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THIRD EDITION
www.investmentbankingbook.com
Copyright © 2020 by Joshua Rosenbaum and Joshua Pearl. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Second Edition published by John Wiley & Sons, Inc. in 2013.
First Edition published by John Wiley & Sons, Inc. in 2009.
Published simultaneously in Canada.
Cover design: Wiley
Cover images: Stock Prices © Alan Schein/ Getty Images, Blank golden award medal with ribbon © SCOTTCHAN/Shutterstock, Gold polished metal, steel texture © Pooh photo/Shutterstock
Author photos: Courtesy of Noli Novak
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ISBN 978-1-119-70618-2 (cloth)
ISBN 978-1-119-70658-8 (ePDF)
ISBN 978-1-119-70655-7 (ePub)
In loving memory of Ronie Rosenbaum, an inspiration
for strength and selflessness.
—J.R.
To the memory of my grandfather, Joseph Pearl, a Holocaust
survivor, for his inspiration to persevere and succeed.*
—J.P.
Investment Banking, Third Edition is supplemented by a suite of products that will further enhance your understanding of the material, including:
Professors can learn more about available instructor and student resources by visiting: www.wiley.com/go/ib3eresources
Valuation Models for the methodologies discussed in Investment Banking, Third Edition are available with purchase of the book. To access the models visit: www.wiley.com/go/ibebook3e
There are six model templates as well as six completed models, one for each of the following:
The Investment Banking Workbook is designed for use both as a companion to Investment Banking, Third Edition, as well as on a standalone basis. The Workbook provides a mix of multi-step problem set exercises, as well as multiple choice and essay questions—over 500 questions in total. It also provides a comprehensive answer key that aims to truly teach and explain as opposed to simply identify the correct answer. Therefore, the answers themselves are an effective learning tool. The completion of this comprehensive guide will help ensure the achievement of your professional and educational milestones.
Investment Banking Focus Notes provides a comprehensive, yet streamlined, review of the basic skills and concepts discussed in Investment Banking, Third Edition. The Focus Notes are designed for use as a companion to the main book as well as a standalone study program. This text serves as a one-stop resource in an easy-to-read-and-carry format that serves as a perfect reference material for a quick refresher.
Focus Notes seeks to help solidify knowledge of the core financial topics as true mastery must be tested, honed, and retested over time. It is the ultimate self-help tool for students, job seekers, and existing finance professionals, as well as in formal classroom and training settings.
www.efficientlearning.com/investment-banking
Investment Banking Online Prep Course is a comprehensive interactive tutorial that serves to provide further context to the main book. It also includes additional topics, such as accounting and financial modeling. With the online prep course, you can study anytime, anywhere, and on any device with the integrated web and mobile platform.
The course features:
JOSHUA ROSENBAUM is a Managing Director and Head of the Industrials & Diversified Services Group at RBC Capital Markets. He originates, structures, and advises on M&A, corporate finance, and capital markets transactions. Previously, he worked at UBS Investment Bank and the International Finance Corporation, the direct investment division of the World Bank. He received his AB from Harvard and his MBA with Baker Scholar honors from Harvard Business School.
JOSHUA PEARL has served as a Managing Director at Brahman Capital, a long/short equity asset manager. He focuses on public equity investments and special situations utilizing a fundamentals-based approach. Previously, he structured high yield financings, leveraged buyouts, and restructurings as a Director at UBS Investment Bank. Prior to UBS, he worked at Moelis & Company and Deutsche Bank. He received his BS in Business from Indiana University’s Kelley School of Business.
Please feel free to contact JOSHUA ROSENBAUM and JOSHUA PEARL with any questions, comments, or suggestions at josh@investmentbankingbook.com
JOSEPH GASPARRO is a Vice President in Capital Services at Credit Suisse. He advises on capital raising and operations for alternative asset managers. Previously, he executed M&A and capital markets transactions in the firm’s Investment Banking Division. Prior to Credit Suisse, he worked at BofA Securities and UBS. He received his BA from Gettysburg College and his MBA from Rutgers Business School. He is a two-time recipient of the President’s Volunteer Service Award, bestowed by the President of the United States.
RAYMOND AZIZI is a Portfolio Manager at Weiss Multi-Strategy Advisers where he manages a long/short equity portfolio. Previously, he was an investment professional at Lehman Brothers Merchant Banking where he focused on leveraged buyouts and growth capital investments. Prior to his private equity role, he worked in the Investment Banking Division at Lehman Brothers. He received his BS in Business from Rutgers University and his MBA from The Wharton School of the University of Pennsylvania.
Mark Twain, long known for his critical views of formal education, once wisely noted: “I never let my schooling interfere with my education.”
