Introduction to Investment Banking Modeling, Mergers & Acquisitions & Valuation

Chris Haroun
A free video tutorial from Chris Haroun
Award Winning MBA Professor, Venture Capitalist and Author.
4.5 instructor rating • 54 courses • 1,077,653 students

Learn more from the full course

The Complete Financial Analyst Training & Investing Course

Succeed as a Financial Analyst &Investor by Award Winning MBA Prof who worked @Goldman, in Hedge Funds & Venture Capital

22:29:00 of on-demand video • Updated July 2021

  • 22+ hour complete financial analyst course!
  • #1 Best Selling Investing Course on Udemy!
  • How to pick stocks.
  • Become an expert in Excel for financial analysts (no prior Excel knowledge is required).
  • How to manage a portfolio.
  • How an IPO works.
  • How to build financial models.
  • How to get hired and promoted as a financial analyst.
  • How risk management works.
  • How to use technical analysis.
  • How to value companies.
  • Use and create Excel based templates developed by Chris to help you create financial statements from scratch (meaning income statements, balance sheets, cash flow statements and more).
  • Use and create Excel based templates developed by Chris to help you value companies using several different valuation methodologies, including P/E, P/R and Discounted Cash Flow (DCF).
  • Use and create Excel based templates developed by Chris to help you manage a portfolio.
  • How Monetary Policy works.
  • How Fiscal Policy works.
  • How interest rates are changed and why this is crucial to understand for successful financial analysts.
  • How to pitch long and short ideas to portfolio managers.
  • How to find great venture capital investment ideas.
  • How to come up with mutual fund investment ideas (longs - meaning buys) using an easy to understand top down and bottoms up research process.
  • How to come up with hedge fund investment ideas (longs and shorts) using an easy to understand top down and bottoms up research process.
  • Identify crucial catalysts (timed events) in order to know when the optimal time is to buy or short a stock.
  • Understand how investment banks (the 'Sell Side') can help you be more successful in a hedge fund or mutual fund career.
  • Analyze and understand an income statement (even if you have no experience with income statements).
  • Analyze and understand a balance sheet (even if you have no experience with balance sheets).
  • Analyze and understand a cash flow statement (even if you have no experience with cash flow statements).
  • Understand and use modeling best practices so you can create financial models.
  • Know where to get data in order to build a financial model (in depth understanding of identifying and using/navigating the best free websites and sources to build your financial model)!
  • Create a financial model (projecting the future) for an income statement.
  • Other valuation methodologies, including EV/Sales, EV/EBITDA, P/B, EV/FCF, etc.
  • Create a financial model (projecting the future) for a balance sheet.
  • Create a financial model (projecting the future) for a cash flow statement.
  • Understand valuation best practices so you can create target prices based on your financial models.
  • How to use Discounted Cash Flow (DCF) and how to create the Weighted Average Cost of Capital and Terminal values in order to pick target prices.
  • How to use P/E in order to pick target prices.
  • How to use P/R in order to pick target prices.
  • Come up with a target price based on an average of several different valuation methodologies.
  • Learn about 14 different Financial Analyst jobs and how they overlap and work together (including Investment Banking, Venture Capital, Private Equity, Private Wealth Management etc.).
  • Investment Banking: Understand from a high level perspective what an Investment Bank is as well as what the role/job is of an Investment Banking Financial Analyst, including the pros and cons.
  • Venture Capital: Understand from a high level perspective what a Venture Capital firm is as well as what the role/job is of a Venture Capital Financial Analyst, including the pros and cons.
  • Private Equity: Understand from a high level perspective what a Private Equity firm is as well as what the role/job is of a Private Equity Financial Analyst, including the pros and cons.
  • Private Wealth Management: Understand from a high level perspective what a Private Wealth Management firm is as well as what the role/job is of a Private Wealth Management Financial Analyst, including the pros and cons.
  • Sell Side Research Analyst: Understand from a high level perspective what a Sell Side Research Analyst’s firm is as well as what the role/job is of a Sell Side Research Financial Analyst, including the pros and cons.
