Equity Valuation: Models from Leading Investment Banks

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A Word of Caution

LBO models value companies from the perspective of a financial investor who acquires a company, recapitalizes its financial structure and restructures operations to increase profitability and capital efficiency. Used in combination, DCF and LBO models give a more complete picture on how companies are valued in competitive financial markets. From the perspective of a private equity investor, the value of controlling a company can be substantial. Investors of publicly listed companies can benefit from leveraged buyouts as private equity investors usually have to offer a control premium to take a public company private. Studying LBO models helps investment professionals, students and anyone else interested in equity valuation to understand how an increasingly important investor group values equity.

Financial analysts at leading investment banks such as UBS, Deutsche Bank, Morgan Stanley, Goldman Sachs and Credit Suisse use LBO models to identify future LBO candidates. Like any other model, LBO models are based on simplifying assumptions. Before interpreting the results of an LBO model, investors should always carefully review the assumptions made, including those not immediately evident within the published research. Financial sponsors, of course, use similar LBO models when analyzing potential leveraged buyouts and in some cases – especially as a deal becomes live – considerably more detailed models. However, the knowledge base of a financial analyst not directly ...