ubs i banking guide

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Investment Banking 101

November 8, 2006

University of Chicago

STRICTLY CONFIDENTIAL


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Table of Contents

SECTION 1 Overview of Investment Banking 2

SECTION 2 Role of Analyst and How to Get the Job 9

SECTION 3 Career Opportunities at UBS Investment Bank 18

SECTION 4 UBS Investment Bank: A Global Leader 21

APPENDIX A Understanding the Financial Statements 27

APPENDIX B Understanding Debt and Equity 38

APPENDIX C Valuing a Company 43

APPENDIX D Terms to Know 49


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SECTION 1

Overview of Investment Banking


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UBS Investment Bank

The Investment Bank is comprised of...

RevenueGenerators

SupportServices

Investm

entBank

Research Analysts

Information Technology/Operations

General Corporate Services

Investment Banking

Sales & Trading

Asset Management

Private Equity


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What Is Investment Banking?

Investment Banking is primarily about two tasks:

Giving Advice Raising Capital


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Giving Advice

Investment Bankers act as advisors to industry leaders and key investors

Investment Bankers Advise on Various Types of Transactions

Mergers

Acquisitions

Divestures

Equity offerings

IPOs

follow-on offerings

Debt offerings

Management

Equity holders

Debt holders

Prospective buyers

Additionally, much advisory work is doneaway from transactions


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Raising Money

Investment Banks act as an intermediary between entities that require capital and investors

Simply put, Investment Bankers get money for people who need itfrom people who have it

Provide Capital Require Capital

Corporations

Governments

Banks

Mutual Funds

Hedge Funds

Private Equity

Pension Funds

Insurance Funds

Individuals

Money exchanged for

Stocks, Sr Debt,Bonds, Mezzanine


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Industry Groups Product Groups

Where Do You Fit In?

At UBS, you will work in either an Industry Group or a Product Group

Consumer Products & Retail

Energy and Power

Financial InstitutionsHealthcare

Global Industrial Group

Real Estate

Technology/Media/Telecom

Transportation & Services

Debt Capital Markets Group

Equity Capital Markets Group

Equity Corporate Finance TeamFinancial Sponsors

Leveraged Finance

Global Syndicated Finance

Mergers & Acquisitions

Private Equity Placement Group


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Where Do You Want to Be?

Industry Group Product Group

Passion for a particularindustry (i.e. Technology, Media)

Desire for a particular skill-set(i.e. M&A, Restructuring)

Motivated to create a toolbox ofskills (i.e. M&A, Equity, LBOs)

Focus on building relationshipswith clients

Interact with all product groups

Think macrolook at the BIGGERpicture!

Would like to be a specialist

Focus on executing transactions

Advise all industry groups

Hone in on a particular skill-set!


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SECTION 2

Role of Analyst and How to Get the Job


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Hierarchy in Investment Banks: Welcome to the Bottom

Team sizes can range from 3 to 5 people and consist of at least an Analyst,mid-level banker (AD or D) and a senior level banker (ED or MD)

Managing Director

Analyst

Executive Director

Director

Associate Director/Associate

You!


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What Would You Do?

Valuation work Comps

Precedents

DCF analysis

Summarize research analyst views

Earnings impact (Accretion/Dilution) of potential (or actual) M&A situations

Company profiles

Track news and key events

Analyze industry trends

Attend diligence sessions and management presentations

General support for Associate and rest of team

General administrative work like setting up meetings or conference calls

Employ learned academic skills in real world business situation

Role of an analyst at an investment bank


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What Makes a Good Analyst?

PersonalSkills

Efficiency

Ability to anticipate work that needs to be accomplished and be proactive Problem solving

Strong work ethic

Professional presentation and positive att itude

Judgment (what makes sense for the client and the firm)

Ability to manage expectations

Outstanding communication skills

Flexibility (including ability to manage expectations)

TechnicalAbility

Accounting (balance sheet, income statement, statement of cash f lows)

Finance (capital structure analysis: equity vs debt)

Valuation techniques (comparable company analysis, precedent transactions, discounted cash flow)


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What Makes the Analyst Job Great (Besides the Hours)?

As an Analyst, you will have the opportunity to

Work with talented and reputable senior bankers

Gain insight into finance, business and a career in Investment Banking

Work at a top firm with a strong global platform

Be a part of an international team, i.e. cross-border deals

Work on deals that change the face of an industry

Learn the fundamentals that will make you a good banker

Be challenged by a steep learning curve

Meet and interact with clients at various levels from junior executives through CFOs and CEOs


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There are Many Routes to Wall Street

There is no right formula, but there are ways to maximize your chances of getting a job

Talk to as many people as you can

find out about their experiences and their views

seek out classmates who have interned in Investment Banking

focus on how the various banks differentiate themselves in terms of culture, prospects and responsibility givento Analysts

Positioning yourself

It is important to present yourself as having a portfolio of skills and qualities

There are several skills and qualities that banks look for

technical ability and a strong interest in finance

familiarity with Excel

strong interpersonal skills

ability to work within teams

relevant work experience

a record of success/achievement


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Qualities that Investment Banks Look for in Candidates

