchase price of $800 million
The transaction was financed through: (i) $415 million in Senior Secured Credit Facilities,
which included a $65 million revolving credit facility; (ii) $230 million of Senior
Subordinated Notes; and (iii) $260 million of cash equity from The Carlyle Group
$415,000,000
Senior Credit Facilities
Lehman Brothers acted as Financial Advisor to The Carlyle Group and as a Joint Book-
Running Manager for UCI’s offering of $230 million of 9 3/8% Senior Subordinated Notes
$230,000,000 due 2013 and Joint Lead Arranger on UCI’s $415 million Senior Secured Credit Facility
9 3/8% Senior Subordinated
Company Overview
Notes due 2013
UCI is uniquely positioned as one of North America’s largest and most diversified
companies servicing the vehicle replacement parts market, or the aftermarket
The Company designs, manufactures, and distributes filtration products, fuel and cooling
Joint Book-Running Manager systems, engine management systems, driveline components, and lighting systems to the
automotive, trucking, marine, mining, construction, agricultural and industrial vehicle
markets
UCI’s customer base consists of the largest and fastest growing companies servicing the
aftermarket, including Advance Auto Parts, AutoZone, CARQUEST, Mighty, NAPA and
Valvoline
This transaction demonstrated Superior Execution
Lehman Brothers’ dedication to an
The $230 million 9 3/8% Senior Notes offering priced at the tight end of price talk and
important financial sponsor client inside pre-roadshow price expectations
as well as our ability to successfully The offering was well oversubscribed and the Notes traded strongly on the break, despite a
execute on a short timetable significant amount of automotive offerings accessing the high yield market at the same time
Demand for the Senior Credit Facilities exceeded supply by more than two times and
resulted in a 50 bps reduction to the LIBOR spread
15
Role of An Analyst
Role of An Analyst
Named one of The Daily Deal’s “Deals of the Year” for 2005
Pending Transaction Summary

On November 18, 2005, Cisco Systems announced that it would acquire
$6.9 billion
Scientific-Atlanta for $6.9 billion ($5.3 billion enterprise value)
Under terms of the agreement, Cisco will pay $43.00 per share in cash in
exchange for each issued and outstanding share of Scientific-Atlanta common
stock
has agreed to acquire The per share consideration represents a 3.7% premium to Scientific-Atlanta’s
closing price on November 17, 2005 and a 17.4% premium over Scientific-
Atlanta’s 30-day average price. Adjusting for rumors about the sale of the
company, the consideration represents a premium of 27.9% over Scientific-
Atlanta’s pre-leak closing price on October 27, 2005 and a premium of 22.4%
The undersigned acted as financial advisor to over its pre-leak 30-day average price
the Board of Directors of Scientific-Atlanta in
Implied transaction multiples based on consensus estimates(1): 12.0x CY05
this transaction
EBITDA and 10.9x CY06 EBITDA; 26.0x CY05 P/E and 22.8x CY06 P/E
The transaction is subject to shareholder and regulatory approvals
The transaction is expected to close during the first quarter of 2006
___________________________
1. Source: IBES consensus estimates as of 11/17/05.
16
Recruiting Process
The Recruiting Process
Recruiting Process
Timeline of Investment Banking Recruiting for Full-time and Summer Positions
All Year
Get to know the investment banks

– Attend company presentations and Investment Banking Club events
– Talk to former summer analysts
– Network with alumni
Become knowledgeable about the industry and keep up with current business events
– Read The Wall Street Journal, The Financial Times, The Economist, etc.
Refine your resume to highlight the appropriate areas
– Quantitative aptitude
– Leadership
– Initiative
– High academic performance (GPA / ACT or SAT)
– Relevant work experience
17
Recruiting Process
Timeline of Investment Banking Recruiting for Summer Positions (Junior Year)
October to January
Organize informational interviews

– Be professional and well prepared before contacting people
– Be proactive
Begin preparing for interviews
– ‘Vault Guide to Finance Interviews’ (see www.vault.com)
Send cover letters and resumes (December)
Refine your story and practice mock interviews
– Know the three central questions (Why investment banking? Why this firm? Why you?)
January and February

Interviews
18
Recruiting Process
Timeline of Investment Banking Recruiting for Full-time Positions (Senior Year)
August and September
Organize informational interviews

