Transcript investment banking

and
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Investment Banking
Shashank More
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Structure of an I-bank
Intermediary Directing / Facilitating the Flow of Capital
Clients Seeking Capital
Investors With Capital
INVESTMENT MANAGEMENT
(Private Wealth / Asset Management)
PUBLIC
COMPANIES
INVESTMENT BANKING
Advisory
PRIVATE
COMPANIES
MARKETS
• Traditional Private • Sales
Financing
Groups
MERCHANT
BANKING
INSTITUTIONAL
INVESTORS
Equity Fund
Group
§ Country
Teams
§ Debt Product
Groups
• Real Estate Private
Equity Fund
§ Industry
Teams
§ Equity
Product
Groups
• Infrastructure
Fund
• Trading &
Strategy
• GSS/Prime
Brokerage
RETAIL
INVESTORS
• SSG
§ Derivatives
GLOBAL INVESTMENT RESEARCH
Operations, Technology
& Finance
GOVERNMENT &
AGENCIES
Human Capital
Management
Legal/Management
Compliance Controls
*Including Services
EXECUTIVE OFFICE
Chinese Wall
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Source: GS Sumer Internship presentation 2006
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GOVERNMENTS
& AGENCIES
Work done by IBD Team
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Relationship Development
Acquisition Strategy
IPO Advisory
Sale Advice
Execution of M&A
Debt advisory
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Recent Trend
 Debt Restructuring to avoid bankruptcy
 Global Expansion by Firms
 Structured Products that aid fund raising for deals
 Participation by Private Equity and VC Firms
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Types of Valuations
 Market Based (# of shares outstanding * Share Price)
 Comparables Method (Very common in IPOs)
 P/E , P/B , EV/EBITDA, EV/EBIT
 Sum of the Parts Valuation
 Most often method used in M&A today
 Cash Flow based Valuations
 Used in Manufacturing Industries
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FCF based Valuation
• EV (Enterprise Value) = Equity Value + Net Debt
• Net Debt = ST and LT loans – Operating Cash – Liquid
and short term investments
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Sector Preparation
• Detailed sector analysis of at least 2 sectors
• Choose common sectors
• Imp. points to think over:
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What has been happening in the sector?
Where is the sector headed?
FDI norms in the sector.
Which stocks in the sector are over valued? Avg P/E
Stocks to buy in the sector?
Which company should come out with an IPO?
What M&A opportunities are there?
Evaluative parameters of the sector. E.g. EV/Reserves, ARPU, Avg.
cost per seat mile
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Deal Preparation
• All the deals of the sector that you are preparing
• Major historic deals and all recent deals
• Questions
– Why did the deal happen?
– Did it make strategic sense?
– Value of the deal
– Transaction multiples
– Was it over valued?
– What happened after the deal got executed?
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Key Industry
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Infrastructure
Real Estate
Steel
Mining
Metals (Aluminum)
Banks and Financial Services
Automobile
Telecom
Airlines
Spirits Business
Retail
IT & BPO Services
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Steel Industry
 Major Deals
 Mittal Arcelor
 Tata Corus
 Essar Steel acquired a Canadian firm
 Parameter for Evaluation: EV/Tonne
 Why did Mittal buy Arcelor? (Image
makeover)
 Did Tata Steel over-pay?
 What is Tata Steel doing with Corus?
 Other important issues:
 How is raw material sourced?
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Banks & Financial Services
 Major Deals
 Nationalization of RBS
 India: ICICI BOR Deal
 Events out of the credit crisis
 BASEL III Norms (How is it better than the previous norms?
Should BASEL be made a regulation?)
• Parameter: Geographical Spread, CASA: Current Account Savings
Account, Advances Growth, Gross NPA ratio, Net NPA/Net advances,
RWA/Total Assets, Cost / Income Ratio, Cost of Funds, NIM-Net Interest
Income/(Average Interest Bearing assets),
• Capital Adequacy ratio-need to raise capital
• CARMEL Model
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Telecom
 Major Deals
 Idea Cellular - Spice
 Hutch – Vodafone
 Unitech-Telenor, Swan- Etisalat
 NTT Docomo-Tata teleservices
 Bharti-Zain Deal
 Parameters:
 Revenue=Subscribers x ARPU (ARPU is more for Airtel and Vodafone because old post paid urban
customers)
 Revenue = RPM x MOU
 Spectrum availability (900 Mhz, 1800 MHz)
 EVA/No. of subscribers
 Common Questions:
 After the huge price war, where do you see the industry headed?
 Details of 3G Spectrum allocation. Was it overpriced?
 Why did Hutch Sell? What was the value that Vodafone saw? What is tax issue that
Vodafone is facing now?
 What are the tax hiccups they face with the Indian revenue authorities?
 Possible mergers is a very relevant question for this sector
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Bharti MTN deal
• $24-billion cash-and-share swap deal which will have over 200
million subscribers and $20 billion in annual revenues
• Bharti to buy 49% of MTN for $14 billion MTN, to acquire 33%
of Bharti for about $10 billion
• Merged entity to be the world’s third-largest mobile phone
operator by subscribers that would straddle Africa, Asia and
the Middle East.
• South African government keen on dual listing –Indian laws do
not allow dual listing
• GDR issues with voting rights may fall under SEBI takeover
code
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Coal and Iron Ore
• Indian Power and mining companies scouting for raw
materials in Australia, Indonesia and South Africa
• Look at major mines acquired by Indian companies abroad
• Shift in industry practice from long term contracts to short
term contracts
• Coal India IPO:
• Multiples, EV/Reserves EV/Resources
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Airlines
 Major Deals
 Kingfisher – Air Deccan
 Jet – Air Sahara
 Parameters: Average fuel costs, average yield/passenger, average yield/kg,
Passenger Load Factor, Number of Departures, revenue/passenger-km
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What is the current industry scenario? Further Consolidation?
