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 • 34 courses • 876,319 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

22:31:28 of on-demand video • Updated June 2020

  • 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 want to put on your radar screen. OK. And later on in the course we'll 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 I'll cop You're welcome. Thank you. Thank you. So when you are a model you're basically predicting the future by building out financial statements. And as I've 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 that with the stock market more Excel exercises the high side and eventually we'll drill down to modeling and projecting earnings which is at the bottom of the income statement. So let's talk a little bit more about the investment bankers rule when it comes to modeling and valuation. Okay so you need to put in a ton of comments see this year put the comments in your model because you to be working on teams and I'll show you exactly what this means. So let's say that you're forecasting revenue in 2019 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. I mean this will do it over here. And then you right click and you go at it. Okay. So my initials are C.H. right. So you'll you'll type in S.H. that date to 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. And then if somebody else does the model and they have another comment to put in they should use the exact same naming convention. OK. Except they should put there. So say it's John Snow right. And the dates and the Executive he spoke to for that model update whenever it is. And then just type blow. 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 evaluation 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 or revenue. Gardner 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. It's going to feed into the S-1 filing eventually and maybe parts will go to the sales mammo 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 it will go to pished books as well. So again cast your net very very wide Okay now talk about mergers and acquisitions so models are are you can you can always show in a model where M&A discrepancies exist. Okay. And again you never have heard 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 a CFO both companies do you know that you're going to have to unfortunately get one of those CFOs or reallocate them to a different apartment. Right and so again you cover up for 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 Linked-In bought this company called Linda. OK. And we have this model out here as well as take a look here I'm doing this on the fly right on here it is. So they bought Linda. Right. And so we're able to add the revenue numbers for Linda at least as much information as we have. We don't have all of the information we only had Linda on an annual basis back here. IDS we have it on an annual basis here and I think we have quarterly for some of the numbers here just three of them okay. So again it's more art than a science. And then what we can do is of course you forecast that going forward as we figure that growth is robust initially because Linda is going to be sold through Linked-In massive distribution channels globally and then of course growth will slow over time. And that's all we have from Lynn and 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 ex Linda. Okay. Very important. Very important. And that's going to be lumped into the Learning and Development section going for us what they're going to call at least Okay. Let's go back. Again bottom line is often more of an art than a science. You'll never have perfect information just do best you can. OK 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 write every line item and you can comment the heck out of your your your yourself here as well. Again you do right clicking go to insert comments and we talked about that already. OK. And they're there to help you help you with your estimates on the future in terms of what you're 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. And then you have monster that's not sold every country in the world let's just assume it's know a quarter of the world's roughly speaking. So Coca-Cola it's got all those executives on the left side in gold. The CFO CEO CMO chief technology officer chief security officer CIO etc. 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 Munster. OK. So who's Me and Coco has more distribution channels which is why there's more monsters everywhere. And now we've got all this redundancy so what do we do. Well we have to we know that revenue growth accelerated from monster when Coke both because again Coke's got initial results. But we've got to make some cuts. We had to make some tough decisions. And so the CFO from Monster is going to be let go into the C o Actually if Coca-Cola surprisingly can be let go because the CEO at Monster. Hypothetically speaking of course is is is a better seat. Oh. 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. 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 about the company. Okay. And on the income statement it's also easy with expenses you simply add them together. Okay. And then you assume what the overlap is and you can also trim a lot of fat Once you realize what the overlaps going to be in 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 proper property plant and equipment section on the balance sheet you don't need to factories 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 castle estate and you 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 too I enjoy it. And again don't worry if you have no idea what's going on because management is going to walk you through every single cell in your model. So again you got to include many many different comments ask and you shall receive management wants to help you because you're helping them. OK. So again we talked about Linda. The revenue is 120 million in 2013. Hundred fifty million. 