– Be professional and well prepared before contacting people
– Be proactive
Refine your story and practice mock interviews
– Know the three central questions (Why investment banking? Why this firm? Why you?)
Send cover letters and resumes
September to November
Interviews
19
Recruiting Process
What Investment Banks are Looking For

Demonstrated excellence (in multiple dimensions)
– High academic performance (GPA / ACT or SAT)
– Leadership
– Self motivator
– Communication skills
– Team skills
Positive attitude / enthusiasm
Presence / professionalism
Commitment to learning
In general, firms are looking for people who have done their homework
– Those who understand the industry and can differentiate among the firms
20
Recruiting Process
Personal Fit
Do you have the characteristics to make a good investment banker? Be prepared to relate anecdotes that illustrate
these qualities:
– Hardworking – Handle stress well / thick skinned

– Motivated – Quantitative
– Willing to take initiative – Personable
– Detail oriented – Flexible
– Team player – Sound judgment
– Aggressive – Articulate
Does your personality fit well with the bank’s culture?

– Team oriented culture vs. one that favors individual achievers
– Meeting and talking to people at the various banks will give you a good idea
– Remember, you will be spending a lot of time with these people so it’s best to find an environment in which you
are comfortable
21
Recruiting Process
Know How to Differentiate Among the Firms, Both for Interviewing and for Your Own
Firm Selection Process
In addition to obvious geographic and market position characteristics, firms have other differing qualities
Know how the firms are internally structured
– All have some type of industry and product groups
– Every firm has a different approach to group placement
Know how the firms perceive themselves
– What are their strengths, what are recent significant transactions?
– How do they view their own culture?
– What are employee demographics?
Try to come to some conclusion regarding firm culture and personal fit
– Meet as many people as you can
22
Investment Banking Interviews
Interview Process and Format

Round In-person / phone interview – usually 30 minutes
1
Round Usually 3 or 4 back-to-back interviews with more senior bankers
2 Short case studies may be presented – focused on both technical skills and
management / leadership skills
The Interview Format

Introductory remarks and get to know you (resume review)
Why did you choose your school?
Why Investment Banking? Why this firm?
What is the role of an analyst?
Technical questions
Wrap-up and Q&A
23
Commitment to the Industry and the Firm

Be able to provide a succinct answer as to why you want to be an investment banker
– Will be different for each person
– Your resume should tell much of the story
Be familiar with the firm’s history and some of its recent transactions
– Demonstrate a broader understanding of the industry
Be prepared to answer questions such as
– Who else are you talking to? (be specific)
– How would you compare firm A with firm B?
• Strength of businesses
• Culture
– Are you interviewing outside of investment banking? Why?
Most importantly, show that you have done your homework
24
Technical Questions
Before the interview, you should be familiar and comfortable with the following concepts:
Finance Accounting
Discounted Cash Flow Analysis Basic
– Free cash flow – Income Statement
– Terminal value – Balance Sheet
– WACC – Cash Flow Statement
Comparable Company Analysis Intermediate
– Enterprise vs. equity value multiples – Purchase accounting
Comparable Transaction Analysis – Cash EPS
– Enterprise vs. equity value multiples, premium analysis – Deferred taxes
CAPM Advanced
– Pension accounting
– Recap accounting
– LBO accounting
25
Interviewing Tips
Resume
– Ensure your resume highlights the key competencies required by investment banks
– Include only what you are comfortable talking about and know it by heart
– Be able to expand upon each bullet point
– Be able to clearly explain why you made certain choices (e.g., college, major, internships)
– Don’t overlook the additional information section – it can provide good insight into who you are
Answering tough or unexpected questions
– Take a moment to think about your answer – a well thought out answer is better than a fast answer
– Be direct in your answer and stand by your reasoning
– Remain composed and balanced
Personal impact is important
– Body language, composure, volume
– Always look the interviewer in the eye and use his / her name
– Relax and try to learn from the interview
26
Lehman Brothers Overview
Who We Are
Founded in 1850, Lehman Brothers is one of Wall Street’s premier investment banking firms.
Franchise
Our market leadership and global presence provide us with access to the most significant issuers
and investors around the globe
Our strategy is client-driven. Providing the highest level of service to our clients is the core of our
Strategy
business strategy
Future Lehman Brothers’ rich history and tradition provide a strong foundation as we continue to expand
our franchise with a focus on high-margin business areas (e.g., M&A, equities, leveraged finance
and private equity investing)
We operate on a “One Firm” philosophy that emphasizes integration and teamwork across all
Culture
businesses worldwide. Working together as “One Firm” enables us to deliver a full range of
products and services to our clients in a seamless manner
Our people are our greatest asset. Lehman Brothers’ professionals are driven to challenge
People
themselves and take an active role in shaping their careers. They are deeply committed to our
business philosophy and motivated to contribute to the Firm’s clients early in their careers
27
Lehman Brothers – Best In Class Independent Investment Bank
Strong Momentum (1) Employee Base and Ownership (2)