  • Sales Trader: Understand from a high level perspective what a Sales Trader’s firm is as well as what the role/job is of a Sales Trader Financial Analyst, including the pros and cons.
  • Buy Side Trader: Understand from a high level perspective what a Buy Side Trader’s firm is as well as what the role/job is of a Buy Side Trader Financial Analyst, including the pros and cons.
  • Mutual Fund: Understand from a high level perspective what a Mutual Fund is as well as what the role/job is of a Mutual Fund Financial Analyst, including the pros and cons.
  • Sell Side Trader: Understand from a high level perspective what a Sell Side Trader’s firm is as well as what the role/job is of a Sell Side Trader Financial Analyst, including the pros and cons.
  • Large Non Finance Company: Understand from a high level perspective what a Large Non Finance Company firm is as well as what the role/job is of a Large Non Finance Company Financial Analyst, including the pros and cons.
  • Equity Capital Markets: Understand from a high level perspective what an Equity Capital Markets’ firm is as well as what the role/job is of a Equity Capital Markets Financial Analyst, including the pros and cons.
  • Hedge Fund: Understand from a high level perspective what a Hedge Fund is as well as what the role/job is of a Hedge Fund Financial Analyst, including the pros and cons.
  • Equity Sales: Understand from a high level perspective what an Equity Sales’ firm is as well as what the role/job is of an Equity Sales Financial Analyst, including the pros and cons.
  • Tech / Artificial Intelligence: Understand from a high level perspective what a Tech / Artificial Intelligence’s firm is as well as what the role/job is of a Tech / Artificial Intelligence Financial Analyst, including the pros and cons.
  • Learn what finance role you are most passionate about pursuing.
English [Auto] We're going to talk about investment banking, modeling and valuation very quickly, I just want to put on your radar screen, OK? And later on, the course will actually get to do a case study of a model and we'll project what the valuation should be for a company when we hopefully work on the IPO of your buddy Tony Sharks company, Shark Virtual Reality. I hope we're going to get that deal. Please, please don't quit. OK, I want you to stay here. I know he's trying to recruit you, but stay here, OK, Hilcorp. You're welcome. Thank you. Thank you. So when do you model your basically predicting the future by building out financial statements? And as I mentioned before, in this course, we start top down, OK, and we drill down after we understand the macro, which we do now. Now we understand investment banking and the stock market more Excel exercises the buy side and eventually will drill down to modeling and projecting earnings, which is at the bottom of the income statement. So let's now talk a little bit more about the investment bankers rule when it comes to modeling and valuation. OK, so you need to put in a ton of comments. See this here, put the comments in your model because you're going to be working on teams and I'll show you exactly what this means. So let's say that you're forecasting revenue in, I don't know, twenty, nineteen or whatever it might be. So right here, say you want to add a comment, you can insert a comment here and say you always put your initials first and the date as well. Let me just this little dude over here and then you right. Click and you go to edit. OK, so my initials are S.H.. Right. So you'll you'll type in S.H. the dates OK. And maybe the person you're talking to, CFO, if it was that person. Then you put in your comments here, whatever that might be. OK, and then. If somebody else visits the model and they have another comment to put in, they should use the exact same naming convention. OK, except they should put their so John Snow right. And the dates and the executive he spoke to for that model update whatever it is, and then just type below that. I think you get the idea. And I want to mention that Isabel is going to do every single type of model, OK, and every type of valuation. It's very important for her to do that. And you always have to cast your net wide if you're a banker. So for an IPO, the analysts got a model and value companies assuming that every type of customer is going to look at it, you know, value investors. They like DCF growth investors, they like price to revenue, GARP investors. They like both or neither. So you have to do this because the equity sales force has tons of different types of clients. OK, they're going to talk to mutual funds and hedge funds and that sort of thing. OK, so make sure that it's perfect as well because it's going to feed into the S-1 filing eventually and maybe parts of it will go into the sales memo the equity capital markets will use to educate the sales force on the trading floor at the investment banks for an IPO. And a lot of people going to pitch books as