SCOOPBOOKS THE PRACTITIONER'S GUIDE TO INVESTMENT BANKING MERGERS & ACQUISITIONS CORPORATE FINANCE Jerilyn J. Castillo and Peter J. McAniff circinus Business press CONTENTS Commonly Used Acronyms i Foreword iii Introduction vii PART I: THE BASICS 1 Chapter 1 Investment Banking 3 Advisory vs. Raising Capital 5 Strategic Planning vs. Financial Management 6 Confidential Information 7 A Career in Banking 8 Chapter 2 Corporate Finance Basics 11 Time Value of Money 11 Why is Time Value of Money Important? 13 What is an Investment 14 Present Value and Future Value - Conceptually 15 Risk vs. Reward 19 Discount Rate and Interest Rate 21 Present Value and Future Value - Numerical Examples 21 Net Present Value 27 Internal Rate of Return 29 Multiple Payments in a Compounding Period 30 Annuities and Perpetuities 32 Valuing a Bond 34 Chapter 3 Financial Statement Basics 39 Financial Accounting Basics 40 Basic Financial Concepts 43 Creating the Cash Flow Statement 54 Financial Ratios and Terminology 59 Market Value of Equity 59 Shares Outstanding, Options and Converts 60 Total Debt and Net Debt 64 Enterprise Value 64 Earnings per Share 66 Key Multiples and Metrics 68 Chapter 4 Strategic Transactions 73 Strategic Planning 73 Strategic and Financing Transactions 74 Buy vs. Build 75 Strategic Rationale 76 Increasing Shareholder Value 77 Synergies 81 Chapter 5 Introduction to M&A 89 Types of Strategic Transactions 89 Buy-Side vs. Sell-Side 92 The Sell-Side Process 94 The Deal Process 96 Chapter 6 Analyzing Strategic Transactions 103 Strategic Rationale Analysis 104 Valuation Analysis 104 Financial Impact Analysis 107 Social Issues Analysis 109 Constituents Analysis 110 Chapter 7 Screening for M&A Transactions 113 Initial Screening 113 Common Screening Errors 116 Checklist and Review 117 PART II: VALUATION 119 Chapter 8 The Role of Valuation 121 Value is Relative 121 Valuation Methods 123 Multiples Based Methods 124 Cash Flow Based Methods 126 Breakup Analysis 128 Valuation Ranges 128 Chapter 9 Comparable Company Analysis 131 Key Benefits 132 Key Challenges 132 When to Use Trading Comparables 133 Preparing Trading Comparables 133 Additional Pointers 136 Developing Trading Comparables 140 Reading Trading Comparables 144 Drawing Valuation Conclusions 147 Chapter 10 Comparable Transaction Analysis 151 The Control Premium 151 Key Benefits 152 Key Challenges 153 Identifying Transaction Comparables 153 Reading Deal Announcements 155 Developing Transaction Comparables 158 Additional Pointers 170 Chapter 11 Discounted Cash Flow Analysis 171 Key Benefits 172 Key Challenges 172 Key Components 173 Unlevered Free Cash Flow 177 Common Errors in Calculating Free Cash Flow 180 Weighted Average Cost of Capital 181 Terminal Value 186 Common Errors in Calculating Terminal Value 190 Midyear Convention 192 Checking a DCF Model 197 Comprehensive DCF Analysis Example 198 Chapter 12 Leveraged Buyout Analysis 201 LBO Analysis 203 Key Components 204 Simplified LBO Analysis 207 Returns on Private Equity Investments 227 Traditional LBO Candidates , 227 Screening for LBO Candidates \ 229 Participants in an LBO 230 Structure of a Private Equity Firm 233 How Financial Sponsors are Compensated 235 Clawbacks 238 Chapter 13 Breakup Analysis 251 Developing Breakup Analysis 252 PART III: M&A ANALYSIS 255 Chapter 14 Accretion/Dilution Analysis 257 Why Perform Accretion/Dilution Analysis? 