book

Investment Banking For Dummies

by Matthew Krantz, Robert R. Johnson

February 2014

Beginner

384 pages

10h 33m

English

For Dummies

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About This BookFoolish AssumptionsIcons Used in This BookBeyond the BookWhere to Go from Here
What Investment Banking IsThe role investment banking playsHow investment banking differs from traditional bankingThe services investment banks provideHow investment banks are organizedThe current lay of the investment banking landTypes of investment banking operationsHow investment banks get paidHow Investment Banking Is DoneFinding the financial statementsUnderstanding the importance of financial statements and ratiosZeroing in on past transactionsSeeing the value of fixed incomeTurning Into an Investment Banking ProPutting the discounted cash flow analysis to workSeeing how leverage becomes a force in investment bankingPinpointing buyout targetsPutting Investment Banking to WorkStaying in compliance with the rulesLooking beyond the published financial statementsMaking adjustments to financial statements for comparability
Putting the For-Sale Sign on Corporate AmericaMergers and acquisitionsLeveraged buyoutsPrivate business salesInitial public offeringsHelping Investors Decide Whether to Buy or SellThe importance of researchWhat do the analysts do?Digging Into the Role of the Trading DeskWhy investment banks are into tradingHow investment banks turn pennies into billionsThe type of analysis used in trading operations
Getting Companies Ready for Sale on Public MarketsMeeting the requirements to make an IPO happenWriting the prospectusSupporting the IPO: Making success lastSeeing What Sell-Side Analysts DoThe goals of the sell-side analystWhat investors look to sell-side analysts forSpreading the word: Disseminating sell-side researchExamining a Sample Research ReportWhat to look for in the documentThe main sections of a research reportWays to look beyond the “buy” or “sell”
Come Here Often? The Basics of Mergers and AcquisitionsKinds of mergersWhy companies merge instead of simply growing organicallyFirms that make attractive acquisition targetsHow companies identify firms to merge withThe nature of the merger: Friendly or hostile?Tools Used to Analyze the M&A DealThe role of the buy-side M&A advisorThe role of the sell-side M&A advisorWhy Many M&A Deals Go WrongMisplaced incentivesFaulty analysisOverstated synergiesCulture warsThe winner's curse: Overpaying
In This Corner: Introducing the PlayersInvestment banksBig institutionsManagementStock and bond investorsAiming for the Right Targets in a Leveraged BuyoutIdentifying companies that can work in a leveraged buyoutAppreciating the power of cash flowComing to terms with the return analysis: Internal rate of returnFinding the ExitSetting a target for exit in timeConsidering how the exit will happen
Finding What You Need on the Securities and Exchange Commission's WebsiteWhat types of information you can findThe key types of documentsHow to use EDGAR to pinpoint informationGetting Data in a Format You Can Work WithAssembling the tools you needImporting financial information into ExcelGetting in tune with interactive dataPaying Attention to the Non-Financial InformationMonitoring news streams for investment banking ideasQuickly processing information with aggregatorsDoing research on the key players in a deal
Income StatementsLocating the areas of interest to investment bankersTweaking the statement with different assumptionsFinding investment banking opportunitiesBalance SheetsFinding your way around the key partsUnderstanding a company's financial strengthLocating pitfalls and opportunitiesStatement of Cash FlowsSeeing why the cash flow statement is so important in deal makingUnderstanding the key parts of the documentCalculating free cash flowProxy StatementsLearning about the key players in a dealIdentifying the management team's incentivesAnalyzing management pay packages

