Mergers & Acquisitions

Master in Management | Investment Banking

Session 3 – Investment Banking

Alfonso Lacave | PwC Corporate Finance – Partner

Ignacio Cañal, CFA | PwC Corporate Finance – Director
Agenda

1. What is an Investment Bank?

2. Pitch Book: Theory / Gamo Outdoor Case Study

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1 What is an Investment
Bank?
What is an Investment Bank?
Investment banks cover a wide range of services

Lets take an example on how Goldman Sachs presents itself.

“In Goldman Sachs we:

• Advise: Advise companies on buying and selling businesses, raising capital and
managing risks, which enables them to grow.
• Finance: Help local, state and national governments finance their operations, so
they can invest in infrastructure, like schools, hospitals and roads.
• Transact: Transact for our clients in all key financial markets, including equities,
bonds, currencies and commodities, so that capital flows, jobs are created and
economies can grow.
• Support: Help markets remain efficient and liquid, so investors and companies can
meet their needs, whether to invest, raise money or manage risk.
• Manage: Preserve and grow assets for institutions, including mutual funds, pension
funds and foundations, as well as individuals.
• Invest: Invest our capital alongside our clients' capital to help businesses grow.
• Innovate: We develop ideas and analysis that drive new perspectives, new
products and new paths to growth.”

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Differences vs traditional banks (1 of 2)
Investment banks rely on selling financial instruments to funnel cash from
investors/savers to issuers

The critical part of the investment banking process is in the way cash is funneled from the people
who have it to the people who need it. After all, traditional banks do essentially the same thing
investment banks do — get cash from people who have excess amounts into the hands of those who
have productive uses for it

Take deposits from savers with excess cash and lend the money out to borrowers
Traditional • Commercial banks: deal primarily with businesses
banks
• Retail banks: deal mostly with individuals

Instead of collecting deposits, investment banks usually rely on selling financial

instruments (such as stocks and bonds), in a process called underwriting
Investment
banks By selling financial instruments to investors, the investment bankers raise the money
that’s provided to the people, companies, and governments that have productive uses
for it

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Differences vs traditional banks (2 of 2)
Traditional banks’ main revenue source come from the interest spread, whereas
investment banks earn fees on services provided

Traditional banks Investment banks

• Interest margin: spread between rate paid to • Commissions: fees in exchange for
deposits and the rate received from loans conducting a financial transaction between
• Interest on investments: interest and buyer and seller (e.g. brokerage fees)
dividends received on securities held (e.g. • Underwriting fees: fees for selling securities
government bonds) in the primary market (e.g. IPO)
• Fees income: fees charged to clients for • Trading income: attempts to take advantage
performing services (e.g. loan commissions) of temporarily mispriced financial instruments
• Commissions on third party products: fees to provide profit for the fee
earned by distributing products such as • Asset management fees: some banks help
insurance to their client base their clients make decisions on how to invest
their money, charging a fee
• Advisory fees: banks receive fee for their
advise, especially in the cases of M&A

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Investment Bank Structure
IBs are usually structured in different independent divisions with focus on specific
products

Investment bank
Investment Banking Division
Sales & Trading Asset Management Research
(IBD)

Product group Sales group • Institutions and individuals • Equity research

• Mergers and Acquisitions • Equity • Private clients • Fixed income research
(M&A) • Fixed income • Alternative investments • Macro Research
• Equity Capital Markets • Derivatives
(ECM)
• …
• Debt Capital Markets (DCM)
Trading group
Industry group
• Equity
• Financial Institutions Group
• Fixed income
• Technology
• Derivatives
• Healthcare
• Currencies
• Utility and Energy
• …
• Industrials
• Consumer Retail
• Media and Telecom
• …

Agency & Proprietary Agency & Proprietary

Agency business Agency business
business business
These areas work on an independent basis as conflicts of interest arise between them, setting the so called “Chinese
Walls”

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Offering & clients
Clients of investment banks can be segmented into “investors” and “issuers”
The Offering / Client matrix

Offering

Capital raising Capital markets Advisory services

Financial
Capital Market maker Sales
institutions
Investors

Individuals Financing Broker Research

Client

Corporations Capital Risk management M&A

Issuers

Governments Bonds underwriting Government dealer Privatization

Proprietary Principal investor Proprietary trading Investment partnership

Raise money Distribute securities Advise

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Investment Banking Division | Overview
The Investment Banking Division is structured in three different areas that work
together to cover client’s needs with regards to equity, debt and corporate
transactions
Mergers and Acquisitions Equity Capital Markets (ECM) Debt Capital Markets (DCM)

