IBD Introduction

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Brigham Young University Introduction to Investment Banking March 7, 2006 Presentation to:

Transcript of IBD Introduction

Page 1: IBD Introduction

Brigham Young University

Introduction to Investment Banking

March 7, 2006

Presentation to:

Page 2: IBD Introduction

Table of ContentsAgenda

I. Introduction

II. Investment Banking Overview

III. Role of An Analyst

IV. Recruiting Process

V. Investment Banking Interviews

VI. Lehman Brothers Overview

_____________________________________________________________

Appendices

A. Basic Finance / Valuation Workshop

B. Suggested Reading Material / Resources

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Introduction

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Introduction

We are pleased to be able to speak with you about investment banking, and the steps and considerations involved in landing a job in this industry

Presenters are Brigham Young University alumni and members of Lehman Brother’s BYU recruiting team

– Colin Cropper, Vice President, Global Mergers & Acquisitions (BYU Class of 1996)

– Tyler Willardson, Analyst, Global Technology Mergers & Acquisitions (BYU Class of 2004)

Although we work for Lehman Brothers, this presentation is meant to be generally applicable to all investment banking firms

Introduction

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Investment Banking Overview

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Investment Banking OverviewInvestment Banking Overview

Investment Banking Corporate Structure

Lehman Brothers

PrivateEquity

Investment Banking

FixedIncome Equities

IndustryGroups Sales

ProductGroups Trading

GeographicGroups Research

Investment Management

Asset Management

PrivateInvestment

Management

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Investment Banking Overview

Capital Markets – Sales, Trading & Research (Equity and Fixed Income)

– Distributes new (primary) security issues to institutional investors/clients

– Transacts blocks of previously issued (secondary) securities through private placement or negotiation

– Maintains markets for securities already distributed

– Provides research on securities, companies, industries and economies

Investment Management Services

– Provides investment and financial advisory services

– Focuses on high net worth individuals and mid-sized institutional investors

Investment Banking

– Provides strategic, financial and valuation advisory services

– Raises capital through the issuance of securities

– Advises companies in merger & acquisition and restructuring transactions

– Offers specialized products and services to meet the needs of corporate and government clients

Investment Banking Overview

Functional Areas of a Typical Investment Bank

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Investment Banking Overview

Provide strategic, financial and valuation advisory services

– Use industry knowledge, expertise and contacts to advise senior executives and boards of directors

– Identify and assess strategic opportunities

– Interpret market information and enhance shareholder value

– Provide general valuation services (e.g., segment analysis, break-up valuations, fairness opinions)

Raise capital through the issuance of securities

– Act as intermediary between issuers and investors

– Provide access to equity and fixed income capital (e.g., investment grade, bank, high yield, preferred stock)

– Create specialized securities and derivatives (e.g., convertibles, trust preferred securities, warrants)

Investment Banking Overview

What is Investment Banking?

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Investment Banking Overview

Advise companies in merger & acquisition and restructuring transactions

– Sell-side assignments (represent client in the sale of its company or some of its assets)

– Buy-side assignments (represent potential acquirers and negotiate transactions)

– Hostile take-over defense/advisory

Offer specialized products and services that satisfy the needs of corporate and government clients

– Private equity (e.g., Merchant Banking, Real Estate, Venture Capital, other)

– Privatization

– Monetization

– Asset-backed securities

Investment Banking Overview

What is Investment Banking?

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Investment Banking OverviewInvestment Banking Overview

Issue of Securities

Client InvestorsSales Force– Equity– Fixed Income

Research– Equity– Fixed Income

Capital Markets– Equity– Fixed Income

Industry Group

Investment Bank

Investment Banking Capital Markets(Sales, Trades & Research)

Investment Advice

Chinese W

all

Ongoing financingdialogue

Specific ExecutionAdvice

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Investment Banking OverviewInvestment Banking Overview

M&A Transactions

Client Potential M&APartner

M&A Group

Industry Group

Chinese Wall

Research– Equity– Fixed Income

Feedback on possible marketreaction and “story”*

___________________________* Research involvement requires officially bringing analyst over the wall.

Specific Execution Advice

Ongoing Strategic Dialogue

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Investment Banking Overview

Develop wide range of skills (finance, strategy, marketing, etc.)