Net Revenue Net Income Percentage Ownership Employee Base
$mm $mm
CAGR=13% $14,176 40% 28,000
$16,000 $4,000 CAGR=13%
$3,260
$11,576 30% 21,000
$12,000 $3,000
$2,369
20% 14,000
$7,707
$8,000 $2,000 $1,775
10% 7,000
$4,000 $1,000
0% 0
1994 2005
$0 $0
Employee Base Employee Ownership
2000 2004 2005 2000 2004 2005
Recent Accolades Lehman Brothers: Share Price Performance (1994-Current)

“Best Investment Bank” “...Lehman Brothers has
Price Volume
cemented its position as a top-tier full-service (shares in 000s)
investment bank, one that is as confident as an equity
house and M&A adviser as it has been in fixed income” $150 25,000
$125 20,000
“...one of the purest investment banks, has become
more formidable in almost every market it contests” $100
15,000
“…Lehman Brothers’ Success Illustrates the
$75
Benefits of Strong Management”
10,000
$50
“Lehman Brothers: ‘Big-Shot’ Bank of the Year for 5,000
Role in Cingular, Sprint and Kmart Transactions”
$25
$0 0
Named IFR U.S. Equity House and Structured 5/2/94 4/18/96 4/3/98 3/22/00 3/8/02 2/24/04 2/10/06
Equity House of the year in 2005
Volume Traded Lehman Brothers Holdings Inc.
___________________________
1. Source: Company press releases.
2. Employee base reflects acquisition of Neuberger Berman in 2003.
28
Lehman Brothers’ Premier Global Finance Franchise
Lehman Brothers’ equity and equity-linked franchise continues to garner recognition

Performance Recognition Leading Equity Sales and Trading Platform
#1
#1
2005 U.S. Equity 2005 NYSE Trading

House of the Year
#1
#1
2005 NASDAQ Trading
“From the integration of debt and equity capital markets, to the #1

#2
inclusion of derivatives, tax and accounting specialists, Lehman
Brothers has been a trailblazer in shaping the modern form of capital 2005 Institutional Sales
markets in the U.S.”
- International Financing Review, December 2005 Leadership Across Products(1)
IPOs Common Stock Convertibles
2005 2005 2005
Market Market Market
2005 U.S. Rank Bookrunner Share Rank Bookrunner Share Rank Bookrunner Share
Structured Equity
House of the Year 1 Citigroup 11.3% 1 Morgan Stanley 12.5% 1 Goldman Sachs 15.4%
2 Goldman Sachs 10.9% 2 Citigroup 12.5% 2 Citigroup 13.5%
3 Morgan Stanley 10.2% 3 Lehman Brothers 10.7% 3 Lehman Brothers 11.7%

“From … sales and trading, and ultimately to capital markets
solutions, the bank’s measured approach 4 Lehman Brothers 9.4% 4 Goldman Sachs 10.6% 4 JP Morgan 10.7%
was a valuable resource in 2005...”
5 Credit Suisse 8.2% 5 Merrill Lynch 9.0% 5 Morgan Stanley 10.4%
- International Financing Review, December 2005
___________________________
1. Source: Bloomberg.
29
M&A Announced League Tables
Global Announced M&A Through March 5, 2006
Announced Deals
Value ($bil) Rank Market Number of
Share Deals
Lehman Brothers 247.4 1 41% 41