well. So, again, cast your net very, very wide. OK, now let's talk about mergers and acquisitions, so models are you can you can always show in a model where M&A discrepancies exist. OK, and again, you never have perfect information, but you can make a lot of assumptions and you have to put models of two separate companies side by side before merging them, because you have to understand where the synergies are or if there's any redundancies. Like if you have one company buying another company and there's, you know, a CFO at both companies, you know that you're going to have to, unfortunately, get rid of one of those CFOs or reallocate them to a different department. Right. And so, again, you have a profit information, but you start out by putting the model side by side and then you basically add the stuff together. And I'll give you an example in a second, OK? It can often be more of an art than a science. Actually, before we go on, I go back to my model here and LinkedIn bought this company called Linda. OK, and we have this model out here is well, let's take a look here. I'm just doing this on the fly. Right on. Here it is. So they bought Linda, right. And so we are able to add the revenue numbers for Linda, at least as much information as we have. We don't have all the information. We only had Linda on an annual basis back here. OK, it's we have an annual basis here. And I think we have Cortile for some of the numbers here. Just three of them, OK. So, again, it's more of an art than a science. And then what we can do is, of course, you forecast that going forward, we figure that growth is robust initially because Linda is going to be sold through Lincoln's massive distribution channels globally. And then, of course, growth will slow over time. And that's all we have from Linda. We don't have that much else. But it's very important to separate Linda from the rest of the model because you want to understand what organic growth is, meaning growth X, Linda. OK, very important. Very important. And that's going to be lumped into the learning and development section going forward. That's what they're going to call it, at least. OK, let's go back again modernly is often more of an art than a science, you'll never have perfect information. Just do the best you can and it's actually a lot easier. And it's fun. Easier than you think, right. So you got to ask the management team for a zillion comments on every cell about the model and they'll help you out, too. It's their job. You'll sit down with the CFO and the CFO will basically explain every single line item. Right, every line item. And you can comment the heck out of your your your cells here as well. Again, you do right. Click and go to insert comments. And we talked about that already. OK, and there they're there to help you, help you with your estimates on the future in terms of what your modeling and also the past as well. OK, back to our presentation. Cool, so let's actually do a quick case study on Coca-Cola, OK, and a hypothetical investment that they have in Monster. OK, so Coca-Cola is obviously sold everywhere in the world. It's one of the most recognizable brands. OK, and then you have monster that's not sold in every country in the world. Let's just assume it's a quarter of the world's, roughly speaking. OK, so Coca-Cola has got all those executives on the left side called the CFO, the CEO, CMO, chief technology officer, chief security officer, CIO, et cetera, that sort of thing. And you can see on the right hand side and silver here, that monster has similar titles for all of their management team. OK, and so Coca-Cola, actually. Just bought Monster, hypothetically speaking, and Coca-Cola has more distribution channels, which is why there's more monsters everywhere and now we've got all this redundancy. So what don't we do? What we have to we know that revenue growth accelerated from Monster once Coke bought them, because, again, Coke's got additional distribution channels. But we've got to make some cuts, we got to make some tough decisions, and so the CFO from Monster is going to be let go back into the sea. Oh, actually, if it surprises me, let go. Because the CEO at Monster, hypothetically speaking, of course, is is a better CEO and then we'll do the rest for the rest of the positions. And usually the acquiring company wins these battles and is the last person standing. OK, so here are some steps to work on an amendment. OK, so on the income statement, it's pretty easy to add the revenue together and then you assume there's overlap or or an increase in revenue because there's new distribution channels. Right. So Monster is now going to be sold in many different distribution channels, given the fact that Coke, hypothetically speaking, but the company. OK, and on the income statement, it's also easy with expenses. You simply add them together, OK? And then you assume what the overlap is and you can also trim a lot of fat once you realize