– Team and project management

Interact with senior management

– Deal directly with CEO/CFO and senior management

– Transactions undertaken are often high profile, company altering events

Work with highly talented peers

– Learn from those around you

Able to take on responsibility early

– Steep learning curve

Industry expertise or breadth of knowledge across industries

– Can specialize in an industry (e.g., Industrials, Technology, Healthcare, etc.) or a product group (e.g., M&A, Leveraged Finance or High Yield, Debt Capital Markets, Equity Capital Markets, etc.) that covers many industries

Wall Street deal flow

– Long-term growth in industry expected to continue

– Breadth of different types of transactions and experiences

Investment Banking Overview

Reasons to Consider a Career in Investment Banking

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Investment Banking Overview

Investment Banking vs. Sales, Trading & Research

– More team and project-oriented, longer-term assignments

– More strategic rather than market-oriented

– More exposure to valuation, accounting, tax and corporate finance issues

– Skills more transferable outside the industry

Investment Banking vs. Industry and Management Training Programs

– More training and development along a wide range of general business skills (finance and capital markets; tax, accounting and legal; negotiation; marketing; and how to create transaction opportunities)

– More responsibility at an earlier stage

– Faster career track

– More exposure to senior management and board members

– Greater interaction with leading industry players, better opportunity to develop network

– Greater intensity

Investment Banking Overview

Career Comparisons

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Investment Banking Overview

Investment Banking vs. Consulting

Like consultants, investment bankers provide strategic advice to their clients

– For example, investment bankers advise clients on how to survive in a changing industry

• Optimize operating and stock price performance by divesting non-core business units

• Capitalize on synergies or unrecognized value by acquiring other companies or assets

However, unlike consultants, investment bankers also provide financial advice to their clients

– Investment bankers present their clients with alternatives to reduce the client’s cost of capital or to help the client obtain a stronger balance sheet

– In simple terms, investment bankers efficiently match capital providers with capital users

While transactions are conceived at a “strategic” level, execution requires detailed analysis and a thorough understanding of the financial, accounting and tax profile of the client

More immediate, visible results to your advice – transactions executed in shorter time period and the “market” provides an immediate opinion on your advice

Investment Banking Overview

Career Comparisons

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Investment Banking Overview

Investment Banking vs. Start-ups

More infrastructure support

– Training and development

– Substantial resources available to get the job done

More defined career path, although still in an entrepreneurial environment

– Merit-based system

– Team approach

Less career risk

– As with a start-up, you work plenty of hours, but certainty of reward is much greater

Many start-ups look to investment banks for direction

– Opportunity to review and evaluate numerous business plans

Investment Banking Overview

Career Comparisons

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Role of An Analyst

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Role of An AnalystRole of An Analyst

The Hierarchy

Role

Managing Director

SVP /Vice President

Analyst

Years in Industry

Associate

Client RelationshipsStrategic Thinking

Knowledge of IndustryExecution / Expertise

Day to DayExecution

10+

3½ to 10

1 to 3½

2 to 3 year program

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Role of An Analyst

Industry Coverage

Preparation of presentations (e.g., new business pitches, board books)

Comparable company / transactions analysis

Create company profiles

Perform industry research

Equity / Debt / Convertible Offerings

Assemble marketing materials to win the mandate, perform initial valuation work

Conduct due diligence through site visits, interviews and extensive industry research

Draft prospectus with company management, lawyers and accountants

Prepare documentation for internal commitment committee process

Produce marketing materials for the company’s management team to present to investors to sell the transaction

Develop a target of likely investors and coordinate sales effort with capital markets and sales force

Perform final valuation work, price the offering

Role of An Analyst

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Role of An Analyst

M&A

Valuation analysis

– Comparable company / transactions analysis

– Discounted cash flow

– LBO analysis

– Sum-of-the-parts

Prepare marketing / presentation materials (e.g., teasers, information memos, board books, committee memos)

Attend management presentations / negotiate transaction terms

Conduct / host due diligence sessions

Draft / edit legal documents (e.g., exclusivity, fairness opinions, engagement letters, purchase agreements)

Work with product specialists (e.g., leveraged finance) to refine capital structure issues

Winning the Mandate

– Develop strategic analysis and rationale for acquisition

– Present a thorough analysis of potential acquisition candidates to client

– Formulate financing and capital structure to support the acquisition

Role of An Analyst

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Role of An AnalystRole of An Analyst

Lehman Brothers advised Carlyle on the $800 million acquisition of United ComponentsTransaction Overview

