UBS Recruiting Guide

CLNLPALLY ACCLSSl8LL
Seplember 2009

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SLCTlON ! !"# %&'(&)'* _____________________________________________________________________________________ !
SLCTlON 2 +,-'(,./)0 1)2'3),' ______________________________________________________________________________ !0
SLCTlON 3 %&'(&)'* 45 +,&'.-2',- "6,7),8_______________________________________________________________ !3
SLCTlON 4 +,-'(&)'* 9('06(6-)4, ___________________________________________________________________________ 20
SLCTlON 5 !"# 1':/,):63 ;'5'(',:' <=)>' _________________________________________________________________ 3!

S.\Clobal Sourcing\lall2009-Spring20!0\M8A\l8D\M8A l8D Pecruiling Cuide\M8Al8D_ Pecruiling CuidellNAL_09_23_09.doc
!
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2

!"#EC(* @A ,F* G@4?7H+ I*.70(1 J0(.(30.? J04-+
!"# ). 6 834?63 5)(2 0(4&)>),8 .'(&):'. -4 0()&6-'@ :4(04(6-' 6,> ),.-)-=-)4,63 :3)',-. -/(4=8/ )-. *'63-/
26,68'2',- 6,> #*).. ?6,7),8 ?=.),'..'. 634,8.)>' )-. 834?63 'A0'(-).' ), ),&'.-2',- ?6,7),8 6,> 6..'-
26,68'2',-B +, #*)-C'(36,>@ !"# ). -/' 26(7'- 3'6>'( ), ('-6)3 6,> :422'(:)63 ?6,7),8
!"# /6. DEF GG@HIH 2)33)4, 'J=)-K allribulable lo U8S shareholders@ 34,8L-'(2 :('>)- (6-),8. 45 MNOM6POMN
(lilch, Moody's and S&P respeclively), and ),&'.-'> 6..'-. 45 DEF P@PHQ ?)33)4,RB

S'63-/ T6,68'2',-
M2'():6.
<34?63 M..'-
T6,68'2',-
S'63-/ T6,68'2',-
U #*).. "6,7
U8S's weallh managemenl
business calers lo /)8/ ,'- *4(-/
6,> 6553=',- ),>)&)>=63. around
lhe world (excepl lhose served by
Weallh Managemenl Americas)
whelher lhey are invesling
inlernalionally or in lheir home
counlry.
U8S ollers lhese clienls a complele
range ol -6)34('> 6>&):' 6,>
),&'.-2',- .'(&):'..
lls #*).. "6,7 business provides a
complele sel ol banking services
lor Swiss individual and corporale
clienls.
Clobal Assel Managemenl is one ol
lhe world's leading assel managers,
providing inveslmenl solulions lo
privale clienls, linancial
inlermediaries and inslilulional
inveslors worldwide.
ll ollers >)&'(.' ),&'.-2',-
:606?)3)-)'. 6,> ),&'.-2',- .-K3'.
across all major lradilional and
allernalive assel classes. Specialisl
equily, lixed income, currency,
hedge lund, real eslale,
inlraslruclure and privale equily
inveslmenl capabililies can also be
combined in mulli-assel slralegies.
Weallh Managemenl Americas
provides 6>&):'L?6.'>
('36-)4,./)0. lhrough ils linancial
advisors who deliver a lully
inlegraled sel ol producls and
services .0':)5):633K >'.)8,'> lo
address lhe needs ol high nel
worlh and ullra high nel worlh
individuals and lamilies.
ll includes lhe lormer Weallh
Managemenl US business area, as
well as lhe domeslic Canadian and
8razilian (U8S Paclual) businesses
and lhe inlernalional business
booked in lhe Uniled Slales.
+,&'.-2',-
"6,7
ln lhe inveslmenl banking and
securilies businesses, U8S provides
securilies 0(4>=:-. 6,> ('.'6(:/
in equilies, lixed income, rales,
loreign exchange and melals.
ll also provides advisory services as
well as 6::'.. -4 -/' *4(3>V.
:60)-63 26(7'-. lor corporale,
inslilulional, inlermediary and
allernalive assel managemenl
clienls.
* lor lhe quarler ended 30 June 2009

3

K0)0+0@(+ @A ,F* '()*+,-*(, ".(/
F)A'> +,:42'@ D=((',:)'.
6,> D4224>)-)'. WF+DDX
A leading global inveslmenl
banking lranchise using
),,4&6-)&' .-(=:-=('. 6,>
:('6-)&' .43=-)4,. lo lead some
ol lhe mosl challenging and
complex M&A, debl, equily and
equily-linked ollerings in lhe
markel.
U8S provides 5)(.-L:36.. 6>&):'
6,> 'A':=-)4, services lo
corporalions, linancial sponsors
and hedge lunds.
Our advisory group assisls on
lransaclions and advises on
.-(6-'8): ('&)'*. 6,> :4(04(6-'
('.-(=:-=(),8 solulions, while our
capilal markels and leveraged
linance leams arrange lhe
execulion ol 0()26(K 6,>
.':4,>6(K 'J=)-K@ 6. *'33 6.
>'?- )..='. worldwide.
+,&'.-2',- "6,7),8
Y'06(-2',- W+"YX ZJ=)-)'.
We locus on meeling lhe needs ol
corporale, inslilulional, public
seclor and privale banking clienls
providing a 5=33 (6,8' 45
0(4>=:-. across loreign Lxchange
and lixed lncome.
We are dedicaled lo 0(4&)>),8
4=-.-6,>),8 :3)',- .'(&):' in
Originalion and Dislribulion and
26,68),8 ().7 6,> 0(4&)>),8
3)J=)>)-K in lX, Pales, Credil and
Lmerging Markels.
We oller leading advice across all
major producls >=' -4 6 >''0
=,>'(.-6,>),8 45 4=( :3)',-.[
,''>. combined wilh an abilily lo
deliver exceplional service. Ollering
*4(3>L:36.. >).-()?=-)4, 6,>
'A':=-)4,, U8S is a leader in lhe
global currencies markels and
mainlains a powerlul presence
across lixed income markels.
We dislribule, lrade, linance
and clear cash equily and equily-
linked producls as well as
.-(=:-=(),8@ 4()8),6-),8 6,>
>).-()?=-),8 new equily and
equily-linked-issues. We also
0(4&)>' ('.'6(:/ on companies,
induslry seclors, geographical
markels and macroeconomic
lrends.
A 54:=. 4, -':/,4348K has led lo
signilicanl improvemenls in
business processes and clienl
services.
lnveslmenls have been made in
>)(':- 26(7'- 6::'..@ 0()2'
?(47'(68' 6,> :3)',-
('36-)4,./)0 036-54(2., earning
U8S recognilion as a markel leader
in lhe provision ol a number ol
eleclronic services.
!"# 455'(. :3)',-. 'A0'(-
6>&):'@ .=0'(?
'A':=-)4,@ 0(4>=:-
),,4&6-)4, 6,>
:420('/',.)&'
6::'.. -4 -/' *4(3>[.
:60)-63 26(7'-.
"K >'&'340),8 6 -/4(4=8/
=,>'(.-6,>),8 45 -/' ,''>.
45 '&'(K :3)',- *' 6(' 6?3' -4
455'( -6)34('>@ ),.)8/-5=3 6,>
-)2'3K .43=-)4,. -4 /'30 -/'2
6:/)'&' -/')( 5),6,:)63
4?\':-)&'.

4

%*,403+ ,@ %*.+54* . J04-
!"# ('26),. 6 834?63 5),6,:)63 .'(&):'. 04*'(/4=.'

DY# ;6-' ] HK(

D('>)- ;6-),8
U8S has mainlained a lop
credil raling
The 26(7'- (':48,)C'. U8S's
5),6,:)63 .-(',8-/
Absenl TAPP recipienls, U8S
has a leading 1)'( ^ :60)-63
(6-)4
%,' 45 -/' 36(8'.- *'63-/
26,68'(. ), -/' *4(3>
Over DEFPBPH-( ), 6..'-.
under managemenl
U8S has mainlained a lop
credil raling
The 26(7'- (':48,)C'. U8S's
5),6,:)63 .-(',8-/
Absenl TAPP recipienls, U8S
has a leading 1)'( ^ :60)-63
(6-)4
%,' 45 -/' 36(8'.- *'63-/
26,68'(. ), -/' *4(3>
Over DEFPBPH-( ), 6..'-.
under managemenl

_'&'3 G M..'-.

D4206,K DY#
U8S US$36b/ 2
Coldman Sachs US$54b/ 6
Morgan Slanley US$59b/ 9
Credil Suisse US$67b/ 7
Deulsche 8ank US$85b/ 4
Ciligroup US$!!3b/ 6
8olA US$!22b/ 5
JPMorgan US$!42b/ 7

D4206,K
DY#
Ciligroup 249
Morgan Slanley !68
8olA !56
Coldman Sachs !28
!"# ^^Q
Deulsche 8ank 94
Credil Suisse 83
JPMorgan 68

1)'( ^ D60)-63 ;6-)4

D4206,K 1)'( ^ ;6-)4 W`X
Morgan Slanley !5.8
!

D('>)- #=)..' ^HBH
Coldman Sachs !3.8
!

U8S !3.7
2

Ciligroup !2.7
!

8olA !!.9
!

Deulsche 8ank !!.0
JPMorgan 9.7
!

D4206,K T44>K[.O#U9OF)-:/
T44>K[.
%=-3447
Deulsche 8ank Aa!/A+/AA- NLC
!"# M6POMNOMN #-6?3'
Credil Suisse Aa2/A/AA- NLC
JPMorgan Aa3/A+/AA- NLC
Coldman Sachs A!/A/A+ NLC
8olA A2/A/A+ Slable
Morgan Slanley A2/A/A NLC
Ciligroup A3/A/A+ Slable

! 8anks reporling on a 8asel l basis as opposed lo a 8asel ll basis
2 Pro lorma lor anlicipaled ellecls lrom lhe announced sale ol U8S Paclual (+0.5)

5

6?@>.? K*.?@103 I*.15* =.>?*+ L899M;899: N=KO
;6,7 "6,7 F''. Wa2X
T7- #/6('
W`X
! 8ank ol America Mer !,958 8.4
2 JPMorgan !,758 7.6
3 8arclays Capilal !,544 6.6
4 Cili !,465 6.3
5 Deulsche 8ank !,!!8 4.8
6 Credil Suisse !,039 4.5
b !"# ^@Q^c IBI
8 P8S 980 4.2
9 Morgan Slanley 952 4.!
#=?-4-63 ^^@cGP HQBd
14-63 PG@PIH ^QQBQ
;6,7 "6,7 F''. Wa2X
T7- #/6('
W`X
! JPMorgan 3,335 !2.3
2 8ank ol America Mer 2,698 9.9
3 Coldman Sachs 2,394 8.8
4 Morgan Slanley !,864 6.9
H !"# ^@cPc eBb
6 Cili !,6!2 5.9
8 Deulsche 8ank !,!!8 4.!
9 8arclays Capilal 962 3.6
#=?-4-63 ^b@GHH eIBQ
14-63 Pb@^G^ ^QQBQ
;6,7 "6,7 F''. Wa2X
T7- #/6('
W`X
! Coldman Sachs 2,663 9.0
2 JPMorgan 2,557 8.7
I !"# P@QGd eBd
5 Morgan Slanley !,967 6.7
6 Cili !,656 5.6
8 Deulsche 8ank !,5!! 5.!
9 Lazard !,!60 3.9
#=?-4-63 ^b@GdQ HcBc
14-63 Pd@HHP ^QQBQ
;6,7 "6,7 F''. Wa2X
T7- #/6('
W`X
! JPMorgan 8,655 9.!
3 Coldman Sachs 6,272 6.6
4 Cili 5,3!7 5.6
H !"# H@QdH HBI
6 Morgan Slanley 5,065 5.3
7 Credil Suisse 4,575 4.8
8 Deulsche 8ank 4,2!5 4.4
9 8arclays Capilal 3,680 3.9
#=?-4-63 HQ@dId HGBe
14-63 dH@QbQ ^QQBQ
!"# /43>. 3'6>),8 834?63
26(7'- 04.)-)4,. 6,>
./6(' 6:(4.. 633 0(4>=:-.
M33 9(4>=:-. TUM
ZDT YDT

6

!"# P.+ Q?.R*7 . I*.70(1 2@?* 0( %.(R @A ,F* N*.4H+ S*R =4.(+.3,0@(+
f4-6?3' M2'():6. 6,> ZTZM 1(6,.6:-)4,.
Joinl global coordinalor and joinl
bookrunner on lhe C3.5bn righls
issue lor Cas Nalural. Joinl
bookrunner on C2.5bn dual
lranche bond, lheir largesl ever
bond ollering
Lxclusive linancial advisor lo lial
on ils announced global slralegic
alliance wilh Chrysler
Joinl bookrunner on
Pabobank's $!.5bn Tier !
lransaclion (AAA / Aaa)
Sole global coordinalor, sole
bookrunner and lead underwriler
on Holcim's c.CHl2.0bn capilal
increase, sole underwriler ol lhe
debl lo equily bridge lacilily, and
exclusive provider ol a lairness
opinion on ils CHl!.8bn
acquisilion ol Cemex Auslralia
Sole bookrunner on lhe
CHl3.8bn placemenl ol
new shares lor U8S
Joinl bookrunner in lhe
Swiss Conlederalion's
CHl5.5bn placemenl ol
U8S shares lrom
conversion ol MCNs
Lead linancial advisor lo Perdigao
on ils US$5bn merger wilh Sadia
and sole global coordinalor and
joinl bookrunner on lhe US$2.4bn
lollow-on ollering lor lhe
combined enlily, 8rasil loods
linancial advisor lo Lloyds
8anking Croup and P8S in
relalion lo lheir.
parlicipalion in lhe assel
proleclion scheme, 8
share capilal raisings, and
lhe replacemenl ol
prelerence shares held by
HMT wilh new ordinary
shares
Joinl bookrunner on lhe
US$!3.5bn 5-lranche 2 year, 3
year, 6 year, !0 year and 30 year
bonds lor Plizer
Joinl mandaled lead arranger
lo Porsche on ils up lo
C!2.5bn loan relinancing
linancial advisor lo
Volkswagen on ils inlended
combinalion wilh Porsche
Joinl bookrunner and
sponsor on a !.05bn lirm
placing and righls issue lor
Wolseley PLC
Lead lell bookrunner lor
Anadarko on ils US$!.4bn
equily block lrade, lhe
largesl ever lor a US
energy company
Joinl bookrunner on lhe
!bn equily placing lor
Slandard Charlered plc
linancial advisor lo lhe Ad
Hoc commillee ol credilors
on lhe US$2!.0bn linancial
reslrucluring ol Charler
Communicalions, lnc.
Lxclusive linancial advisor
lo lhe 8elgian lederal
Covernmenl on lhe
C!.5bn recapilalisalion ol
Llhias and on lhe
renegolialion ol lhe lerms
ol lhe sale ol lorlis 8ank
and lorlis lnsurance
8elgium lo 8NP Paribas
linancial advisor lo
Cadbury in relalion lo
Krall's unsoliciled
US$!6.7bn share and cash
oller
Joinl linancial advisor and
broker lo Anglo American
PLC in relalion lo lhe
approach by Xslrala PLC

7

!"# P.+ Q?.R*7 . I*.70(1 2@?* 0( %.(R @A ,F* N*.4H+ S*R =4.(+.3,0@(+
f4-6?3' M9MD 1(6,.6:-)4,.
Sole linancial advisor lo
Sumilomo Trusl 8ank on ils
US$!.2bn acquisilion ol
Nikko Assel Managemenl
Joinl bookrunner lor
Mizuho linancial Croup's
JPY552bn (US$5.9bn)
ordinary share lollow-on
ollering
Joinl Clobal Coordinalor
and Joinl 8ookrunner lor
Orix Corporalion's
JPY86.9bn (US$943m)
ordinary share and ADS
lollow-on ollering
Sole lead manager,
bookrunner and
underwriler lo CPT Croup
in ils A$!.2bn one-lor-one
enlillemenl issue and
inslilulional placemenl and
A$470m relail enlillemenl
oller
Joinl bookrunner and sole
underwriler on lhe
US$2.8bn selldown ol
8ank ol America's slake in
CC8, lhe largesl HK block
lrade ever
Sole bookrunner and sole
placing agenl on Penhe's
US$720m parlial lop-up &
sell down combo placemenl
Joinl lead manager and
joinl underwriler on
Asciano's A$2.35bn equily
raising
Sole lead manager and
underwriler lo lhe lulure
lund 8oard ol Cuardians on
ils $A2.37bn sell-down ol
34 ol ils holding in
Telslra
Vodalone on lhe US$5.9bn
merger ol Vodalone
Auslralia wilh Hulchison 3C
Auslralia
Sole bookrunner and lead
manager on PM85bn
enlerprise bond ollering lor
Tianjin Porl
Amcor on ils US$2,025m
acquisilion ol Alcan
Packaging, joinl lead
manager, underwriler and
bookrunner on ils
A$!,6!!m equily raising
and lender in ils A$!,200m
debl lacilily
Sole global coordinalor,
sole sponsor and joinl
bookrunner on lhe
HK$5,955m lPO ol 88MC
Sold linancial advisor lo
Yanzhou Coal Mining on ils
recommended A$3.5bn
oller lor lelix Pesources
Joinl lead manager lor lhe
8ank ol Communicalions
on ils announced plan lo
issue up lo PM880bn ol
subordinaled bonds lrom
2009 lo 20!!