A Strong Interest in Finance

Take courses that demonstrate your interest in finance

Convey to an interviewer/contact person that you understand: what investment banking is

what an analyst does

why you would be a strong candidate for that particular bank

Coursework or Work Experience

Where you used Excel, and if possible, built models

Where you have learned to read financial statements

That demonstrates that you are comfortable with numbers

That shows you are comfortable in front of people (e.g., sales position, leading a seminar, student government)

Any work experience during the summer or while attending school that demonstrates your strong work ethic

A Team Player

Team-driven job accomplishments on resume

Other obvious team experiences and team successes

The objective is to demonstrate that you work well with others

A Record of Success and/or Achievement

Academic GPA, scholarships/honors, test scores

Leadership of student organizations or teams

A high level of athletic accomplishment

Community service with a record of achievement


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What Can You do to Develop Some of these Qualities?

Do Your Homework

Understand what Investment Banking is and what an Analyst does so you can decide if it really is for you

talk to individuals who work or have worked within the industry

read industry guides such as Vaultand Wet Feet

Understand the different firms so that you can choose well

each Investment Bank has its own unique culture

focus on the places where you fit best and go after those firms

Enroll in Applicable Courses

Take as many finance and accounting courses as possible so that you:

become familiar with financial terminology

progress further along the learning curve increase the likelihood of securing a full-time offer

Enrolling in these courses further demonstrates your interest and commitment to the industry

Read the Financial Press

Pick an industry or industries that are of interest to you

familiarize yourself with that industry and a few companies within that sector

Understand an industry and be able to talk about it intelligently

Suggested readings: Wall Street Journal, Financial Times, The Economist, Fortune, Business Week, Forbes, etc.

Develop Your Story

You are marketing yourself, and you need to explain clearly why you want to be a banker

Point to examples that show you will be successful once you become an Analyst

A large extent of an investment banking interview is about testing judgment

what is the reasoning behind the decisions you have made and what have you learned from those experiences

investment banks are looking for individuals who can demonstrate that they possess good judgment


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Helpful References

Books About Investment Banking

Auletta, Greed & Glory on Wall Street

Bhatawedekhar, Vault Guide to Finance Interviews

Brealey & Myers, Principles of Corporate Finance

Burroughs, Barbarians at the Gate

Greenberg, Memos from the Chairman

Knee, The Accidental Investment Banker: Inside the Decade that Transformed Wall Street

Lott & Prior, Vault.com Career Guide to Investment Banking

Naficy, The Fast Track

Pratt, Valuing a Business

Reed, The Art of Mergers and Acquisitions

Rolfe & Troob, Monkey Business: Swinging Through the Wall Street Jungle

Smith, Comeback

Stewart, Den of Thieves

Wall Street Journal Editors, Who's Who and What's What on Wall Street

Wasserstein, The Big Deal

Industry Related Websites

www.ubs.com/graduates

www.vault.com

www.wetfeet.com

www.investmentbanking.net


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SECTION 3

Career Opportunities at UBS Investment Bank


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UBS Recruiting at the University of Chicago

Positions:

IBD summer intern

New York office

Chicago office

Key Dates:

Internship Career Fair: Thursday, January 11, 2006

Resume Drop: TBD

Interviews: Monday, January 29, 2006

UBS recruits at University of Chicago for both our New York and our Chicago offices

We offer separate resume drops and interview schedules for each office


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APPENDIX A

Understanding the Financial Statements


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The Three Financial Statements

Shows a companysfinancial position at asingle point in time

Balance Sheet

Shows how much acompany makes over aperiod of time

Income Statement

Shows how much cash acompany generates over aperiod of time

Statement of Cash Flows

Assets = Liabilities + EquityRevenue Costs = ProfitProfit + Non-Cash Costs =

Cash Flow

There are three key financial statements


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The Income Statement

Line Item $mm Comment

Revenue (or Sales) 100 How much you get paid for the items you sell

Cost of Goods Sold ( COGS ) (40) How much the items you sell cost you

Gross Profit 60 How much you have left after paying for items you sell

Selling, General & Administrative Costs ( SG&A ) (30) How much it costs to market your goods and run your business

EBITDA1 30 A proxy for how much cash your business generates

Depreciation & Amortization ( D&A ) (5) A non-cash cost (more on p.7)

Operating Prof it (or EBIT)2 5 How much profit the operations of your company generates

Interest (5) Interest you pay on debt

Taxes (6) Income tax you pay

Net Income 14 How much you have left after all costs are paid for

Earnings per Share ( EPS ) $1.40 Net income divided by the number of shares

in this case, there would be 10,000,000 shares

Notes:

1 Earnings Before Interest, Taxes, Depreciation and Amort ization

2 Earnings Before Interest and Taxes

The income statement tells you the following information


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Current Assets

Cash 10 Cash on hand

Accounts Receivable 20 Money your customers owe a company

Inventory 15 Goods on shelves or in a warehouse waiting to be sold

Long-Term Assets

Plant, Property & Equipment ( PP&E ) 125 Factories and warehouses and such

Assets

TOTAL ASSETS 170

Current Liabilities

Accounts Payable 15 Money a company owes its suppliers

Short -Term Debt 10 Debt that must be paid back within a year

Long-Term Liabilit ies

Long-Term Debt 95 Debt that must be paid back over a longer period of time than one yearLiabilities

