BAFI359: Intermediate Corporate Finance

Case Western Reserve University, Weatherhead School of Management BAFI 460: Investment Banking

Spring 2008

Professor: Scott A. Fine

Contact Info: WSOM Office: 366 Peter B. Lewis Building WSOM Phone: 216.368.0909 Cell Phone: 216.533.3590 (voicemail available 24 hrs.) Home Phone: 216.751.7599 (8:00 am – 10:00 pm) E-Mail: [email protected]

Class Meeting Time: 6:00 – 8:00 p.m. Mondays

Classroom: Peter B. Lewis Building, Room 401

Office Hours: By appointment.

Pre-Requisite: BAFI 403 – Financial Management II. In addition, students should have experience with financial modeling using Microsoft Excel.

COURSE OVERVIEW AND TEACHING GOALS

This is an introductory class about Investment Banking. We will discuss the structure of the overall industry and the strategic and regulatory challenges facing industry participants. By the end of the course, students will also understand the different functions and departments within an investment bank, and how they work together to deliver products and services to issuing and investing clients. There will also be some discussion of how investment banks are managed, how clients are managed, and how bankers themselves are managed and compensated.

Most of our focus will result from peering inside an investment bank to understand the products and services they offer, both as agent and principal. Topics discussed will include: (i) raising public and private capital for clients, (ii) providing financial advisory services with a particular focus on mergers and acquisitions and leveraged buyouts and (iii) trading and investing for the firm’s own account with a particular focus on private equity. Although important functions, we will not spend significant time discussing retail brokerage, private wealth management, third party asset management, market making or proprietary trading.

My teaching goals are to expose students to the industry overall, its key players, different departments within specific organizations, and their key functions. Students will also be exposed to the tools, processes and mechanics used by investment banks to raise equity capital, provide strategic M&A advice and to effectuate leveraged buyouts. We will spend considerable time in and out of the classroom using Microsoft Excel models as part of our modules on initial public offerings, mergers and acquisitions and leveraged buyouts. You will get substantial experience with Excel based financial models in this class. While focused on investment banking, many of the topics discussed and analytic methods presented form the foundation for careers in commercial and investment banking, investment management, corporate finance and treasury management. You will learn how to value companies in a variety of markets – the public equity market, the strategic merger and acquisition market, and the leveraged buyout (financial buyer) market.

READINGS AND CASES

There is one required book, which is available at the CWRU Bookstore and at most large bookstores. This book is a humorous account of life as an investment banker, and should be read prior to the first session:

Monkey Business, John Rolfe and Peter Troob, Warner Books, April 2000.

The Course Packet is $50.00 and is available in Tedda Nathan’s office (PBLB 371). Please bring her a check for that amount payable to “Case,” or bring cash. If you need to make arrangements with her outside of normal business hours to make payment and/or pick up materials, please call her at 216.368.2040. The packet contains all of the required reading materials and cases for the course. I will also hand out supplemental reading information from time-to-time. Finally, lecture notes will be made available during the course of the semester. I plan on using Blackboard to post lecture notes as well as assignments.

I would also strongly encourage all students to read The Wall Street Journal on a daily basis, as well as weekly periodicals such as Business Week, Fortune and Forbes.

There are also several other textbooks that cover various aspects of the industry, and may be used as a helpful reference:

Investment Banking and Brokerage, by John Marshall & M.E. Ellis, Kolb Publishing Co., 1994.

The Business of Investment Banking, by Thomas Liaw, John Wiley & Sons Inc., 1999.

Doing Deals: Investment Banks at Work, by Robert G. Eccles and Dwight B. Crane, Harvard Business School Press, 1998.

The Investment Banking Handbook, by J. Peter Williamson, Wiley-Interscience, 1998.

Vault Career Guide to Investment Banking, by Tom Lott, Vault Reports Inc., 2001.

In addition, there are countless good popular books that provide insight into various firms, events and issues. I would be happy to provide suggestions upon request. Some of my favorites are Liar’s Poker by Michael Lewis (the trading culture at Salomon), Den of Thieves by James B. Stewart (the insider trading scandal of the 1980s), The Predator’s Ball by Connie Bruck (the rise and fall of Drexel during the junk bond era), Barbarians at the Gate by Bryan Burrough and John Helyar (an in-depth look at one of the biggest LBOs ever), Goldman Sachs: The Culture of Success by Lisa Endlich, When Genius Failed by

2 Roger Lowenstein (the Long Term Credit fiasco), and Tearing Down the Walls by Monica Langley (biography of Sandy Weill and his Wall Street career).

GRADING

For some assignments, you will be encouraged and/or required to work in small groups (3-4 members). If you work in a group, only one write-up should be submitted for the group, with all members clearly listed. All members will receive the same grade for that assignment.

Your grade will be based on the following:

Four (4) Case Write-Ups 40 (10 points each) Group Presentation 20 Class Participation/Peer Review 15 (Quantity and quality) Take-Home Final Exam 25

Note: All written assignments and the group presentation should be done to the same standards as a real work setting. In all cases, please proofread your work to check for grammar, spelling, etc. I also value concise, cogent work over voluminous pages of incoherent gibberish.

COURSE SCHEDULE AND ASSIGNMENTS

Note: Materials should be read prior to the class in which they are listed.

Mon. January 14th Primary Functions, Industry Overview and Key Players

Monkey Business, John Rolfe and Peter Troob, Warner Books, April 2000.