On April 25, 2003, The Carlyle Group entered into a definitive agreement to acquire the vehicle replacement parts business of UIS, Inc., renamed United Components, Inc. (“UCI”), for an aggregate purchase price of $800 millionThe transaction was financed through: (i) $415 million in Senior Secured Credit Facilities, which included a $65 million revolving credit facility; (ii) $230 million of Senior Subordinated Notes; and (iii) $260 million of cash equity from The Carlyle GroupLehman Brothers acted as Financial Advisor to The Carlyle Group and as a Joint Book-Running Manager for UCI’s offering of $230 million of 9 3/8% Senior Subordinated Notes due 2013 and Joint Lead Arranger on UCI’s $415 million Senior Secured Credit Facility

Company Overview

UCI is uniquely positioned as one of North America’s largest and most diversified companies servicing the vehicle replacement parts market, or the aftermarketThe Company designs, manufactures, and distributes filtration products, fuel and cooling systems, engine management systems, driveline components, and lighting systems to the automotive, trucking, marine, mining, construction, agricultural and industrial vehicle markets UCI’s customer base consists of the largest and fastest growing companies servicing the aftermarket, including Advance Auto Parts, AutoZone, CARQUEST, Mighty, NAPA and Valvoline

Superior Execution

The $230 million 9 3/8% Senior Notes offering priced at the tight end of price talk and inside pre-roadshow price expectationsThe offering was well oversubscribed and the Notes traded strongly on the break, despite a significant amount of automotive offerings accessing the high yield market at the same timeDemand for the Senior Credit Facilities exceeded supply by more than two times and resulted in a 50 bps reduction to the LIBOR spread

$230,000,000 9 3/8% Senior Subordinated

Notes due 2013

This transaction demonstrated Lehman Brothers’ dedication to an important financial sponsor client

as well as our ability to successfully execute on a short timetable

Closed June 20, 2003

Joint Book-Running Manager

$415,000,000 Senior Credit Facilities

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Role of An AnalystRole of An Analyst

Transaction Summary

On November 18, 2005, Cisco Systems announced that it would acquire Scientific-Atlanta for $6.9 billion ($5.3 billion enterprise value)

Under terms of the agreement, Cisco will pay $43.00 per share in cash in exchange for each issued and outstanding share of Scientific-Atlanta common stock

The per share consideration represents a 3.7% premium to Scientific-Atlanta’s closing price on November 17, 2005 and a 17.4% premium over Scientific-Atlanta’s 30-day average price. Adjusting for rumors about the sale of the company, the consideration represents a premium of 27.9% over Scientific-Atlanta’s pre-leak closing price on October 27, 2005 and a premium of 22.4% over its pre-leak 30-day average price

Implied transaction multiples based on consensus estimates(1): 12.0x CY05 EBITDA and 10.9x CY06 EBITDA; 26.0x CY05 P/E and 22.8x CY06 P/E

The transaction is subject to shareholder and regulatory approvals

The transaction is expected to close during the first quarter of 2006

___________________________1. Source: IBES consensus estimates as of 11/17/05.

Pending

has agreed to acquire

The undersigned acted as financial advisor to the Board of Directors of Scientific-Atlanta in

this transaction

$6.9 billion

Named one of The Daily Deal’s “Deals of the Year” for 2005

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Recruiting Process

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The Recruiting Process

Get to know the investment banks

– Attend company presentations and Investment Banking Club events

– Talk to former summer analysts

– Network with alumni

Become knowledgeable about the industry and keep up with current business events

– Read The Wall Street Journal, The Financial Times, The Economist, etc.

Refine your resume to highlight the appropriate areas

– Quantitative aptitude

– Leadership

– Initiative

– High academic performance (GPA / ACT or SAT)

– Relevant work experience

Recruiting Process

Timeline of Investment Banking Recruiting for Full-time and Summer Positions

All Year

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The Recruiting Process

Organize informational interviews

– Be professional and well prepared before contacting people

– Be proactive

Begin preparing for interviews

– ‘Vault Guide to Finance Interviews’ (see www.vault.com)

Send cover letters and resumes (December)

Refine your story and practice mock interviews

– Know the three central questions (Why investment banking? Why this firm? Why you?)

Recruiting Process

Timeline of Investment Banking Recruiting for Summer Positions (Junior Year)

October to January

Interviews

January and February

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The Recruiting Process

Organize informational interviews

– Be professional and well prepared before contacting people

– Be proactive

Refine your story and practice mock interviews

– Know the three central questions (Why investment banking? Why this firm? Why you?)