Goldman Sachs & Co 247.1 2 41% 52
JP Morgan 228.1 3 38% 62
Citigroup 219.0 4 37% 39
Merrill Lynch 203.1 5 34% 50
BNP Paribas SA 144.5 6 24% 19
UBS 139.6 7 23% 53
Deutsche Bank AG 116.8 8 20% 33
Morgan Stanley 115.6 9 19% 29
Evercore Partners 99.9 10 17% 7
Industry Total 598.8 100% 4,717
30
Top 20 Global M&A Announced Transactions in 2006
Deal Size
Date Announced ($bil) Target Acquiror Region Industry
1 3/5/2006 $82.1 BellSouth Corp AT&T Americas Telecomunications
2 2/21/2006 56.7 Endesa SA E ON AG Europe Natural Resources
3 2/25/2006 44.8 Gaz de France Suez SA Europe Natural Resources
4 1/27/2006 23.8 Arcelor SA Mittal Steel Co NV Europe Industrial
5 2/6/2006 17.5 Portugal Telecom SGPS SA Sonae SGPS SA Europe Telecomunications
6 1/23/2006 17.4 Albertsons Inc Investor Group Americas Consumer/Retail
7 1/25/2006 14.9 BOC Group PLC Linde AG Europe Industrial
8 1/16/2006 12.5 VNU NV Investor Group Europe Media
9 2/27/2006 11.3 KeySpan Corp National Grid PLC Americas Natural Resources
10 2/2/2006 10.8 Banca Nazionale del Lavoro SpA BNP Paribas SA Europe FIG
11 2/3/2006 9.6 KT&G Corp Investor Group Asia Consumer/Retail
12 2/15/2006 9.5 Merrill Lynch Invest Managers BlackRock Inc Americas Financial Institutions
13 2/21/2006 6.2 Australian Gas Light Co Alinta Ltd Asia Natural Resources
14 1/24/2006 6.1 Pixar Walt Disney Americas Media
15 1/31/2006 5.8 TIM Celular SA TIM Participacoes SA Americas Telecomunications
16 2/13/2006 5.5 ZAO Kyivstar GSM Vimpelcom OJSC Europe Telecomunications
17 2/6/2006 5.4 Westinghouse Electric Co LLC Toshiba Corp Americas Technology
18 1/27/2006 5.2 Dofasco Inc ThyssenKrupp AG Americas Industrial
19 1/3/2006 5.0 Engelhard Corp BASF AG Americas Industrial
20 1/10/2006 4.7 GTECH Holdings Lottomatica SpA Americas Technology
___________________________
Note: Shading indicates transactions in which Lehman Brothers acted as Financial Advisor. Lehman clients are in bold.
Source: Thomson / SDC and Lehman Brothers. Through 3/5/06.
31
Investment Banking Summer Analyst Program

Duration
– 8-week program beginning on two different start dates
Group Placement
– Driven by Summer Analyst preference and group requirements
Training
– Training for the summer is one week and includes an accounting and finance overview, comparable company and
transaction analysis, financial modeling and use of various software programs
– Helps you get to know the firm and review basic tasks you will be asked to perform over the summer
– Presentations by the industry and product groups to raise your interest and awareness about what they do
32
Appendices
Basic Finance / Valuation Workshop
Valuation – Introduction
The purpose of this workshop is to provide you with Investment Banking finance and valuation basics
– Methodologies
– Contexts for valuation work
– Comparable Company Analysis
– Comparable Transaction Analysis
– Discounted Cash Flow
– Leveraged Buyout Analysis
33
Valuation – Methodologies
Comparable Company Analysis (“Comps”) Comparable Transaction Analysis (“Deals”)
A public market valuation assigned on the A control transaction valuation assigned on

