Investment Banking For Dummies, 2ed

Introduction

About This Book  

Foolish Assumptions  

Icons Used in This Book  

Beyond the Book  

Where to Go from Here  

Part 1: Getting Started with Investment Banking

Chapter 1: Introducing Investment Banking  

• What Investment Banking Is
• The role investment banking plays
• How investment banking differs from traditional banking
• The services investment banks provide
• How investment banks are organized
• The current lay of the investment banking land
• Types of investment banking operations
• How investment banks get paid
• How Investment Banking Is Done
• Finding the financial statements
• Understanding the importance of financial statements and ratios
• Zeroing in on past transactions
• Seeing the value of fixed income
• Turning Into an Investment Banking Pro
• Putting the discounted cash flow analysis to work
• Seeing how leverage becomes a force in investment banking
• Pinpointing buyout targets
• Putting Investment Banking to Work
• Staying in compliance with the rules
• Looking beyond the published financial statements
• Making adjustments to financial statements for comparability

Chapter 2: The Purpose of Investment Banking: What Investment Bankers Do

• Putting the For-Sale Sign on Corporate America
• Mergers and acquisitions
• Leveraged buyouts
• Private business sales
• Initial public offerings
• Helping Investors Decide Whether to Buy or Sell
• The importance of research
• What do the analysts do?
• Digging Into the Role of the Trading Desk
• Why investment banks are into trading
• How investment banks turn pennies into billions
• The type of analysis used in trading operations

Chapter 3: How Investment Bankers Sell Companies

• Getting Companies Ready for Sale on Public Markets
• Meeting the requirements to make an IPO happen
• Writing the prospectus
• Supporting the IPO: Making success last
• Seeing What Sell-Side Analysts Do
• The goals of the sell-side analyst
• What investors look to sell-side analysts for
• Spreading the word: Disseminating sell-side research
• Examining a Sample Research Report
• What to look for in the document
• The main sections of a research report
• Ways to look beyond the "buy" or "sell"

Chapter 4: How Investment Banking Is Used in Mergers and Acquisitions

• Come Here Often? The Basics of Mergers and Acquisitions
• Kinds of mergers
• Why companies merge instead of simply growing organically
• Firms that make attractive acquisition targets
• How companies identify firms to merge with
• The nature of the merger: Friendly or hostile?
• Tools Used to Analyze the M&A Deal
• The role of the buy-side M&A advisor
• The role of the sell-side M&A advisor
• Why Many M&A Deals Go Wrong
• Misplaced incentives
• Faulty analysis
• Overstated synergies
• Culture wars
• The winner's curse: Overpaying

Chapter 5: How Investment Banking Is Used in Leveraged Buyouts

• In This Corner: Introducing the Players
• Investment banks
• Big institutions
• Management
• Stock and bond investors
• Aiming for the Right Targets in a Leveraged Buyout
• Identifying companies that can work in a leveraged buyout
• Appreciating the power of cash flow
• Coming to terms with the return analysis: Internal rate of return
• Finding the Exit
• Setting a target for exit in time
• Considering how the exit will happen

Part 2: Digging In: Performing Investment Banking

Chapter 6: Finding the Data: Documents and Reports

• Finding What You Need on the Securities and Exchange Commission's Website
• What types of information you can find
• The key types of documents
• How to use EDGAR to pinpoint information
• Getting Data in a Format You Can Work With  
• Assembling the tools you need
• Importing financial information into Excel
• Getting in tune with interactive data
• Paying Attention to the Non-Financial Information
• Monitoring news streams for investment banking ideas
• Quickly processing information with aggregators
• Doing research on the key players in a deal

Chapter 7: Making Sense of Financial Statements

• Income Statements  
• Locating the areas of interest to investment bankers  
• Tweaking the statement with different assumptions  
• Finding investment banking opportunities  
• Balance Sheets  
• Finding your way around the key parts  
• Understanding a company's financial strength  
• Locating pitfalls and opportunities  
• Statement of Cash Flows  
• Seeing why the cash flow statement is so important in deal making  
• Understanding the key parts of the document  
• Calculating free cash flow  
• Proxy Statements  
• Learning about the key players in a deal  
• Identifying the management team's incentives  
• Analyzing management pay packages  