Send cover letters and resumes

Recruiting Process

Timeline of Investment Banking Recruiting for Full-time Positions (Senior Year)

August and September

Interviews

September to November

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The Recruiting Process

Demonstrated excellence (in multiple dimensions)

– High academic performance (GPA / ACT or SAT)

– Leadership

– Self motivator

– Communication skills

– Team skills

Positive attitude / enthusiasm

Presence / professionalism

Commitment to learning

In general, firms are looking for people who have done their homework

– Those who understand the industry and can differentiate among the firms

Recruiting Process

What Investment Banks are Looking For

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The Recruiting Process

Do you have the characteristics to make a good investment banker? Be prepared to relate anecdotes that illustrate these qualities:

Recruiting Process

Personal Fit

Does your personality fit well with the bank’s culture?

– Team oriented culture vs. one that favors individual achievers

– Meeting and talking to people at the various banks will give you a good idea

– Remember, you will be spending a lot of time with these people so it’s best to find an environment in which you are comfortable

– Hardworking

– Motivated

– Willing to take initiative

– Detail oriented

– Team player

– Aggressive

– Handle stress well / thick skinned

– Quantitative

– Personable

– Flexible

– Sound judgment

– Articulate

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The Recruiting Process

In addition to obvious geographic and market position characteristics, firms have other differing qualities

Know how the firms are internally structured

– All have some type of industry and product groups

– Every firm has a different approach to group placement

Know how the firms perceive themselves

– What are their strengths, what are recent significant transactions?

– How do they view their own culture?

– What are employee demographics?

Try to come to some conclusion regarding firm culture and personal fit

– Meet as many people as you can

Recruiting Process

Know How to Differentiate Among the Firms, Both for Interviewing and for Your Own Firm Selection Process

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Investment Banking Interviews

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Investment Banking InterviewsInvestment Banking Interviews

Interview Process and Format

Round

1Round

2

In-person / phone interview – usually 30 minutes

Usually 3 or 4 back-to-back interviews with more senior bankers

Short case studies may be presented – focused on both technical skills and management / leadership skills

The Interview Format

Introductory remarks and get to know you (resume review)

Why did you choose your school?

Why Investment Banking? Why this firm?

What is the role of an analyst?

Technical questions

Wrap-up and Q&A

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Investment Banking Interviews

Be able to provide a succinct answer as to why you want to be an investment banker

– Will be different for each person

– Your resume should tell much of the story

Be familiar with the firm’s history and some of its recent transactions

– Demonstrate a broader understanding of the industry

Be prepared to answer questions such as

– Who else are you talking to? (be specific)

– How would you compare firm A with firm B?

• Strength of businesses

• Culture

– Are you interviewing outside of investment banking? Why?

Most importantly, show that you have done your homework

Investment Banking Interviews

Commitment to the Industry and the Firm

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Investment Banking Interviews

Finance Accounting

Discounted Cash Flow Analysis

– Free cash flow

– Terminal value

– WACC

Comparable Company Analysis

– Enterprise vs. equity value multiples

Comparable Transaction Analysis

– Enterprise vs. equity value multiples, premium analysis

CAPM

Basic

– Income Statement

– Balance Sheet

– Cash Flow Statement

Intermediate

– Purchase accounting

– Cash EPS

– Deferred taxes

Advanced

– Pension accounting

– Recap accounting

– LBO accounting

Technical QuestionsInvestment Banking Interviews

Before the interview, you should be familiar and comfortable with the following concepts:

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Investment Banking Interviews

Resume

– Ensure your resume highlights the key competencies required by investment banks

– Include only what you are comfortable talking about and know it by heart

– Be able to expand upon each bullet point

– Be able to clearly explain why you made certain choices (e.g., college, major, internships)

– Don’t overlook the additional information section – it can provide good insight into who you are

Answering tough or unexpected questions

– Take a moment to think about your answer – a well thought out answer is better than a fast answer

– Be direct in your answer and stand by your reasoning

– Remain composed and balanced

Personal impact is important

– Body language, composure, volume

– Always look the interviewer in the eye and use his / her name

– Relax and try to learn from the interview

Investment Banking Interviews

Interviewing Tips

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Lehman Brothers Overview

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Our people are our greatest asset. Lehman Brothers’ professionals are driven to challenge themselves and take an active role in shaping their careers. They are deeply committed to our business philosophy and motivated to contribute to the Firm’s clients early in their careers

We operate on a “One Firm” philosophy that emphasizes integration and teamwork across all businesses worldwide. Working together as “One Firm” enables us to deliver a full range of products and services to our clients in a seamless manner

Lehman Brothers’ rich history and tradition provide a strong foundation as we continue to expand our franchise with a focus on high-margin business areas (e.g., M&A, equities, leveraged finance and private equity investing)

Our strategy is client-driven. Providing the highest level of service to our clients is the core of our business strategy

Founded in 1850, Lehman Brothers is one of Wall Street’s premier investment banking firms. Our market leadership and global presence provide us with access to the most significant issuers and investors around the globe

Strategy

Future

Culture

People

Franchise

Lehman Brothers OverviewWho We Are

Lehman Brothers Overview

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5/2/94 4/18/96 4/3/98 3/22/00 3/8/02 2/24/04 2/10/060

5,000

10,000

15,000

20,000

25,000

Price Volume

Volume Traded Lehman Brothers Holdings Inc.