what the overlap is going to be. And on the balance sheet, it's really easy again, you add everything together, right, and then you cut and consolidate, right. And so if you look at the property plant and equipment section on the balance sheet, you don't need to factory. So maybe you can shut one down, that sort of thing. And every single company and every merger situation is completely different. That's why I want to talk about it from a high level perspective on the cash flow statement. Just add everything together again. It's pretty simple. That's it. It's that easy is really easy. It's actually a lot of fun to I enjoy it. And again, don't worry if you have no idea what's going on because management's going to walk you through every single cell in your model. So, again, you got to include many, many different comments asking you shall receive management wants to help you because you're helping them. OK, so again, we talked about Linda, the revenue was one hundred twenty two million in 2013, one hundred fifty million in 2014 and 108 million to date or so in 2015. So we threw all that in our model. I already showed you that. Insurance expenses, you just got to ask LinkedIn and Linda together what expense cuts might what they might be and just reduce them from your combined model. You can make assumptions yourself, but it's best you talk to management because they will help you out with this. And so, again, big companies, when they buy small companies like Coke buying Monster, it's accretive, meaning earnings are going to go up for Coke, even though the valuation on Monster, for example, is way, way higher than Coke. And this is what happens with Hewlett-Packard as well. Hewlett-Packard has 60 percent of the revenues overseas and 40 percent in the United States. And so when Hewlett-Packard buys a very expensive software company that is US focused only, it becomes immediately accretive, meaning it helps their earnings right away and the valuation right away, too, because HP has international distribution channels, they can distribute the product of the underlying software company they just bought to 60 percent of their customers, which are overseas in this hypothetical example. Let's look an example now of Apple from an M&A perspective, let's have fun with this. OK, so we have Apple, they've got a low price earnings, multiple, OK, it's cheap, right? And over 60 percent of Apple sales are international. OK, so Apple is going to buy beats by Dre. And sorry, I have to put some humor in this. There we go. Beats by Dre. They want to look to buy that company, but hypothetically speaking, Beets has a very high P, assuming Beets was just assume it was publicly traded to a very high price earnings multiple, OK, and. Beets has way under 50 percent in this example of revenues from international. OK, so Apple takes a bite out of beets. OK, they buy the company. And what happens is there is a there are a ton of synergies. OK. So Apple plus beats equals more than Apple plus beats one plus one equals three, because Apple can distribute beats headphones which are massive all over the world and their own distribution channels or in all of their Apple stores. Right. So revenue goes up a lot for beats itself. One plus one equals three in this hypothetical example. OK. Now, this is a hypothetical discussion of the income statement for Apple buying beats, OK, so we're going to put together an income statement here. It's gonna be very simplistic lessons, always more. All right. So Apple has revenues of one hundred bucks, for example. Casket's sold of 20 bucks, Jeanna, of 10 bucks, sales, marketing, 15 bucks. Research and development, which is also called product development, 10 bucks and EBITA a forty five bucks in taxes of 50. And I guess 50 over 45 means a thirty three percent tax rate. And that's their net income. OK. All right, and this is what beats Hask lower revenues, it's a smaller company, and these are all just hypothetical numbers, right? And you go all the way down and beats doesn't pay tax because they have net operating loss carryforwards, meaning they've lost money in the past. OK, so they don't have to pay taxes until they make up for the money they've lost in the past. Again, that's called a net operating loss carry forward. OK, so we just added the income statements together and look at this, one hundred plus hundred ten equals hundred twenty. Say what? Well, Apple can distribute beets products in many more markets that beets is not in. So instead of it just being 110 million revenue, it's one hundred twenty. Got it. OK, cool. So we can look at the percentage of revenue for each line item as well. And remember, when you model stuff, spend a lot of time on revenue because everything else just becomes a percent of revenue. It's cake. It's really, really easy. OK, let's do it. All right. So when we combined the companies here, right, you can see that the cost of goods sold 20 plus four equals twenty