basis of certain key ratios, or “market the basis of multiples of Net Income, EBIT,
trading multiples” of Net Income, EBIT, EBITDA or Sales for comparable
EBITDA or Sales for comparable public companies which have recently been
companies acquired. If the target is public, the
premium paid is also relevant
Estimated Range of
Value for Target
Leveraged Buyout Analysis (“LBO”) Discounted Cash Flow Analysis (“DCF”)
Value that a financial buyer would pay The value of future free cash flows
based upon the maximum amount of debt discounted to the present at an appropriate
appropriate for the target company and the discount rate or the weighted average cost
required return on private equity funds of capital
34
Illustrative Football Field Analysis
Trading Comparables $20.00 $24.00
Transaction Comparables $22.00 $26.00
DCF Analysis $24.00 $27.00
LBO Analysis $22.50 $24.50
$15 $20 $25 $30 $35
35
Contexts for Valuation Work
Buy-Side M&A Advising a client on what price to pay
Sell-Side M&A Advising a client on how much should be received as consideration for the sale of stock or assets
Advising the shareholders as to the fairness, from a financial point of view, of a price to be paid
Fairness Opinion
or received
Advising a client on how to best and most fairly reallocate the value of the company to creditors
Restructuring
and shareholders
Initial Public Offering Determining the potential public market value of a private company
Add-on Financing Positioning and timing the sale of client securities to maximize proceeds
Share Repurchase Deciding whether a company is undervalued and should repurchase shares
36
Comparable Company Analysis

The Comparable Company Analysis is one of several techniques used to determine a range of values for a specific
company, the “target” company
The equity of fundamentally similar, or “comparable” companies tends to be valued on a relatively consistent basis by
the public markets
– Broadly speaking, if Widget Company A competes in the same industry as Widget Company B, using a similar
business model, the equity markets are likely to value the two businesses in a relatively consistent manner
By analyzing certain key ratios and operating data for each of the companies in the comparable universe, it is possible
to estimate how the public equity markets would value the target. Typical benchmarks include multiples of net income
and book value (equity value multiples) and multiples of Sales, EBITDA and EBIT (enterprise value multiples).
The Comparable Company Analysis is, by its nature, based on an analysis of currently public companies.
Accordingly, the valuations received by the comparable universe do not typically reflect:
– The premium a buyer must pay for control of a company in an M&A transaction; or
– The discount the market may place on shares which are newly introduced in an initial public offering or the
discount that is appropriate for a private company
37
Identifying Your Comparable Company Universe

A comparable peer group should possess the same fundamental business and financial attributes such that their public
trading values represent a meaningful proxy from which to determine a value range for the target. Relevant attributes
include:
– Macroeconomic issues – Customers
– Industry group – Operations (production, processes, critical
– Business model inputs/components)
– Geographic location – Financial characteristics (leverage, historical and
future growth, margins)
– Business mix (products, markets, distribution channels)
Refining Your Comparable Company Universe

In some cases it will be necessary to limit the universe to a smaller, more focused group of comparables. Factors to
consider include:
– Size (sales, value) – Growth (organic vs. acquisitions)
– Operating history/philosophy – Profitability
– Ownership structure
Expanding the View of Comparability

As a practical matter, in many cases a broad universe of directly comparable companies will not exist. In these
situations the parameters of comparability will be widened to assemble a group of companies with sufficiently similar,
albeit not ideal, characteristics
38
Comparable Transaction Analysis

The “Comparable Transaction Analysis” is based on the premise that the value of a company or an asset can be
estimated by analyzing the prices paid by purchasers of ownership interests in reported comparable transactions
The analysis provides a history of selected transactions in one particular industry where acquired companies have
relatively similar characteristics in terms of economic drivers such as business mix, size, customer base, distribution
channels, industry dynamics, etc.
The purpose of the comparable transaction analysis is to derive pricing benchmarks based on the selected transactions.
It compares the transaction values paid for selected companies to the respective companies’ financial results to
determine transaction multiples. Typical benchmarks include multiples of net income and book value (equity value
multiples) and multiples of Sales, EBITDA and EBIT (enterprise value multiples)
Transaction multiples define the prices that acquirers are willing to pay for companies in that industry in the context
of a deal. By applying transaction multiples to financial results of the company being analyzed, it is possible to
determine a range of value
In contrast to the “Comparable Company Analysis,” this approach is generally based upon multiples paid for control
of a company (i.e., includes control premium)
39
Importance of Situational Understanding

A good understanding of the background and factors surrounding a transaction is necessary to extract meaningful
conclusions from the analysis. In particular, specific deal circumstances are likely to have an impact on prices
paid, including:
– Nature of transaction (minority stake vs. control, incidence of other contractual arrangements, auction vs.
negotiated sale)
– Attractiveness of the target company
– Relative needs of seller vs. buyer (i.e., a distressed seller may get a lower price)
– Identity of acquirer (strategic vs. financial, foreign vs. domestic)
– Underlying market conditions (state of M&A, equity, financing markets)
40
Discounted Cash Flow