Twain’s one-liner strikes at the core of investment banking, where deals must be lived before proper knowledge and understanding can be obtained. Hard time must be spent doing deals, with complexities in valuation, terms, and negotiations unique to every situation. The truly great firms and dealmakers have become so by developing cultures of apprenticeship that transfer knowledge and creativity from one generation to the next. The task of teaching aspiring investment bankers and0 finance professionals has been further complicated by the all-consuming nature of the trade, as well as its constantly evolving art and science.
Therefore, for me personally, it’s exciting to see Joshua Rosenbaum and Joshua Pearl take the lead in training a new generation of investment bankers. Their work in documenting valuation and deal process in an accessible manner is a particularly important contribution as many aspects of investment banking cannot be taught, even in the world’s greatest universities and business schools. Rosenbaum and Pearl provide aspiring—and even the most seasoned—investment bankers with a unique real-world education inside Wall Street’s less formal classroom, where deals come together at real-time speed.
The school of hard knocks and of learning-by-doing, which was Twain’s classroom, demands strong discipline and sound acumen in the core fundamentals of valuation. It requires applying these techniques to improve the quality of deals for all parties, so that deal makers can avoid critical and costly mistakes, as well as unnecessary risks. My own 50 years of Wall Street education has clearly demonstrated that valuation is at the core of investment banking. Any banker worth his salt must possess the ability to properly value a business in a structured and defensible manner. This logic and rationale must inspire clients and counterparties alike, while spurring strategic momentum and comprehension into the art of doing the deal.
Rosenbaum and Pearl succeed in providing a systematic approach to addressing a critical issue in any M&A, IPO, or investment situation—namely, how much is a business or transaction worth. They also put forth the framework for helping approach more nuanced questions such as how much to pay for the business and how to get the deal done. Due to the lack of a comprehensive written reference material on valuation, the fundamentals and subtlety of the trade are often passed on orally from banker-to-banker on a case-by-case basis. In codifying the art and science of investment banking, the authors convert this oral history into an accessible framework by bridging the theoretical to the practical with user-friendly, step-by-step approaches to performing primary valuation methodologies.
Many seasoned investment bankers commonly lament the absence of relevant and practical “how-to” materials for newcomers to the field. The reality is that most financial texts on valuation and M&A are written by academics. The few books written by practitioners tend to focus on dramatic war stories and hijinks, rather than the nuts-and-bolts of the techniques used to get deals done. Rosenbaum and Pearl fill this heretofore void for practicing and aspiring investment bankers and finance professionals. Their book is designed to prove sufficiently accessible to a wide audience, including those with a limited finance background.
It is true that we live in uncertain and volatile times—times that have destroyed or consumed more than a few of the most legendary Wall Street institutions. However, one thing will remain a constant in the long-term—the need for skilled finance professionals with strong technical expertise. Companies will always seek counsel from experienced and independent professionals to analyze, structure, negotiate, and close deals as they navigate the market and take advantage of value-creating opportunities. Rosenbaum and Pearl promulgate a return to the fundamentals of due diligence and the use of well-founded realistic assumptions governing growth, profitability, and approach to risk. Their work toward instilling the proper skill set and mindset in aspiring generations of Wall Street professionals will help establish a firm foundation for driving a brighter economic future.
JOSEPH R. PERELLA
Founding Partner, Perella Weinberg Partners
We are deeply indebted to the numerous colleagues, peers, and industry-leading professionals who provided sage guidance, input, and hard work to help make this book possible.
We would like to highlight the contributions made by Joseph Gasparro toward the successful revision and production of the third edition of this book. His contributions were multi-dimensional and his unwavering enthusiasm, insights, and support were nothing short of exemplary. In general, Joe’s work ethic, creativity, “can-do” attitude, and commitment to perfection are a true inspiration.
To the outstanding team at RBC Capital Markets, thank you for your insightful comments and support. Larry Grafstein, Deputy Chairman, is a true sage advisor who has seen it all in M&A and possesses unique wisdom and bedside manner. Andrew Schwartz, Managing Director in Leveraged Finance, helped ensure that the LBO content is timely and leading edge. Hank Johnson, Managing Director in M&A, provided helpful input on the sell-side process content as that part of the M&A market evolves and grows.
We’d like to thank the talented team of lawyers from Latham & Watkins. As the world’s leading capital markets, M&A, and finance law firm, the Latham team provided us with vital insight and guidance on several chapters, including those on capital markets and IPOs, M&A, and LBOs. As Latham has long shared their collective wisdom on the law and the lore of Wall Street through their publications, they are well-practiced at delivering the kind of demystifying explanations that are valued by dealmakers. Recognized as trailblazers in the capital markets arena, especially for their work around IPOs, direct listings, and convertible notes, Marc Jaffe, Greg Rodgers, Benjamin Cohen, Arash Aminian Baghai, and Brittany Ruiz, were instrumental in ensuring the accuracy, timeliness, and relevancy of our capital markets content at the time of publication. Christopher Drewry, part of a team who see and close more deals than almost any group in the country, shared his seasoned and extensive perspective on M&A. Senet Bischoff similarly leveraged his market-leading expertise to contribute to our LBO chapters.