$0

$25

$50

$75

$100

$125

$150

$7,707

$11,576

$14,176

$0

$4,000

$8,000

$12,000

$16,000

2000 2004 2005

$mm

$1,775

$2,369

$3,260

$0

$1,000

$2,000

$3,000

$4,000

2000 2004 2005

$mm

___________________________1. Source: Company press releases.2. Employee base reflects acquisition of Neuberger Berman in 2003.

Lehman Brothers Overview

Lehman Brothers: Share Price Performance (1994-Current)

Strong Momentum (1)

CAGR=13% CAGR=13%

Net Revenue Net Income

Recent Accolades“Best Investment Bank” “...Lehman Brothers has cemented its position as a top-tier full-service investment bank, one that is as confident as an equity house and M&A adviser as it has been in fixed income”

“...one of the purest investment banks, has become more formidable in almost every market it contests”“…Lehman Brothers’ Success Illustrates the Benefits of Strong Management”

“Lehman Brothers: ‘Big-Shot’ Bank of the Year for Role in Cingular, Sprint and Kmart Transactions”

Named IFR U.S. Equity House and Structured Equity House of the year in 2005

Lehman Brothers – Best In Class Independent Investment Bank

(shares in 000s)

Percentage Ownership Employee Base

Employee Base and Ownership (2)

0%

10%

20%

30%

40%

1994 20050

7,000

14,000

21,000

28,000

Employee Base Employee Ownership

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Lehman Brothers’ Premier Global Finance FranchiseLehman Brothers’ equity and equity-linked franchise continues to garner recognition

Performance Recognition

“From the integration of debt and equity capital markets, to the inclusion of derivatives, tax and accounting specialists, Lehman

Brothers has been a trailblazer in shaping the modern form of capital markets in the U.S.”

- International Financing Review, December 2005

2005 U.S. Equity House of the Year

Leading Equity Sales and Trading Platform

Lehman Brothers Overview

2005 U.S. Structured Equity House of the Year

“From … sales and trading, and ultimately to capital markets solutions, the bank’s measured approach

was a valuable resource in 2005...”

- International Financing Review, December 2005

Leadership Across Products(1)

2005 Institutional Sales

#1#2

2005 NYSE Trading

#1#1

2005 NASDAQ Trading

#1#1

IPOs Common Stock Convertibles

Rank Bookrunner

2005 Market Share

1 Goldman Sachs 15.4%

2 Citigroup 13.5%

3 Lehman Brothers 11.7%

4 JP Morgan 10.7%

5 Morgan Stanley 10.4%

Rank Bookrunner

2005 Market Share

1 Morgan Stanley 12.5%

2 Citigroup 12.5%

3 Lehman Brothers 10.7%

4 Goldman Sachs 10.6%

5 Merrill Lynch 9.0%

Rank Bookrunner

2005 Market Share

1 Citigroup 11.3%

2 Goldman Sachs 10.9%

3 Morgan Stanley 10.2%

4 Lehman Brothers 9.4%

5 Credit Suisse 8.2%

___________________________1. Source: Bloomberg.

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M&A Announced League TablesLehman Brothers Overview

Global Announced M&A Through March 5, 2006

Announced DealsValue ($bil) Rank Market

ShareNumber of

Deals

Lehman Brothers 247.4 1 41% 41Goldman Sachs & Co 247.1 2 41% 52JP Morgan 228.1 3 38% 62Citigroup 219.0 4 37% 39Merrill Lynch 203.1 5 34% 50BNP Paribas SA 144.5 6 24% 19UBS 139.6 7 23% 53Deutsche Bank AG 116.8 8 20% 33Morgan Stanley 115.6 9 19% 29Evercore Partners 99.9 10 17% 7

Industry Total 598.8 100% 4,717

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Top 20 Global M&A Announced Transactions in 2006

___________________________Note: Shading indicates transactions in which Lehman Brothers acted as Financial Advisor. Lehman clients are in bold.Source: Thomson / SDC and Lehman Brothers. Through 3/5/06.