Chapter 8: Perfecting the Financial Ratios for Investment Banking

• Valuation Multiples: Assessing How Much the Company Is Worth  
• Investors' favorite valuation tool: P/E ratio  
• Going old school with price-to-book  
• Putting a price on profitability  
• Liquidity Multiples: Checking Companies' Staying Power  
• Deciphering debt to equity  
• Getting up to speed with the quick ratio  
• Interpreting interest coverage  
• Profitability Ratios: Seeing How a Company's Bottom Line Measures Up  
• Why gross margin isn't so gross after all  
• Income from continuing operations: Looking at profit with a keen eye  
• Keying into profits with net margin  
• Efficiency Ratios: Knowing How Well the Company Is Using Investors' Money  
• Finding out about return on assets  
• Digging into return on capital  
• Uncovering company secrets with return on equity  
• Calculating a company's growth rate  

Chapter 9: Sizing Up the Industry

• Performing an Industry Analysis  
• Understanding why industry analysis is important  
• Creating a comparison universe  
• Adjusting the industry comparison universe  
• Unearthing Company Trends and Common sizing the Financial Statements  
• Comparing growth rates  
• Comparing leverage  
• Comparing various profit margins  
• How a Company Stacks Up: Comparing the Key Ratios  
• Sizing up valuation  
• Comparing total debt-to-equity  
• Sizing up companies on their efficiency  
• Industry ratios  

Chapter 10: Understanding Stocks and Focusing on Past Transactions

• Introducing Stock  
• Characteristics of stock  
• Types of stock  
• Understanding stock pricing  
• Finding Past Transactions  
• Tracking the stock market  
• Studying private deals  
• Looking at pre-IPO marketplaces  
• Examining buyouts  
• Analyzing Past Transactions  
• Knowing what the market will bear  
• Knowing when the market is distorted  
• Tabulating key ratios for past deals  
• Understanding the pitfalls  

Chapter 11: Applying Investment Banking to Fixed Income

• Introducing Bonds  
• Identifying the Various Types of Bonds  
• Convertible bonds  
• Callable bonds  
• Puttable bonds  
• Floating-rate bonds  
• Zero-coupon bonds  
• Knowing Their Place: The Position of Bondholders  
• Understanding Bond Pricing  
• Introducing the concept of present value  
• Relating yield to maturity and price  
• Playing the spread: How different factors affect bond prices  
• Considering bond sensitivity to changes in interest rates  
• Tracking the Bond Market  
• Debt or Equity: How a Company Chooses  

Part 3: Taking Investment Banking to the Next Level

Chapter 12: Doing a Discounted Free Cash Flow Analysis

• Gearing Up for Discounted Free Cash Flow  
• Computing free cash flow  
• Forecasting free cash flow  
• Calculating the Weighted Average Cost of Capital  
• Understanding why the weighted average cost of capital is so important  
• Measuring the cost of debt and equity  
• Understanding the capital asset pricing model  
• Going for Terminal Value  
• Knowing the perpetuity growth formula  
• Applying the constant growth formula  
• Applying the two-stage growth model  
• Stress-testing the results  
• Valuing a Share of Stock  

Chapter 13: Structuring a Leveraged Buyout

• Seeing How Leveraged Buyouts Are Structured  
• The types of financing  
• Understanding seniority and maturity  
• Building a Leveraged Buyout Model  
• Creating a pro forma model  
• Deciding on methods of financing  
• Seeing how the results work out  
• The importance of taxes in a leveraged buyout  
• What can go right and what can go wrong  

