Cambridge University

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Cambridge University
Presentation to

• Investment Banking Interviews

13 October 2003
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Presenting Today
Elizabeth Brown Analyst Corporate Finance -
Mergers Acquisitions Gema Movilla Analyst
Corporate Finance - Mergers Acquisitions
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Reasons to consider Investment Banking

• Develop wide range of skills
• Quantitative skills valuation, accounting, etc.
• Qualitative skills strategy, team and project
  management, presentation skills, negotiating
  skills etc.
• Interact with senior management
• Deal directly with senior management
• Transactions undertaken are high profile, company
  altering events
• Work with highly talented peers
• Learn from those around you
• Early responsibility
• Steep learning curve
• Industry expertise or breadth of knowledge across
  industries
• Specialise in an industry (e.g. Technology,
  Healthcare, etc.) or
• Specialise in a product group (e.g. MA, High
  Yield, etc.) covering many industries
• Fast pace of the City
• Breadth of different types of transactions and
  experiences
• Busy, high energy environment

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Agenda

• Introduction to Investment Banking
• Investment Banking
• Capital Markets
• What you should know before applying
• Appendix
• Company Valuation Overview

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Introduction to Investment Banking
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What do Investment Banks do?
Company Related (Sell side)
Market Related (Buy side)

• Capital Markets
• Sales
• Suggest investment opportunities
• Allow clients to trade
• Trading
• Provide liquidity
• Research
• Research equities/bonds

• Investment Banking
• Mergers Acquisitions
• Strategic Advice
• Transaction Execution
• Corporate Finance
• Financing
• Risk Management

Investment Bank
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Investment Banking
Mergers and Acquisitions

• Advise companies on mergers, acquisition and
  restructuring transactions
• Sell-side assignments (represent client in the
  sale of its company or some of its assets)
• Buy-side assignments (represent potential
  acquirers and negotiate transactions)
• (Hostile) take-over defense/advisory

Evaluate

• Valuation
• What is a company worth?
• Market Analysis
• Share price performance
• Premium Analysis
• Relative Valuation
• Comparable Companies
• Comparable Transactions
• Absolute Valuation
• Discounted Cash Flow analysis

• Strategy
• How can a company deliver value to its
  shareholders?
• Growth
• Synergies
• Competitive Positioning
• Survival

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Investment Banking
Corporate Finance

• Help companies issue shares and debt instruments
  to the market
• Investors try to estimate future value of the
  shares
• Valuation heavily dependent on expectations of
  future performance (mainly profits)
• Future performance is hard to accurately quantify
  
• Valuations often driven by investor sentiment
  based on a particular investment story
• Investors are trying to estimate the credit risk
  associated with debt instruments
• Valuation heavily dependent on ability of company
  to meet future interest payments
• Estimate is more one of risk of reaching a given
  target rather than ultimate success of the
  business
• More mathematical relationship than valuation of
  shares

Evaluate

• Valuation
• How does raising capital affect the company?
• Capital requirements
• Particular investment story
• Method for raising capital

• Market Conditions
• How can a company raise capital?
• Investor sentiment
• Institutional behavior
• Leverage (proportion of debt/equity)

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Capital Markets
Sales

• Take buy/sell orders from clients
• Suggest potential trade ideas
• Update investors on market activity
• Advise on overall portfolio strategy

Trading

• Execute buy/sell orders on behalf of clients
  taken by Sales people
• Provide liquidity in the market
• Price complex/illiquid securities e.g., fixed
  income derivatives
• Speculate with the firms own money
  proprietary (or prop.) traders

Research

• Undertake detailed research on industry sectors
  and the companies within them
• Publish research notes containing valuation
  perspectives
• Make buy/sell recommendations

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What You Should Know Before Applying
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What Investment Banks are Looking For
Skills Required by Investment Bankers and How to
Demonstrate Them

• Problem solving and analytical abilities
• Logical and accurate approach
• General business awareness
• Challenges faced in previous experiences
• Personal presence
• How you present yourself at the interview
• Personal accomplishments
• Leadership ability
• Extra curricular activities
• Motivation
• Initiative
• Record of personal achievements
• Future aspirations
• Knowledge of current affairs
• Bias towards wanting to learn
• Team player
• Extra curricular activities

Investment Banking offers a variety of roles for
a variety of individuals
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What Investment Banks are Looking For
Tips and Interview Techniques

• Why you want to be an investment banker . . . .
• Will be different for each person
• Your resumé should tell much of the story
• Why this firm . . . .
• Demonstrate a broader understanding of the
  industry
• Who else are you talking to (be specific)?
• How would you compare firm A with firm B?
• Are you interviewing outside of investment
  banking? Why?
• Answering tough or unexpected questions
• Take a moment to think about your answer a well
  thought out answer is better than a fast answer
• Be direct in your answer and stand by your
  reasoning
• Remain composed and balanced
• Personal impact is important
• Look the interviewer in the eye!