Date AnnouncedDeal Size

($bil) Target Acquiror Region Industry

1 3/5/2006 $82.1 BellSouth Corp AT&T Americas Telecomunications

2 2/21/2006 56.7 Endesa SA E ON AG Europe Natural Resources

3 2/25/2006 44.8 Gaz de France Suez SA Europe Natural Resources

4 1/27/2006 23.8 Arcelor SA Mittal Steel Co NV Europe Industrial

5 2/6/2006 17.5 Portugal Telecom SGPS SA Sonae SGPS SA Europe Telecomunications

6 1/23/2006 17.4 Albertsons Inc Investor Group Americas Consumer/Retail

7 1/25/2006 14.9 BOC Group PLC Linde AG Europe Industrial

8 1/16/2006 12.5 VNU NV Investor Group Europe Media

9 2/27/2006 11.3 KeySpan Corp National Grid PLC Americas Natural Resources

10 2/2/2006 10.8 Banca Nazionale del Lavoro SpA BNP Paribas SA Europe FIG

11 2/3/2006 9.6 KT&G Corp Investor Group Asia Consumer/Retail

12 2/15/2006 9.5 Merrill Lynch Invest Managers BlackRock Inc Americas Financial Institutions

13 2/21/2006 6.2 Australian Gas Light Co Alinta Ltd Asia Natural Resources

14 1/24/2006 6.1 Pixar Walt Disney Americas Media

15 1/31/2006 5.8 TIM Celular SA TIM Participacoes SA Americas Telecomunications

16 2/13/2006 5.5 ZAO Kyivstar GSM Vimpelcom OJSC Europe Telecomunications

17 2/6/2006 5.4 Westinghouse Electric Co LLC Toshiba Corp Americas Technology

18 1/27/2006 5.2 Dofasco Inc ThyssenKrupp AG Americas Industrial

19 1/3/2006 5.0 Engelhard Corp BASF AG Americas Industrial

20 1/10/2006 4.7 GTECH Holdings Lottomatica SpA Americas Technology

Lehman Brothers Overview

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Lehman Brothers Overview

Duration

– 8-week program beginning on two different start dates

Group Placement

– Driven by Summer Analyst preference and group requirements

Training

– Training for the summer is one week and includes an accounting and finance overview, comparable company and transaction analysis, financial modeling and use of various software programs

– Helps you get to know the firm and review basic tasks you will be asked to perform over the summer

– Presentations by the industry and product groups to raise your interest and awareness about what they do

Lehman Brothers Overview

Investment Banking Summer Analyst Program

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Appendices

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Basic Finance / Valuation Workshop

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Valuation – Introduction

The purpose of this workshop is to provide you with Investment Banking finance and valuation basics

– Methodologies

– Contexts for valuation work

– Comparable Company Analysis

– Comparable Transaction Analysis

– Discounted Cash Flow

– Leveraged Buyout Analysis

Basic Finance / Valuation Workshop

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Valuation – Methodologies

Estimated Range ofValue for Target

A public market valuation assigned on the basis of certain key ratios, or “market trading multiples” of Net Income, EBIT, EBITDA or Sales for comparable public companies

Comparable Company Analysis (“Comps”)

Basic Finance / Valuation Workshop

A control transaction valuation assigned on the basis of multiples of Net Income, EBIT, EBITDA or Sales for comparable companies which have recently been acquired. If the target is public, the premium paid is also relevant

Comparable Transaction Analysis (“Deals”)

Value that a financial buyer would pay based upon the maximum amount of debt appropriate for the target company and the required return on private equity funds

Leveraged Buyout Analysis (“LBO”)

The value of future free cash flows discounted to the present at an appropriate discount rate or the weighted average cost of capital

Discounted Cash Flow Analysis (“DCF”)

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Illustrative Football Field AnalysisBasic Finance / Valuation Workshop

$22.50

$24.00

$22.00

$20.00

$24.50

$27.00

$26.00

$24.00

$15 $20 $25 $30 $35

LBO Analysis

DCF Analysis

Transaction Comparables

Trading Comparables

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Deciding whether a company is undervalued and should repurchase shares

Positioning and timing the sale of client securities to maximize proceeds

Determining the potential public market value of a private company

Advising a client on how to best and most fairly reallocate the value of the company to creditors and shareholders

Advising the shareholders as to the fairness, from a financial point of view, of a price to be paid or received

Advising a client on how much should be received as consideration for the sale of stock or assets

Advising a client on what price to pay

Sell-Side M&A

Fairness Opinion

Restructuring

Add-on Financing

Buy-Side M&A

Initial Public Offering

Contexts for Valuation WorkBasic Finance / Valuation Workshop

Share Repurchase

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Comparable Company AnalysisComparable Company Analysis