The DCF analysis is based on the premise that ownership is essentially a claim on the cash flows generated by a
firm’s assets
The method entails estimating the free cash flows (“FCF”) available to all investors (equity and debt holders) and
discounting these cash flows back to the present using an appropriate cost of capital to arrive at a present value for
the assets
These assets may be financed in a multitude of different ways, but because the returns generated by these assets are
available to all providers of capital, and to avoid distortions caused by a particular capital structure, the cash flows
should be considered on an unlevered basis (i.e., free from financing considerations)
The company’s operational value (prior to adjustments for non-operating assets) can be broken down into two
components:
– Present Value of free cash flows up to cut point for terminal (or continuing) value calculation;
– Present Value of terminal value
– Company value = PV(FCF) = ∑ FCFt / (1+r)t + TV / (1+r)n
The discount rate r is the Weighted Average Cost of Capital (“WACC”), which reflects the required returns by both
debt and equity investors for investments with the same risk profile
The company’s operational value must be adjusted for non operating assets such as investments in unrelated
subsidiaries, discontinued operations, hidden assets, contingent liabilities, etc.
The company’s equity value is obtained by deducting the value of the Company’s financial debt and other non-
working capital debt
41
DCF Process
Forecast Unlevered Free Cash Flows
Choose Discount Rate
Calculate Terminal Value
Discount FCFs and Terminal Value
Determine Firm Value
Subtract Net Debt and Adjust for Non-Operating

Assets and Liabilities
Determine Equity Value
Review Results
42
Leveraged Buyout Analysis
What is an LBO?
A leveraged buyout (“LBO”) is an acquisition of a company in which a financial sponsor (e.g., private investor, LBO
fund) invests a relatively small amount of equity (compared to the total purchase price) and uses leverage (debt or
other source of financing) to fund the remainder of the consideration
– Debt is repaid with cash flows of the business acquired (conceptually similar to buying a house, renting it out and
using the rent to pay the mortgage)
LBOs are used in numerous types of transactions and corporate finance situations, including:
– Take-privates, in which a public company goes from being owned and traded by a large number of public
shareholders to one that is privately held by a small group of investors
– Buyouts of a subsidiary or division of a larger company by a group of investors
– Management buyouts, in which the acquisition is done by the company’s existing management group, often with
the backing of a financial sponsor
– Recapitalizations (i.e., re-leveraging the company and paying a large dividend)
– Leveraged acquisitions by corporations
– JV LBOs, in which corporations and financial sponsors partner together to acquire a business in a leveraged
transaction (corporations sometimes contribute assets); in most instances the JV structure permits the debt to be
off-balance sheet for the corporation
43

LBO Analysis is a valuation methodology that provides an indication of:
– The maximum price that a financial investor would be willing to pay for a business on a stand-alone basis (i.e.,
without any strategic value or synergies)
– The credit statistics and potential equity returns for the business at a given price
LBO Analysis is used for a number of purposes in various transactions
– Estimates the amount a financial buyer would be willing to pay for a business, helps to identify potential LBO
opportunities
– Estimates the potential equity returns to the business, and provides sensitivity of the returns to growth, leverage,
and valuation multiple expansion
– Highlights the effects of adding leverage to the business (e.g., recapitalization, take-private)
– Illustrates the debt capacity of business (based both on company specific credit criteria and capital market criteria)
In LBO Analysis, there are several assumption areas that need to be addressed (Note: it is often easiest to approach
them in the following order)
– Develop operating projections
– Determine maximum leverage and capital structure parameters
– Determine the expected method of exit and most likely (and realistic) exit valuation multiples
– Establish return parameters
– Solve for the maximum price within the given criteria
44
Suggested Reading Material / Resources
Magazines and Newspapers
Wall Street Journal The most widely read business periodical in the world
Financial Times A leading global newspaper covering business and specialist financial information
Investment Dealers
This magazine covers many recent trends on Wall Street and lists recent security issues
Digest
A leading industry publication which covers what is going on at leading firms in both fixed
Financial Trader
income, derivatives, currencies, commodities and equities
Daily Deal This daily publication covers developments within or impacting the investment banking industry
Covers technology industry finance. A good resource if you are interested in investment banking
Red Herring
in this area
45
Books – Corporate Finance Related
Applied Corp. Finance:

