IB 400 (Understanding Banking) Flashcards
Let’s say I’m working on an IPO for a client. Can you describe briefly what I would do?
First, you meet with the client and gather basic information – such as their financial details, an industry overview, and who their customers are.
Next, you meet with other bankers and the lawyers to draft the S-1 registration statement – which describes the company’s business and markets it to investors. You receive some comments from the SEC and keep revising the document until it’s acceptable.
Then, you spend a few weeks going on a “road show” where you present the company to institutional investors and convince them to invest. Afterwards, the company begins
trading on an exchange once you’ve raised the capital from investors.
What’s in a pitch book?
It depends on the type of deal the bank is pitching for, but the most common structure is:
- Bank “credentials” (similar deals they’ve done to “prove” their expertise).
- Summary of a company’s options (“strategic alternatives” in banker-speak).
- Valuation and appropriate financial models (for example, if you’re pitching for an IPO you might show where the IPO proceeds would go).
- Potential acquisition targets (buy-side M&A deal) or potential buyers (sell-side M&A deal). This is not applicable for equity/debt deals.
- Summary and key recommendations.
How do companies select the bankers they work with?
This is usually based on relationships – banks develop relationships with companies over the years before they need anything, and then when it comes time to do a deal, the company calls different banks it has spoken with and asks them to “pitch” for the business. This is called a “bake-off” and the company selects the “winner” afterward.
Walk me through the process of a typical sell-side M&A deal.
A typical sell-side M&A deal with many potential buyers would look like this:
- Meet with company, create initial marketing materials like the Executive Summary and Offering Memorandum (OM), and decide on potential buyers.
- Send out Executive Summary to potential buyers to gauge interest.
- Send NDAs (Non-Disclosure Agreements) to interested buyers along with more detailed information like the Offering Memorandum, and respond to any followup
due diligence requests from the buyers. - Set a “bid deadline” and solicit written Indications of Interest (IOIs) from buyers.
- Select which buyers advance to the next round.
- Continue responding to information requests and setting up due diligence meetings between the company and potential buyers.
- Set another bid deadline and pick the “winner.”
- Negotiate terms of the Purchase Agreement with the winner and announce the deal.
Walk me through the process of a typical buy-side M&A deal.
- Spend a lot of time upfront doing research on dozens or hundreds of potential acquisition targets, and go through multiple cycles of selection and filtering with the company you’re representing.
- Narrow down the list based on their feedback and decide which ones to approach.
- Conduct meetings and gauge the receptivity of each potential seller.
- As discussions with the most likely seller become more serious, conduct more in-depth due diligence and figure out your offer price.
- Negotiate the price and key terms of the Purchase Agreement and then announce the transaction.
Walk me through a debt issuance deal.
It’s similar to the IPO process:
- Meet with the client and gather basic financial, industry, and customer information.
- Work closely with DCM / Leveraged Finance to develop a debt financing or LBO model for the company and figure out what kind of leverage, coverage ratios, and covenants might be appropriate.
- Create an investor memorandum describing all of this.
- Go out to potential debt investors and win commitments from them to finance the deal.
The main differences vs. an IPO: there are fewer banks involved, and you don’t need SEC approval to do any of this because debt is not sold to the “general public” but rather to sophisticated institutional investors and funds.
How are Equity Capital Markets (ECM) and Debt Capital Markets (DCM) different from M&A or industry groups?
ECM and DCM are both more “markets-based” than M&A. In M&A your job is to execute sell-side and buy-side transactions, whereas in ECM/DCM most of your tasks are related to staying on top of the market, following current trends, and making recommendations to industry and product groups for clients and pitch books.
In ECM/DCM you go more in-depth on certain parts of the deal process, but you don’t get as broad a view as you might in other groups.
What’s the difference between DCM and Leveraged Finance?
They’re similar but Leveraged Finance is more “modeling-intensive” and does more of the deal execution with industry and M&A groups on LBOs and high-yield debt financings. DCM, by contrast, is more closely tied to the markets and also focuses more on investment-grade debt.
But there’s always overlap and some banks have just 1 of these groups, some have both, and some divide it differently altogether.
Explain what a divestiture is.
It’s when a company (public or private) decides to sell off a specific division rather than sell the entire company. The process is very similar to the sell-side M&A process above,
but it tends to be “messier” because you’re dealing with a part of one company rather than the whole thing.
Creating a “standalone operating model” for the particular division they’re selling is extremely important, and the transaction structure and valuation are more complex than
they would be for a “plain-vanilla” M&A deal.
Imagine you want to draft a 1-slide company profile for an investor. What would you put there?
“Put the name of the company in the header, then divide the slide into 4 equal parts. The top-left is for the business description, headquarters, and key executives. Put a stock
chart and the key historical and projected financial metrics and multiples on the top right. The bottom left can have descriptions of products and services, and the bottom right should have key geographies with a color-coded map to make it look pretty.”
Let’s say you’re hired as the financial advisor for a company. What value could you add for them if they ask you about their suggested growth / M&A strategy?
At a high-level, first you’d want to see what their expansion goals are and how they can best achieve them – whether it’s by partnering with another company, expanding with a
merger or acquisition, or expanding organically with new products.
As the investment banker, you could provide value by making introductions to potential M&A targets and partners, and then advising on the best negotiation strategy, what companies would be most receptive, what type of price to expect, and how to manage the entire process.