• Advise companies and financial

investors on the purchase, sale • Advise companies and financial • Advise companies and financial
and merger of private and sponsors to originate, structure sponsors to originate,
Overview
public companies and execute equity and equity- structure and execute debt
linked transactions financings
• Role of Lead Financial adviser
Primary market • Leveraged finance: syndicated
• Initial Public Offering (IPO) loans, project finance
• Acquisition processes
Type of • Follow-on Offering • Refinancings
• Sell-side processes
services Secondary market • Fixed income: bonds
• Carve-outs, spin-offs, etc.
• Block trades • Other products (e.g. Asset-
• Shares Buybacks backed securities)

• Usually leverages on other • Usually leverages on other

capabilities and areas capabilities and areas
- Sales: help in distributing the - Sales: help in distributing the
• Usually involves ECM and DCM
Other shares to bank’s institutional product to bank’s institutional
when capital/ debt capabilities
comments clients and investors clients and investors
are needed
- Balance sheet capabilities to - Balance sheet capabilities to
structure the operations (e.g. structure the operations (e.g.
secure IPO) secure financing)

Industry group (cross-area)

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Role of the M&A advisor
A clear scope needs to be agreed between manager and its investment bank
before beginning the engagement

The role of the M&A / financial advisor

• Reviewing with the Board of Directors and management the financial plans,
strategic plans and business alternatives
• Reviewing and analyzing the historical and projected financial information of
the Company and the other party provided by the respective managements of the
Company and the other party
• Assisting the Company's Board of Directors and management in the valuation of
the business(es) involved in the transaction
• Assisting the financial due diligence efforts of the Company with respect to the
other party
• Advising the Company with regard to the financial structure and terms of any
transaction that might be realized in the current market environment and assisting
the Company in structuring and negotiating the financial aspects of the Transaction
• Preparing all process documentation (Financial models, presentations, etc)
• – …. Anything (almost) really to make sure the transaction is fully successful!

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The road towards IPO
Investment banks help the company throughout the process and price is set on
the very last minute before the first trading day
• The Company and the Investment Bank prepare the main marketing document of the IPO process – the
Preparation Prospectus, a comprehensive document about the industry, the company and recent financial statements
& prepared for investors
distribution • Distribution of the document to the market

• Events and meetings investment bankers arrange between companies selling stock and prospective
investors
Roadshow

• During the roadshows, investment bankers get an idea of how likely it is for specific investors to buy stock,
how many shares, and at what price. The investment bankers record this indicated interest, or general idea of
Book-building how much buyers want to invest, to gauge how many shares are likely to be bought when the IPO is sold

• The night before the stock starts to trade, the underwriters look at all the orders for the stock and at what
prices investors are interested to find the highest possible price at which all the shares would sell and then
Underwriters the IPO is priced, or the initial price charged to these initial investors is set.
price the deal

• The initial investors in IPOs are typically the friends and business partners of the underwriting firms. For
Underwriters instance, large institutions that use the investment bank’s other services are often given access to IPOs, as
support the are wealthy individuals that may be clients of the investment banks.
IPO • After the deal is priced, these initial investors are free to sell on the open market (aftermarket trading)

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Debt raise process
IBs tend to explore new financing structures besides the traditional Government
and Corporate Bonds when commercial banks take their business (and margins)
away
Origination-to-distribution
Origination Structuring Distribution

Banks
Insurance
companies
A strong sales
Sectorial knowledge
Corporates Financial engineering platform Asset

Investors
Managers
Issuers

Financial
institutions Established and Pension funds
Matching issuer and Access to and
recognized origination
Public Sector investor requirements knowledge of investor Hedge funds
platform
expectations
Family offices
Feedback reverse enquiry
Sovereign
funds
Syndication

Investment Banks have developed a wide range of structures to fit both issuers and investors’ needs such as

Traditional bonds Senior debt Project Finance

Convertible bonds Mezzanine debt High-Yield bonds …and much more

Zero-coupon bonds Subordinated debt ABS / CDOs

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Relationship management: the key for IB
Bankers aim to be trusted advisors to its clients as a result of a long-term
relationship

Role of bankers

Building relationships in the long run, recognition and influence in a specific sector, sharing relevant
sector experiences and trends, updating regularly on current trading, providing continuous advice,
and managing psychological aspects of a business man’s decision making process
Core elements of relationship management
• Client segmentation: not trying to be all things to people but to meet the needs of specific clients;
focus on clients which profile fits best with the bank’s line of products
• Culture and operational model: organize resources to deliver the right solution to the right
customer at the right time
• “Plan your play and play your plan”: develop a commercial strategy to identify which are the client
to focus in and why in order to build relationships

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Getting the deal: the Pitchbook
Pitchbooks represent an essential part of Investment Banking, where the bank
promotes its services and capabilities to clients

• The pitchbook is a presentation to promote the Investment Bank and its services to the client.
These services could be to give advice on potential targets and/or buyers, to carry out a full
What is a valuation, to assist negotiations, and/or to lead the execution of the deal
Pitchbook? • Banks have to demonstrate the knowledge of the industry, dynamics, the company, potential
valuation and investors’ universe
• Previous experience in similar transactions / same industry is highly valued by clients

