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First published in Great Britain and United States of America in 2012
Copyright © Harriman House Ltd
The right of David Pilger to be identified as the Author has been asserted in accordance with the Copyright, Design and Patents Act 1988.
ISBN: 978-0-85719-224-0
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This book is dedicated to Ashley. For your patience and support during the writing of this book – thank you.
About the Author
David Pilger is a founder and principal at Flex Banker LLC, a corporate advisory firm focused on providing corporate finance and capital raising advice to growing companies with innovative technologies. Flex Banker focuses on education, Ag-science, alternative energy, and manufacturing/industrial sectors as well as the financial sector. In addition to advising emerging growth companies with game-changing technology, he has been a consultant or advisor to large institutional clients such as Goldman Sachs, Morgan Stanley, and Pepsico to name a few.
David teaches corporate valuation and financial modeling and trains financial industry professionals at top financial institutions such as Paulson & Co., Barclays Capital, and other leading financial institutions at Blue Chip Career advisors.
Prior to working at Flex Banker, David specialised in senior bank debt at Goldman, Sachs & Co. He oversaw approximately $2 billion in the firm’s bank loan structured trading and derivative portfolios. Before joining Goldman Sachs, he worked in investment banking at Merrill Lynch and Shinsei Bank in Tokyo, Japan, focusing on corporate advisory and M&A within the financial institutions sector.
David studied finance at the University of Virginia, earning a B.S. in Commerce. Upon graduating from the University of Virginia, he entered Princeton University, studying Japanese, and later went on to study advanced Japanese at Jouchi University in Tokyo, Japan.
Preface
What this book is about
This book is designed to explain the logic, concepts and analytical techniques behind leveraged buyout analysis – in plain (and painless) English and with a practical emphasis.
It explains leveraged buyouts and everything involved in their analysis. It also contains a detailed step-by-step guide to the process of putting together an LBO analysis. This lays bare the analytical model most often used by practitioners in the investment industry, in a sequential narrative form. Readers should be able to take the techniques described in this book and create their own leveraged buyout analyses. A complete MS Excel version of the leverage buyout analysis can be found at www.fin-models.com.
Who this book is for
This booked is designed for the individual who wants to learn the fundamental principles and modeling techniques of LBO analysis, as used by financial analysts in the investment banking industry.
With the modeling analysis approached from a practitioner’s standpoint, it is assumed that the reader is most interested in a practical approach. The emphasis is on the approach a practitioner takes on a daily basis in preparing a leveraged buyout analysis. This is as opposed to an academic approach, which would be more focused on theory and leveraged buyouts as a concept (though the theory and concept is dealt with in the first few chapters).
What knowledge is assumed
It is assumed that the reader has had a previous introduction to financial statements (the income statement, balance sheet and cash flow statement) and rudimentary accounting concepts. A basic knowledge of what financial statements are as well as the function and purpose of the income statement, balance sheet and cash flow statement will be essential. However, the book does explain every element of an LBO analysis, which necessarily involves explaining aspects of financial statements as this analysis relates to them.
This book assumes that the reader will be using MS Excel as their spreadsheet software for creating an LBO analysis. It therefore also assumes that the reader has a very basic working knowledge of Excel. The formulaic functions within MS Excel are explained in detail, but it is taken for granted that the user has some basic understanding of MS Excel as a tool that can be used for financial analysis.
Chapter 1: What Is An LBO?
If you’re looking for a job or about to start a new job in investment banking or corporate finance you’re probably going to have to know a thing or two about companies buying other companies. You may have picked up this book because you are just curious to know more about the workings of corporate finance and financial transactions. Well, you have come to the right place. But before we get started and dive into the makings of an LBO transaction, we first need to define what exactly an LBO is.
An LBO or leveraged buyout is, simply put, one company buying another company and using a large amount of debt to do it. That’s it. So ‘why all the fuss?’ you might ask. Why does this type of transaction get set aside from other types of mergers and acquisitions? The answer lies in the inherent risks that go along with a transaction that is financed primarily with borrowed money.
“An LBO is, simply put, one company buying another company and using a large amount of debt to do it.”
There are a few things that we need to recognize about the debt that is used in a leveraged buyout transaction. The first is that the debt used to acquire the target company is often secured by the assets of the target. In other words, a potential buyer does not necessarily need to possess the financial means to purchase a target company. Instead, the target company just needs to have enough available collateral, in the form of its assets, to allow an outside buyer to obtain debt financing (secured by the target’s assets) to pay for the cost of the transaction. Debt financing can also be secured by the assets of the buyer, but naturally using someone else’s assets as collateral is always considered more attractive than pledging one’s own assets as security for debt financing.
The second point to mention about the debt is that it can come in the form of bonds or bank loans. In the case of bonds, this means that the debt is issued and typically sold to investors in the capital markets. There is a fixed coupon rate that the target company must pay to its creditors (i.e. the purchasers of the bonds), which is dictated