Investment Banking

Valuation, LBOs, M&A, and IPOs (Book + Valuation Models)

Joshua Rosenbaum, Joshua Pearl

• Publisher: Wiley
• Year: 2022
• ISBN:
  9781119867883
• Edition: 3
• Topic: Business
• Subtopic: Valuation
• Index: Business

An essential, all-in-one guide to investment banking and valuation, complete with downloadable models – this new edition reflects valuable contributions from Nasdaq and the global law firm Latham & Watkins LLP plus access to the online valuation models and course.

The thoroughly revised Third Edition of Investment Banking: Valuation, LBOs, M&A, and IPOs (Book + Valuation Models) delivers the most current discussion of valuation and deal-making fundamentals essential to the work of investment bankers, private equity professionals, hedge fund investors, corporate lawyers, executives, and students. Drawing on over four decades of combined experience in investment banking and investing, authors Joshua Rosenbaum and Joshua Pearl explain how to perform the valuation work and financial analysis at the core of Wall Street – comparable companies, precedent transactions, DCF, LBO, M&A analysis...and now IPO analytics and valuation. Using a step-by-step, how-to approach for each methodology, the authors build a chronological knowledge base and define key terms, financial concepts, and processes throughout the book.

Now, over 10 years after the release of the first edition, the book is more relevant and topical than ever. The book has sold over 250, 000 copies and is used in over 200 universities globally. It has become a go-to resource for investment banks, private equity, investment firms, and corporations undertaking M&A transactions, LBOs, IPOs, restructurings, and investment decisions. While the fundamentals haven't changed, the environment must adapt to changing market developments and conditions. As a result, Rosenbaum and Pearl have updated their widely-adopted book accordingly, turning the latest edition into a unique and comprehensive training package.

The Third Edition includes six downloadable valuation model templates: Comparable Companies Analysis, Precedent Transactions Analysis, Discounted Cash Flow Analysis, Leveraged Buyout Analysis, M&A Analysis, and IPO Valuation, available at www.wiley.com/go/investmentbanking3e.

PART One
Valuation

CHAPTER 1
Comparable Companies Analysis

Comparable companies analysis (“comparable companies”, “trading comps”, or simply “comps”) is one of the primary methodologies used for valuing a given focus company, division, business, or collection of assets (“target”). It provides a market benchmark against which a banker can establish valuation for a private company or analyze the value of a public company at a given point in time. Comps has a broad range of applications, most notably for various mergers & acquisitions (M&A) situations, initial public offerings (IPOs), restructurings, and investment decisions.

The foundation for comps is built upon the premise that similar companies provide a highly relevant reference point for valuing a given target due to the fact that they share key business and financial characteristics, performance drivers, and risks. Therefore, the banker can establish valuation parameters for the target by determining its relative positioning among peer companies. The core of this analysis involves selecting a universe of comparable companies for the target (“comparables universe”). These peer companies are benchmarked against one another and the target based on various financial statistics and ratios. Trading multiples are then calculated for the universe, which serve as the basis for extrapolating a valuation range for the target. This valuation range is calculated by applying the selected multiples to the target’s relevant financial statistics.

While valuation metrics may vary by sector, this chapter focuses on the most widely used trading multiples. These multiples—such as enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) and price-to-earnings (P/E)—utilize a measure of value in the numerator and a financial statistic in the denominator. While P/E is the most broadly recognized in circles outside Wall Street, multiples based on enterprise value are widely used by bankers because they are independent of capital structure and other factors unrelated to business operations (e.g., differences in tax regimes and certain accounting policies).

Comps is designed to reflect “current” valuation based on prevailing market conditions and sentiment. As such, it is often more relevant than intrinsic valuation techniques, such as the DCF (see Chapter 3). At the same time, market trading levels may be subject to periods of irrational investor sentiment that skew valuation either too high or too low. Furthermore, no two companies are exactly the same, so assigning a valuation based on the trading characteristics of similar companies may fail to accurately capture a given company’s true value.

As a result, comps should be used in conjunction with the other valuation methodologies discussed in this book. A material disconnect between the derived valuation ranges from the various methodologies might be an indication that key assumptions or calculations need to be revisited. Or, it may indicate that you have discovered true valuation arbitrage in the market. Therefore, when performing comps and other valuation methodologies, it is imperative to diligently footnote key sources and assumptions both for review and defense of conclusions.

This chapter provides a highly practical, step-by-step approach to performing comps consistent with how this valuation methodology is performed in real world applications (see Exhibit 1.1). Once this framework is established, we walk through an illustrative comparable companies analysis using our target company, ValueCo (see Introduction for reference).

Step I.	Select the Universe of Comparable Companies
Step II.	Locate the Necessary Financial Information
Step III.	Spread Key Statistics, Ratios, and Trading Multiples
Step IV.	Benchmark the Comparable Companies
Step V.	Determine Valuation

EXHIBIT 1.1 Comparable Companies Analysis Steps

SUMMARY OF COMPARABLE COMPANIES ANALYSIS STEPS

• Step I. Select the Universe of Comparable Companies. The selection of a universe of comparable companies for the target is the foundation of comps. While this exercise can be fairly simple and intuitive for companies in certain sectors, it can prove challenging for others whose peers are not readily apparent. To identify companies with similar business and financial characteristics, it is first necessary to gain a sound understanding of the target.
  As a starting point, the banker typically consults with peers or senior colleagues to see if a relevant set of comparable companies already exists internally. If beginning from scratch, the banker casts a broad net to review as many potential comparable companies as possible. This broader group is eventually narrowed, and then typically further refined to a subset of “closest comparables”. A survey of the target’s public competitors is generally a good place to start this exercise.
• Step II. Locate the Necessary Financial Information. Once the initial comparables universe is determined, the banker locates the financial information necessary to analyze the selected comparable companies and calculate (“spread¹”) key financial statistics, ratios, and trading multiples (se...