Details regarding Jet & Kingfisher agreement/ Deccan buyback
Details of Air India’s sovereign backed debt issue
Details regarding changes in the loan structure for airline industry
How much impact does fuel prices make on the industry?
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Others:
• Oil and Gas:
– Imperial Energy Corp Plc-ONGC
– Reliance petroleum Ltd-Reliance Industries Ltd
• Pharma: Ranbaxy-Daiichi Sankyo, Piramal Abott
(Why is pharma the source of many acquisitions?)
• Auto and auto ancillary: JLR-Tata Motors
• Infrastructure and Engineering sector
• Retail (Recent FDI controversies in Retail. Should the
74% cap be raises?)
• FMCG
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Primary Market
The market for new issue of securities.
 Primary market issuers are bodies corporate, mostly
companies under the Companies Act, 1956. Other
bodies corporate are corporations owned predominantly by the Government.
 The main market for new issuances are Public Issues
(IPOs and FPOs), Rights Issues and Private Placements.
 The main constituents of the primary market are –
Investors, Issuers, Instruments and intermediaries.
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Primary Market
 Investors are in three categories – Institutional, HNI and
Retail.
 The main instruments that can be issued are pure equity
(ordinary shares), pure debt such as NCDs/long term notes
or bonds and convertibles. Convertibles can be debt
convertibles such as PCDs/FCDs and equity convertibles
such as warrants.
 The main intermediaries associated with the primary market
are merchant bankers, underwriters and brokers. The service
providers are bankers, registrars, depository participants,
couriers and printers.
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Institutional Investors
• Also known as Qualified Institutional Buyers (QIBs)
as per regulations –
– Multilateral, Bilateral and Domestic Financial
Institutions (MFIs/ DFIs)
– Foreign Institutional Investors (FIIs)
– Unregistered Foreign Investors (FDI Investors)
– Foreign Venture Capital Investors (FVCIs)
– Domestic Venture Capital Investors (VCs)
– Domestic Mutual Funds (MFs)
– Commercial Banks
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Non-Institutional Investors
 High Networth Investors – These are investors who cannot be
categorized either as Institutional or Retail –
◦ Non-banking Financial Companies
◦ Capital Market Intermediaries (other than in issues wherein they are acting
in official capacity)
◦ Investment companies, trusts, societies and other incorporated bodies
◦ Partnership Firms
◦ HUFs and Individuals
 Retail Investors –
◦ Are those whose application in a public issue does not exceed Rs. 100,000
in value.
◦ Any of the above category of investors under the HNI category can be a
retail investor if the application size does not exceed the above limit.
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Methods of Raising Funds
• IPO
– Fixed Price Offer – also known as 100% retail
offer
– Book Built Offer – price discovery through
book building
FPO and Right Issues
Qualified Institutional Placement
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Recent trends in Equity Capital Markets
• Large number of divestments
• Near zero fees
• Standard chartered issued India’s first ever IDR
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Depository Mechanism
 Depository - security that represents ownership in a
foreign security. Therefore they are negotiable
securities in a foreign jurisdiction that represent a
company’s publicly traded domestic equity.
 An ADR is an American security that is issued
through a public offering in the US which requires
SEC registration.
 A GDR is issued anywhere in the world through a
public offer but only through private placement
(Rule 144A) in the US.
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Underwriting
• Contingent Obligation
• Underwriting Agreement and Commission
• SEBI (Underwriters) Rules 1993
• Devolvement
– Tata Motors Rights Issue – JM Financial
– Hindalco Right issue
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Fight for League Tables
• Major banks are getting mandates at near
zero fees to get top spots in the league tables
• Evaluation criteria used by companies is
70% based on bid and 30% technical based
on the presentation
• Coal India IPO total banker’s fees is
expected to be around Rs. 12,000/- to be
shared among 5 bankers
• Banker’s expense expected to go upto
Rs. 25 crores
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Stages of fund raising
• VC or seed investment
– Now even VCs have started to approach I-banks for
advisory
– Evaluate individual more than company
• PE investment
– If company does not wish to list to avoid regulatory
compliance
• IPO
– To gain visiblity
– Have to abide by regulatory compliance
– PE firms can invest as PIPE
• Delisting
– Market is undervaluing the firm
– Change in strategic objectives due to change in control
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Company specific preparation
• Know as much as possible about the bank you
are interviewing
• Regions and areas of operation
• Sector of expertise (This will give you a point of
discussion in the ppt and interview)
• Scale in India
• Major deals that it has been a part of
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Stock market specific questions
• Where is the stock market headed?
• Are Indian companies overvalued? What is the
average P/E?
• Which industries are you bullish on?
• Which companies would you invest in?
• Do you have a portfolio?
• What is your criteria of choosing stocks?
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Preparation stuff
• HR Questions
– Why IBD?
– Why not Markets / Consulting?
– Lifestyle management
– Finance personality you are a fan of
• Other resources
– Vault Guides
– Text Books
• Corporate Finance, Macroeconomics, Valuation
– Online News resources
• Bloomberg
• http://online.wsj.com/public/page/news-mergers-acquisitions.html
• http://www.marketwatch.com
• http://money.cnn.com/news/deals/mergers/dealchart.html
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Thank You
Questions ???
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