258 Basic Principles 259 Accounting Treatments 267 Consolidation Method 270 Step-by-Step Accretion/Dilution 275 Growth Rate Analysis 307 Equity Method 308 Cost and Available-for-Sale Methods 312 Chapter 15 Acquisition Currency 517 Cash vs. Stock Consideration 319 100 Percent Cash Consideration 320 100 Percent Stock Consideration 322 Cash/Stock Combinations 324 Is Equity Ever Cheaper than Debt? 325 Ownership Dilution 328 Acquisition Finance 330 Chapter 16 Stock Deals 331 Exchange Ratios 333 Fixed Exchange Ratio 336 Floating Exchange Ratio 340 Collars, Caps and Floors 344 Risk Arbitrage 347 Chapter 17 Other M&A Analyses 355 Shareholder Analysis 355 Technical Market Analysis 359 Relative Valuation Analysis 364 Social Issues Analysis 367 Chapter 18 Merger of Equals (MOE) 369 Key Features of a Merger of Equals 369 Splitting the New Company Equity 370 Financial Analysis in an MOE 374 Contribution Analysis 375 Historical Natural Exchange Ratios 377 Valuation Analysis and MOEs 378 Governance and Other Issues 379 Negotiating an MOE 380 PART IV: TRANSACTION STRUCTURING 383 Chapter 19 The Deal Team 385 Confidential Information 385 Participants in the Transaction 386 Fiduciary Duties of the Board of Directors 390 Chapter 20 Deal Mechanics 393 Due Diligence 393 Due Diligence Objectives 395 Due Diligence Planning 399 Areas of Due Diligence 400 The Legal Agreement 402 Deal Protection 411 Public vs. Private Agreements 413 Corporate Acquisitions 415 Merger Transactions 416 Tender Offers 419 Proxy Contests 428 Cross-Border Transactions 429 Chapter 21 Taxes and M&A 431 What is Tax? 432 Book vs. Tax Accounting 433 Issues Related to Depreciation 435 Deferred Taxes 438 Effective Tax Rates 449 Tax Shields 450 Taxable Income and Taxable Gain 451 Book Value vs. Tax Basis 457 Inside Basis vs. Outside Basis 458 Net Operating Losses (NOLs) and Capital Losses 462 Acquired NOLs 466 Tax Credits 468 Shareholder-Level and Corporate-Level Tax 470 Selling Stock vs. Selling Assets - Tax Issues 471 Selling Stock vs. Selling Assets - Non-Tax Issues 474 Asset Write-Ups 474 Basis Step-Ups 478 GAAP Accounting for M&A Transactions 481 Tax-Free Reorganizations 493 338(h)(10) Election 501 Chapter 22 Corporate Restructurings 507' Purpose of a Corporate Restructuring 507 Public vs. Private Market Separation 510 Public and Private Market Separation Techniques 512 IPO and/or Public Sale of Equity 514 Spin-off 516 Split-off 518 Tracking, Targeted or Letter Stock 520 Sale of Subsidiary for Cash 522 Sale of Subsidiary for Stock 524 Joint Venture and Partnership 526 Stock/Asset Swap 528 Financial Restructuring 530 Chapter 23 Corporate Defense 535 Purpose of Corporate Defense 535 State Statutes and Delaware 536 When a Hostile Situation Emerges 537 Public Relations 539 Implementing Structural Defenses 540 Structural Defenses 540 "Vote" Related Defenses 542 "Value" Related Defenses 544 "Board" Related Defenses 545 Delaware-Specific Protections 546 Shareholder Rights Plan (Poison Pill) 546 Flip-in Rights Plan 549 Flip-in Exchange Rights Plan 553 Flip-over Rights Plan 555 PART V: CREDIT AND FINANCING 561 Chapter 24 Credit Analysis 563 Capital Structure 563 Credit Analysis 566 Quantifying Credit Risk 567 Credit Risk Indicators 570 Rating Agencies 572 Ratings and Rating Scales 574 Credit Ratios 578 Calculation of Credit Ratios 582 Credit Rating Notching 587 Calculating Debt Capacity 590 Changes in Credit Risk 592 Private Companies 593 Chapter 25 Sources of Capital 595 The Capital Markets Group 595 Liquidation Preference 595 Financing Glossary Terms 599 Sources of Capital 607 Short-Term Debt 609 Senior Long-Term Debt 611 Subordinated Debt 618 Preferred Equity 618 Common Equity 619 Public vs. Private Capital 620 Private Placements 620 Financial Sponsors 622 Registration of Public Securities 622 Investors 624 Managing Risk with Derivatives 625 Liability Management 626 Acknowledgments 629 Appendix A List of Investment Banks 643 Appendix B Glossary of Terms 649 Appendix C Suggested Reading and Other Resources 707 Index 711 .