Chapter 1- Intro to IB Flashcards
A Financial Intermediary Between Corporations and Investors:
- Investment dealers act as intermediaries between investors (who have money to invest) and corporations (who
require capital to grow and run their businesses) - Investment banking is the division within an investment dealer that serves corporations, governments and other
institutions by providing capital markets advisory services, including mergers & acquisitions (M&A), raising capital
(underwriting) and corporate finance advisory
Investment Dealer is separated into 2 groups:
- Investment banking (Private or Sell-Side)
- Sales, Trading & Research ( Public or Buy-Side)
The 3 Primary Service Offerings:
- Mergers and Acquisitions (M&A) Advisory
- Raising Capital (Underwriting)
- Corporate Finance Advisory
Mergers and Acquisitions (M&A) Advisory
- Helping companies execute strategic transactions, including acquisitions, mergers or asset divestitures, and identifying and evaluating new strategic opportunities (“idea generation”)
- Includes sell-side M&A (ie. advising the seller) and buy-side M&A (ie. advising the buyer)
- Investment banks typically generate a success fee based on the total enterprise value of the transaction (flat fee on buy-side mandates and a fee grid on sell-side mandates)
Raising Capital (Underwriting)
- Helping companies raise capital in the equity and debt markets by acting as an intermediary with investors
- Includes private placements, initial public offerings and follow-on offerings
- Investment banks typically generate a commission on total capital raised
Corporate Finance Advisory:
- Includes assessing a company’s strategic and financial position in order to provide capital structure and capital allocation advice
- Is a critical component of both M&A advisory and raising capital
- Investment banks typically provide corporate finance advisory services for free in an attempt to strengthen client relationships and improve the likelihood of generating M&A and financing fees
Organizational Structure:
- Most investment banks are structured with specialized “industry” and “product” groups
Industry Groups:
- Consumer, Industrial & Telecom
- Healthcare
- Technology
- Real-Estate
- Mining
- Financial Institutions
- Power & Infrastructure
- Energy Transition
Product Groups:
- Mergers & Acquisitions (M&A)
- Equity Capital Markets (ECM)
- Debt Capital Markets (DCM)
- Corporate Banking (Lending)
- Risk Management / Hedging
- Corporate Finance
Industry groups work with ______ to:
product groups to manage existing
relationships, originate new business and execute transactions
Investment Banking Hierarchy and Career Progression: A majority of investment banks have five key positions/titles that follow a similar progression:
- Analyst
- Associate
- VP (Director at CBC)
- Director ( Executive Director at CIBC)
- Managing Director
Timeline and Primary Role of Analyst and Associate’s:
Timeline: 3 Years
* Industry and company research, comps and precedents,
corporate financial analysis, financial modelling, populating
client pitches, managing the day-to-day items on live projects
(ie. trading updates, data room population, progress trackers)
Success Factors of Analyst and Associates:
- Analytical
- Quick Learner
- Detail-Oriented
- Strong Work Ethic
- Attitude/Resilience
- Dependable
Timeline and Primary Role of VP:
Timeline: 4+ years
- Project manager, drafting and presenting client pitches, idea
generation, supporting directors and managing director on
client coverage
Timeline and Primary Role of Director and Managing Director:
Timeline of Director: 4+ years
Managing Director: N/A
- Relationship management (CEO, CFO, Boards), new client
origination, deal execution, develop coverage strategies,
provide directional guidance to the rest of the team
Success Factors of VP, Director, and Managing Director
- Strong Manager
- Well-Rounded
- Critical Thinker
- Strategy Formation
- Deal Origination
- Experience
Common Exit Opportunities:* The skills and experience developed in investment banking can open a lot of doors
- Private Equity / Pension Fund
- Corporate Executive / Corporate Development
- Asset Management / Hedge Fund
- Top MBA Program
- Operations / Start-up
- Law
key income statement items investment bankers typically focus on:
- Revenue
- EBITDA
- Earnings (Net Income)
- Free Cash Flow
Revenue:
- Revenue from the sale of the company’s goods and services
EBITDA:
- EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization
- The most common performance measure used by investment bankers; commonly reported by companies in their financial statements
- Serves as a pre-tax proxy for cash generated by the business
Earnings ( Net Income):
- Earnings after depreciation & amortization and the payment of interest and taxes
Free Cash Flow:
- Free Cash Flow (FCF) = Cash from Operations less Capital Expenditures
- Unlevered (before interest) vs. levered (after interest) free cash flow
EBITDA, earnings and free cash flow should be adjusted to exclude any:
- non-recurring expenses or
- nonoperating gains/losses
Key Balance Sheet Items that Investment Bankers typically focus on:
- Cash & Cash Equivalents
- Total Debt
- Net Debt
- Minority or Non-Controlling Interest
Cash & Cash Equivalents:
- Includes cash and any cash equivalents such as marketable securities
- Should exclude any cash on the balance sheet deemed restricted by the company
Total Debt:
- Includes notes payable, commercial paper, lines of credit, bank overdrafts, current
portion of long-term debt and capital leases and long-term debt and capital leases - If calculating leverage or valuation metrics, total debt should include operating leases
only if EBITDA is before rent expense (IFRS 16 changes)
Net Debt:
- Net Debt = Total Debt less Cash & Cash Equivalents
Minority or Non-Controlling Interest
- Represents the portion of a subsidiaries equity that is not owned by the company (however 100% of the earnings from that subsidiary are captured on the income statement)
Key Operating Metrics:
- Growth rates (revenue, EBITDA, FCF, etc)
- Profitability (EBITDA margin, FCF margin, etc.)
- Capex intensity (Capex / Revenue)
- Return on Equity
- Return on Invested Capital
- Business mix
- Seasonality & cyclicality
Key Capital Structure Metrics:
Leverage Metrics
* Total Debt / EBITDA
* Net Debt / EBITDA
* Debt / Capitalization
Return of Capital Metrics
* Dividend Yield (Dividends Per Share / Share Price)
* Payout Ratio (Dividends Per Share / Free Cash Flow or Earnings Per Share)