2014 and 108 million to date or so in 2015. So we threw all that in our model. I already showed you that internes expenses you just got to ask Linked-In and Linda together when 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 a creed of 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. Packard has 60 percent of their revenues overseas and 40 percent in the United States. And so when Hewlett-Packard buys a very expensive software company that is U.S. focused only it becomes immediately accrete of me it helps earnings right away and the valuation right away too because HP has international distribution channels they can distribute the product of the underlying supercommittee 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 you go. Beats by Dre. They want to look to buy the company. But hypothetically speaking beats has a very high P E assuming beats was just assume it was publicly traded at a very high price earnings multiple. OK. And beats has way under 50 percent in this example of revenues from international. OK. So Apple takes a bite out of beats 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 puts beats one plus one equals three because Apple can distribute beats headphones which are massive all over the world and their own distribution channels are 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 a case so we're going to put together an income statement here. It's very very simplistic. Less is always more. All right. So Apple has revenues of 100 bucks for example caskets sold of 20 bucks DNA of 10 bucks sales marketing 15 bucks. Research Development which is also called product development. Ten bucks and it does a forty five bucks in taxes of fifty and I guess 15 over 45 means a 33 percent tax rate and that's their net income. OK. All right. And this is what beats that's OK. Lower revenue is a smaller company. And these are all just hypothetical numbers right. And you go all the way down NBC doesn't pay tax because they have net operating loss carry forwards mean 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 an O L or net operating loss carry forward. OK. So we just added the income statements together and look at this 100 plus 110 equals hundred twenty. So they wanted. Well Apple can distribute Beatz products in many more markets that Beatz is not in. So instead of just being $110 million revenue it's a 120. Got it. Okay cool. So we can look at the percentage of revenue for each line item as well. Okay. And remember when you model stuff spend a lot of time on the 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 costs get sold 20 plus verticals 24 right. And still that's still 20 percent of revenue. Okay. DNA. Ten bucks plus one equals 11 that's 9 percent of revenue. Sales of marketing watch this 15 plus to a 17 is actually 16 because they were able to trim a little bit here. There was overlap. 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. So look what has happened there. R&D used to be 10 percent of revenue. Now it's actually only 8 percent right. Nicole Okay interesting. And even as a percentage revenue was 45 percent or 45 bucks to and you had 20 percent margins for beats. Right. But the member means earnings before income taxes depreciation and amortization if it exists. Add these together 45 plus to WOO-HOO it gets to be a lot bigger. Look at that. Look how creative this was. So the margins for Apple again hypothetically is 49 percent. Right. It's amazing. It used to be only 45 percent. And despite the fact that Beatz had brutal Ebbitt that margins current 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 is a little complicated but instead of being 33 percent what they're doing is they have a tax loss carry forward because Beatz lost a lot of money before. Right. So they get the benefit of up to about that company. They get the benefit that purchasing the asset. Okay. And so the bottom line is net income as it is up as sale went from 30 percent to 33 percent. A highly creative acquisition for Apple and it made less 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 price close and then or hold a webcast that everybody can listen into. You may fidelity the whole world and they'll walk through why they did the deal and why it's creative so that investors don't panic. They do it after hours markets close and hopefully the next day the stock goes up doesn't always happen. 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 on to that right away and sell the stock the next day or whenever. OK. So we found the synergies and there they are pretty cool on pretty cool. The only place we have synergies 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 assets equals liabilities plus equity always right see 11 plus 4 is 15. And here we have the cash building's liabilities etc. for beats remember equity plus liabilities equals assets. And then we combined them. Okay. 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 debts 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 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 debt and then looks like they're going to one employee. So we got four bucks here member 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 that delta right there net income went from 30 bucks to 40 bucks. Let's go back a couple of slides and I'll show you that. 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 for investing is three bucks because Apple sold three of monsters plants to get a $3 benefit. And then Castro in financing is nothing because they retired what monsters debts whatever back in debt. Then he is Munster's cash to do that. Right. There's no change there. So net net the increase on the cash bounced thirteen bucks post the Montreal.