8

GF., K@ '()*+,-*(, ".(/*4+ K@T
+,-'(2'>)6(K
D3)',-.
Wg,''> :60)-63X
+,&'.-4( D3)',-.
Wg/6&' :60)-63X
+,&'.-2',-
"6,7'(.
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;'.'6(:/
9(),:)063
Capilal
Pisk Assumplion
Proprielary Trading
#63'.
U 1(6>),8
M,63K.-.
D4(04(6-)4,.
<4&'(,2',-.
F),6,:)63
+,.-)-=-)4,.
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;'-6)3 +,&'.-4(.
+,>)&)>=63.
+,.-)-=-)4,63 +,&'.-4(.
T=-=63 5=,>.
9',.)4, 5=,>.
E'>8' 5=,>.
Lquily
Debl
Pisk Managemenl
lX/Commodilies
D60)-63 T6(7'-.
Lquily
Debl
Pisk Managemenl
lX/Commodilies
D60)-63 T6(7'-.
Mergers & Acquisilions
Corporale linance
Peslrucluring
M>&).4(K
Mergers & Acquisilions
Corporale linance
Peslrucluring
M>&).4(K

9

B?0*(, 64@5U+
+"Y #'(&'. -/' F4334*),8 9()26(K D3)',- <(4=0. F+< 6,> <+< ;'0('.',- -/' _6(8'.- #=0'( #':-4(.
Pevenues by Super Seclor (2008)
M..'- T6,68'(. D4(04(6-'.
"6,7.OF),6,:)63
+,-'(2'>)6()'.
E'>8' F=,>.
<','(63 96(-,'(.
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+,.=(6,:'
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#4&'(')8,.O
M8',:)'.
F),6,:)63 #04,.4(.

lnlraslruclure
Ulililies
Privale lunds
Croup (PlC)
Peal Lslale,
Lodging and
Leisure
Lnergy
Clobal lnduslrials
Croup (ClC)
linancial
lnslilulions
Croup (llC)
Consumer
Producls & Pelail
Technology
Heallhcare
Media &
Telecommunicalions

!0

SLCTlON 2
'(,*4(+F0U =0-*?0(*

!!

J04+, #*-*+,*4 2*3@--*(7*7 '()*+,-*(, ".(/0(1 2*3450,0(1 =0-*?0(*
+-'2 <463 Y6-' 45 D4203'-)4,
Meel wilh career services counselors
and M8A2s il you have general
concerns
Delermine il inveslmenl banking is lor you
Slarl lo locus your search
Help you gel slarled
Seplember lo November
Pead lhe Wall Slreel Journal 8e able lo speak inlelligenlly aboul currenl evenls in lhe
linance induslry
Spol key deals and which banks are involved
Undersland general lrends over lime
Lvery day!
Spending an hour/day is key (bul realislically lhis will gel dillicull lo do,
lhe closer lo corporale presenlalions/ inlerviews lhe more imporlanl
lhis will be)
Allend inveslmenl banking
club evenls
Undersland whal is happening in lhe markel
Cain valuable inlormalion perlaining lo recruiling
Help assisl you in your inveslmenl banking job search
Lvery week
Co lo lhese evenls as much as you can, lhey can only help
Walch CN8C, check up on lhe markel Undersland whal is happening in lhe markel
Undersland currenl lrends
Daily
lollow an induslry
(research, magazines or reporls),
CN8C and websiles are uselul sources
ol inlo lor lollowing happenings and
lrends in cerlain induslries
Have a currenl underslanding ol a parlicular induslry and be
able lo speak inlelligenlly aboul your induslry wilh bankers
Undersland lhe markel
Help narrow down an area ol inleresl
Slarl lhis ASAP as well

Designale a period ol lime each week
Ceneral research/inlormalion
galhering aboul inveslmenl banking
Delermine il inveslmenl banking is lor you
Delermine areas ol inleresl in inveslmenl banking
ASAP
lor inlormalionals or corporale presenlalions
(i.e. anylime you have sel up a meeling or will be speaking in deplh
wilh bankers)
lorm inveslmenl banking groups Help divide up lhe research ol lhe banks
8roaden your underslanding by speaking wilh olher people
Cain exposure lo all areas
Prepare lor closed lisl inlerviews
Save you lime in lhe process
Have groups lormed ASAP
(be sure lo gel people .'()4=.3K inleresled in inveslmenl banking lhal
will pul lhe lime inlo a group)
Corporale presenlalions

Make some conlacls/eslablish some conneclions
Calher inlormalion/oblain corporale malerials handed oul
al evenls
Cel a leel lor lhe bank
Seplember lo November

Nole. The above are only suggeslions lo assisl you in your job search

!2

J04+, #*-*+,*4 2*3@--*(7*7 '()*+,-*(, ".(/0(1 2*3450,0(1 =0-*?0(*
+-'2 <463 Y6-' 45 D4203'-)4,
Corporale evenls Allend lhose designaled specilically lowards areas ol inleresl
Make some conlacls/gel your name oul lhere
Cel a leel lor lhe bank
All lall and recruiling season
Pul logelher a slrong resume, includes
reviewing wilh a career counselor,
peers and lhose in lhe induslry
Allend career services evenls and workshops
Have a resume lhal is locused on inveslmenl banking
Know how lo lailor a specilic resume in inveslmenl
banking lerms
Have a working resume ASAP, il is beller lo have a decenl
resume in case bankers or anyone needs lo see somelhing
belore your "ollicial" resume is posled
Slarl pulling lhis logelher ASAP, bul galher inlormalion lrom club and
career services evenls lo help you.
DO NOT WAlT UNTlL THL LAST MlNUTL
(The resume deadline sneaks up quickly)
The bulk ol lhis work should be done during Oclober
Pesumes compleled Have a slrong working resume lor inveslmenl banking evenls
Have one main resume which you will always use (nol greal
lo have lloaling copies ol lormer resumes going oul lo
lhe banks)
Oclober/November
Specilic bank analysis, induslry
inlormalion
8e able lo speak inlelligenlly lo bankers aboul lheir
specilic bank
8elore inlormalional inlerviews
Sel up and prepare lor inlormalionals Help make conlacls lor closed lisls
Undersland lhe bank beller
Demonslrale whal a good candidale you are
Show inleresl and do your homework
Usually lime period ol mid-lo-lale Oclober lo Winler 8reak
Some banks make lisls earlier lhan olhers
(Slarl wilh junior bankers lirsl)
Send oul resumes and cover lellers CLT ON CLOSLD LlSTS SO YOU CAN lNTLPVlLW Usually around Thanksgiving, allow sullicienl lime, il lakes longer lhan
you lhink lo come up wilh good cover lellers and galher all ol
lhe addresses
Pay allenlion lo club and career services reminders as lhe
semesler progresses
Complele inlormalionals, allend
remaining recruiling evenls
Help make conlacls lor closed lisls
Meel more people and gel your name oul lhere
8y closed lisl deadlines (usually belore Winler 8reak is lhe very lasl
chance lo visilcheck each bank's deadlines so you don'l miss oul!)

Nole. The above are only suggeslions lo assisl you in your job search

!3

SLCTlON 3
C)*4)0*D @A '()*+,-*(, ".(/0(1

!4

C)*4)0*D @A '()*+,-*(, ".(/0(1
9=(04.'
Paise capilal lhrough issuance ol securilies
equily and debl
specialized securilies and derivalives
Advise companies in M&A and reslrucluring
Provide valualion and slralegic advisory

#7)33 #'-
Molivaled
Team player
Quanlilalive
Personable
llexible
Arliculale

Aggressive
Deal orienled
Willing lo lake inilialive
Handle slress well
Prolessionalism
Pesponsible
94.)-)&'.OY(6*?6:7.
94.)-)&'. Y(6*?6:7.
Lxposure/nelwork
Magnilude/noloriely ol deals
Pesponsibilily
Skill and knowledge base developmenl
Compensalion

Long hours
Work-lile balance
Slress environmenl
lnlensily
locus on delail

!5

Q4@753, .(7 #*3,@4 =*.-+

9(4>=:-. #':-4(.

ZDT<
F#_F TUM
ZDT<
F#_F TUM

E'63-/:6(' +,5(6.-(=:-=(' 94*'(
<+< ;'63 Z.-6-' F+<
D4,.=2'( U
;'-6)3
Z,'(8K 1T1
E'63-/:6(' +,5(6.-(=:-=(' 94*'(
<+< ;'63 Z.-6-' F+<
D4,.=2'( U
;'-6)3
Z,'(8K 1T1

!6

Q4@753,V#*3,@4 '(,*4.3,0@(

9(4>=:- #-(',8-/. #':-4( #-(',8-/.
Producl Lxperlise
Clobal Producl Liaison
Lxeculion Lxperience
Specialized Pesources

Seclor Knowledge
Clienl Managemenl Skills
Clobal Coverage
Specialized Pesources

While lhere is an emphasis on execulion ol lransaclions in lhe producl groups and an emphasis on
markeling and clienl managemenl in lhe seclor groups, lhere is a high degree ol overlap
Al lhe end ol lhe day, all inveslmenl bankers work lor lhe clienl
Specializalion maximizes elliciency and service lor clienls

!7

=F* &++@30.,*V&++@30.,* K04*3,@4 2@?*

;'.04,.)?)3)-)'. h=63)-)'.
Technical Analysis
Team Managemenl
Logislics/Processing
Whalever il lakes

Leadership
Teamwork
Communicalion
Dedicalion
Prolessionalism

Lillle lhings can mean a lol and poor execulion can mask good skills
allenlion lo delail
lormalling
prolessionalism
limeliness
Communicalion is lhe key lo good leamwork and elliciency
ask queslions il you don'l know
undersland whal expeclalions are (liming/deliverable)
lel people know your limilalions
Treal your Associale/AD years as an inveslmenl (more experiences = more personal capilal)
seek oul work
lry lo vary lhe people and lypes ol projecls you work wilh or on
gel included in as many clienl calls or meelings as possible

!8

=F* &++@30.,*V&++@30.,* K04*3,@4 0( . =*.-
1/' M..4:)6-' ). 6, ),-'8(63 06(- 45 -/' >'63 -'62
You are an inlegral member ol lhe leam
leam is organized by skills, responsibililies and experience
you need lo work closely wilh lhe Analysl and lhe person above you
you will be in a posilion where you represenl lhe bank
you have supporl, use il wisely lo maximize your own leverage

You will have lo develop a managemenl slyle
supporl slall can help you a lol or a lillle, so lreal lhem wilh respecl
you will need lo lrain Analysls, summer inlerns and new Associales
you will need lo build relalionships and undersland molivalions
you need lo lake advanlage ol lhe bigger "Team"

Working wilh Junior Pesources
learn lo do whal you ask lhem lo do
lake lime lo leach lhem

Undersland who lhe conlacl people are in dillerenl areas ol lhe bank
use conlacls in dillerenl groups amongsl your class
you will be lhe decision maker in cerlain circumslances
help each olher as a leam ol Associales/ADs in your group ("lresh Lyes")

!9

"*0(1 .( &++@30.,*E& J*D =0U+

Whal makes a good Associale?
prolessionalism (inleraclion wilh clienls and co-workers)
limeliness (know deadlines and meel lhem, lime managemenl, parallel processing)
lechnical skills (accounling, linance and spreadsheel skills)
accuracy (every possible research source examined, ,4 lypos, carelul numbers work)
learning lo eyeball lhe oulpul every lime you prinl il oul, and lo spol unreasonable numbers al a glance
judgmenl (whal makes sense lor lhe clienl and lor lhe lirm)
good allilude and a slrong work elhic
lhink like a projecl manager (anlicipale work lhal needs lo be accomplished and be proaclive)

Queslions.
do nol be alraid lo ask well lhoughl-oul queslions
lor general queslions ask peers, lor specilic projecl orienled queslions, ask lhe immediale supervisors and
your leam
il no one is around lo ask, use your besl judgmenl and loolnole your assumplion

20

SLCTlON 4
'(,*4)0*D Q4*U.4.,0@(

2!

K*)*?@U0(1 N@54 #,@4RW S*R Q0*3*+ @A &7)03*

Pick relevanl lime lrames
Have dillerenl lenglh versions ol your slory, bul be sure lo include lhe mosl imporlanl poinls or lhemes
in each version
Your slory should llow wilh your resume, bul you should nol be re-hashing your resume
Don'l read oll ol your resume or pause lo reler lo il when inlerviewing
Keep your slory consislenl
Your slory should always answer "why banking?"
ll you menlion il or lisl il on your resume, il's lair game
Praclice, praclice, praclice!

22

K*)*?@U0(1 N@54 #,@4RW S*R Q0*3*+ @A &7)03*
#42' 7'K J='.-)4,. -/6- K4= 26K ',:4=,-'(@ */):/ -(6,.36-' ),-4 ggg i-'33 2' K4=( .-4(Kjk
So, lell me aboul yoursell.
l haven'l had lime lo read your resume, lill me in.
Tell me why banking?
Walk me lhrough your resume.
Whal did you do belore business school?
Whal do you wanl me lo know aboul you and your background?
You are a career-swilcher. Whal makes you wanl lo do banking?
You have never done banking belore. Why now?
You have done XYZ belore, whal makes you lhink you can do banking?

23

'(,*4)0*D X5*+,0@(+E"01 Q03,54* %5+,YQ4.3,03* ',*-+

Why do you wanl lo do inveslmenl banking?
challenge, visibilily, opporlunily lo work wilh lhe besl
Whal skills does lnveslmenl 8anking require? Whal in your background shows you can do il?
inlelligence, inilialive, communicalion skills, allenlion lo delail, leamwork
Whal do inveslmenl banks do?
inveslmenl banks acl as linancial advisors on a range ol issues including M&A, reslrucluring and
capilal raising aclivilies. Once a course ol aclion is decided lhe bank lhen execules lhe slralegy by
underwriling securilies, elc
ln which induslry/producl do you wish lo locus?

24

'(,*4)0*D X5*+,0@(+E6*(*4.? =F*@4R

Whal is working capilal?
Deline 8ela, whal are lhe limilalions ol 8ela?
Show how lo lever and unlever 8ela
Whal is CAPM, whal are lhe assumplions ol CAPM?
Deline reward lo risk ralio
Wrile lormula lor WACC
Deline Sharpe ralio
Draw lhe yield curve
Deline duralion
Show how convexily impacls a bond's price lo yield relalionship
Lxplain lhe lheory behind 8lack-Scholes
Discuss dillerenl accounling lrealmenls lor dillerenl securilies (e.g. available-lor-sale)
Whal is a carve-oul, spin-oll and splil-oll?
Whal is accrelion and dilulion? Cive an example
Co over a cash llow slalemenl
Whal are some liquidily/leverage ralios?
How do you go lrom Nl lo cash llow? lCl and lClL?
How do you value a company?
ll you know a company's P/L, whal is ils POL?
Where do delerred lax liabililies come lrom? Cive an example

25

#.-U?* '(,*4)0*D X5*+,0@(+E'()*+,-*(, ".(/0(1 J0,
Whal lhree adjeclives would your peers, superiors and subordinales use lo describe you?
Whal is lhe grealesl risk we lace in hiring you?
Whal are your grealesl leam and personal achievemenls?
Describe your leadership slyle
Describe a leam silualion you were in where lhings did nol work oul
Why did you choose your M8A program?
Whal olher business schools did you apply lo and why?
Do your grades rellecl your abililies?
Why do you wanl lo be an inveslmenl banker?
Why do you wanl lo work lor U8S?
Whal dillerenliales you lrom all lhe olher highly qualilied candidales we are looking al loday?
Whal olher lypes ol jobs are you inlerviewing lor and why?
Whal olher inveslmenl banks are you inlerviewing wilh? ll you gol ollers lrom all ol lhem, where would
you go?
Walk me lhrough your resume explaining why you made lhe choices you did in lhe pasl
Tell us aboul lhree ol your slrenglhs and lhree ol your weaknesses
Whal eleclives have you laken oulside ol linance and accounling?
Whal is your lavorile class and why?
Are you well-rounded?
How do you know you will be able lo handle lhe hours required ol an inveslmenl banker?
Describe whal you learned in class lhis morning
Do you consider yoursell a risk-laker?
How well do you work under pressure?

26

#.-U?* '(,*4)0*D X5*+,0@(+EC,F*4 6*(*4.? X5*+,0@(+

Whal lype ol a company would be a good candidale lor an L8O?
Name lwo common ways companies can manage lheir earnings?
How does Nel lncome llow inlo lhe 8alance Sheel, lncome Slalemenl and Slalemenl ol Cash llows?
Describe how lo value a privalely held company
Describe lhree valualion melhods
Discounled Cash llow
Comparable Company or Mulliple Valualion
Comparable Transaclion Valualion
Whal is a slock lhal you lollow?
Whal is lhe dillerence belween commercial and inveslmenl banking?
Do you lhink lhe markel is ellicienl?
How would you describe lhe cosl ol capilal lo a non-linance person?
Whal is CAPM?
Deline 8ela lor a layman
Whal kind ol linancial modeling have you done in lhe pasl?
Suppose your clienl had signilicanl excess cash on lhe balance sheel. How would you recommend ils
use?
Have you ever worked wilh a dillicull leam?
ll l had $! million loday, how should l invesl?
Whal queslion would you like lo ask our CLO?

27

#.-U?* '(,*4)0*D X5*+,0@(+EC,F*4 6*(*4.? X5*+,0@(+

Where did lhe Dow, S&P and NASDAQ close yeslerday?
Whal is lhe led lunds rale?
Whal is lhe discounl rale?
How ollen does lhe led meel?
Whal is lhe !0-year Treasury bond yield?
Whal does lhe yield curve look like?
Whal is lhe $/Yen exchange rale?
Where do you see lhe markels in a year?
Whal did lhe markels do lasl week and why?
Whal have lhe markels been doing lhis week and why?
Whal are lhree major news ilems relaled lo lhe induslry in which you are inleresled? Whal is lhe mosl
inleresling arlicle you read in lhe WSJ ol lale?
Whal was in lhe Journal loday?
Whal business publicalions do you read? Whal inleresling arlicles have you recenlly read in lhose
publicalions?
Whal aclivilies have you parlicipaled in college and business school?
Whal mulliples are used in lhe induslry in which you are inleresled?
Tell me aboul a recenl lPO you lollowed
Describe a recenl M&A lransaclion you read aboulwhal were lhe reasons lhey merged?