four. Right. And still that's still 20 percent of revenue. OK. Gené, 10 bucks plus one equals 11, that's nine percent of revenue. Sales and marketing, watch this, 15 plus to a 17 percent, actually 16, because they're able to trim a little bit here. There's overlap like research and development, 10 plus 11. Looks like Apple's just going to stick with their own R&D and get rid of the R&D folks here, hypothetically speaking. OK. All right. Interesting, huh? So look what just happened there. R&D used to be 10 percent of revenue. Now it's actually only eight percent, right? Isn't that cool? OK, interesting, and EBITA as a percentage of revenue was 45 percent or 45 bucks. OK. And you had 20 percent EBIT margins for beets, right? But that never means earnings before income taxes, depreciation and amortization. If it exists, add these together. Forty five plus two. So it gets to be a lot bigger. Look at that. Look how creative this was. So keep it that margins for Apple again, hypothetically is forty nine percent. Right. It's amazing. It used to be only forty five percent. Huh. And despite the fact that Beats had brutal but that margin at Apple, it was still a creative OK. Interesting, interesting. OK, and looks like the tax is a little bit less for Apple as well. Why? It's a little bit complicated, but instead of being thirty three percent, what they're doing is they have a tax loss carry forward because beats lost a lot of money before. So they get that benefit as well about that company. They get the benefit that purchasing the asset. OK, and so the bottom line is net income, as is that sale went from 30 percent to thirty three percent, a highly accretive acquisition for Apple. And it made a lot of sense. And Wall Street loved it. So sometimes companies can buy other companies instead of the stock going down of the company, acquiring the other company can actually go up if Wall Street likes it. And usually when a company buys Company B, if it's a big deal, they do it. After the market closes, say it. They'll announce at 4:00 or 5:00 p.m. New York time when the stock market closed, and then they'll hold a webcast that everybody can listen into to you, me, fidelity, the whole world, and they'll walk through why they did the deal and why it's accretive so that investors don't panic. They do it after hours, the markets closed and hopefully the next day the stock goes up. Doesn't always happen. You know, investors sometimes don't like it because sometimes the big software companies or big companies in general buy other companies because they're not growing themselves and they want to hide the fact that they're not growing, which is disingenuous. But the smart investors like you will catch onto that right away and sell the stock the next day or whatever. OK, so we found the synergies and there they are. Pretty cool, huh? Pretty cool, the only place we didn't have synergise was cost of goods sold. I don't know why maybe we didn't want to close that factory yet. Anyway, that's that's it. Now we're working on this M&A deal, we're going to look at the balance sheet, OK? OK, so we have assets plus or assets equals liabilities plus equity, always. Right. C11 plus four is 15. OK. And here we have the cash building's liabilities, etc., for four beats. Remember, equity plus liabilities equals assets. And then we combine them, OK? And so. Wow. How did we get an increase in cash? Let's go through this, 10 plus one is not 13. So what happened was Apple. Pay down the debt right from beats, OK, and then they sold three buildings. OK, I get it. So they bought beats 10 plus one is 11 bucks, 11 bucks, OK? And then they paid the debt off here, the loans. So we're back down to 10 bucks. And then Apple sold three buildings. OK, so that's 13 bucks in cash. OK, I get it, I get it, I get it. OK, it makes sense, makes sense. That's fine. They sold some of their own assets as well. OK, it looks like here debt is going to be zero because they pay back a dollar in debts and then looks like they're going to one employee. So we got four bucks here. Remember, assets, equal liabilities plus equity. So 11 plus four is 15, which which adds up again, hypothetical situation. OK, so let's move on to the cash flow statement. OK, Apple's cash flow from operations is 10 bucks, OK? And that's that Delta because their net income went from 30 bucks to 40 bucks. Let's go back a couple of slides. I'll show you that. All right, yeah, there you go, see Apple. Net income went from 30 to 40 bucks, all hypothetical here, high level, of course. All right. Go back to our cash flow statement. That makes sense. Cash flow from investing is three bucks because Apple sold three of monstrous plants to get a three hour benefit and then from financing is nothing because they retired. What a monstrous debt. Whatever a buck in debt. Then they use Munster's cash to do that. So there's no change there. So net net, the increase on the cash balance, 13 bucks post-industrial.