Basic Finance / Valuation Workshop

The Comparable Company Analysis is one of several techniques used to determine a range of values for a specific company, the “target” company

The equity of fundamentally similar, or “comparable” companies tends to be valued on a relatively consistent basis by the public markets

– Broadly speaking, if Widget Company A competes in the same industry as Widget Company B, using a similar business model, the equity markets are likely to value the two businesses in a relatively consistent manner

By analyzing certain key ratios and operating data for each of the companies in the comparable universe, it is possible to estimate how the public equity markets would value the target. Typical benchmarks include multiples of net income and book value (equity value multiples) and multiples of Sales, EBITDA and EBIT (enterprise value multiples).

The Comparable Company Analysis is, by its nature, based on an analysis of currently public companies. Accordingly, the valuations received by the comparable universe do not typically reflect:

– The premium a buyer must pay for control of a company in an M&A transaction; or

– The discount the market may place on shares which are newly introduced in an initial public offering or the discount that is appropriate for a private company

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Comparable Company AnalysisIdentifying Your Comparable Company Universe

Basic Finance / Valuation Workshop

A comparable peer group should possess the same fundamental business and financial attributes such that their public trading values represent a meaningful proxy from which to determine a value range for the target. Relevant attributes include: – Macroeconomic issues– Industry group– Business model– Geographic location– Business mix (products, markets, distribution channels)

In some cases it will be necessary to limit the universe to a smaller, more focused group of comparables. Factors to consider include:– Size (sales, value)– Operating history/philosophy

As a practical matter, in many cases a broad universe of directly comparable companies will not exist. In these situations the parameters of comparability will be widened to assemble a group of companies with sufficiently similar, albeit not ideal, characteristics

– Customers– Operations (production, processes, critical

inputs/components)– Financial characteristics (leverage, historical and

future growth, margins)

– Growth (organic vs. acquisitions)– Profitability– Ownership structure

Refining Your Comparable Company Universe

Expanding the View of Comparability

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Comparable Transaction AnalysisComparable Transaction Analysis

Basic Finance / Valuation Workshop

The “Comparable Transaction Analysis” is based on the premise that the value of a company or an asset can be estimated by analyzing the prices paid by purchasers of ownership interests in reported comparable transactions

The analysis provides a history of selected transactions in one particular industry where acquired companies have relatively similar characteristics in terms of economic drivers such as business mix, size, customer base, distribution channels, industry dynamics, etc.

The purpose of the comparable transaction analysis is to derive pricing benchmarks based on the selected transactions. It compares the transaction values paid for selected companies to the respective companies’ financial results to determine transaction multiples. Typical benchmarks include multiples of net income and book value (equity value multiples) and multiples of Sales, EBITDA and EBIT (enterprise value multiples)

Transaction multiples define the prices that acquirers are willing to pay for companies in that industry in the context of a deal. By applying transaction multiples to financial results of the company being analyzed, it is possible to determine a range of value

In contrast to the “Comparable Company Analysis,” this approach is generally based upon multiples paid for control of a company (i.e., includes control premium)

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Page 50: IBD Introduction

Comparable Transaction AnalysisImportance of Situational Understanding

Basic Finance / Valuation Workshop

A good understanding of the background and factors surrounding a transaction is necessary to extract meaningful conclusions from the analysis. In particular, specific deal circumstances are likely to have an impact on pricespaid, including:

– Nature of transaction (minority stake vs. control, incidence of other contractual arrangements, auction vs. negotiated sale)

– Attractiveness of the target company

– Relative needs of seller vs. buyer (i.e., a distressed seller may get a lower price)

– Identity of acquirer (strategic vs. financial, foreign vs. domestic)

– Underlying market conditions (state of M&A, equity, financing markets)

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Page 51: IBD Introduction

Discounted Cash FlowDiscounted Cash Flow

Basic Finance / Valuation Workshop

The DCF analysis is based on the premise that ownership is essentially a claim on the cash flows generated by a firm’s assets

The method entails estimating the free cash flows (“FCF”) available to all investors (equity and debt holders) and discounting these cash flows back to the present using an appropriate cost of capital to arrive at a present value forthe assets

These assets may be financed in a multitude of different ways, but because the returns generated by these assets are available to all providers of capital, and to avoid distortions caused by a particular capital structure, the cash flows should be considered on an unlevered basis (i.e., free from financing considerations)

The company’s operational value (prior to adjustments for non-operating assets) can be broken down into two components:

– Present Value of free cash flows up to cut point for terminal (or continuing) value calculation;

– Present Value of terminal value

– Company value = PV(FCF) = ∑ FCFt / (1+r)t + TV / (1+r)n

The discount rate r is the Weighted Average Cost of Capital (“WACC”), which reflects the required returns by both debt and equity investors for investments with the same risk profile

The company’s operational value must be adjusted for non operating assets such as investments in unrelated subsidiaries, discontinued operations, hidden assets, contingent liabilities, etc.