28

'(,*4)0*D #,4.,*1R

1/),8. -4 2',-)4, >=(),8 -/' ),-'(&)'*k
Menlion lhe names ol olher bankers wilh whom you have mel and done inlormalionals
Names ol all olher banks wilh which you are in linal rounds or have gollen ollers
Tell your slory ol why you wanl lo do inveslmenl banking
Drop names ol prominenl deals lhe bank has done
Show lhal you have done your homework and know lhe bank's slrenglhs
#7)33.Oh=63)-)'. -4 >'24,.-(6-' K4= /6&'k
Academic excellence
Pelevanl business experience
Demonslraled leadership experience
Demonslraled work elhic
lnlerviewing skills
Compuler compelency
Analylical skills
Problem solving/modeling
Perceived clienl relalionship skills
Know why you wanl lo be a banker (slory)
Know why you wanl lo be al lhal bank

29

S**U N@54+*?A '(A@4-*7 K540(1 ,F* Q4@3*++
"3442?'(8 1'(2),63 D/'6- #/''-

l''0 =0 *)-/ Y'63. U l'K D63',>6(.

T6(7'- f'*.
!"#$ &'()*+,(- .$/,0 1234

!"#$ &'()*+,(- .$/,0 1234
MA M&A deals dalabase TOP Today's lop business/linance news
MA LLAC M&A league lables TOP STK Top slock markel news
NlM 8ond new issue monilor TOP DLAL Clobal deals
Click on LLAC lor league lables 88Nl News by induslry
LCDP Lquily new issue monilor Nl MNA M&A news
Click on LLAC lor league lables Nl CNl New corporale bond issue news
lOMC lederal reserve announcemenls/news Nl lNl lPO news

30

S**U N@54+*?A '(A@4-*7 K540(1 ,F* Q4@3*++

D4206,K M,63K.).

%-/'(. W167' 6 "('67mX
!"#$ 1!+)5$64178'+*"412,4 9(: 6'( &'()*+,(- .$/,0 !"#$ &'()*+,(- .$/,0 1234
DLS Company descriplion

DlNL Peslauranl inlormalion
CN Headlines 8SP Main sporls news
CACS Corporale aclion calendar POSH Classilieds
HP Daily slock prices 8SPL 8aseball News
CP Price Craph
MCMT Managemenl and board

3!

SLCTlON 5
!"# =*3F(03.? 2*A*4*(3* 6507*

32

Z*3*++.4R =@@?+E'(A@4-.,0@( 0+ [)*4R,F0(1
T4.- -/),8. /6&' ?'', >4,'n6.7 4-/'( ?6,7'(. ?'54(' (':('6-),8 -/' */''3

9=?3): F)3),8. W!#X
M>>)-)4,63 D4206,K
+,54(26-)4, 6,> Z.-)26-'. %,L_),' Y6-6?6.'. %-/'( Y6-6?6.'. %-/'(.
Annual Peporl lnveslexl/Mullexl (research reporls) lLX Dun & 8radslreel New ArliclesLibrary
(Lexis/Nexis)
!0-K (20-lloreign lilers) S&P Tear Sheel laclSel One Source The Wall Slreel Journal, The
New York Times, The
linancial Times, 8usiness
Week, lorbes, elc.
!0-Q (6-Kloreign lilers) Value Line 8loomberg OneSource Privale Managemenl liles
Proxy l/8/L/S Dalaslream Speclrum Colleagues
!3-D/!4D-! lirsl Call SDC Technimelrics
Pegislralion
Slalemenl/Prospeclus (S-!, l-!)
Zack's Speclrum Securilies Dala
8-K Nelson's Lquidesk
Moody's Company Peporls 8ondesk
U8S research Amadala
8ondware
M&A Desk
Peulers

33

B@4U@4.,* \.?5.,0@(E=F* B@4* @A B@4U@4.,* J0(.(3*
%&'(&)'*
As schemalically expressed, inveslmenl banks lypically employ al leasl lwo ol lhe melhodologies below lo arrive al a
(6,8' ol value lor a company. This manual will oulline lhese lechniques in grealer delail

#6203' o63=6-)4, M,63K-):.
Analysis
Comparable Company
Analysis
Precedenl Transaclions
Analysis
Z.-)26-'> D4206,K
o63=' ;6,8'
8reak-Up Analysis
Leveraged Acquisilion
Analysis
Analysis
Comparable Company
Analysis
Analysis
Z.-)26-'> D4206,K
o63=' ;6,8'
8reak-Up Analysis
Analysis
Analysis
Comparable Company
Analysis
Analysis
Z.-)26-'> D4206,K
o63=' ;6,8'
8reak-Up Analysis
Analysis
Analysis
Comparable Company
Analysis
Analysis
Z.-)26-'> D4206,K
o63=' ;6,8'
8reak-Up Analysis
Analysis

34

\.?5.,0@( %*,F@7@?@10*+ C)*4)0*D

T'-/4> Y'.:()0-)4, 9(4. D4,. D422',-.
D4206(6?3' D4206,)'.
M,63K.).
Compare lhe lrading and
operaling perlormance ol lhe
Company lo lhal ol ils peers
Specilically, delermine how
lhe markel has capilalized lhe
earnings and cash llows ol
similar companies. Also,
analyze olher paramelers
such as book value, leverage
and margins. Compare lhese
ralios lo lhe Company's
perlormance and/or use lhem
lo impule a markel value lor
lhe Company
Markel elliciency ensures lhal
lrading values rellecl induslry
lrends, business risk, markel
growlh, elc.
Values oblained are a reliable
indicalor ol lhe value ol lhe
Company lor a
minorily inveslmenl
Uselul lechnique lor assessing
vulnerabilily, when
lundamenlal vs markel value
is large, vulnerabilily is high
Always comparing apples lo
oranges. Truly comparable
companies are rare lor which
dillerences are hard lo
accounl
Thinly lraded, small
capilalizalion and poorly
lollowed slocks may nol lully
rellecl lundamenlal value
Many people leel lhal lhe
slock markel is "emolional"
and lhal somelimes il
llucluales irralionally
The unallecled lrading level
does nol include a conlrol
premium or synergy value
associaled wilh
slralegic acquisilions
Lxplaining value gaps
belween lhe Company and ils
comparables can involve
exlensive hand-waving
The markel is nol always an
ellicienl one, small
capilalizalion and lhinly
lraded slocks may nol lrade
aclively and lhe share price
lherelore may nol rellecl
linancial value ll is imporlanl
lo selecl lruly comparable
companies lo rellecl
accurale comparabilily

9(':'>',- 1(6,.6:-)4,.
M,63K.).
Delermine lhe value ollered
in pasl acquisilions ol
similar companies
Specilically, delermine lhe
pricing ol pasl deals as
compared lo lhe largel's
linancial perlormance and
unallecled markel value
Pecenl comparable
lransaclions can rellecl supply
and demand lor salable assels
Pealislic in lhe sense lhal pasl
lransaclions were successlully
compleled al cerlain
premiums. lndicales a range
ol plausibilily lor
premiums ollered
Trends such as consolidaling
acquisilions, loreign
purchasers or linancial
purchases may become clear
Pasl lransaclions are rarely
direclly comparablealways
comparing apples lo oranges
Public dala on pasl
lransaclions can be
nonexislenl or misleading
Values oblained ollen vary
over a wide range and lhus
are ol limiled uselulness
lnlerprelalion ol lhe dala
requires lamiliarily wilh lhe
induslry and lhe
properlies involved
Analysis is lypically based on
hislorical dala, nol lorward
looking dala
ll is imporlanl lo undersland
lerms and logislics ol
lransaclions (e.g., unsoliciled
lransaclions lend lo occur al
higher mulliples)

35

\.?5.,0@( %*,F@7@?@10*+ C)*4)0*D

T'-/4> Y'.:()0-)4, 9(4. D4,. D422',-.
Y).:4=,-'> D6./ F34*
M,63K.).
Discounl unleveraged, aller-
lax projecled lree cash llow
al Company's weighled
average cosl ol capilal lo
oblain an economic presenl
value ol assels. Sublracl
oulslanding debl lrom lhe
presenl value ol assels lo gel
presenl value ol equily
Several discounl rales and
operaling scenarios are used
lo eslimale lhe uncerlainly ol
lhe values oblained
Theorelically lhe mosl sound
melhod il one is very
conlidenl in lhe projeclions
and assumplions
Nol inlluenced by
lemperamenlal markel
condilions or
non-economic laclors

Presenl values oblained are
sensilive lo assumplions
and melhodology
Values oblained can vary over
a wide range and lhus be ol
limiled uselulness
lnvolves lorecasling lulure
perlormance, which is
inherenlly subjeclive
DCl value should be adjusled
lor non-operaling ilems such
as environmenlal liabililies
and lhe value ol excess assels
Need realislic live- lo len-year
projecled linancial slalemenls
Sales growlh rale, margins,
lerminal mulliples and discounl
rales are key lo value

_'&'(68'> M:J=).)-)4,
W_"%X 4( ;':60)-63)C6-)4,
M,63K.).
Model lhe Company's
linancial perlormance under
an inilially highly leveraged
capilal slruclure
Assume lransaclion occurs in
loday's borrowing
environmenl and delermine
maximum inilial debl lhe
Company can realislically repay
in a limely manner
Several operaling and
business environmenl
scenarios are used lo eslimale
lhe uncerlainly in
values oblained
Will help delermine realizable
linancial bidder value lhal any
slralegic bidder will have
lo exceed
L8O value is realislic, in lhe
sense lhal il can be achieved
by a well-delined process
Slandalone L8O will
undereslimale slralegic sale
value by ignoring synergies
wilh acquirer. linancial buyers
lend lo pay lower mulliples as
lhey are in lor lhe shorler
lerm lhan are slralegic buyers.
However, markels change and
linancial buyers can be
compelilive wilh slralegic
buyers
Value oblained is sensilive lo
projeclions and aggressiveness
ol operaling assumplions (bul
less so lhan DCl melhodology)
L8O value only meaninglul lor
companies which could
operale under high
linancial leverage
Need realislic len-year
projecled linancial slalemenls
Lquily can be closely held
(privale L8O) or publicly
lraded (recap/public L8O)
Sales growlh rale, margins,
exil mulliples and discounl
rales are key lo value

36

\.?5.,0@( %*,F@7@?@10*+ C)*4)0*D

T'-/4> Y'.:()0-)4, 9(4. D4,. D422',-.
"('67L!0 M,63K.). Valualion ol lhe Company is
based on valualion ol
individual segmenls using
mulliples lrom comparable
companies and precedenl
lransaclions analysis and DCl
and L8O analyses
Aller valuing lhe individual
segmenls, one musl add and
sublracl non-operaling values
and liabililies such as cash,
debl, environmenlal liabililies,
pension surplus/(delicil), elc.
lo arrive al an
Lnlerprise Value
This melhodology provides a
perspeclive on whal lhe
mulli-segmenl Company
could be worlh il lhe markel
value ol lhe slock accuralely
rellecled lhe break-up value
Uselul lechnique lor largeling
undervalued companies lhal
may receive a "conglomerale
discounl"
Slighl varialions in mulliples
can vary lhe break-up value
making an undervalued
properly lully-valued or
overvalued or vice versa
Applicalion ol mulliples
requires lamiliarily wilh
induslry and
businesses involved

37

[(,*4U40+* \.?5* )+ []50,R \.?5*

Y'5),)-)4,.
ZJ=)-K o63='
On a lrading basis, Lquily Value or Markel Value is delined as.
Lalesl Shares Oulslanding x Currenl Markel Price
The lalesl shares oulslanding should be laken lrom lhe cover page ol lhe lalesl lorm !0-K or lorm !0-Q (20-l, 6-K,
Annual Peporl or lnlerim Slalemenl lor non-US companies), whichever is more recenl
Y% f%1 !#Z #EM;Z# %!1#1MfY+f< F;%T "_%%T"Z;<. 1EZ#Z F+<!;Z# M;Z %F1Zf S;%f<
be sure lo check whelher lhere has been any kind ol slock splil or olher change in lhe number ol shares (e.g.,
secondary ollering, slock dividend, acquisilion lor slock, elc.) since lhe lalesl liling
On a lransaclion basis, Lquily Value is delined as.
Lalesl Shares Oulslanding x Oller Price
+ Shares lor Oplions
!
, Warranls
!
, SAPs
2
,

elc. x (Oller Price Average Lxercise Price)
+ Shares lor Converlible Debl x Oller Price
3

+ Shares lor Converlible Prelerred Slock x Oller Price
3

= Lquily Value
Z,-'(0().' o63='
I

ln addilion lo Lquily Value, Lnlerprise Value includes all olher sources ol capilal ulilized by lhe company. Lnlerprise
Value is used in ralios lhal measure lhe relurn lo all sources ol capilal (e.g., Lnlerprise Value/L8lTDA, Lnlerprise
Value/L8lT, elc.)

!
Only il oller price exceeds average exercise price
2
SAP = Slock Apprecialion Pighls
3
Only il oller price exceeds conversion price
4
Also relerred lo as lirm Value, Adjusled Markel Capilalizalion and Aggregale Value

38

[(,*4U40+* \.?5* )+ []50,R \.?5*
Lnlerprise Value is delined as.
Lquily Value
+ Shorl-Term Debl and Long-Term Debl
+ Capilal Lease Obligalions
+ Prelerred Slock al Liquidalion Value
5

+ Oul-ol-lhe-Money Converlible Debl
+ Oul-ol-lhe-Money Converlible Prelerred Slock
+ Minorily lnleresl (al markel value, il publicly lraded)
Cash and Cash Lquivalenls
6

= Lnlerprise Value
f'- +,:42' -4 D4224,
Nel lncome lo Common represenls lhe earnings available lo common shareholders aller inleresl expense, laxes and
prelerred dividends. Nel lncome should always be laken belore exlraordinary ilems and adjusled lor non-recurring
ilems on an aller-lax basis (See discussion on page !3)
Z"+1
L8lT ("Larnings 8elore lnleresl [inleresl expense less inleresl income} and Taxes") represenls lhe earnings slream
(operaling income) available lo all inveslors, including debl holders and prelerred shareholders. ln a lypical income
slalemenl, il is delined as.
Cross prolil
SC&A
Deprecialion and Amorlizalion
7

Any olher recurring operaling expenses/(income)
8

= L8lT

5
All prelerred slock which is nol included in Lquily Value
6
Used as a proxy lor excess cash, which is cash over and above lhal needed lo run lhe business on a daily basis
7
Ollen included in parl or in whole in lhe Cosl ol Coods Sold. When calculaling L8lT using lhis melhod, use Deprecialion and Amorlizalion lrom lhe lncome
Slalemenl (il available) since a porlion ol lhe Deprecialion & Amorlizalion may already be included in COCS. Do nol use Deprecialion & Amorlizalion lrom lhe
Slalemenl ol Cash llows. However, when calculaling L8lTDA (see nexl page), you should use Deprecialion & Amorlizalion lrom lhe Cash llow Slalemenl and add
il back lo L8lT
8
Nole lhal olher income/expense below lhe operaling income line should be included assuming lhal il is bolh recurring and non-linancial. Check lhe noles lo lhe
linancial slalemenls!

39

[(,*4U40+* \.?5* )+ []50,R \.?5*
Z"+1YM
L8lTDA ("Larnings 8elore lnleresl, Taxes, Deprecialion and Amorlizalion") represenls lhe pre-lax operaling cash llow
available lo all inveslors. Delined as.
L8lT (as delined above)
+ Deprecialion and Amorlizalion (laken lrom Slalemenl ol Cash llows)
= L8lTDA
ZJ=)-K o63=' &. Z,-'(0().' o63=' T=3-)03'.
ZJ=)-K o63=' W4( T6(7'- o63='X T=3-)03'.
Cerlain llows or values apply lo equily holders onlylhese include nel income and book value ol equily. Since each
ol lhese values is aller debl and prelerred linancing is laken inlo accounl, mulliples ol lhese llows or values should be
based on lhe value ol lhe equily only
Therelore, lhe only relevanl ralios are.
Lquily Value lo. Nel lncome lo Common Shareholders, 8ook Value and Cash llow (delined on page 2!)
Z,-'(0().' o63=' WiZojX T=3-)03'.
Olher llows apply lo all capilal providers (i.e., debl and equily), and lherelore Lnlerprise Value should be used
Pelevanl ralios are.
Lnlerprise Value lo. Sales, L8lTDA and L8lT
Also use Lnlerprise Value as lhe numeralor lor induslry specilic measures (e.g., LV/mineral produclion, LV/relail sales
space, LV/P&D)

40

=4*.,-*(, @A !(5+5.? .(7 Z@(Y2*35440(1 ',*-+
140LY4*, D4206(6-)&' ZA6203' Y'5),)-)4,
"4--42L!0 D4206(6-)&' ZA6203'
Noles.
! $600 * (!-lax rale) = $600 *(0.6) = $360
2 Nel lncome lo Common Shareholders (aller Prelerred Dividends, which, unlike inleresl
expense, are nol lax-deduclible like inleresl expense)
W!#a22X ;'04(-'> M>\=.-'>
Pevenues !,000 !,000
COCS (500) (500)
SC&A (300) (300)
+ Cain on Sale ol Lquipmenl 600 0
L8lTDA 800 200
; <96=+( >? @
Deprecialion & Amorlizalion (!00) (!00)
L8lT 700 !00
Margin 70 !0
lnleresl Lxpense (50) (50)
650 50
Taxes 40 (260) (20)
Nel lncome 390 30
Prelerred Dividends (5) (5)
f'- +,:42' 14 D4224, #/6('/43>'(. GcH PH
Weighled Average Shares Oulslanding (mm) 25 25
L.P.S. !5.40 !.00
W!#a22X Z"+1YM Z"+1 f'- +,:42'
Peporled Pesulls 800 700 390
Pre-Tax Cain on Sale (600) (600)
Posl-Tax Cain on Sale ( 40) (360)
!