Convince the interviewer that Investment Banking
is the right career for you
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Some Typical Investment Banking Interview
Questions

• What do Investment Banks do?
• Why do you want to be an Investment Banker?
• Why do you want to work for Lehman Brothers?
• What skills do you think Investment Bankers
  require?
• How do you value a company?
• If you had some money, where would you invest it?
• What would make you buy or sell a security?
• Tell me about a recent / current transaction that
  you have read about?
• Why do you want to work in MA rather than
  Trading?

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Overview of Lehman Brothers
Who We Are
Franchise
Global presence with balanced revenue mix
Best operator strategy instead of scale/focus
strategies
Strategy
People
Team players with a long history together
Future
Strong growth and exciting future
Culture
One Firm Culture
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Company Valuation Overview
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Mergers Acquisitions and Corporate Finance

• Valuation areas you should be familiar with prior
  to making your application

Finance
Accounting

• Comparable Company Analysis
• Enterprise vs. equity value multiples
• Comparable Transaction Analysis
• Premium analysis
• Discounted Cash Flow Analysis
• Free cash flow
• Terminal value
• WACC

• Income Statement
• Revenues
• Profits
• Balance Sheet
• Assets
• Liabilities
• Cash Flow Statement
• Free cash flow

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Market Analysis
2 Year Target plc Share Price Graph

• Analyse
• Historic share price performance
• Market sentiment
• Shareholders-in-price

Full Year Results
Interim Results
Full Year Results
52 week high
Major Shareholder increases shareholding
52 week low
Major Shareholder reduces shareholding
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Relative Valuation
Comparable Companies

• Values a company based on the relative market
  valuations of its listed peers
• Why value a company using comparable companies?
• What to pay/sell a company for?
• What price can a company expect to trade at after
  an IPO?
• Shares of public companies have a market price
• When number of shares known, implies a market
  capitalisation (Equity Value)
• Equity Value multiples (e.g. P/E) can be
  calculated
• Equity Value plus value of Net Borrowings equals
  Enterprise Value
• Enterprise Value multiples (e.g Sales, EBITDA,
  EBIT)
• Valuation multiples vary across industries,
  geographies and specific companies based on
  market perception
• What drives this valuation?
• Sales (Revenue Multiples)
• Profits (EBITDA, EBIT and P/E Multiples)

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Comparable Companies Analysis
Global Brewing Companies
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Relative Valuation
Comparable Transactions

• Values a company based on prices that have been
  paid in the market for similar businesses
• Why value a company using comparable
  transactions?
• What to buy/sell a company for?
• Can you buy a company for its market
  capitalisation? No
• Market price of shares is the price you can buy
  limited amounts of shares in the market
• To buy more shares and gain control of a
  company you have to increase the supply
• Need to offer a higher price to current investors
• Bid Premia (30 - 40 in the UK) reflects this
  control premium
• Paying a premium also results in paying higher
  multiples ie. higher EBITDA, EBIT and Sales
  multiples
• Varies across industries and geographies and for
  specific transactions
• By looking at comparable transactions can see
  what the mean is in a particular industry or
  geography

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Comparable Transactions Analysis
Global Brewing Transactions
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Absolute Valuation
Discounted Cash Flow (DCF)

• Determines what a company is worth on a
  standalone basis independent of market
  perceptions
• Add up all the free cash flows accruing to the
  company in the future after having discounted
  them to take account that they are in the future
• Cash today is worth more than cash tomorrow
• Imagine interest rates of 3. Could invest 100
  today and have 103 in a year
• Hence need to discount future free cashflows to
  give an Enterprise Valuation
• Free Cash cash available to pay for financing
• Subtract net debt to give an Equity Valuation

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Discounted Cash Flow (DCF)
Cash flows and Indicative Valuation
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Valuation Overview
Take-out Price Range for Target plc
IndicativeValuation Range
162
154
183