M&A - Complete Beginner

[Alex1]

Hi,

So I'm new to this site, and totally fresh on the concept on investment banking. Having just finished Sixth Form and starting University soon I thought I'd look into careers, and M&A in investment banking looked up my street (from my limited understanding).

I literally started learning yesterday. So I've gone into reading the three main valuation methodoligies in M&A: Comparable Company Analysis, Precedent Transaction Analysis and Discounted Cash Flow (DCF).

I was reading into Precedent Transaction Analysis and didn't understand what it meant in one of its steps. It said: "Once you have your universe of precedent transactions in your industry, the next step is finding the necessary financials that will be used to spread your multiples".

I understand what the "Universe of precedent transactions" means (I think it's to do with the selection of historical transactions related to the company you're valuing, right?). But what does the part: "the next step is finding the necessary financials that will be used to spread your multiples". - I've defined the terms and financials supposedly means financial information on an organisation, and multiples are a method of comparing two metrics within a company (this doesn't really fit the context of the statement, does it?).

Anyway,
Hopefully someone can help me

 

[CTRL ES1]

When you look at previous transactions as a means of valuing a company, you have to look the financials such as EBITDA, EBIT, EBITA, EV, Market Cap, Share Price, EPS, revenue etc of the companies in the transaction. You can then generate multiples such as EV/EBITDA, P/E (although banks hardly use this because it takes capital structure into account and ain't no body got time for that), EV/revenue and you apply these multiples to your chosen financial metric.

So say a similar deal closed 12 months ago for company X with an EV of 1,000m and EBITDA of 100m, your EV/EBITDA multiple of 10.0x can be applied to the company you are valuing, Y. Say that company Y has an EBITDA of 65m, you could argue that it should be priced around 650m (its EV). Of course, no valuation method is a science and bankers often produce a 'football field' of different valuation ranges using different valuation methods.

 

[Alex1]

When you look at previous transactions as a means of valuing a company, you have to look the financials such as EBITDA, EBIT, EBITA, EV, Market Cap, Share Price, EPS, revenue etc of the companies in the transaction. You can then generate multiples such as EV/EBITDA, P/E (although banks hardly use this because it takes capital structure into account and ain't no body got time for that), EV/revenue and you apply these multiples to your chosen financial metric.

So say a similar deal closed 12 months ago for company X with an EV of 1,000m and EBITDA of 100m, your EV/EBITDA multiple of 10.0x can be applied to the company you are valuing, Y. Say that company Y has an EBITDA of 65m, you could argue that it should be priced around 650m (its EV). Of course, no valuation method is a science and bankers often produce a 'football field' of different valuation ranges using different valuation methods.

Thanks - I've been reading about similar topics all day, quite interesting!

 

[CTRL ES1]

Thanks - I've been reading about similar topics all day, quite interesting!

Know the valuation methods on the surface but be prepared to answer broader questions in interviews. People can easily regurgitate how a DCF or LBO works. People want to know your thought process. For example, on our desk, analysts don't make the comps. We out source that to India, like most banks.

Instead, you might be asked about which valuation method yields a higher valuation and why. Being able to say something like "DCF yields the highest valuation because assumptions tend to be generous. For example, the growth rate used in the gordon growth model might be above GDP and we cannot predict macroeconomic trends 5-10 years into future. Transaction comps might yield higher or lower valuation depending on context - i.e. if deal Z happened in 2009, was it at a discount or premium to what the transaction value should have been? If we say 2009, valuations would have been low because of (insert mammoth fuck up here). Additionally, because there is a premium to take over a company, we would have to apply a premium to our valuation as that is something that would have been factored into a precedent transaction comp."

One question my VP always likes to ask is 'What drives the valuation of an ice cream shop?'

 

[Alex1]

Know the valuation methods on the surface but be prepared to answer broader questions in interviews. People can easily regurgitate how a DCF or LBO works. People want to know your thought process. For example, on our desk, analysts don't make the comps. We out source that to India, like most banks.

Instead, you might be asked about which valuation method yields a higher valuation and why. Being able to say something like "DCF yields the highest valuation because assumptions tend to be generous. For example, the growth rate used in the gordon growth model might be above GDP and we cannot predict macroeconomic trends 5-10 years into future. Transaction comps might yield higher or lower valuation depending on context - i.e. if deal Z happened in 2009, was it at a discount or premium to what the transaction value should have been? If we say 2009, valuations would have been low because of (insert mammoth fuck up here). Additionally, because there is a premium to take over a company, we would have to apply a premium to our valuation as that is something that would have been factored into a precedent transaction comp."

One question my VP always likes to ask is 'What drives the valuation of an ice cream shop?'

Yeh I read about the advantages of each valuation method - how some lead to over prediction. At the moment I've learnt/learning:
* What M&A actually is and does
* Roughly what an investment bank does (Do I need to know other sectors in detail?)
* How to value a firm - the three methods
* Tomorrow I will look into the advantages and disadvantages of these
* Looked into what "multiples" are and various examples: P/S ratios , P/E ratios and why they're useful in calculating the value of a business
* Know what an Enterprise value is and how it is calculated
* Looked at some interview Q&As on "Why investment banking" etc.

Where do you think I should go after this? What else is there to learn?

 

[CTRL ES1]

Your far ahead of the curve. Spend more time on those questions which test your interpersonal skills.

Read up on two deals. Note their multiples paid and be ready to talk about what it is that interests you. Then formulate questions that they could follow up.

 

[hardworkdetermination1]

In M&A world, the common valuation of the Ice Cream shop would be ... what other multiple shops got sold at?

Or are you speaking about value drivers? like the companies cost per ice cream? or number of flavours it offers? I read a mckinsey book on this once... found it was far too laborious.

 

[Millitia1]

You should have a look at Investment Banking by Rosenbaum and Pearl, it is considered a bible of M&A

 

[TGibd1]

How much technical knowledge is expected of non-finance students applying for spring weeks/summer internships?

 

[economics-newb1]

^i'd love to find that out too- i hear its pretty minimal for spring weeks though