200 !00 30
Prelerred Dividends (5)
Nel lncome lo Common Shareholders 25
2

Weighled Average Shares Oulslanding (mm) 25
L.P.S. !.00

Unusual and non-recurring ilems ollen are included in a company's L8lTDA, L8lT
and nel income and musl be removed (adjusled lor) in order lo assess "normal"
operaling perlormance. These ilems include gains on sale ol assels, reslrucluring
charges, losses on planl closings, wriledown ol assels, legal selllemenls, elc
T'-/4>4348K
These non-recurring ilems are somelimes delailed in lhe linancial slalemenls, bul
can always be lound in noles lo lhe linancial slalemenls and in lhe
"Managemenl's Discussion and Analysis" seclion. ll is imporlanl lhal lhese
seclions ol lhe annual reporl are carelully read in order lo lind lhese adjuslmenls
Ollen, lhese ilems are lound in lhe noles lo lhe linancial slalemenls, under
"olher income/expense" and are only shown on a pre-lax basis. ll lhe aller-lax
basis is nol shown, one musl calculale lhe aller-lax ellecl on nel income
assuming lhe marginal lax rale, which varies by counlry
You should lirsl check lhe lax loolnole in lhe Annual Peporl or !0-K (20-l) lor an
elleclive lax rale, making sure lo exclude non-recurring lax ellecls like very large
NOLs. lor US companies one can use 40, which includes lhe lederal lax rale ol
35 and a slale and local lax rale ol aboul 5. The marginal 5'>'(63
:4(04(6-' -6A (6-'. al December 3!, 2008 as delined in Lrnsl & Young's
"Worldwide Corporale Tax Cuide and Direclory" were.
Nole lhal marginal corporale lax rales should ideally include lederal, slale and
local laxes, allhough mulli-slale and mulli-nalional companies complicale lhis
issue. Consull local ollices lor lheir inpul on whal lax rale lo use. Allhough lhe
lax rales above are as ol December 3!, 2008, some have changed and you
should double-check lhem
` ` `
8razil 33.0 Japan 37.5 Swilzerland 20.0
Colombia 35.0 Mexico 34.0 UK 33.0
lrance 33.3 Nelherlands 35.0 USA 35.0
Cermany 45.0 Soulh Alrica 35.0
Hong Kong !6.5 Sweden 28.0

4!

#,@3/ #U?0,+

Y'5),)-)4,
Corporalions ollen declare slock splils in order lo reduce lhe lrading price ol lheir slock and enhance liquidily. While
mosl splils are 2-lor-! (i.e., a shareholder receives one addilional share lor each share he already holds), corporalions
also splil lheir slock 3-lor-!, 3-lor-2, elc. ln addilion, a corporalion may ellecl a reverse slock splil in order lo
consolidale ils shareholder base (i.e., a shareholder receives one share lor every lhree shares he already holds). When
a slock splils, lhe slock price will adjusl lo rellecl a proporlional decrease or increase in price depending upon lhe
direclion ol lhe splil (i.e., il a $60 slock splils 3-lor-2, lhe posl-splil share price will be $40 per share or il a $40 slock
reverse splils !-lor-2, lhe posl-splil share price will be $80 per share). ll should be noled lhal lhe markel value ol all
lrading shares will remain lhe same. lurlhermore, high growlh, cash conslrained companies will occasionally declare
slock dividends, which also increase lhe number ol shares oulslanding. 8e sure lo nole lhe elleclive dale ol lhese
lransaclions, as lhe slock price will nol be adjusled unlil lhal lime
ll is imperalive lo walch carelully lor slock splils. Since lhere is a lime lag lor when public documenls are released, lhe
slock price lhal appears on lLX or 8loomberg may rellecl a splil lhal occurred since lhe public documenls were issued.
This would resull in incorrecl calculalions ol LPS, Lquily Value and Lnlerprise Value and hence improper
valualion mulliples
T'-/4>4348K
One should always check lhe company's headlines and earnings announcemenls on lLX and 8loomberg lor slock
splils lhal have occurred since lhe dale ol lhe lalesl public documenl. You can also check lor slock splils on
8loomberg by lyping lhe company's licker symbol, pressing lhe Lquily key, lyping "DVD" and lhen pressing lhe
green Co key. The row wilh while colored lexl will indicale lhe relevanl dales relaling lo lhe slock splils

42

B.?35?.,0(1 I.+, =D*?)* %@(,F+ LÎ=%_ @4 ^=4.0?0(1_V_==%_O

D4,:'0-
Markels are dynamic and absorb inlormalion inslanlaneously, and lherelore income slalemenl dala musl rellecl lhe
lasl lwelve monlhs ("LTM") lor which publicly reporled inlormalion is available. Nole lhal lypically only US companies
and loreign issuers wilh American Deposilory Peceipls ("ADPs") reporl quarlerly
D63:=36-)4,
LTM relales lo lhe lncome Slalemenl and Slalemenl ol Cash llows which represenl a "llow" over a period ol lime, as
opposed lo lhe 8alance Sheel which represenls a "slock" (or "snapshol") al a poinl in lime. Thus, LTM ligures are
calculaled as. !2-monlh period + mosl recenl periodcorresponding prior year period. lor example, lo calculale lhe
lrailing lwelve monlhs' sales lor XYZ Corporalion (wilh a !2/3!/08 year end) lor lhe period ending 6/30/09 lake lhe
2008 annual sales, add lhe sales lor lhe six monlhs ended 6/30/09 and sublracl lhe sales lor lhe six monlhs ended
6/30/08. Schemalically

Lasl liscal Year ("LlY") h^ 6,> hP PQQc hG 6,> hI PQQc
(Sublracl)
Lasl Quarlers ("LQs") Q! and Q2 2009
(Add)
Lasl Twelve Monlhs hG 6,> hI PQQc Q! and Q2 2009
When calculaling LTM L.P.S., use lhe above melhodology only and do nol divide LTM Nel lncome by a calculalion ol
LTM weighled average shares oulslanding

43

B@-U@5(7 &((5.? 64@D,F 2.,* L^B&62_O

Y'5),)-)4,
A value lhal simplilies lhe observed dala inlo one number lhal will, il is hoped, describe il lo olhers in an accurale
and meaninglul way
T'-/4>4348K
The lormula used lo eslimale lhe conslanl annual percenlage rale is.
((Xn/X!)(!/(n-!))-!) x !00
where. X! ... Xn = observalions lor n values
lor example, il XYZ Corporalion has produced earnings per share as lollows

p'6( 9'()4> M:-=63 ZB9B#B W!#aX
2004 ! 2.00
2005 2 2.70
2006 3 3.!3
2007 4 3.7!
2008 5 4.88
We can calculale lhe Company's CACP in ol growlh/year as lollows.
(($4.88/$2.00)
(!/4)
-!) x !00 = 25
Thal is, each year we eslimale, on average, lhal XYZ's L.P.S. grows by 25 lrom lhal ol lhe previous year
When growlh rales are used in exhibils and memos, lhey should be clearly idenlilied as "n-year compound annual
growlh rales"

44

B@-U.4.>?* B@-U.(0*+

Y'5),)-)4,
The comparable companies analysis ("Comps") lypically consisls ol a comparison ol several companies' operaling and
lrading slalislics. The exacl ralios and range analyzed will vary lrom projecl lo projecl
Comps are good lor valuing companies in virlually any given induslry. Almosl all ol our valualion presenlalions
include comparablesusually one sel lor each sizable segmenl ol lhe valualion largel. Comps serve as lhe primary
measure ol value when analyzing a public ollering
Use ol comps will give you a TPADlNC VALUL. You will need lo add a "conlrol premium" lo oblain an ACQUlSlTlON
VALUL
D4,:'0-
A comparable peer group should embody lhe same business and linancial allribules such lhal lheir public lrading
values represenl a reasonable proxy lor lhose ol lhe company under consideralion
Pelevanl allribules include.
induslry group
business mix (producls, markels served, dislribulion channels, elc.) and respeclive weighl ol each producl
geographic localion
operalions (produclion processes, crilical inpuls/componenls)
size (revenues, assels, markel capilalizalion)
linancial paramelers (leverage, hislorical and lulure growlh rales, margins, dividend yield)

45

B@-U.4.>?* B@-U.(0*+

T'-/4>4348K
The lirsl slep in pulling logelher a comparables exhibil is lo idenlily companies lhal are considered comparable. An
SlC code run lrom lhe library and on laclSel are lhe main sources lor a search. Pesearch reporls, lhe proxy slalemenl,
lhe !0-K and 8loomberg may also lisl comparable companies. You wanl lo idenlily "pure plays" or lhose companies
lhal closely resemble lhe company (or segmenl ol a company) lhal you are evalualing
Once you have lhe oulpul lrom lhe SlC code run and laclSel search, read Value Line, S&P Tear Sheel descriplions
and/or Moody's Company Peporls lo pinpoinl lhose companies lhal are mosl similar. These publicalions also have
induslry groupings lhal may be helplul in idenlilying comparables. linally, run your lisl ol comparables by anolher
member ol your leam or induslry analysl lor a linal check
The median values lor lhe comparables chosen are always included in lhe exhibil. Mean values musl be used carelully
because skewed or oullying dala can resull in misleading values. Thus, oulliners are ollen excluded lrom lhe mean
calculalion
ll is crilical lo be allenlive lo how parlicular induslries lrade. Some lrade based on L8lTDA mulliples (i.e., mosl
manulacluring companies), some lrade on Price/Larnings or Price/8ook mulliples (i.e., linancial inslilulions) and some
lrade on induslry specilic slalislics (i.e., cellular companies lrade on a "per pop" basis and paging companies lrade on
a "per subscriber" basis)
Using lhe appropriale mulliple lor lhe induslry and even lhe individual company lo be valued will more accuralely
rellecl lhe lrue value ol lhe enlerprise

46

B@-U.4.>?* B@-U.(0*+ &(.?R+0+
M3.4 7,4*, 6. i-(6>),8 :420.j 4( i'J=)-K :420.j

M..=20-)4,. 6,> F44-,4-'.
Peporled inlormalion is almosl never complele enough lo meel all inpuls lor your analysis
Pead lhe Noles lo lhe linancial Slalemenls, answers are ollen lound lhere
Check wilh bankers on your deal leam or in your induslry group, melhodologies may diller
Do nol be alraid lo make assumplions lor which lhere are reasonable loundalions
loolnole all company-specilic assumplions accordingly.
sources ol assumplions and eslimales
melhodologies used lor calculalions
adjuslmenls lor non-recurring ilems and marginal lax rale, il appropriale
loolnole all global delinilions where applicable, including.
inclusion ol minorily inleresls in nel debl
lrealmenl ol prelerred slock
Mark your source malerial wilh a highlighler and posl ils so lhal inpuls are easily localed and checked
_ZMoZ Mf M!Y+1 1;M+_ MfY TMlZ f%1Z# %F M__ #%!;DZ#@ M##!T91+%f# MfY DM_D!_M1+%f#
U8S has conslrucled a cuslom-designed Lxcel model lhal downloads lrading and operaling dala lrom laclSel. This
model should fZoZ; be shown lo clienls or more senior bankers unless il is hand-checked and/or explicilly requesled.
Moreover, il should be used lo "sanily check" your work or provide "quick and dirly" analysis

47

".+03+ @A =4.70(1 B@-U+
+,0=-. -4 -/' D4206(6?3'.

%=-0=-. -4 -/' D4206(6?3'.
+-'2 #4=(:'
Lalesl lndicaled Annual
Dividend
On 8loomberg under Currenl News, look lor lhe lalesl dividend
declaralion headline. Look al lhe arlicle lo gel lhe mosl recenl
dividend and annualize il (e.g., mulliply by 4 lor quarlerly
dividends). Allernalively, go lo lhe same screen as lhe slock splil
screen, see page !4 under "Melhodology"
Common Shares
Oulslanding
On lhe lronl page ol lhe !0-Q or !0-K near lhe bollom. Make
adjuslmenls lor subsequenl evenls, il any (e.g., share repurchase,
slock splil, elc.)
Long-Term ("LT") Debl LT debl plus redeemable prelerred slock plus capilal lease
obligalions (il any). Olher lypes ol prelerred slock are nol
considered LT debl
Shorl-Term ("ST") Debl Under currenl liabililies, "shorl-lerm borrowings" or "bank
noles", plus "currenl malurilies ol LT debl", "accrued inleresl"
!
,
il any
Minorily lnleresl Minorily inleresl al markel value il publicly lraded
Prelerred Slock Prelerred Slock al liquidalion value, nol included in LT Debl.
8ook Value Common Shareholders' Lquily lrom lhe lalesl balance sheel.
Nel lnleresl Lxpense
2
lnleresl expense less inleresl income bolh lrom income slalemenl
D,D&A (D&A) Deprecialion, Deplelion and Amorlizalion (Deprecialion and
Amorlizalion) is lound on lhe Slalemenl ol Cash llows (some !0-
Qs may nol disclose lhis)
L8lT Larnings belore Nel lnleresl Lxpense and Taxes
L8lTDA L8lT plus D,D&A.
Nel lncome Nel lncome lo Common Shareholders
L.P.S. Primary belore exlraordinary ilems. Walch lor slock splils. il Nel
lncome/Shares Oulslanding dillers lrom L.P.S. by more lhan 5,
lry lo lind oul why. Pemember lhal some discrepancy is normal,
because lolal shares oulslanding does nol usually equal weighled
average shares oulslanding
Cash llow lrom
Operalions per Share
Lslimales
Cash llow per Share is equal lo Nel lncome + D,D&A + Delerred
Taxes (lrom Slalemenl ol Cash llows) + Olher Non-Cash Charges
divided by Shares Oulslanding. Pesearch reporls or Value Line
(in library
L.P.S. Lslimales lrom lirsl Call, l/8/L/S, laclSel, 8loomberg or research reporls

+-'2 #4=(:'
Lquily Value Slock Price Common Shares Oulslanding

Lnlerprise Value Lquily Value + LT Debl + ST Debl + Minorily lnleresl +
Prelerred Slock (nol included in LT Debl) (Cash + Cash
Lquivalenls)
Price/Larnings Price/L.P.S.

Price/Cash llow Slock Price/Cash llow per Share

Dividend Yield Dividends per Share/Slock Price
Price/8ook Lquily Value/8ook Value
Payoul Dividends per Share/L.P.S. (lasl !2 monlhs)
lnleresl Coverage
2
L8lT/lnleresl Lxpense
Lnlerprise Value/Sales)
3
Lnlerprise Value/Sales
Lnlerprise Value/L8lTDA
3
Lnlerprise Value/L8lT
3
Noles.
! Accrued lnleresl is somelimes delailed on lhe balance sheel or in lhe Accrued Liabililies loolnole
2 lor an lnleresl Coverage ralio, i.e., L8lTDA/lnleresl or L8lT/lnleresl, be sure lo add Capilalized lnleresl lo your Nel lnleresl Lxpense and sublracl il lrom L8lTDA.
Capilalized lnleresl, il available, can be lound in lhe Managemenl's Discussion and Analysis seclion or in lhe noles (P,P,&L) lo lhe linancial slalemenls
3 The idea here is lhal since L8lT, L8lTDA and Sales are nol allecled by lhe company's choice ol capilal slruclure (as are cash llow, nel earnings and book value),
lhe appropriale mulliples use lolal capilal (i.e., equily and debl), and nol jusl equily capilal

48

#*?*3,*7 =4.70(1 #,.,0+,03+
1/' 4?\':-)&' 45 -/). 'A/)?)- ). -4 6..'.. -/' &63=' 45 6 :4206,K ('36-)&' -4 )-. 0''( 8(4=0 ?K :4206(),8
&6()4=. 'J=)-K -(6>),8 2=3-)03'.
1/' 'A/)?)- ). ?(47', ),-4 -/' 54334*),8 06(-.k
Closing Price.
use a recenl closing slock price lrom 8loomberg, laclSel or lLX and be sure lo nole lhe dale ol lhis quole in lhe
exhibil. Prices lor all companies should (normally) be as ol lhe same dale
LTM P/L (Lasl Twelve Monlhs).
il lhe liscal year is lhe mosl recenl period, simply divide lhe currenl slock price by lhe lasl liscal year's L.P.S.
il one or more lorm !0-Qs have been liled since lhe end ol lhe liscal year, compule lhe LTM P/L (see page !5)
Projecled P/L.
gel eslimales lrom lirsl Call or l/8/L/S (make sure you delermine whelher L.P.S. are on a lully-diluled or primary
basis and loolnole lhis) lor lhe nexl 2 liscal years (i.e., il your LTM dale is as ol March 3!, 2008 and your liscal
year-end is December 3!, 2008, gel lhe December 3!, 2008 and December 3!, 2009 eslimales). The lirsl Call
eslimales can be oblained lrom laclSel or lrom lhe lirsl Call compuler (lypically localed on lhe lrading lloor),
online l/8/L/S eslimales are available on laclSel
be sure lo use lhe median (nol lhe mean) l/8/L/S eslimales lo avoid skewed dala values
il lhe second year eslimales are unavailable, you should look up lhe Median Lslimaled 5-Year Crowlh Pale lor lhe
company in lhe l/8/L/S seclion ol laclSel. Use lhis growlh rale and apply il lo lhe lasl eslimale you have. lor
example, il your lasl eslimale is $!.50 and you have a Median Lslimaled 5 Year Crowlh Pale ol 20, lhen lhe
nexl liscal year's eslimale would be $!.80 ($!.50 x !.20 = $!.80)

49

#*?*3,*7 =4.70(1 #,.,0+,03+

D63',>6()C' Z6(,),8. Z.-)26-'. 6. f''>'> W6,> F44-,4-' 1/).X@ )B'Bk

June 2008 + June 2009
2 = December 2008
Or
May 2008 x
5
!!2 + May 2009 x
7
!!2 = December 2008

Trading Slalislics.
Lnlerprise Value/Sales
L8lTDA, L8lT and Nel Margins.
exclude any exlraordinary ilems and one-lime occurrences (e.g., reslrucluring charges) lrom all earnings numbers
divide L8lTDA, L8lT and Nel lncome by lolal revenues. Use lhe mosl recenl linancial slalemenls lor lhese ligures
(i.e., LTM calculalion) and also look al lorecasled ligures

50

#*?*3,*7 =4.70(1 #,.,0+,03+

L8lT/Assels.
use same L8lT value as above
lo calculale average assels, add beginning period assels lo ending period assels (bolh lrom lhe periods lor which
lhe L8lT applies) and divide by 2 (walch oul lor equily issues and acquisilions). Use lhe assel value al lhe mosl
recenl balance sheel available
Pelurn on Lquily.
use nel income
divide by average Slockholders' Lquily. Sum beginning and ending period equily and divide by 2 lo gel average
Slockholders' Lquily (walch oul lor equily issues and acquisilions). Use lhe Slockholders' Lquily value al lhe mosl
recenl balance sheel available
Price/8ook Value.
book value ol common equily per share (sum ol equily accounls on mosl recenl balance sheels) divided inlo lhe
mosl recenl slock price. 8e sure lo exclude 8ook Value ol Prelerred il il is reporled wilh lhe Shareholders' Lquily
Price/Cash llow.
Cash llow relers lo Operaling Cash llow, OP Nel lncome plus Deprecialion, Deplelion and Amorlizalion plus
Delerred Taxes and olher Non-Cash Charges
Cash llow Projeclions can be laken lrom research reporls whereas lalesl !2 monlhs cash llow should be calculaled
lrom lhe lalesl linancial slalemenls

5!