Valuation Multiples: Assessing How Much the Company Is WorthInvestors’ favorite valuation tool: P/E ratioGoing old school with price-to-bookPutting a price on profitabilityLiquidity Multiples: Checking Companies’ Staying PowerDeciphering debt to equityGetting up to speed with the quick ratioInterpreting interest coverageProfitability Ratios: Seeing How a Company's Bottom Line Measures UpWhy gross margin isn't so gross after allIncome from continuing operations: Looking at profit with a keen eyeKeying into profits with net marginEfficiency Ratios: Knowing How Well the Company Is Using Investors’ MoneyFinding out about return on assetsDigging into return on capitalUncovering company secrets with return on equityCalculating a company's growth rate
Performing an Industry AnalysisUnderstanding why industry analysis is importantCreating a comparison universeAdjusting the industry comparison universeUnearthing Company Trends and Common sizing the Financial StatementsComparing growth ratesComparing leverageComparing various profit marginsSeeing How a Company Stacks Up: Comparing the Key RatiosSizing up valuationComparing total debt-to-equitySizing up companies on their efficiencyIndustry ratios
Introducing StockCharacteristics of stockTypes of stockUnderstanding stock pricingFinding Past TransactionsTracking the stock marketStudying private dealsLooking at pre-IPO marketplacesExamining buyoutsAnalyzing Past TransactionsKnowing what the market will bearKnowing when the market is distortedTabulating key ratios for past dealsUnderstanding the pitfalls
Introducing BondsIdentifying the Various Types of BondsConvertible bondsCallable bondsPuttable bondsFloating-rate bondsZero-coupon bondsKnowing Their Place: The Position of BondholdersUnderstanding Bond PricingIntroducing the concept of present valueRelating yield to maturity and pricePlaying the spread: How different factors affect bond pricesConsidering bond sensitivity to changes in interest ratesTracking the Bond MarketDebt or Equity: How a Company Chooses
Gearing Up for Discounted Free Cash FlowComputing free cash flowForecasting free cash flowCalculating the Weighted Average Cost of CapitalUnderstanding why the weighted average cost of capital is so importantMeasuring the cost of debt and equityUnderstanding the capital asset pricing modelGoing for Terminal ValueKnowing the perpetuity growth formulaApplying the constant growth formulaApplying the two-stage growth modelStress-testing the resultsValuing a Share of Stock
Seeing How Leveraged Buyouts Are StructuredThe types of financingUnderstanding seniority and maturityBuilding a Leveraged Buyout ModelCreating a pro forma modelDeciding on methods of financingSeeing how the results work outThe importance of taxes in a leveraged buyoutWhat can go right and what can go wrong
Understanding the Importance of Return on EquityWhat return on equity showsPros and cons of return on equity versus other profitability measuresHow return on equity can help guide an investment banking dealUsing a DuPont AnalysisThe three-factor DuPont methodThe five-factor DuPont methodInterpreting the ResultsCola warsWhat the numbers meanLooking past the numbers for insightTelling companies how to react to the numbers
The History of Regulation of Investment BankingThe goals of investment banking regulationWhy the rules of today are the result of days pastHow regulations have shaped the investment banking industryThe Ins and Outs of Modern Investment Banking RulesThe types of rules imposed on investment bankingHow investment banking rules changed after the financial crisisThe Rules on AnalystsWhy rules were neededThe not-so-delicate balancing act analysts playWhat disclosure and compliance are requiredWhy Simply Making Rules Isn't Enough
Did You Really Sell That? When Companies Aggressively Report RevenueDon't let the sun go down on meThe truth?Lucy, You Got Some ’Splainin’ to Do: When Companies Understate Their ExpensesWhat a wasteCrazy like a foxMissed It by That Much: When Companies Overstate Their Financial PositionThose pesky pensions: The epidemic of firms understating pension liabilitiesWe are the worldKeeping Investors Off-BalanceEnron's special purposeA mountain of a scandalSwap meetWhat Should an Investment Banker Do?
Knowing Your AlternativesHedge fundsVenture capitalCommoditiesReal estateDigging Into Asset ManagementAttracting investors to asset managementCreating asset management toolsManaging Potential Conflicts with ClientsHow asset management can cause conflictsHow to eliminate and manage conflicts
Setting the SceneThe acquirerThe targetConsidering the OptionsIdentifying the optionsLooking at financingCreating the AnalysisAn analysis of the financial statementsStructuring a DealForm of acquisitionCreating pro forma statementsSuccess or Failure
The Dot-Com Boom and BustTainted Research ScandalsEnron and the Accounting ScamsThe Mortgage Debacle and Collapse of LehmanThe Flash CrashThe London Whale at JPMorgan and Barings BankLong-Term Capital ManagementBankruptcy in Jefferson County, AlabamaIPO Allocations with CSFBBad Mergers and Acquisitions Like AOL Time Warner
Financial Analysis Isn't PhysicsShow Your Sensitive SideMonte Carlo Isn't Just for High RollersWhat Can Go Wrong Will Go WrongIt's Tough to Make Predictions, Especially about the FutureThe Investor of Today Doesn't Profit from Yesterday's GrowthGarbage In, Garbage OutRates Are Falling — It's a Better Deal!Read Your Putt from Several AnglesThe Weighting Is the Hardest Part
BloombergReutersStandard & Poor'sRenaissance Capital and IPOScoop.comThe Securities and Exchange CommissionMoody'sFreeStockCharts.comIndex Fund AdvisorsMorningstarBureau of Labor StatisticsDepartment of CommerceFederal ReserveTrefis
Exploring the Roots of Investment BankingGoing way back: Evolving out of traditional banksThe Renaissance of bankingBanking starts to spread to BritainBanking Catches On in the United StatesWitnessing the development of modern investment bankingSeeing how investment banks were threatened by banksFeeling the pain: The financial crisis of 2007 changes everything

Content preview from Investment Banking For Dummies

Chapter 16

Seeing How Some Companies Lie, Cheat, and Steal Their Way to the Top

In This Chapter

Understanding how companies can manipulate accounting numbers

Seeing how investment bankers can identify accounting problems

Identifying potential accounting red flags

Understanding the importance of accounting assumptions

Developing a skeptical nature

The lifeblood of investment banking is the analysis of financial statements like the ones we introduce in Chapter 7 (for example, the income statement, balance sheet, statement of cash flows, and proxy statement). Even though each of these statements is prepared using the same rules — generally accepted accounting principles (GAAP) — and the financial statements are audited by independent accounting firms, like Alice in Wonderland, things aren't always as they seem. A successful investment banker is part financial analyst and part detective. An inquisitive and skeptical nature is essential.

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