“History of Investment Banking,” Ashish Nanda, Thomas Delong and Lynn Wadalid Roy, Harvard Business School Publishing, 2002.

*** Discussion of Case Assignment #1 Due Two in Weeks ***

Mon. January 21st No Class – MLK Day

Mon. January 28th Case Discussion: Three Key Players Introduction to Initial Public Offerings

*** Case Assignment #1 Due at Beginning of Class ***

“The Goldman Sachs IPO (A),” Ashish Nanda, Malcolm Salter, Boris Groysburg and Sarah Matthews, Harvard Business School Publishing, 2002.

“Investment Banking at Thomas Weisel Partners,” Malcolm Baker and Lauren Barkley, Harvard Business School Publishing, 2006

“The Credit Suisse Group (A),” Ashish Nanda and Kelley Morrell, Harvard Business School Publishing, 2001.

3 The first hour will be a case discussion of the three assigned cases. You will only be responsible for fully preparing one of them.

After the break and next week, the lecture will highlight why companies go public, the process and mechanics of going public, the costs of going public to the issuer, and the profitability of IPOs to the underwriters. We will also review the IPO model. There are many readings for this week and next, all of which are listed for next week. Please pace yourself accordingly.

Mon. February 4th Public Equity – Initial Public Offerings

*** Discuss Case Assignment #2 due in two weeks *** *** Discuss Group Presentation due in four weeks *** *** Discuss Detailed Work Program for Group Presentation ***

“The Issue Process for Public Securities,” Darden Publishing.

“The Initial Public Offering, A Guidebook for Executives and Boards of Directors,” various contributors, Bowne, 2004 (to be posted electronically.)

Profile of Investment Banking Contacts – Evaluation criteria for choosing RELTEC managers (to be distributed.)

RELTEC IPO Summary Schedule (to be distributed.)

Spreadsheet – Sample Economics of Public Offering (to be distributed.)

Mon. February 11th Public Equity – Positioning and Valuation

“Note on Dilution” (to be posted online.)

“Note on Public Equity Valuation.”

“Advertising Valuation” from Lauren Rich Fine.

Excerpts from “Eskimo Pie Corporation,” Harvard Business School Publishing.

“Valuation Analysis – Company A Initial Public Offering,” a spreadsheet model (to be distributed.)

Case study materials on “1-800 Contacts” initial public offering (to be distributed.)

Mon. February 18th Case Discussion: “UPS Initial Public Offering”

“United Parcel Service’s IPO,” Paul Healy, Harvard Business School Publishing, 2002.

Mon. February 25th Public Equity – Practitioner’s Perspective

Guest Lecturer TBD

4 5 Mon. March 3rd Group Presentations on IPOs

*** Group Projects Due at Beginning of Class ***

Presentations and discussion of IPO candidates

Mon. March 10th SPRING BREAK (No class)

Mon. March 17th Syndicated Bank Debt, High Yield Debt and Credit Analysis

Required Reading:

Standard & Poor’s Corporate Ratings Criteria, 2006 (to be distributed.)

Convertible Securities, Mezzanine Financing, Preferred Stock and Product Innovation

Required Reading:

“The Origin of LYONs: A Case Study in Financial Innovation,” by John J. McConnell and Eduardo S. Schwartz, Chapter 24 of The New Corporate Finance: Where Theory Meets Practice, Donald H. Chew, McGraw-Hill Companies, Inc., 2001.

Optional Reading:

“Convertibles Special Report,” by Anne Cox, Merrill Lynch, 2000 (to be distributed.)

Mon. March 24th Leveraged Buyouts and Venture Capital

Work in class on LBO Model (to be distributed.)

Review high-yield, mezzanine and syndicated loan materials from earlier in term.

“Technical Note on LBO Valuation (A),” Carliss Baldwin, Harvard Business School Publishing, 2001.

“Note on Leveraged Buyouts,” Fred Wainwright and Colin Blaydon, Tuck School of Business, Dartmouth College, 2003 (to be distributed.)

*** Discuss Case Assignment #3 Due Next Week ***

Mon. March 31st Leveraged Buyout Case

“Dressen,” Thomas R. Piper and Jeremy Cott, Harvard Business School Publishing, 2005.

6 Mon. April 7th Mergers and Acquisitions

Presentation will be posted on Blackboard. We will discuss this presentation during class, including walking through the various valuation methodologies.

*** Discuss Case Assignment #4 Due Next Week ***

Mon. April 14th Mergers and Acquisitions

“Structuring Repsol’s Acquisition of YPF S.A. (A),” Case 44 in Case Studies in Finance, Managing for Corporate Value Creation, Robert F. Bruner, McGraw-Hill Irwin, 2003 (pages 629-657).

Client Management and the CFO’s Perspective

“ The Union Carbide Deal (Abridged),” Thomas DeLong, Harvard Business School Publishing, 1999.

Handout – Chief Financial Officer Responsibilities and Needs and Wants (to be distributed.)

Mon. April 21st Wrap-Up and Discussion of Final

We will touch upon several topics that weren’t addressed during the term, including Real Estate, Structured Finance, Project Finance, Restructuring, Asset Management, etc. We will also revisit the syllabus to wrap-up the course. Finally, we will discuss the take- home final and provide time for Q&A.

Mon. April 28th Take Home Final Due by 5 p.m. (Can Be Submitted Earlier!)