#*?*3,*7 =4.70(1 #,.,0+,03+

Addilional slalislics may include.
invenlory lurnover. ralio ol COCS lo invenlory or annual sales lo invenlory, which shows how many limes lhe
invenlory ol a lirm is sold and replaced during an accounling period
inleresl coverage (lixed charge coverage). ralio ol prolils belore paymenl ol inleresl on bonds and olher
conlraclual long-lerm debl. ll indicales how many limes inleresl charges have been earned by lhe corporalion
on a pre-lax basis
lolal debl/L8lTDA. (ST Debl + LT Debl + Pedeemable Prelerred Slock)/L8lTDA. This slalislic measures how many
limes debl covers L8lTDA
capilal expendilures/revenues
working capilal/revenues
days payable. lhe number ol days belween when lhe company receives goods and/or services and when il
pays lor lhem
days receivable. lhe number ol days belween when lhe company provides goods and/or services and when il
receives paymenl lor lhem

52

Q4*3*7*(, =4.(+.3,0@(+ &(.?R+0+

Y'5),)-)4,
14>6K@ qpr 6,,4=,:'> -/' .63'
45 )-. Y6,:4 .=?.)>)6(K -4 _"%
96(-,'(. 54( a^GH 2)33)4,@
),:3=>),8 -/' 6..=20-)4, 45
>'?- 6,> 4-/'( 3)6?)3)-)'.B
14>6K@ +"T 6,,4=,:'> -/' .63'
45 )-. 0(),-'> :)(:=)- ?46(>
40'(6-)4,. 54( acQ 2)33)4,@ 03=.
a^QQ 2)33)4, 45 6..=2'> >'?-B
14>6K@ qpr 6,,4=,:'> -/' .63'
45 )-. Y6,:4 .=?.)>)6(K -4 _"%
96(-,'(. 54( a^GH 2)33)4,@
),:3=>),8 -/' 6..=20-)4, 45
>'?- 6,> 4-/'( 3)6?)3)-)'.B
14>6K@ +"T 6,,4=,:'> -/' .63'
45 )-. 0(),-'> :)(:=)- ?46(>
40'(6-)4,. 54( acQ 2)33)4,@ 03=.
a^QQ 2)33)4, 45 6..=2'> >'?-B

The precedenl lransaclions exhibil conlains inlormalion aboul selecled M&A lransaclions in lhe
same induslry as lhe company (or segmenl ol a company) lhal you are evalualing, lhereby allowing
a value lo be impuled lo lhe company under consideralion. The purpose is similar lo lhal ol lhe
comparables lrading slalislics excepl lhal by looking al prior acquisilions, you can gel a sense ol
lhe premium lhal is paid lo gain conlrol ol lhe largel company (i.e., conlrol premium). This is
anolher way lo assess lhe value ol lhe company lrom a polenlial buyer's perspeclive
T'-/4>4348K
Unlike lhe DCl analysis, lhis lechnique does nol locus on lhe operaling assumplions ol lhe currenl
or prospeclive owner. Palher, such mulliples represenl an index ol recenl markel prices paid by
olher acquirers and accepled by olher sellers. lrom a polenlial seller's viewpoinl, lhe mulliples
suggesl a largel price range al which olher buyers have been willing lo buy. Conversely, lor
polenlial buyers, lhe mulliples suggesl price ranges lhal are acceplable lo sellers
However, because each acquisilion is unique and buyers and sellers lypically do nol know all lhe
laclors and molives lhal wenl inlo lhe lormulalion ol anolher acquisilion price, acquisilion
mulliples ollen suggesl a wide range ol values and musl be used wilh care. Moreover, because lhe
acquisilion markel is nol conlinuous in lime, lhe lacl lhal a parlicular mulliple was paid in lhe pasl
does nol necessarily mean lhal il slill applies loday. Unlike lhe slock markel, lhere is no currenl P/L
benchmark olher lhan lhe mosl recenl induslry lransaclion which may be several monlhs or even
years old. lurlhermore, many lransaclions occur al lhe subsidiary or division level lor which no
lrading valualions exisl
Precedenl lransaclions analysis is based on hislorical, nol lorward looking, dala. ln realily,
lransaclions are valued using lorward looking dala which are nol disclosed lo lhe public al lhe
lime ol lhe acquisilion

53

Q4*3*7*(, =4.(+.3,0@(+ &(.?R+0+

Prices paid as a mulliple ol nel earnings and/or operaling prolil (L8lTDA and L8lT) are lypically lhe mosl uselul lor a
broad range ol induslrial companies. An imporlanl requiremenl lor such mulliples lo be meaninglul is lhal lhe
accounling principles underlying earnings be comparable across lhe sample ol lransaclions
The oulpul lor precedenl lransaclion analysis is largely similar lo lhal ol comparable companies wilh one dillerence.
Lquily ValueLquily value should be calculaled based on lhe lully-diluled number ol shares oulslanding because
converlible securilies and oplions will lypically come "in-lhe-money" in an M&A lransaclion. Nole lhal
managemenl oplions, nol lo be conlused wilh publicly-lraded oplions, lypically vesl in change ol conlrol
lransaclions
Lnlerprise ValueSince a majorily ol M&A lransaclions are done al lhe division and subsidiary level, linancial dala
is somelimes dillicull lo procure. ll no debl is assumed, Lquily Value and Lnlerprise Value will be equal
S6((6,-. 6,> %0-)4,.
Warranls, oplions and similar securilies are considered common slock equivalenls al all limes unless conversion ol
lhese securilies proves anlidilulive (i.e., L.P.S. is aclually increased aller accounling lor lhese securilies. This occurs il
lhe markel price ol lhe slock is lower lhan lhe exercise price ol lhe oplion). As a resull, bolh primary and lully-diluled
L.P.S. should rellecl lhe dilulion lhal would resull lrom exercise or conversion ol lhese securilies
The amounl ol dilulion rellecled in L.P.S. dala should be compuled by applicalion ol lhe "lreasury slock" melhod.
Under lhis melhod, L.P.S. is calculaled as il lhe warranls and oplions were exercised al lhe beginning ol lhe reporling
period (or, il laler, al lhe lime ol issuance) and as il lhe lunds oblained by lhe exercise were used lo purchase
common slock al a markel price

54

Q4*3*7*(, =4.(+.3,0@(+ &(.?R+0+

Shares lor L.P.S. purposes = Shares Oulslanding + lncremenlal Shares
= Number ol Oplions Number ol Oplions x Lxercise Price lncremenlal Shares
Markel Price ol Slock
lor primary shares oulslanding, use lhe average markel price during lhe period as lhe denominalor.
To calculale lully-diluled shares oulslanding, subslilule lhe closing markel price ol lhe slock (lor lhe period in queslion)
lor lhe markel price il lhe closing price is higher.
ll lhe closing markel price is higher, lhe number ol shares repurchased will be smaller and lherelore more shares will be
lell oulslanding. This resulls in a more diluled L.P.S.
As a praclical maller, we lypically use lhe currenl slock price lor bolh calculalions lor lhe sake ol simplicily, unless lhe
slock price has changed dramalically over lhe period in queslion.
1('6.=(K #-4:7 T'-/4> ZA6203'
W!#aX
Nel lncome 5,000,000
Shares Oulslanding 2,000,000
Shares lor Warranls and Oplions 200,000
Lxercise Price per Share 20
Average Markel Price per Share 25
Closing Markel Price per Share 30
9()26(K ZB9B#B
200,000 200,000 x $20 = 40,000 incremenlal shares
$25
$5,000,000 Primary L.P.S.
= 2,000,000 + 40,000
= $2.45

55

Q4*3*7*(, =4.(+.3,0@(+ &(.?R+0+

F=33KLY)3=-'> ZB9B#B

200,000 x $20 = 66,667 incremenlal shares 200,000
$30
$5,000,000 = $2.42 lully-Diluled L.P.S. =
2,000,000 + 66,667
Sources. Securilies Dala Company ("SDC")SDC provides a comprehensive M&A and corporale linance dalabase lhal can be used lo screen lor and download
inlormalion relaled lo M&A lransaclions. This dala is lrequenlly inaccurale and musl be checked. Neverlheless, an SDC screen should only be used lo
idenlily lransaclions. Analysis should always be done using ollicial documenlalion and lilings
You musl order lhe relevanl merger proxies and public lilings available al lhe lime ol acquisilion lo accuralely rellecl lhe purchase price and olher
operaling dala
"Precedenl Transaclions 8ook"a book ol compleled precedenl lransaclion lisls is being compiled and will be kepl in lhe library. You should submil lo
lhe library lor inclusion lo lhis compilalion any Precedenl Transaclions Analyses you have perlormed
Nole. The number ol shares assumed lo be repurchased using oplion proceeds cannol exceed 20 ol oulslanding slock (400,000 limil in our example, versus
!60,000 shares assumed lo be repurchased lor lhe Primary calculalion). The addilional oplion proceeds should be assumed lo relire shorl-lerm debl lirsl,
lhen long-lerm debl, and linally, lo be invesled in governmenl securilies

56

K0+3@5(,*7 B.+F J?@D LKBJO

Y'5),)-)4,
Discounled Cash llow is one melhod ol valuing a company, business segmenl or projecl. The DCl value represenls
lhe presenl value ol unlevered, aller-lax cash llows lo all providers ol capilal using lhe weighled average cosl ol
capilal (WACC) as lhe discounl rale
T'-/4>4348K
The DCl melhod enlails eslimaling lhe lree cash llow available lo debl and equily inveslors (i.e., lhe annual cash llows
generaled by lhe business, and lhe lerminal value ol lhe business al lhe end ol lhe lime horizon) and discounling lhese
llows back lo lhe presenl using lhe weighled average cosl ol capilal as lhe discounl rale lo arrive al a presenl value ol
lhe assels
Pros and pillalls.
lhe DCl is nol lied lo hislorical accounling values, il is lorward-looking
il recognizes lhe lime value ol money
il allows an expecled operaling slralegy lo be incorporaled inlo lhe model
pay parlicular allenlion lo lhe generalion ol cash llows and lhe assumplions you use. Since lhere is a greal deal ol
subjeclivily in making assumplions, a poorly conslrucled sel ol assumplions may yield inaccurale or unmeaninglul
resulls. Make sure lhal lhe cash llow assumplions and calculalions are reasonable
check lo see how much ol lhe lolal value comes lrom lhe lerminal value. ll lhe lerminal value represenls signilicanlly
more lhan 5060 ol lhe lolal value, lhen lhe DCl value is less reliable since much ol lhe value is driven by your
assumplions aboul how much lhe business is worlh in lhe lulure
be carelul aboul inllalion lorecasls. Discounl currenl dollar cash llows al nominal discounl rales and conslanl dollar
cash llows al real discounl rales
DCl valualions are based on assumplions. Use several scenarios aboul lhe lulure lo creale bounds on lhe largel's value

57

J4** B.+F J?@D LJBJO
Y'5),)-)4,
Cash llow generaled by all assels
Unlevered, "lree lrom linancing consideralions"
Accrual lo all providers ol capilal
D63:=36-)4,
L8lTDA
Deprecialion
= L8lTA
Nolional Taxes
!

= Aller-lax L8lTA
+ Deprecialion
lnveslmenl in Working Capilal ((Currenl Assels-Cash)-(Currenl Liabililies-STD))
Capilal Lxpendilures
= lree Cash llow
M3-'(,6-)&'3K
Nel lncome
2

+ Delerred Taxes and olher Non-Cash Charges (e.g., deprecialion, amorlizalion and delerred laxes)
3

+ Aller-lax lnleresl Lxpense
lnveslmenl in Working Capilal
Capilal Lxpendilures
4

= lree Cash llow
Noles.
! Al lhe company's elleclive lax rale, lypically 40
2 Nel lncome belore prelerred dividends, equily income and minorily inleresl
3 Nole lhal goodwill amorlizalion is only deduclible lor lax purposes under limiled circumslances in lhe US
4 Capilal expendilures will llucluale lrom year lo year. ll is assumed lhal in lhe lerminal year, capilal expendilures equals lhe deprecialion, deplelion and
amorlizalion charge. On average, capilal expendilure is likely lo be higher lhan in lhe lerminal year

58


Conlrasled wilh Cash llow lrom Operalions (which consisls ol Nel lncome plus Deprecialion and Amorlizalion plus
Delerred Taxes and Non-Cash charges)
T'-/4>4348K
+,:42' #-6-'2',-
Projecl growlh in Nel Sales.
base assumplions on.
research reporls
clienl lorecasls (il available)
induslry lrends
percenl growlh is usually an inpul, aggregale sales is derived lrom lhis inpul
Lslimale lhe lollowing by percenl ol sales.
cosl ol Coods Sold (COCS)
selling, Ceneral and Adminislralive (SC&A) Lxpenses
Delermine lnleresl Lxpense based on lhe noles lo lhe mosl recenl lorm !0-K. Peler lo lhe debl schedule and
calculale lhe weighled average inleresl rale. ll no debl schedule is available, lhen compule lnleresl Lxpense as a
percenl ol average Long-Term Debl.
average LTD oulslanding = (8eginning LTD + Lnding LTD)/2
nole lhal his inleresl expense calculalion will cause a ClPC in Lxcel, lherelore, you need lo ilerale lhe model
several limes. Pemember lhal lhe amounl ol inleresl will have no impacl on a DCl's value since lhe analysis is
done on an unlevered basis
Assess lax rale based on lhe marginal lax rale (lederal, slale and local) and currenl lax regulalion

59


Nel lncome lrom lhe income slalemenl
9

Deprecialion.
beginning Properly, Planl and Lquipmenl (PP&L) plus Capilal Lxpendilures divided by average assel lile
also express as ol PP&L
nole. This deprecialion calculalion will cause a ClPC in Lxcel. Therelore, you need lo ilerale lhe model several
limes
excludes owned properly because il is nol depreciable (leased properly is)
average assel lile = PP&L divided by deprecialion expense
Delerred Taxes.
some percenlage ol deprecialion based on hislorical relalionship
Aller-lax inleresl expense.
inleresl expense x (ll) where l = marginal lax rale
nole. lnleresl Lxpense should be nel ol inleresl income (i.e., gross inleresl expense minus inleresl income)
because inleresl income is nol a lunclion ol operalions (excluding linancial inslilulions)
Capilal Lxpendilures (CapLx).
lhe expendilures necessary lo mainlain lhe required capilal inlensily (see PP&L analysis under selecled balance
sheel ilems)

9
8elore prelerred dividends, equily income and minorily inleresl

60

lnveslmenl in Working Capilal (WC).
dillerence belween beginning and ending WC (see WC analysis under Selecled 8alance Sheel llems below)
exclude Cash and Cash Lquivalenls
exclude Shorl-Term Debl (STD)
#'3':-'> "636,:' #/''- +-'2.
Working Capilal excluding cash and cash equivalenls and STD.
eslimale WC as a percenl ol sales. WC = (Currenl AsselsCash and Cash Lquivalenls)(Currenl LiabililiesSTD)
possible lo squeeze cash lrom WC by operaling more ellicienlly
lhe lhree major componenls ol working capilal are. invenlories, receivables and payables
invenlories are calculaled based on "lurns". The equalion is.

lnvenlories
Cosl ol Coods Sold
x 365
receivables are based on days oulslanding. The equalion is.

Peceivables
Sales
x 365
payables are also based on days. The equalion is.

Payables
Cosl ol Coods Sold
x 365
"olher currenl assels" should be calculaled as a percenlage ol sales and "olher currenl liabililies" as a percenlage
ol COCS
Properly, Planl and Lquipmenl (PP&L).
projecl by capilal inlensily/elliciency. sales divided by (PP&L)

8eginning PP&L known
Deprecialion known
+ CapLx solved lor
= Lnding PP&L known

6!