The company’s equity value is obtained by deducting the value of the Company’s financial debt and other non-working capital debt

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Page 52: IBD Introduction

Discounted Cash FlowDCF Process

Basic Finance / Valuation Workshop

Forecast Unlevered Free Cash Flows

Choose Discount Rate

Calculate Terminal Value

Discount FCFs and Terminal Value

Determine Firm Value

Subtract Net Debt and Adjust for Non-OperatingAssets and Liabilities

Determine Equity Value

Review Results

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Page 53: IBD Introduction

Leveraged Buyout AnalysisWhat is an LBO?

Basic Finance / Valuation Workshop

A leveraged buyout (“LBO”) is an acquisition of a company in which a financial sponsor (e.g., private investor, LBO fund) invests a relatively small amount of equity (compared to the total purchase price) and uses leverage (debt or other source of financing) to fund the remainder of the consideration

– Debt is repaid with cash flows of the business acquired (conceptually similar to buying a house, renting it out and using the rent to pay the mortgage)

LBOs are used in numerous types of transactions and corporate finance situations, including:

– Take-privates, in which a public company goes from being owned and traded by a large number of public shareholders to one that is privately held by a small group of investors

– Buyouts of a subsidiary or division of a larger company by a group of investors

– Management buyouts, in which the acquisition is done by the company’s existing management group, often with the backing of a financial sponsor

– Recapitalizations (i.e., re-leveraging the company and paying a large dividend)

– Leveraged acquisitions by corporations

– JV LBOs, in which corporations and financial sponsors partner together to acquire a business in a leveraged transaction (corporations sometimes contribute assets); in most instances the JV structure permits the debt to be off-balance sheet for the corporation

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Page 54: IBD Introduction

Leveraged Buyout AnalysisLeveraged Buyout Analysis

Basic Finance / Valuation Workshop

LBO Analysis is a valuation methodology that provides an indication of:

– The maximum price that a financial investor would be willing to pay for a business on a stand-alone basis (i.e., without any strategic value or synergies)

– The credit statistics and potential equity returns for the business at a given price

LBO Analysis is used for a number of purposes in various transactions

– Estimates the amount a financial buyer would be willing to pay for a business, helps to identify potential LBO opportunities

– Estimates the potential equity returns to the business, and provides sensitivity of the returns to growth, leverage, and valuation multiple expansion

– Highlights the effects of adding leverage to the business (e.g., recapitalization, take-private)

– Illustrates the debt capacity of business (based both on company specific credit criteria and capital market criteria)

In LBO Analysis, there are several assumption areas that need to be addressed (Note: it is often easiest to approach them in the following order)

– Develop operating projections

– Determine maximum leverage and capital structure parameters

– Determine the expected method of exit and most likely (and realistic) exit valuation multiples

– Establish return parameters

– Solve for the maximum price within the given criteria

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Page 55: IBD Introduction

Suggested Reading Material / Resources

Page 56: IBD Introduction

Covers technology industry finance. A good resource if you are interested in investment banking in this area

This daily publication covers developments within or impacting the investment banking industry

A leading industry publication which covers what is going on at leading firms in both fixed income, derivatives, currencies, commodities and equities

This magazine covers many recent trends on Wall Street and lists recent security issues

A leading global newspaper covering business and specialist financial information

The most widely read business periodical in the world

Financial Times

Investment DealersDigest

Financial Trader

Red Herring

Wall Street Journal

Daily Deal

Magazines and NewspapersSuggested Reading Material / Resources

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Page 57: IBD Introduction

Tom Copeland, Tim Koller and Jack Murrin. Potent strategies for measuring and enhancing the bottom-line value of any company. How to do a valuation

Frank Fabozzi. The bible for any job involving fixed income sales, trading, underwriting or derivatives

Peter Bernstein. Modern financial theory

Aswath Damodaran

Capital Ideas

Handbook ofFixed Income

Valuation: Measuring and Managing the Value of Companies

Applied Corp. Finance: A User’s Manual

Books – Corporate Finance RelatedSuggested Reading Material / Resources

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