Aswath Damodaran
A User’s Manual
Capital Ideas Peter Bernstein. Modern financial theory
Handbook of Frank Fabozzi. The bible for any job involving fixed income sales, trading, underwriting or
Fixed Income derivatives
Valuation: Measuring
Tom Copeland, Tim Koller and Jack Murrin. Potent strategies for measuring and enhancing the
and Managing the Value
bottom-line value of any company. How to do a valuation
of Companies
46

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Introduction to Investment Banking

Investment Banking Corporate Structure

Investment Investment Fixed

Functional Areas of a Typical Investment Bank

What is Investment Banking?

What is Investment Banking?

Investment Banking Capital Markets

Research Investment Advice

Feedback on possible market

Reasons to Consider a Career in Investment Banking

Role Years in Industry

Managing Director 10+

Equity / Debt / Convertible Offerings

Pending Transaction Summary

Timeline of Investment Banking Recruiting for Full-time and Summer Positions

 Get to know the investment banks

Timeline of Investment Banking Recruiting for Summer Positions (Junior Year)

 Organize informational interviews

January and February

Timeline of Investment Banking Recruiting for Full-time Positions (Senior Year)

August and September

 Organize informational interviews

What Investment Banks are Looking For

– Hardworking – Handle stress well / thick skinned

 Does your personality fit well with the bank’s culture?

Interview Process and Format

The Interview Format

Commitment to the Industry and the Firm

Strong Momentum (1) Employee Base and Ownership (2)

Recent Accolades Lehman Brothers: Share Price Performance (1994-Current)

Lehman Brothers’ equity and equity-linked franchise continues to garner recognition

2005 U.S. Equity 2005 NYSE Trading

2005 NASDAQ Trading

“From the integration of debt and equity capital markets, to the #1

2 Goldman Sachs 10.9% 2 Citigroup 12.5% 2 Citigroup 13.5%

3 Morgan Stanley 10.2% 3 Lehman Brothers 10.7% 3 Lehman Brothers 11.7%

Global Announced M&A Through March 5, 2006

Lehman Brothers 247.4 1 41% 41

Industry Total 598.8 100% 4,717

1 3/5/2006 $82.1 BellSouth Corp AT&T Americas Telecomunications

2 2/21/2006 56.7 Endesa SA E ON AG Europe Natural Resources

3 2/25/2006 44.8 Gaz de France Suez SA Europe Natural Resources

4 1/27/2006 23.8 Arcelor SA Mittal Steel Co NV Europe Industrial

5 2/6/2006 17.5 Portugal Telecom SGPS SA Sonae SGPS SA Europe Telecomunications

6 1/23/2006 17.4 Albertsons Inc Investor Group Americas Consumer/Retail

7 1/25/2006 14.9 BOC Group PLC Linde AG Europe Industrial

8 1/16/2006 12.5 VNU NV Investor Group Europe Media

11 2/3/2006 9.6 KT&G Corp Investor Group Asia Consumer/Retail

14 1/24/2006 6.1 Pixar Walt Disney Americas Media

15 1/31/2006 5.8 TIM Celular SA TIM Participacoes SA Americas Telecomunications

16 2/13/2006 5.5 ZAO Kyivstar GSM Vimpelcom OJSC Europe Telecomunications

17 2/6/2006 5.4 Westinghouse Electric Co LLC Toshiba Corp Americas Technology

18 1/27/2006 5.2 Dofasco Inc ThyssenKrupp AG Americas Industrial

19 1/3/2006 5.0 Engelhard Corp BASF AG Americas Industrial

20 1/10/2006 4.7 GTECH Holdings Lottomatica SpA Americas Technology

Investment Banking Summer Analyst Program

Comparable Company Analysis (“Comps”) Comparable Transaction Analysis (“Deals”)

A public market valuation assigned on the A control transaction valuation assigned on

Leveraged Buyout Analysis (“LBO”) Discounted Cash Flow Analysis (“DCF”)

Trading Comparables $20.00 $24.00

Get to know the investment banks

Organize informational interviews

Organize informational interviews

Does your personality fit well with the bank’s culture?

Buy-Side M&A Advising a client on what price to pay

Capital Ideas Peter Bernstein. Modern financial theory