Capilalizalion. STD, LTD and Lquily.
projecl STD as a percenlage ol LTD
equily lor each year can be calculaled direclly

8eginning equily known
+ Nel lncome lo Common Shareholders known
+ / Slock issue/buyback known
Common dividends know by payoul
= Lnding equily solved lor

debl projecled by debl lo equily ralio
know LTD/Lquily ralio and equily, solve lor LTD
il appropriale, LTD can be paid down wilh lree cash llow
Y).:4=,-'> D6./ F34* 16?3'.
Lxamines sensilivily ol presenl value lo.
discounl rale (lhe weighled average cosl ol capilal or WACC)
lerminal perpelual growlh rale or lerminal mulliple
Llemenls.
!sl year lCl
presenl value ol lCl years 2 lhrough !0
presenl value ol lerminal value
add olher assels nol accounled lor by lree cash llows (e.g., cash, oplion proceeds, pension surplus)
sublracl liabililies nol accounled lor by lree cash llows (e.g., STD, LTD, pension delicil)
To oblain an equily value per share, divide by lhe lully-diluled number ol shares(i.e., include oplions and
converlible securilies which would be advanlageous lo exercise)

62

J@4*3.+,0(1 =*4-0(.? \.?5*W =D@ %*,F@7+

9'(0'-=63 <(4*-/
lmplicil assumplion. lhe lirm will be owned lorever
Digressiondividend discounl model
slales lhal you can value a slock by laking lhe presenl value ol lhe dividend in perpeluily

Lxpecled Slock Value = Div
r
where Div = a dividend lo be received one period lrom now
r = discounl rale
ll lhe dividend is expecled lo grow lorever al lhe same rale, lhe lormula is modilied lo read.

Lxpecled Slock Value = Div
r-g

where g = perpelual growlh ol lhe dividend
9'(0'-=63 <(4*-/ F4(2=36k
Terminal Value = lCln * (! + g)
(r-g)

where lCln = lree cash llow in period "n"
g = perpelual growlh rale
r = weighled average cosl ol capilal

63

J@4*3.+,0(1 =*4-0(.? \.?5*W =D@ %*,F@7+

lmplicalions ol lhe perpelual growlh lormula.
lCln * (! + g) means you have converled lhe period "n" lCl inlo lhe period "n + !" lCl (i.e., lCln + !)
/(rg)means you have laken lhe presenl value ol a perpeluily ol lCl slarling al period "n + !" and growing al
"g"
lhe lormula assumes lhal you receive lhe lirsl lCl one year lrom now. ("now" being lhe middle ol period "n"
since all lCls are assumed lo occur al mid-period), so lhe "presenl value" ol lhis perpeluily is al lime "n0.5"
you can make a variely ol assumplions aboul when lhe cash llows are received
1'(2),63 T=3-)03'
lmplicil assumplion. lhe lirm will be sold al lhe end ol period "n"
Use a mulliple ol any relevanl ligure. 8ook Value, Nel lncome, Cash llow lrom Operalions, L8lT, L8lTDA, Sales, elc.
nole. Terminal Value should be an Lnlerprise Value, NOT ALL mulliples produce an Lnlerprise Value (e.g., P/Ls)
LlTMUS TLST. Has inleresl been sublracled belore you arrive al lhis ligure?
il yes. lhe mulliple gives an LQUlTY Value
il no. lhe mulliple gives an LNTLPPPlSL Value

T=3-)03' 45 o63=' 9(4>=:'>
8ook Value Lquily
Nel lncome Lquily
Cash llow lrom Operalions (as delined on page 2! and page 24) Lquily
Nel Sales Lnlerprise
L8lTDA Lnlerprise
L8lT Lnlerprise
Since lhe lirm is sold al lhe end ol lhe period ol projecled lCls, lhe lerminal mulliple value is al lime "n"

64

J@4*3.+,0(1 =*4-0(.? \.?5*W =D@ %*,F@7+

;'63)-K D/':7k +20=-),8 6 9'(0'-=63 <(4*-/ ;6-' 4( 6 1'(2),63 T=3-)03'
To equale lhe lerminal values produced by lhe perpelual growlh melhod and by lhe lerminal mulliple melhod, grow
lhe lerminal value generaled by lhe perpelual growlh melhod by hall a period (i.e., mulliply lhe lerminal value by
" # $ %& ' ( ! )
ZJ=)-K T=3-)03' ZA6203'k
TV = lCln * (! + g) * (! + r)0.5 = P/Ln * Nin + TDn
(r-g)
S/'('
TV = unlevered lerminal value
lCln = lree cash llow ol period "n"
g = perpelual growlh rale ol lree cash llow
r = weighled average cosl ol capilal
P/Ln = lerminal P/L mulliple
Nln = nel income ol period "n"
TDn = lolal debl ol period "n", including prelerred slock
#43&' 54( -/' +203)'> 1'(2),63 9OZ ;6-)4k
P/Ln = lCln * (! + g) * (! + r)0.5TDn * (rg)
Nln * (rg)
#43&' 54( -/' +203)'> 9'(0'-=63 <(4*-/ ;6-'k
g = (P/Ln * Nln + TDn) * rlCln * (! + r)0.5
(P/Ln * Nln + TDn) + lCln * (! + r)0.5

65

J@4*3.+,0(1 =*4-0(.? \.?5*W =D@ %*,F@7+
Assel mulliple examplewilh an assel mulliple, lhe lormula is lhe same as wilh an equily mulliple, bul lolal debl =
zero (TDn = 0).
TV = lCln * (! + g) * (! + r)0.5 = A/L8lTn * L8lTn
L8lTn + (rg)
where A/L8lTn = assel value lo L8lT mulliple
#43&' 54( -/' +203)'> MOZ"+1 ;6-)4k
A/L8lTn = lCln * (! + g) * (! + r)0.5
L8lTn + (rg)
#43&' 54( -/' +203)'> 9'(0'-=63 <(4*-/ ;6-'k
g = (A/L8lTn * L8lTn) * rlCln * (! + r)0.5
(A/L8lTn * L8lTn) + lCln * (!+ r)0.5
One lallacy ol lhe DCl analysis is lhal lhe lwo melhods (i.e., lhe lerminal melhod and lhe perpelual melhod) do nol always
concur. Delermining lhe growlh rale is somewhal subjeclive and lhe analysis is highly sensilive lo il. The lerminal mulliple is also
somewhal subjeclive as il requires an eslimale ol lulure lrading mulliples, which may very well be dillerenl lrom currenl
mulliples. The analysis is highly sensilive lo lhis as well and ollenlimes resulls in a lolal presenl value heavily weighled loward lhe
lerminal value, ralher lhan lhe slream ol cash llows
Nolwilhslanding lhe above menlioned lexl, il is ollen uselul lo delermine lhe enlerprise value via bolh melhods so lhal you can
compare lhe lwo resulls and lheir implied mulliples ol currenl operaling resulls. lor example, il lhe lerminal melhod resulls in a
lolal presenl value ol 8x Year ! L8lTDA and lhe perpelual melhod resulls in 5x Year ! L8lTDA, bolh analyses and lheir respeclive
assumplions deserve lurlher review
ln addilion, you should also compare lhe lerminal mulliple implied by lhe perpelual growlh rale and vice versa. ll, lor example,
you are using lhe perpelual melhod and lhe implied lerminal mulliple is 3x L8lTDA (and your induslry lrades al 9x L8lTDA),
chances are your perpelual growlh rale is loo low. Similarly, il you are using lhe lerminal melhod and lhe implied perpelual
growlh rale is !!, chances are your lerminal mulliple is loo high. ll should be noled lhal lhis is nol necessarily always lhe case
and somelimes one parlicular melhod mighl be irrelevanl lo lhal parlicular company. They should be checked neverlheless, and
you should consull someone else on your leam lo delermine appropriale measures

66

B.?35?.,0(1 G&BB

S')8/-'> M&'(68' D4.- 45 D60)-63 WSMDDX
To delermine lhe WACC ol a company, one musl ascerlain lhe cosls ol lhe various sources ol capilal lor lhe
company, wilh a given capilal slruclure. The aller-lax cosls ol lhe various sources are lhen averaged lo arrive al an
appropriale discounl rale lo value unlevered cash llows
We incorporale lhree basic sources ol capilal inlo our melhodology
debl
prelerred Lquily
common Lquily
Since lhe cosl ol each linancing source is parlly a lunclion ol lhe mix belween lhe various sources ol capilal, you may
need lo calculale lhe WACC and ils individual cosl componenls al various capilalizalion slruclures
As a praclical maller, you should delermine lhe credil raling ol lhe company al lhe largeled capilal slruclure(s), and
seek rale views based on lhose credil ralings
Where lo lind cosl ol debl.
check lhe loolnole relerring lo debl lo see whal lhe Company is currenlly paying
consull a banker in debl capilal markels lor a !0-year malurily all-in new issue rale al lhe credil raling
corresponding lo lhe largeled capilal slruclure. As parl ol lhis process, you should look al lhe yield on new issues
ol comparable companies since lhe cosl ol debl is a lunclion ol lhe risks associaled wilh a given business/induslry
il lhe company has public debl oulslanding and you do nol inlend lo change ils capilal slruclure, lind lhe debl
raling in Moody's, lhe S&P handbook or on 8loomberg

67

B.?35?.,0(1 G&BB

Where lo lind cosl ol prelerred equily.
check lo see il lhere is any oulslanding in lhe markel
consull a banker in equily capilal markels lo delermine lhe rale al which lhe company could raise similar prelerred
slock loday
Calculaling lhe cosl ol common equily.
use lhe Capilal Assel Pricing Model (CAPM)
cosl ol Lquily = Pisk-lree Pale + (Predicled 8ela * Lquily Pisk Premium)
The risk-lree rale can be laken as lhe inleresl rale on a generic !0-year governmenl nole. You can oblain lhis generic
len-year rale on 8loomberg by lyping "CT20", pressing lhe Covl key, and lhen pressing lhe green Co key
juslilicalion comes lrom lhe observalion lhal lhe cash llow pallern ol a !0-year bond roughly approximales lhe
cash llow pallern ol a lypical len-year DCl analysis
Lquily Pisk Premium. The "equily risk premium" relers lo lhe premium demanded by equily inveslors on shares which
have an "average" degree ol markel-relaled risk and an "average" level ol leverage (i.e., debl/equily ralio). U8S makes
lhe assumplion lhal lhe hislorical risk premium is a good proxy lor lhe expecled risk premium. Our melhodology
calculales lhe relevanl risk premium as lhe mean ol excess relurns ol common slocks versus long-lerm governmenl
bonds. Dala lor lhis calculalion is laken lypically lrom lhe lbbolson and Sinquelield sludy, Slock, 8onds, 8ills and
lnllalion. You should consull wilh senior members ol your leam over whal markel risk premium lo use and why.

68

B.?35?.,0(1 G&BB

Oblain lhe predicled (nol hislorical) 8ela (b) lrom laclSel. ll you are working wilh a public company and do nol
inlend lo change ils capilal slruclure, simply oblain lhe predicled 8ela lrom 8arra and use il in lhe CAPM lormula
above. ll you do inlend lo aller lhe capilal slruclure or when valuing privale companies or a segmenl ol companies,
you will need lo calculale an average or median 8ela ol comparable companies lo gel a more accurale measure ol
lhe risk associaled wilh a given business
8elas and equily risk premium dala are normally available only lor major slock markels. ll may slill be possible lo use
lhis dala when lhe largel business is in a dillerenl counlry, allhough lhe equily risk premium mighl be higher lor a
developing economy or an emerging slock markel lhan lor, say, lhe NYSL or London Slock Lxchange
8ela rellecls lhe assumed level ol gearing. 8elas oblained lrom laclSel, Dalaslream, Value Line and mosl olher
sources are "geared belas" which rellecl lhe aclual level ol gearing lor lhe company concerned. Wilhin normal
gearing ranges, 8ela can be adjusled lo rellecl assumed gearing levels dillerenl lrom lhe aclual gearing level
The problem wilh laking an average ol lhe published 8elas is lhal a slock or 8ela is a lunclion ol a company's capilal
slruclure. 8elas will be higher lor more highly leveraged companies. Thus, we use a lormula lo unlever all 8elas lo gel
an unlevered 8ela lor each comparable company
"Levered 8ela"calculaled assuming lirm's currenl leverage. lolal debl/adjusled markel capilalizalion. Oblain
predicled levered 8elas lor your company and/or comparable companies lrom laclSel
Unlever lhe predicled 8ela(s) lo arrive al an unlevered 8ela lor your company or each comparable company.

69

B.?35?.,0(1 G&BB

Unlevered 8ela = Levered 8ela
! + ((!l) x (Debl/Common)) + Pld/Common
S/'('
8ela = predicled 8ela (lrom laclSel or 8arra Posenburg)
l = marginal lax rale
Debl = markel value ol lolal debl
Common = markel value ol common equily
Pld = markel value ol prelerred equily
Nole. ll is more lechnically correcl lo use lhe average markel values ol debl, prelerred equily and common equily
lrom lhe period over which lhe predicled bela was calculaled. However, we lypically use lhe mosl recenl values since
lhey are usually nol signilicanlly dillerenl and since il is much easier lo do so
Calculale lhe mean or median unlevered 8ela lrom your sample and relever lhe mean or median unlevered 8ela wilh
dillerenl capilalizalion slruclures lo examine various scenarios
relevered 8ela = Unlevered 8ela * l + ((l-l) * (Debl/Common)) + Pld/Common
use lhe relevered 8ela as lhe "predicled 8ela" in lhe CAPM lormula
lhe Debl, Lquily and Capilalizalion values used should represenl lhe "largel" capilal slruclure (lhe capilal
slruclure lhal includes planned debl and equily linancings)

70

B.?35?.,0(1 G&BB

S')8/-'> M&'(68' D4.- 45 D60)-63
Nole. Always use MAPKLT VALUL ol common equily and prelerred slock

WACC = Ke x L + Kd (!l) x TD + Kpx Pld
TD + L + Pld TD + L + Pld TD + L + Pld
Where
Ke = Pisk lree Pale + (Levered 8ela x Markel Pisk Premium)
Kd = !0-year all-in cosl ol borrowing lor a new issue (acluals or comparables)
Kp = Lslimaled cosl ol prelerred slock (same lype as exisling)

7!

KBJ &(.?R+0+
D4,.).-',:K 45 6..=20-)4,. :4,:'(,),8 ),-'('.- (6-'.@ ),536-)4, (6-'.@ -6A (6-'. 6,> -/' :4.- 45
:60)-63 ). :()-):63
1/' 54334*),8 04),-. ./4=3> ?' :4,.)>'('>
The risk-lree rale should normally be 2-6 above lhe assumed general long-lerm rale ol inllalion
The currency used lor projeclions should be lhe same as lhe currency on which lhe WACC is based
The assumplions aboul capilal slruclure (i.e., proporlions ol debl, equily and prelerred) and lax rales should be
reviewed carelully il lhe company will pay lillle or no lax under lhose assumplions
ll managemenl provides a discounl rale, lhe underlying assumplions should be checked. ls il aller-lax? ls il a relurn
on equily or a relurn on capilal? lor whal currency is il calculaled? ls il a hurdle rale?
An aller-lax discounl rale should be used wilh aller-lax cash llows
Sales and cosls are generally projecled as nominal values (i.e., lhey include inllalion). There are some silualions in
which il is acceplable lo discounl real cash llows using a "real" discounl rale, bul using nominal ligures (i.e., which
include inllalion) is usually more accurale, reduces lhe possibilily ol conlusion and is ollen simpler
Prelerred slock should be included in lhe WACC calculalion and in lhe capilal slruclure weighlings il il represenls a
signilicanl parl ol lhe capilal slruclure

72

I"C

Y'5),)-)4,
A leveraged buyoul (L8O) is lhe acquisilion ol a largel company by an inveslor group, which lypically includes lhe
largel's own managemenl. The inveslor group acquires conlrol ol lhe largel, linancing ils acquisilion wilh a minimal
amounl ol equily capilal. The primary linancing is in lhe lorm ol debl collaleralized wilh lhe assels ol lhe largel ilsell
or wilh lhe largel's cash llow
The goal ol an L8O is lo use lhe largel lo linance lhe purchase. The grealer lhe borrowing power ol lhe largel, lhe
less equily lhe inveslor group requires lo make lhe acquisilion. The aclual cash oullay ol lhe buying group is
minimizedand lhe polenlial relurn on inveslmenl increased
ln a lypical L8O, equily comprises belween 20 and 30 ol lhe purchase price. The lolal amounl ol equily required
depends upon lhe largel's sale price, lhe borrowing power ol lhe largel's assels, lhe lerms ol such borrowing, and
lhe lenders' equily requiremenls. The largel's available cash may also be used lo linance lhe purchase price
1/' 1K0):63 _"% D6,>)>6-'
ll is dillicull lo deline lhe characlerislics ol an ideal L8O candidale. However, il may be said lhal lhe lollowing general
guidelines apply
26,68'2',-. Cood managemenl is lhe single mosl imporlanl laclor in any L8O. A molivaled and compelenl
managemenl group is needed lo run lhe company aller lhe buyoul. ln mosl cases, lhe besl choice is lor exisling
managemenl lo lake an equily inleresl in lhe company. However, new managemenl is somelimes broughl in by
new inveslors. As long as lhe managemenl, new or old, is qualilied and has appropriale invenlive, lhe company
should have a good chance lor success