Which are the type of pitchbooks? M&A origination matrix

Push (IB initiates contact) Pull (client initiates contact)

Approach with a proprietary investment idea with

Buy-side a particular angle / insight
Help with an acquisition already identified

Approach company to offer a potential divestment Companies ask for an advisor to sell the business
Sell-side of the business / part of the business / part of the business (beauty contest)

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IBDs Team structure
Organizational structure of an investment bank / M&A boutique / Big 4 M&A team

Big 4 / Boutiques Banks / Boutiques

Partner Managing Director

<60

Director Executive Director

Avg 3 years

Senior Vice President /

Senior Manager
Avg 3 years Associate Director

Manager Vice President

Avg 3 years

Associate Associate
Avg 2-3 years

Analyst Analyst
Avg 2-3 years

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Overview of other areas of an investment bank
Other areas include both agency and proprietary businesses

Sales
• Talk to clients about market trends and securities and convince them to place their trades through the
desk. Also act as brokers
Sales and • Key in IPOs / bond offerings that the bank manages, as they help to place shares and bonds to investors
trading Trading
• Manage risk and capital in the markets
- Agency trading: act on behalf of the client, looking to execute the trade as skillfully as possible
- Proprietary trading: invest bank money looking for profit or hedge risks

• Manage money and savings from third parties (institutions, individuals) to invest it on their behalf with
different products and strategies (e.g. funds)
Asset • Manage bank’s money (e.g. loans)
Management • This area also includes Private Banking, which is a bespoke asset management service for large High
Net Worth Individuals (HNWI)
• Alternative Investments: specialized investment products for both clients and the bank (e.g. hedge funds)

• Also called sell-side analysts. They follow and analyze companies in order to produce reports that include
buy/sell recommendations, target prices and earnings forecast
Research
• They also pitch investors with investment ideas related to the companies they follow to generate activity
for the sales and trading area

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2
Pitch Book: Theory /
Gamo Outdoor Case
Study
Pitchbook – Gamo Outdoor Case Study
Background to the company and shareholders rationale to exit

Company Activity
• Gamo Oudoor is a Spanish, worldwide leading manufacturer and distributor of
Air-Rifles and Outdoor clothing and equipment.

• Gamo Outdoor was founded by the Casas Family in Barcelona 65 years ago. In
Background 2007, PwC advises the Casas Family in the sale of Gamo Outdoor to a Private
Equity Fund.

Performance • The company has been a Cash Flow generating company, with slight EBITDA
between 2007 and improvement throughout these years, and had now a more professionalized
2013 Management Team

• After 5 years, having survived to the economic crisis, and managed to prove
Rationale for a resilience through market leadership worldwide and product quality, the PE
divestment fund decides to explore a sale and asks PwC and international player for a
pitch to lead the process if they manage to convince the BoD. (RfP requested)

… it’s the Advisors opportunity to show their sector and market

environment knowledge to pitch for the sale

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Pitchbook – Gamo Outdoor Case Study
An executive document should attract the interest of top level decision makers to
give access to the pitch book

1. Background and current situation

2. Key investment considerations

3. Potential candidates

3.1. Industrial players

3.2. Financial investors

4. Multiple analysis

5. Sale process

6. Coordinating Team and PwC Cross-Border Capabilities

6.1. PwC track record

7. Appendix I (About PwC CF)

8. Appendix II (About Gamo)

9. Appendix III (Comparables)

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Pitchbook – Gamo Outdoor Case Study
Q&A – Prepitch

Decision to sell
• Provide several reasons why, as the shareholder of Gamo, you would start
considering a sale by the start of 2012 (Discuss in Groups)

Expectation from • What will be your expectations as shareholders on what you would like to hear
Investment Banks from Financial Advisors (Investment Banks) on the deal?

Request For
Proposal (RFP)
• What should an RFP from the potential seller contain?

Output
• What should be the main ideas that should remain clear to the shareholders
once the pitch book has been presented by the bank

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Pitchbook – Gamo Outdoor Case Study
Q&A – Pitch

Key Investment
Highlights • Reasons why we include the key investment considerations / highlights?

• Analyze bidder segmentation and give as view on the most relevant aspects for
them to be eligible as bidders in the process

• After reading all bidders segmentation and evaluation criteria, give a view on
who are the ideal Strategic and Financial players to maximise price, and
Bidders
guarantee a certainty of a deal?

• What kind of input would be needed from management to evaluate the bidders
list?
• What is important to analyze in relation to the sector from financial investors to
decide upon financial investors?

Financial Statements
• Provide a view on the financial statement which explain the motivation of a sale
process by the PE Fund.

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