Introduction 1 About This Book 1 Foolish Assumptions 3 Icons Used in This Book 3 Beyond the Book 4 Where to Go from Here 4 Part 1: Getting Started with Investment Banking 5 Chapter 1: Introducing Investment Banking 7 What Investment Banking is 8 The role investment banking plays 8 How investment banking differs from traditional banking 10 The services investment banks provide 11 How investment banks are organized 12 The current lay of the investment banking land 14 Types of investment banking operations 15 How investment banks get paid 15 How Investment Banking is Done 17 Finding the financial statements 18 Understanding the importance of financial statements and ratios 18 Zeroing in on past transactions 18 Seeing the value of fixed income 19 Turning Into an Investment Banking Pro 19 Putting the discounted cash flow analysis to work 19 Seeing how leverage becomes a force in investment banking 20 Pinpointing buyout targets 20 Putting Investment Banking to Work 21 Staying in compliance with the rules 21 Looking beyond the published financial statements 21 Making adjustments to financial statements for comparability 22 Chapter 2: The Purpose of Investment Banking: What Investment Bankers Do 23 Putting the For-Sale Sign on Corporate America 24 Mergers and acquisitions 25 Leveraged buyouts 27 Private business sales 29 Initial public offerings 32 Helping Investors Decide Whether to Buy or Sell 36 The importance of research 36 What do the analysts do? 37 Digging Into the Role of the Trading Desk 38 Why investment banks are into trading 39 How investment banks turn pennies into billions 40 The type of analysis used in trading operations 40 Chapter 3: How Investment Bankers Sell Companies 43 Getting Companies Ready for Sale on Public Markets 44 Meeting the requirements to make an IPO happen 45 Writing the prospectus 47 Supporting the IPO: Making success last 51 Seeing What Sell-Side Analysts Do 53 The goals of the sell-side analyst 54 What investors look to sell-side analysts for 55 Spreading the word: Disseminating sell-side research 55 Examining a Sample Research Report 57 What to look for in the document 57 The main sections of a research report 58 Ways to look beyond the "buy" or "sell" 59 Chapter 4: How Investment Banking is Used in Mergers and Acquisitions 61 Come Here Often? The Basics of Mergers and Acquisitions 62 Kinds of mergers 62 Why companies merge instead of simply growing organically 63 Firms that make attractive acquisition targets 66 How companies identify firms to merge with 67 The nature of the merger: Friendly or hostile? 68 Tools Used to Analyze the M&A Deal 70 The role of the buy-side M&A advisor 70 The role of the sell-side M&A advisor 75 Why Many M&A Deals Go Wrong 76 Misplaced incentives 76 Faulty analysis 77 Overstated synergies 78 Culture wars 78 The winner''s curse: Overpaying 78 Chapter 5: How Investment Banking is Used in Leveraged Buyouts 81 In This Corner: Introducing the Players 82 Investment banks 83 Big institutions 84 Management 85 Stock and bond investors 86 Aiming for the Right Targets in a Leveraged Buyout 87 Identifying companies that can work in a leveraged buyout 88 Appreciating the power of cash flow 89 Coming to terms with the return analysis: Internal rate of return 90 Finding the Exit 91 Setting a target for exit in time 92 Considering how the exit will happen 92 Part 2: Digging In: Performing Investment Banking 95 Chapter 6: Finding the Data: Documents and Reports 97 Finding What You Need on the Securities and Exchange Commission''s Website 98 What types of information you can find 98 The key types of documents 99 How to use EDGAR to pinpoint information 100 Getting Data in a Format You Can Work With 105 Assembling the tools you need 105 Importing financial information into Excel 107 Getting in tune with interactive data 109 Paying Attention to the Non-Financial Information 110 Monitoring news streams for investment banking ideas 110 Quickly processing information with aggregators 112 Doing research on the key players in a deal 114 Chapter 7: Making Sense of Financial Statements 115 Income Statements 116 Locating the areas of interest to investment bankers 118 