73

I"C

:6./ 534* is crucial. Cash llows should be heallhy, sleady and relalively prediclable lo permil collaleralized,
secured or unsecured borrowings. Lxcessive requiremenls lor capilal expendilures and research and developmenl
musl nol be crilical lo lhe ongoing success ol lhe enlerprise. cash llow musl be used primarily lo service and relire
acquisilion debl. "CASH lS KlNC, THL PLST lS JUST JOUPNAL LNTPlLS" is a key concepl
'A)- .-(6-'8K. The linancial sponsor should have a slralegy lor exiling lhe business wilhin an appropriale
limelrame, eilher by selling lhe business lo anolher linancial or slralegic buyer or by selling slock lo lhe public
lhrough an inilial public ollering. The exil mulliple should be al leasl lhe acquisilion mulliple assuming lhe
linancial sponsor has improved prolilabilily
26(7'- ,):/'. Mosl L8O enlilies have lound a good niche in lhe markel lor lheir producl lines. These companies
have a sleady slream ol revenues and a clienl base lhal is nol overly dependenl on a lew large cuslomers.
Obviously, il helps lo have a sleady growlh pallern, since growlh in prolilabilily will accelerale lhe repaymenl ol
lhe debl. Crowlh will also greally enhance lhe valualion ol lhe company in lhe evenl lhal il decides lo make an
inilial public ollering
*4(7 54(:'. Since assels are ollen redeployed and business plans change aller an L8O, lhe company's work lorce
musl be llexible and willing lo parlicipale. The company will ollen have lo locus more on debl repaymenl lhan on
expansion. Cood employee morale is lherelore very imporlanl. Managemenl should make a concerled ellorl lo
minimize lurnover by communicaling elleclively wilh all ils employee groups
.7'3'-4,. ), -/' ?46(>(442. Any liligalion problems or unresolved environmenlal concerns can be "deal-
breakers" since lhese problems can make linancing dillicull lo allain
.65'-K &63&'.. Unrelaled or polenlially expendable divisions can greally enhance lhe allracliveness ol a largel
company, since lhey may be sold lo raise lunds lor repaymenl ol debl. Pecenlly, banks have decided nol lo lend lo
lransaclions dependenl upon assel sales
-':/,4348K. Slale-ol-lhe-arl lechnology helps ensure maximum elliciency and prolilabilily. Also, il lhe lechnology
is already in place lhere is less need lor signilicanl capilal expendilure in lhe lulure
?=()'> -('6.=('. Deal-makers always look lor hidden or unlapped assels, such as real eslale, exclusive licenses,
righls, palenls, conlracls, or lranchises lrom which maximum value may be derived
:4.-.. The new company should have lhe capacily and lhe willingness lo cul cosls

74

I"C

A L8O valualion assumes a cerlain capilal slruclure, lhe relurns demanded and lhe conslrainls imposed by lhe various
providers ol linance (equily, mezzanine, debl) and an assumplion as lo an exil roule aller a number ol years (by
llolalion or lrade sale). 8y a process ol ileralion, il eslablishes lhe maximum value lhal can be placed on lhe business
in order lor lhe relurns lo be achieved and lhe arilhmelic lo work
We should bear in mind lhal L8Os are, by lheir very nalure, slruclured wilh relalively high levels ol debl. High debl
adds lo risk, and lhis is rellecled in lhe relurns demanded by inveslors in L8Os, which is in lurn rellecled in valualions
The capilal slruclure ol L8Os rellecls markel circumslances. Whenever an L8O valualion is being considered, il is
crilical lo insure our assumplions aboul viable capilal slruclure are realislic
F),6,:),8
;'&43&),8 :('>)-maximum linancing eslimaled al 75-90 ol receivables and 35-60 ol invenlory. Need lo
undersland seasonalily ol working capilal needs
1'(2 _46,."Senior Debl"lypically has a 78 year malurily. Sum ol Term Loan and Pevolving Credil kepl al
approximalely 50 ol pro lorma capilalizalion (lolal debl + lolal book equily)
#=?4(>),6-'> Y'?',-=('.lypically !2!5 year debl
r'(4 D4=04, Y'?',-=('.lypically !520 year malurily
D4224, ZJ=)-KKepl low lo maximize relurns. Usually minimum ol 30 ol capilalizalion. Ollen diluled lo an
exlenl by oplions and warranls. lully-diluled relurns should be 20-25
9('5'(('> ZJ=)-Kslandard or paid-in-kind
D4&'(68'
Z"+1YMOD6./ +,-'('.-should be 2.0x2.5x in year ! and rise lo 3.0x4.0x in live years
Z"+1OD6./ +,-'('.-should be grealer lhan 2.0x and should rise lo over 2.5x wilhin !2 years

75

I"C

WZ"+1YMLD60ZALD/6,8' ), SDLD6./ 16A'.XOD6./ +,-'('.-should be !.0x al a minimum. !.5x-2.0x is more
comlorlable
Y'?- 06K>4*,should be less lhan 68 years
ZA)- /4()C4,lypically 46 years

76

B@-U.40+@( @A KBJ .(7 I"C
M3-/4=8/ 6, _"% &63=6-)4, 6,> 6 YDF &63=6-)4, ?4-/ -67' 6 :4206,K[. :6./ 534* 0(4\':-)4,. 6. -/')(
.-6(-),8 04),- 6,> ),:4(04(6-' 6 -'(2),63 &63=' 65-'( 6 5'* K'6(.@ -/'(' 6(' .42' &'(K )204(-6,-
>)55'(',:'. ?'-*'', -/'2@ ?4-/ ), :4,:'0- 6,> ), 'A':=-)4,

YDF _"%
9(4:'.. Discounling lo an NPV Lxlrapolalion lrom assumed requiremenls
as lo lPP
1('6-2',- 45 Y'?- Usually subsumed in lhe value ol lhe
business as a whole (i.e., discounling lolal
cash llows lor lhe business produces lhe
value lor lhe equily and lhe debllirm
Value, lrom which debl is deducled lo
oblain Lquily Value)
The allribulion ol dillerenl required
relurns lo lhe dillerenl layers ol capilal
equily, mezzanine, deblis lhe essence ol
lhis process
1'(2),63 o63=' A DCl is, in principle, applied lo a series ol
cash llows lo inlinily. The "lerminal"
value aller a lew years is merely shorlhand
lor producing lhe value ol a (growing)
perpeluily
The lerminal value is a real lulure exil
mullipleeilher on a llolalion or on a
lrade saleand is usually assumed lo lake
place wilhin 37 years
;'.=3-6,- o63=' Unless a hurdle rale ol relurn has been
buill inlo lhe discounl laclor, il produces a
"lheorelical" or "absolule" value belore
laking inlo accounl lhe "prolil"
requiremenl ol lhe buyer
Pellecls lhe dillerenl "prolil"
requiremenls ol lhe providers ol capilal's
perspeclive

77

"4*./Y!U &(.?R+0+

Y'5),)-)4,
The break-up valualion rellecls lhe value ol a company's equily by summing lhe value ol ils individual segmenls on a
slandalone basis lo arrive al lhe aggregale value, and lhen making corporale adjuslmenls lo delermine lhe enlerprise
and equily values. ln essence, lhe break-up analysis looks al lhe company lrom lhe perspeclive ol a raider who would
linance an acquisilion by "breaking up" lhe company (i.e., selling oll each operaling segmenl)
lhe lheory here is lhal lhe parls are worlh more lhan lhe sum
Melhodology
The break-up value exhibil can be slruclured as a one-page exhibil wilh bolh values and commenls on a single page
or a summary sheel ol values and a back-up sheel ol loolnoles and compulalions
ln valuing a diversilied company, lhe break-up value is composed ol individual values lor lhe separale operaling
segmenls (generally, based on mulliples ol L8lT, L8lTA or L8lTDA) and lhe olher non-operaling ilems, such as cash,
debl, environmenlal liabililies, pension surpluses/delicils, lax credils, elc. The operaling segmenls are valued based on
an analysis ol whal similar companies have received in a precedenl lransaclion or by using lrading comps, DCls or a
L8O analysis
!. Segmenls.
A. Lach segmenl ol lhe company is valued independenlly in lhis seclion. The valualion melhod used
depends largely on lhe lype ol company and lhe available inlormalion. Discounled cash llow valualion
and analysis ol mulliples (e.g., premiums paid in precedenl lransaclions, or lrading mulliples ol
comparable companies plus an M&A premium) are lwo commonly used approaches. Conler wilh a leam
member lo choose lhe mosl appropriale valualion lechnique. 8e sure lo loolnole lhe chosen melhod
2. Cash and Lquivalenls.
A. lnclude any cash deemed unnecessary lo operale lhe business (i.e., excess cash), plus
markelable securilies

78

"4*./Y!U &(.?R+0+

3. Oplion Proceeds.
A. Use lhe mosl recenl linancial slalemenls lo delermine lhe number ol oplions oulslanding. loolnole lhe
dale ol lhe balance sheel used
8. ll in-lhe-money, mulliply lhe number ol oplions by lhe average exercise price (also lound in
lhe loolnoles)
C. Make sure lhal lhe number ol shares used lo calculale lhe oplion proceeds is added lo lhe number ol
shares oulslanding used lo calculale lhe per share dala
D. ln lhe "Commenls" column, lisl lhe number ol oplions oulslanding al a given dale and lhe average
exercise price ol lhe oplions
4. Pension Surplus (see loolnoles lo Annual Peporl or !0-K).
A. ln lhe evenl lhal lhe calculalion yields a negalive number, lhe exhibil enlry would be called "Pension
Delicil" and lhe value would be sublracled lrom lhe lolal assels
8. Pension Surplus/(Delicil) is calculaled as such.

WaX WaX
Plan Assels al lair Value 522.9 36!.2
Projecled 8enelil Obligalion 36!.2 or 522.9
Pension Surplus/(Delicil) !6!.7 (!6!.7)
C. Lisl lhe dale ol lhe linancial slalemenls used in calculaling lhe pension surplus

79

"4*./Y!U &(.?R+0+
5. Olher Assels.
A. Olher Assels are usually laken slraighl lrom lhe balance sheel. This lypically includes such ilems as
corporale real eslale (as opposed lo PP&L used by operaling division), advances lo alliliales and equily
inveslmenl in unconsolidaled subsidiaries. ll lhe markel value ol Olher Assels is known, lhen use lhal
number ralher lhan lhe book value
8. Nole lhe dale ol lhe balance sheel lrom which lhe value ol lhese assels was eslimaled
6. Olher llems include. Aller-lax Lnvironmenlal Liabililies, Tax Credils and lhe nel presenl value ol Nel Operaling
Loss Carrylorwards
7. Shorl-Term Debl. lrom mosl recenl balance sheel
8. Long-Term Debl. lrom mosl recenl balance sheel
9. Liquidalion Value ol Prelerred Slock. lrom mosl recenl balance sheel or lhe noles lo lhe linancial slalemenls
!0. Minorily lnleresl. lrom mosl recenl balance sheel or Markel Value (il known)
!!. Lquily Value (or Nel Assel Value).
A. Tolal ilems ! lhrough !0, adding and sublracling when appropriale. The resull is lhe pre-lax breakup
value ol lhe company's equily
8. ll possible, il is usually desirable lo analyze lhe breakup value on an aller-lax basis since in realily, raiders
would have lo pay laxes il lhey sold oll lhe individual segmenls ol lhe company. You will need lo
delermine lhe lax basis ol each segmenl lo ligure oul lhe laxes paid by segmenl and, lherelore, lhe
overall aller-lax breakup value. The only lruly accurale way lo delermine lhe lax basis lor each business is
lo oblain lhis number lrom lhe company. However, mosl ol lhe lime you will nol have access lo lhis
inlormalion so you musl make an eslimale. The process lor eslimaling lax basis will vary by induslry and
company. The concepl is lo slarl wilh lhe book value ol nel assels, sublracl oul delerred laxes and make
lurlher adjuslmenls based on lhe capilal inlensily ol lhe business and lhe lenglh ol lime lhe business has
been owned by lhe company. Consull wilh leam members as lo whal lax basis lo use and loolnole your
assumplion lor each segmenl

80

"4*./Y!U &(.?R+0+

!2. Markel Value.
A. Add lhe number ol shares oulslanding lrom lhe mosl recenl linancial slalemenls and lhe number ol
oplions (lrom 3 above) lo delermine lhe lolal shares oulslanding. loolnole lhe dale ol lhis value
8. Mulliply lhis by lhe recenl closing slock price. Nole lhis dale also
!3. loolnoles.
A. Lisl lhe number ol shares used lo calculale lhe per share numbers. Make sure lhis number includes lhe
oplions which are assumed lo have been exercised in 3 above (i.e., lhe number ol shares used lo
calculale oplion proceeds should be added lo lhe number ol shares oulslanding lo mainlain consislency)
8. Olher loolnoles as needed

8!

"4*./Y!U &(.?R+0+
An example ol a break-up value lor XYZ Company is illuslraled below
qpr D4206,K #'82',- o63=6-)4,
Z"+1YM T=3-)03' o63='
Segmenl ! $!!0.0 8.0x $880.0
Segmenl 2 90.0 !0.0 900.0
Segmenl 3 45.0 7.0 3!5.0
Corporale
!
(!2.0) 8.6 (!03.2)
1%1M_ aPGGBQ cBeA a^@dd^Bc
qpr D4206,K f4,L%0'(6-),8 +-'2.
Cash $30.0
Shorl-Term Debl (20.0)
Long-Term Debl (!90.0)
Liquidalion Value ol Prelerreds (70.0)
Lnvironmenlal Liabililies (Aller-lax) (36.0)
Nel Proceeds lrom Lxercise ol Oplions !00.0
Pension Surplus/(Delicil)
2
40.0
Tax Credils
3
50.0
NPV ol NOLs (Aller-lax)
4
45.0
Tolal Non-Operaling llems (5!.0)
M88('86-' o63=6-)4, a^@dIQBc
lully-Diluled Shares Oulslanding (mm) !25.0
9('L-6A M88('86-' o63=' 0'( #/6(' a^HBHG
Markel Price on June 30, 2007 !4.00
9('L-6A M88('86-' 9('2)=2 -4 T6(7'- ^QBd`
9('L-6A 9('LD4(04(6-' o63=' aP@QIIBQ
9('L-6A 9('LD4(04(6-' o63=' 0'( #/6(' aêBGH
9('L-6A 9('LD4(04(6-' 9('2)=2 -4 T6(7'- êBc`
Noles.
! Corporale expense valued al weighled average mulliple ol all lhree segmenls
2 Lqual lo Plan Assels al lair Value less Projecled 8enelil Obligalion
3 Tax credils are an aller-lax ligure, dollar lor dollar
4 NPV ol NOLs is lhe aller-lax discounled NOL cash llows

82

&3]50+0,0@( #,453,54*+

Aller preparing a sel ol valualions and deciding on a price lor lhe largel, an acquiring company musl decide how
much ol lhe largel lo acquire and how lo accounl lor il
ll an acquirer acquires up lo 20 ol a largel, il is recorded on lhe acquirer's books using lhe Cosl Melhod. lor an
acquisilion ol an inleresl belween 20 and 50, lhe Lquily Melhod is employed. When an acquisilion ol over 50
is made, lhe linancial slalemenls ol lhe largel are lully consolidaled wilh lhe acquirer's linancial slalemenls. All ol
lhese melhods can be accounled lor using lhe purchase melhod
#=88'.-'> 9(4:'>=(' 54( Y'-'(2),),8 M00(40()6-' T'-/4>
Lquily Melhod
and
One-Line Consolidali on
Consolidali on Slalemenl
Cosl Melhod
9'(:',-68'
M:J=)('>
Q`
PQ`
HQ`
^QQ`
9=(:/6.'
T'-/4>
Lquily Melhod
and
One-Line Consolidali on
Consolidali on Slalemenl
Cosl Melhod
9'(:',-68'
M:J=)('>
Q`
PQ`
HQ`
^QQ`
9=(:/6.'
T'-/4>

83

%*41*4 &33@5(,0(1
9=(:/6.' T'-/4>.
D4.- T'-/4>
lor acquisilions ol less lhan 20 ol voling slock
Pecognize income upon receipl ol dividends
Lxample.
Company A purchases a 5 inleresl in lhe Common Slock ol Company 8 lor $!,000. Company A records lhis
purchase on ils books by reducing lhe cash accounl by $!,000 and recognizing a $!,000 inveslmenl in Company 8
Company 8 subsequenlly declares and pays a $2,000 dividend on ils common slock. Company A records lhis
aclion by increasing ils cash balance by $!00 (5 x $2,000) and recognizing $!00 in inveslmenl income, ol which
70 is excluded lrom income lax

"636,:' #/''- "'54(' 9=(:/6.' M5-'( 9=(:/6.' M5-'( Y)&)>',>
Cash ($) 7,000.0 6,000.0 6,!00.0
lnveslmenls 0.0 !,000.0 !,000.0
Tolal Assels ($) 7,000.0 7,000.0 7,!00.0
Currenl Liabililies ($) !,000.0 !,000.0 !,0!0.5
Common Lquily 6,000.0 6,000.0 6,089.5
Tolal Liabilily and Lquily ($) 7,000.0 7,000.0 7,!00.0

+,:42' #-6-'2',-
lnveslmenl lncome ($) !00.0
Tax Liabilily ! (!0.5)
f'- +,:42' WaX cdBH
Nole.
! The Tax Liabilily assumes a marginal income lax rale ol 35. Tax Liabilily = !00 * (!0.7) * 0.35 = !0.5

84

%*41*4 &33@5(,0(1

ZJ=)-K T'-/4>
lor acquisilions ol more lhan 20 ol voling slock (or evidence ol inlluence on largel)
Pecognize income as proporlional inleresl in lhe (adjusled) income ol lhe largel company
Acquirer 26K consolidale resulls inlo ils ?447 linancials il il allains more lhan a 50 voling inleresl
Acquirer 2=.- consolidale resulls lor -6A 0=(04.'. il il allains more lhan an 80 voling inleresl
When recognizing income ol lhe largel, lhe acquirer musl apply purchase accounling adjuslmenls
lncrease value ol inveslmenl by acquirer's proporlional inleresl in largel income
Peduce lhe value ol lhe inveslmenl in lhe largel lo lhe exlenl ol dividends received
Slep-Up vs No Slep-Up.
"slep-Up". increasing lhe -6A basis ol lhe assels acquired lo lair markel value
conlrasled wilh "Wrile-Up". increasing lhe ?447 basis ol lhe assels acquired
why slep-up lransaclions are nearly an exlincl species.
general Ulililies doclrine repealed in Tax Pelorm Acl ol !986
scenarios under which a slep-up is slill considered.
large nel operaling loss carrylorwards on largel's books
largel is an S corporalion
acquirer/largel can benelil lrom cerlain grandlalher provisions