Chapter 14: Determining the Strength of a Company's Return on Equity

• Understanding the Importance of Return on Equity  
• What return on equity shows  
• Pros and cons of return on equity versus other profitability measures  
• How return on equity can help guide an investment banking deal  
• Using a DuPont Analysis  
• The three-factor DuPont method  
• The five-factor DuPont method  
• Interpreting the Results  
• Cola wars  
• What the numbers mean  
• Looking past the numbers for insight  
• Telling companies how to react to the numbers  

Part 4: Applying Investment Banking

Chapter 15: Knowing the Rules

• The History of Regulation of Investment Banking  
• The goals of investment banking regulation  
• Why the rules of today are the result of days past  
• How regulations have shaped the investment banking industry  
• The Ins and Outs of Modern Investment Banking Rules  
• The types of rules imposed on investment banking  
• How investment banking rules changed after the financial crisis  
• The Rules on Analysts  
• Why rules were needed  
• The not-so-delicate balancing act analysts play  
• What disclosure and compliance are required  
• Why Simply Making Rules Isn't Enough  

Chapter 16: How Some Companies Lie, Cheat, and Steal Their Way to the Top

• Did You Really Sell That? When Companies Aggressively Report Revenue  
• Don't let the sun go down on me  
• The truth?  
• Lucy, You Got Some 'Splainin' to Do: When Companies Understate Their Expenses  
• What a waste  
• Crazy like a fox  
• Missed It by That Much: When Companies Overstate Their Financial Position  
• Those pesky pensions: The epidemic of firms understating pension liabilities  
• We are the world  
• Keeping Investors Off-Balance  
• Enron's special purpose  
• A mountain of a scandal  
• Swap meet  
• What Should an Investment Banker Do?  

Chapter 17: Understanding Alternative Investments and Asset Management

• Knowing Your Alternatives  
• Hedge funds  
• Venture capital  
• Commodities  
• Real estate  
• Currencies and cryptocurrencies  
• Digging Into Asset Management  
• Attracting investors to asset management  
• Creating asset management tools  
• Managing Potential Conflicts with Clients  
• How asset management can cause conflicts  
• How to eliminate and manage conflicts  

Chapter 18: Trying Your Hand at Investment Banking with a Case Study

• Setting the Scene  
• The acquirer  
• The target  
• Considering the Options  
• Identifying the options  
• Looking at financing  
• Creating the Analysis  
• An analysis of the financial statements  
• Structuring a Deal  
• Form of acquisition  
• Creating pro forma statements  
• Success or Failure  

Part 5: The Part of Tens

Chapter 19: Ten of the Biggest Debacles in Investment Banking History

• The Dot-Com Boom and Bust  
• Tainted Research Scandals  
• Enron and the Accounting Scams  
• The Mortgage Debacle and Collapse of Lehman  
• The Flash Crash  
• The London Whale at JPMorgan Chase and Barings Bank  
• Long-Term Capital Management  
• Bankruptcy in Jefferson County, Alabama  
• IPO Allocations with CSFB  
• Bad Mergers and Acquisitions Like AOL Time Warner  

Chapter 20: Ten Ways to Improve a Discounted Cash Flow Analysis

• Financial Analysis Isn't Physics  
• Show Your Sensitive Side  
• Monte Carlo Isn't Just for High Rollers  
• What Can Go Wrong Will Go Wrong  
• It's Tough to Make Predictions, Especially about the Future  
• The Investor of Today Doesn't Profit from Yesterday's Growth  
• Garbage In, Garbage Out  
• Rates Are Falling -- It's a Better Deal!  
• Read Your Putt from Several Angles  
• The Weighting is the Hardest Part  

Chapter 21: Ten (Or So) of the Best Online Resources for Investment Bankers

• Bloomberg  
• Reuters  
• Standard & Poor's  
• Renaissance Capital and IPOScoop.com  
• The Securities and Exchange Commission  
• Moody's  
• MarketSmith  
• Index Fund Advisors  
• Morningstar  
• Bureau of Labor Statistics  
• Department of Commerce  
• Federal Reserve  
• Trefis  

Appendix: Where Investment Banking Came From Index