Tweaking the statement with different assumptions 119 Finding investment banking opportunities 120 Balance Sheets 121 Finding your way around the key parts 122 Understanding a company''s financial strength 124 Locating pitfalls and opportunities 126 Statement of Cash Flows 127 Seeing why the cash flow statement is so important in deal making 127 Understanding the key parts of the document 127 Calculating free cash flow 130 Proxy Statements 131 Learning about the key players in a deal 131 Identifying the management team''s incentives 132 Analyzing management pay packages 133 Chapter 8: Perfecting the Financial Ratios for Investment Banking 135 Valuation Multiples: Assessing How Much the Company is Worth 136 Investors'' favorite valuation tool: P/E ratio 137 Going old school with price-to-book 137 Putting a price on profitability 138 Liquidity Multiples: Checking Companies'' Staying Power 140 Deciphering debt to equity 141 Getting up to speed with the quick ratio 142 Interpreting interest coverage 142 Profitability Ratios: Seeing How a Company''s Bottom Line Measures Up 143 Why gross margin isn''t so gross after all 144 Income from continuing operations: Looking at profit with a keen eye 144 Keying into profits with net margin 145 Efficiency Ratios: Knowing How Well the Company is Using Investors'' Money 146 Finding out about return on assets 147 Digging into return on capital 148 Uncovering company secrets with return on equity 149 Calculating a company''s growth rate 150 Chapter 9: Sizing Up the Industry 153 Performing an Industry Analysis 154 Understanding why industry analysis is important 154 Creating a comparison universe 155 Adjusting the industry comparison universe 158 Unearthing Company Trends and Common sizing the Financial Statements 159 Comparing growth rates 160 Comparing leverage 163 Comparing various profit margins 165 How a Company Stacks Up: Comparing the Key Ratios 166 Sizing up valuation 167 Comparing total debt-to-equity 169 Sizing up companies on their efficiency 170 Industry ratios 170 Chapter 10: Understanding Stocks and Focusing on Past Transactions 171 Introducing Stock 172 Characteristics of stock 173 Types of stock 174 Understanding stock pricing 175 Finding Past Transactions 176 Tracking the stock market 177 Studying private deals 177 Looking at pre-IPO marketplaces 179 Examining buyouts 179 Analyzing Past Transactions 180 Knowing what the market will bear 180 Knowing when the market is distorted 180 Tabulating key ratios for past deals 182 Understanding the pitfalls 184 Chapter 11: Applying Investment Banking to Fixed Income 185 Introducing Bonds 186 Identifying the Various Types of Bonds 188 Convertible bonds 188 Callable bonds 189 Puttable bonds 189 Floating-rate bonds 189 Zero-coupon bonds 190 Knowing Their Place: The Position of Bondholders 190 Understanding Bond Pricing 192 Introducing the concept of present value 192 Relating yield to maturity and price 195 Playing the spread: How different factors affect bond prices 196 Considering bond sensitivity to changes in interest rates 197 Tracking the Bond Market 200 Debt or Equity: How a Company Chooses 202 Part 3: Taking Investment Banking to the Next Level 205 Chapter 12: Doing a Discounted Free Cash Flow Analysis 207 Gearing Up for Discounted Free Cash Flow 208 Computing free cash flow 210 Forecasting free cash flow 211 Calculating the Weighted Average Cost of Capital 212 Understanding why the weighted average cost of capital is so important 213 Measuring the cost of debt and equity 214 Understanding the capital asset pricing model 217 Going for Terminal Value 220 Knowing the perpetuity growth formula 220 Applying the constant growth formula 221 Applying the two-stage growth model 222 Stress-testing the results 223 Valuing a Share of Stock 224 Chapter 13: Structuring a Leveraged Buyout 227 Seeing How Leveraged Buyouts Are Structured 228 The types of financing 228 Understanding seniority and maturity 235 Building a Leveraged Buyout Model 236 Creating a pro forma model 236 Deciding on methods of financing 238 Seeing how the results work out 239 The importance of taxes in a leveraged buyout 240 What can go right and wha.