85

%*41*4 &33@5(,0(1
Purchase accounling adjuslmenls.
revaluing largel balance sheel.
goal is lo realize lhe lair Markel Value (lMV) ol lhe assels and liabililies
eliminale exisling amorlizing goodwill on largel's books (no amorlizalions since 200!see below)
eliminale delerred laxes on largel's books
il acquirer sleps up ils lax basis, lhen lhe revalued balance sheel equals lMV
in a no slep-up lransaclion, assels and liabililies are revalued al lheir lair markel values. A delerred lax accounl
is sel up lo equal lhe lax shield loregone (i.e., lhe delerred lax accounl lor lhe acquired company is nol
eliminaled)
Nel Assel Value = Pevalued AsselsPevalued Liabililies
Coodwill = Purchase PriceNel Assel Value
income slalemenl adjuslmenls.
il parl ol lhe consideralion is cash.
lose opporlunily cosl ol cash
exlra inleresl charges lrom debl issued
change in deprecialion lor revalued NP&Llhe 65-'(L-6A change will be lhe same under bolh slep-up and no
slep-up scenarios
] 844>*)33 ). ,4 34,8'( 624(-)C'>
inslead, il is periodically (i.e. annually) lesled lor impairmenl
il impairmenl is lound, lhe impairmenl is recorded and goodwill is 0'(26,',-3K reduced
previously, goodwill was amorlized over up lo 40 years
lhe SLC used lo recommend 25-year lile, bul lhis also depended on lhe induslry
add back any amorlizalion ol old goodwill
amorlize debl discounl/premium lrom revalued LTD over lhe average debl lile
amorlizalion ol discounl >':('6.'. income, amorlizalion ol premium increases income
inluilion. amorlizalion ol debl discounl premium elleclively adjusls inleresl expense lo currenl markel rales
il parl ol lhe consideralion is prelerred slock, prelerred dividends arise

86

B@-U?*` Q543F.+* &33@5(,0(1 [`.-U?* Z@a C(*

#-'0L=0 ), 16A "6.).
1(6,.6:-)4, M..=20-)4,.k
A acquires 8
Lach share ol 8 is exchanged lor $65 cash
Tolal lransaclion size is $4,876, which A raises by issuing $4,84! in long-lerm debl and using $6 in excess cash plus
oplions proceeds ol $29
Slep-up lax basis, no recaplure liabilily
Marginal lax rale ol 35.2
"636,:' #/''-.
9()4( -4 T'(8'( M>\=.- " 9=(:/6.' 9():' 6,> D42?),'>
WaX M " -4 FTo D422',- " 6. M>\=.-'> <44>*)33 M>\=.-2',- M N "
M..'-.k
Olher Assels 83! !,884 47!, 29 Land Peval., Oplions Proceeds 2,384 (35) 3,!80
Nel PP&L !,453 !,499 749 lair Markel Value 2,248 3,70!
Coodwill 54 754 (754) Lliminale Old Coodwill 2,472 2,526
1%1M_ M##Z1# P@GGc I@^Gb I@eGP d@IQb
Liabililies and Shareholders' Lquily.
Currenl Liabililies 756 !,296 !,296 2,052
Long-Term Debl and Minorily lnleresl 298 !,036 (!04) Currenl Pale Pevalualion 932 4,84! 6,07!
Y'5'(('> 16A'. PGP Pcc WPccX Z3)2),6-' Y'5'(('> 16A'. ] PGP
Tolal Liabililies !,286 2,620 2,228 8,355
#/6('/43>'(.[ ZJ=)-K ^@QHP ^@H^b ccb ;'&63=6-)4, M>\=.-2',- P@IQI WP@IQIX ^@QHP
1%1M_ _+M"+_+1+Z# MfY #EM;ZE%_YZ;#[ Zh!+1p P@GGc I@^Gb I@eGP d@IQb

87

B@-U?*` Q543F.+* &33@5(,0(1 [`.-U?* Z@a C(*
1(6,.6:-)4, M..=20-)4,.k
A acquires 8
Slep-up lax basis, no recaplure liabilily
+,:42' #-6-'2',-.
9()4( -4 T'(8'(
9=(:/6.'
M::4=,-),8 D42?),'>
M " M>\=.-2',-. D422',- MN"

Pevenues and lnleresl lncome $3,485 $5,659 (.432) lnleresl on $6 Cash (7.2) $9,!44
Cosl ol Sales !,799 4,22! 50 Deprecialion lncrease (!5 year lile) 6,070
Selling, Ceneral and Adminislralive Lxpense 998 9!8 (!9) Lliminale Prior Coodwill Amorlizalion (40 years),
A, A$0 2,,:0+// BC,6*+D9*+,(
!,897
+,-'('.- ZA0',.' IQ dG I@HQc Y'?- ;'&63=6-)4, WPH K'6(.Xs +,-'('.- 4, aI@cI^ Y'?- W^QBH`X eIH
lncome 8elore Taxes 648 427 532
+,:42' 16A'. Pc^ ^bb W^dcX +,:42' 16A'.t ^cb
fZ1 +fD%TZ aGeb aPHQ aGIH
L.P.S. $2.97 $3.37 Pro lorma L.P.S. $2.78
Dividends per Share !.!3 !.!6 Pro lorma Dividends per Share !.!3
Shares Oulslanding !24 74 Pro lorma Shares Oulslanding !24
Markel Assumplions
Slock Price per Share $62.00 $58.00 Pro lorma Slock Price per Share $62.00
P/L Palio 2!.0x !7.0x Pro lorma P/L ralio 22.3x
Tolal Markel Value $4,588 $4,300 Pro lorma Tolal Markel Value $4,588
Dividend Yield !.8 2.0 Pro lorma Dividend Yield !.8

88

B@-U?*` Q543F.+* &33@5(,0(1 [`.-U?* Z@a =D@
f4 #-'0L=0 ), 16A "6.).]9('LFM#" de
1(6,.6:-)4, M..=20-)4,.k
A acquires 8
No slep-up lax basis
Original lax basis ol Nel PP&L lor 8 is $873
"636,:' #/''-.
9()4( -4 T'(8'( M>\=.- " 9=(:/6.' 9():' 6,> D42?),'>
WaX M " -4 MFTo D422',- " 6. M>\=.-'> <44>*)33 M>\=.-2',- M N "
M..'-.k
Olher Assels 83! !,884 47!, 29 Land Peval., Oplions Proceeds 2,384 (35) 3,!80
Nel PP&L !,453 !,499 265 AlMV !,764 3,2!7
Coodwill 54 754 (754) Lliminale Old Coodwill 2,993 3,047
1%1M_ M##Z1# P@GGc I@^Gb I@Îc d@III
Liabililies and shareholders' equily.
Long-Term Debl and Minorily lnleresl 298 !,036 (67) Currenl Pale Pevalualion 969 4,84! 6,!08
Delerred Taxes 232 288 (288) Lliminale Delerred Taxes 232
14-63 _)6?)3)-)'. ^@Pce P@ePQ P@PeH c@GdP
Shareholders' Lquily !,052 !,5!7 366 Pevalualion Adjuslmenl !,883 (!,883) !,052
1%1M_ _+M"+_+1+Z# MfY #EM;ZE%_YZ;#[ Zh!+1p P@GGc I@^Gb I@Îc d@III

89

B@-U?*` Q543F.+* &33@5(,0(1 [`.-U?* Z@a =D@
1(6,.6:-)4, M..=20-)4,.k
A acquires 8
No Slep-up lax basis
+,:42' #-6-'2',-.
9()4( -4 T'(8'(
9=(:/6.'
M::4=,-),8 D42?),'>
M " M>\=.-2',-. D422',- MN"

Pevenues and lnleresl lncome $3,485 $5,659 (.432) lnleresl on $6 Cash (7.2) $9,!44
Cosl ol Sales !,799 4,22! !8 Deprecialion lncrease (!5 year lile) 6,038
A, A$0 2,,:0+// BC,6*+D9*+,(
!,897
+,-'('.- ZA0',.' IQ dG G@HQc Y'?- ;'&63=6-)4, WPH K'6(.Xs +,-'('.- 4, aI@cI^ >'?- W^QBH`X eII
lncome Taxes 28! !77 (!65) lncome Taxes !99
NLT lNCOML $367 $250 $366
L.P.S. $2.97 $3.37 Pro lorma L.P.S. $2.95
Dividends per Share !.!3 !.!6 Pro lorma Dividends per Share $!.!3
Markel Assumplions
Slock Price per Share $62.00 $58.00 Pro lorma Slock Price per Share $62.00
P/L Palio 2!.0x !7.0x Pro lorma P/L Palio 2!.0x
Tolal Markel Value $4,588 $4,300 Pro lorma Tolal Markel Value $4,588
Dividend Yield !.8 2.0 Pro lorma Dividend Yield !.8

90

B@-U?*` Q543F.+* &33@5(,0(1 [`.-U?* Z@a =F4**
f4 #-'0L=0 ), 16A "6.).nWFM#" deX
1(6,.6:-)4, M..=20-)4,.k
A acquires 8
Original lax basis ol Nel PP&L lor 8 is $873
"636,:' #/''-.
9()4( -4 T'(8'( M>\=.- " " 6. 9=(:/6.' 9():' 6,> D42?),'>
WaX M " -4 FTo D422',- M>\=.-'> <44>*)33 M>\=.-2',- M N "
M..'-.k
Olher Assels 83! !,884 47!,29 Land Peval., Oplions Proceeds 2,384 (35) 3,!80
Nel PP&L !,453 !,499 749 AlMV 2,248 3,70!
Coodwill 54 754 (754) Lliminale Old Coodwill 3,!58 3,2!2
1%1M_ M##Z1# P@GGc I@^Gb I@eGP ^Q@QdG
Liabililies and shareholders' equily.
Long-Term Debl and Minorily lnleresl 298 !,036 (!04) Currenl Pale Pevalualion 932 4,84! 6,07!
Y'5'(('> 16A'. PGP Pcc WPccX@ ece Z3)2),6-' Y'5'(('> 16A'.s D=((',- ece d^c
Tolal Liabililies !,286 2,620 2,9!4 9,04!
Shareholders' Lquily !,052 !,5!7 20! Pevalualion Adjuslmenl !,7!8 (!,7!8) !,052
1%1M_ _+M"+_+1+Z# MfY #EM;ZE%_YZ;#[ Zh!+1p P@GGc I@^Gb I@eGP ^Q@QdG

9!

B@-U?*` Q543F.+* &33@5(,0(1 [`.-U?* Z@a =F4**

1(6,.6:-)4, M..=20-)4,.k
A acquires 8
9()4( -4 T'(8'(
9=(:/6.'
M::4=,-),8 D42?),'>
M " M>\=.-2',-. D422',- MN"

Pevenues and lnleresl lncome 3,485 5,659 (.432) lnleresl on $6 Cash (7.2) 9,!44
Cosl ol Sales !,799 4,22! 50 Deprecialion lncrease (!5 year lile) 6,070
A, A$0 2,,:0+// BC,6*+D9*+,(
!,897
+,-'('.- ZA0',.' IQ dG I@HQc Y'?- ;'&63=6-)4, WPH K'6(.Xs +,-'('.- 4, aI@cI^ >'?- W^QBH`X eIH
lncome Taxes 28! !77 (!98) lncome Taxes !87
fZ1 +fD%TZ Geb PHQ GIH
L.P.S. 2.97 3.37 Pro lorma L.P.S. 2.78
Dividends per Share !.!3 !.!6 Pro lorma Dividends per Share !.!3
Markel Assumplions
Slock Price per Share 62.00 58.00 Pro lorma Slock Price per Share 62.00
P/L Palio (x) 2!.0 !7.0 Pro lorma P/L Palio (x) 22.3x
Tolal Markel Value 4,588 4,300 Pro lorma Tolal Markel Value 4,588
Dividend Yield () !.8 2.0 Pro lorma Dividend Yield () !.8

92

&334*,0@(VK0?5,0@( &(.?R+0+

ln general, execulives ol acquiring companies are concerned wilh lhe ellecls ol an acquisilion on lhe acquiring
company's lulure earnings. Since slock price valualion is subslanlially allecled by a Company's Price/Larnings (P/L)
ralio, lhe lower lhe earnings gel as a resull ol an acquisilion lhe lower lhe price musl gel lo mainlain lhe P/L ralio. ln
general, il a lower P/L company acquires a higher P/L company, lhe lransaclion is dilulive and vice versa il slock is
used as all ol or parl ol lhe consideralion
lor lhis reason, an accrelion/dilulion analysis is carried oul lo delermine il an acquisilion enhances or dilules earnings
per share
The analysis is simple. il lhe aller-lax cosls are grealer lhan lhe aller-lax benelils, lhe lransaclion will be dilulive, and
il lhe aller-lax benelils are grealer lhan lhe aller-lax cosls, lhe lransaclion will be accrelive
Polenlial accrelion resulling lrom a lransaclion include.
L8lT lrom lhe acquired company
synergies/cosl savings realized lrom lhe lransaclion
planl closings
labor consolidalion
beller raw malerials pricing
Polenlial causes ol L.P.S. dilulion include.
goodwill amorlizalion. price paid lor lhe equily minus lhe lair markel value ol lhe nel assels (i.e., book value ol
lhe equily) amorlized by up lo 40 years
incremenlal inleresl
slock issuances in slock swaps
lransaclion cosls

93

&334*,0@(VK0?5,0@( &(.?R+0+

M::('-)4,OY)3=-)4, ZA6203'
Assumplions.
Company A acquires Company 8 lor $!00 cash
book basis is $60
goodwill crealed is $40, no amorlizalion
!00 linanced wilh debl al !0 inleresl rale
+,:42' #-6-'2',-.
9()4( -4 T'(8'( T'(8'>
M " MN"
Sales ($) 300 !20 420
Cosl ol Coods Sold !00 50 !50
Selling, Ceneral and
Adminislralive Lxpense
!00 40 !40
lnleresl Lxpense 20 !4 44 !
<44>*)33 M24(-)C6-)4, Q Q Q
lncome 8elore Taxes 80 !6 86
+,:42' 16A'. IQ c IG
fZ1 +fD%TZ WaX IQ c IG
L.P.S. ($) !.00 !.00 !.075
Accrelion/(Dilulion) () (7.5)
Nole.
! Lquals $20 + $!4 + incremenlal inleresl expense ol $!0 (!00 * !0)

94

&(.?R+0+ @A #F.4*F@?7*4+

Y'5),)-)4,
The analysis ol shareholders exhibil provides insighl inlo shareholder composilion, idenlilies large blocks ol slock and
provides an underslanding ol insider holdings
T'-/4>4348K
!. Major Shareholders
A. The mosl recenl proxy slalemenl will disclose any shareholder owning 5 or more ol lhe oulslanding
slock ol each class ol equily
2. lnslilulions
A. Use lhe lisl lwo seclions ol Speclrum lo idenlily lhe major inslilulional shareholders. This should include
lunds and !3-l lilers. Avoid double counling ol inslilulional and inveslmenl companies by including only
lhose lund holdings lhal do nol have a plus mark in lronl ol lhem
8. Lisl lhe lop len inslilulional holdings or as many more companies lhal hold ! or more ol lhe
oulslanding slock
C. Sum lhe resl ol lhe inslilulional holdings and nole lhe number ol holders lhis represenls
Calculaling inslilulional holdings should be as lollows.

+-'2 f=2?'( 45 +,.-)-=-)4,. f=2?'( 45 #/6('.
!3-l lilings 55 5,323,360
93=.k F=,> E43>),8. c ^Qc@eIQ
Tolal lnslilulional Holdings 63 5,432,000
_'..k 140 ^Q +,.-)-=-)4,. W^QX WG@GHI@QQQX
Olhers 53 2,078,000

95

&(.?R+0+ @A #F.4*F@?7*4+

3 lnsiders (Direclors, Ollicers, Managemenl)
A. Use lhe proxy slalemenl lo idenlily lhe insider and benelicial shareholdings
4 Tolal Nonpublic Holdings
A. Sum inslilulion and insider holdings
5 Tolal Public Holdings
A. Plug lor lhe dillerence belween "Tolal Nonpublic Holdings" and "Tolal Shares Oulslanding"
6 loolnoles
A. (!) and (2) are slandard
8. The holdings ol each direclor or ollicer should be loolnoled as per lhe proxy
M,63K.). 45 #/6('/43>),8.
M24=,- `
lnslilulions
!
5,323,360 35.8
Olher lnslilulions (lolal ol) !08,640 0.7
14-63 +,.-)-=-)4,63 E43>),8. H@IGP@QQQ GeBH
lnsiders
2
!,!02,052 7.4
%-/'( +,.)>'(. W-4-63 45X cPe@^PH HBe
Tolal lnsider Holdings !,928,!77 !3.0
Tolal Nonpublic Holdings 7,360,!77 49.5
14-63 9=?3): E43>),8. b@HQG@Pê HQBH
1%1M_ #EM;Z# %!1#1MfY+f<
G
Î@ceG@GdG ^QQBQ
Noles.
! 8ased on lhe lalesl !3-l lilings ol inveslmenl companies and inslilulions
2 8ased on proxy slalemenl daled _______
3 Oulslanding as ol lorm !0-Q daled _______

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