For the third edition, Robin Feiner’s contributions to the IPO chapters were invaluable, reflecting her leading edge expertise and transaction experience. Robin is a corporate partner at Winston & Strawn LLP and a former business executive with over 20 years of experience in corporate finance and IPOs. Adam Fleisher, a partner at Cleary Gottlieb Steen & Hamilton LLP, made valuable contributions to the new chapters on both traditional IPOs and direct listings. With over 30 years of writing and teaching on IPOs, Professor Jay Ritter of the University of Florida, Warrington College of Business, helped us marry the theory and practice of going public. Lastly, we want to highlight the insights from Dan Hennessy and Nick Petruska of Hennessy Capital on our new SPAC content—they are true leaders and innovators in the space and continue to create successful SPACs.
We also want to reiterate our thanks to those who were so instrumental in the success of the first and second editions of Investment Banking. Joseph Meisner’s technical insights on M&A buy-side and sell-side analysis were priceless, as was his unique ability to marry the academic with the practical. Jeffrey Groves provided us with valuable contributions on the leveraged buyouts content. Jeff is a highly skilled and experienced leveraged finance professional with a soft client touch and his pulse on the market. Daniel Plaxe was also helpful in enriching our LBO content with his technical and precise approach. Vijay Kumra made a valuable contribution to our updated M&A content, providing practical and grounding insights to help preserve the accessibility of a highly complex and technical topic.
The book could never have come to fruition without the sage advice and enthusiasm of Steve Momper, Director of Darden Business Publishing at the University of Virginia. Steve believed in our book from the beginning and supported us throughout the entire process. Most importantly, he introduced us to our publisher, John Wiley & Sons, Inc. Special thanks to Ryan Drook, Milwood Hobbs, Jr., Eric Klar, James Paris, Michael Lanzarone, Joseph Bress, and Benjamin Hochberg for their insightful editorial contributions. As top-notch professionals in investment banking and private equity, their expertise and practical guidance proved invaluable. Many thanks to Steven Sherman, Eric Leicht, Greg Pryor, Mark Gordon, Jennifer Fonner Fitchen, and Ante Vucic for their exhaustive work in assisting with the legal nuances of our book. As partners at the nation’s leading corporate law firms, their oversight helped ensure the accuracy and timeliness of the content.
We’d like to thank the outstanding team at Wiley, who have been our partners for over a decade on all of our books. Bill Falloon, our acquisition editor, brought us into the Wiley family and never wavered in his vision and support. He has provided strong leadership over the years and has become a true friend. Our publisher Matt Holt championed our book both internally and externally. Susan Cerra, Steven Kyritz, Samantha Enders, and Purvi Patel on the editorial and production side, worked diligently to ensure all the details were addressed and facilitated a smooth production process. Evan Burton, Doug Salvemini, Claire Brock, Sadhika Salariya, and Amanda Wainer were critical in the production and editorial process of our Wiley Efficient Learning (WEL) Investment Banking Course. Jean-Karl Martin, our marketing manager, helped us realize our vision through his creativity and foresight.
We also want to express immeasurable gratitude to our families and friends. Margo and Alex, and Masha, Jonathan, and Olivia, thank you so much for your support, patience, and sacrifice! You were always in our hearts and minds as we worked diligently to produce a book that would make us all proud.
This book could not have been completed without the efforts and reviews of the following individuals:
Views Expressed All views expressed herein are those of the Authors as of the date of publication and do not represent the views of their respective current or former employers, or any entity with which the Authors ever have been, are now, or will be affiliated. The information and views expressed herein are subject to change at any time without notice. The Authors and John Wiley & Sons, Inc. (the “Publisher”) are not under any obligation to update or correct any information provided in this book.
Informational Only; No Investment Advice The information provided herein is for general informational purposes only and is not and should not be regarded as “investment advice”, a “recommendation” of any kind (whether investment, financial, accounting, tax, or legal), or “marketing material” of any kind. This book does not provide recommendations or views as to whether a stock or investment approach is suited to the financial needs of a specific individual. Your needs, goals, and circumstances are unique and may require the individualized attention of a licensed financial advisor.
References and Examples Illustrative Only Any and all examples included herein are for illustrative purposes only, and do not constitute recommendations of any kind, and are not intended to be reflective of results you can expect to achieve. Any reference to any company in this book is not intended to refer to, nor should it be considered, an endorsement of any stock, brand, or product.
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