TOTAL LIABILITIES 120

Paid-In Capital 10 Your initial investment in your company

Retained Earnings 40Net income you reinvested in your company (e.g., used to buy

new factories)Equity

TOTAL EQUITY 50

TOTAL LIABILITIES + EQUITY 170

The Balance Sheet

The balance sheet provides a snapshot of your financial position at a single moment in time


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In Focus: Depreciation & Amortization

Understanding depreciation & amortization is key to understanding accrual accountingthe rest isjust details

What is Accrual Accounting? What Is Depreciation & Amortization?

Example: You buy a factory for $100mm

you pay cash upfront

You expect to use the factory for 20 years

So, even though you pay $100mm cash in thefirst year, you spread the expanse equally over20 years on your income statement

i.e., $5mm/year for 20 years

this $5mm annual cost is called Depreciation

Example: In 2004, you buy a sweater for $30 tosell in 2005

rather than take a charge for $30 in 2004, youwait to take a charge until 2005

this principle is called matching

Accrual accounting matches a cost to when youbenefit from it (e.g., when you sell something)

In short, depreciation takes a large, one-time costand matches it over time to sales of goods

produced by the factory


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$5mm $5mm $5mm $5mm $5mm




DepreciationA Visualization

The information below shows a visualization of how depreciation works

The Initial Purchase The Estimate

Year 1 By Year 20By Year 10 In Year 21

You borrow money to buy a factory for $100mm You estimate the factory will last 20 years

$100mm

$5mm $5mm $5mm $5mm $5mm $5mm






New Factory


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Statement of Cash Flows

The statement of cash flows bridges accrual accounting and cash accounting


Net Income 14 See p. 5

Plus: D&A 5 See pp. 7 and 8

Less: Change in Working Capital (9) Ignore for now

Cash Flow from Operations 10 How much cash your operations generateCashFlow

from

Operations

Less: Capital Expenditures (5) Cash paid for new factories and such

Cash Flow from Investing (5) How much cash you spend investing in your business

CashFlowsfrom

Investing

Less: Dividend Paid (2) Dividends paid to stockholders

Plus: New Debt 20 Borrowed cash

Cash Flow from Financing 18 How much cash financing your business costs

CashFlowsfrom

Financing

Net Change in Cash 23 How much your cash on your balance sheet increases/decreases over agiven period


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What Is the Difference between Net Income and Cash Flow?

Net Income and Cash Flow are each important in their own special way

Event Net Income Cash Flow

Buy a sweater for$30 to sell

No impact $30

Sell for $50+$50 in revenue$30 in COGS

$20 in net income

+$50

Buy a Factory for$100mm

No impact $100mm

$10mm Profit ingoods produced by

Factory

+$10mm in gross profit$5mm in depreciation

$5mm in net income

+$10mm

In theory, differences between net income and cash flow will balance out over thelong runbut we can learn a good deal from the short-term differences

Beginner

Advanced


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Linking the Financial Statements

Key to projecting a companys future financial performance

Financial statements are interactive

with income and cash flow statements and prior year balancecan calculate most current balance sheet

with income statement and two years balance sheetcan calculate cash flow statement

Key interactions

net income (income statement)

first line of cash flow

less dividend provides change in shareholders equity on balance sheet

net change in cash (bottom of cash flow)indicates change in cash on balance sheet

cash and debt (on balance sheet)average over one year determines interest income and expense (respectively) on income

statement


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How Do the Statements Link?

Income Statement Balance Sheet Statement of Cash Flows

Revenue Assets Net Income

Cost of Goods Sold Cash Plus: Depreciation & Amortization

Gross Prof it Accounts Receivable Less: Change in Working Capital

SG&A Inventory

EBITDA PP&E

Depreciation & Amort ization Capital Expenditures

Operating Profit Liabilities Dividend Paid

Interest Accounts Payable New Debt

Taxes Short-Term Debt

Long-Term Debt Change in Cash

Net Income

Equity

Paid-in Capital

Retained Earnings

The above shows some key relationships, but by no means is all inclusivethis is what makes attention todetail in financial modelling so important

The three financial statements are interlinkedthis is why a financial model includes all three


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37.6 37.235.0

25.7

33.6

0

15

30

45

60

Avon L'Oral Beiersdorf Clarins Este Lauder

(%)

Cosmetics Mean= 32.8% 2

HPC Mean = 45.0% 1

3

How Bankers Use Financial Statements

Financial statements are basic to much of the work investment bankers do

Some Uses of Financial Statements Example: Benchmarking

Profitability margin benchmarking

Base for forward projections

Accretion/(dilution) analysis

Financing models Valuation multiples

Potential value creation models

Source of data on key industry trends

And much, much more

Investment bankers use financial statements every dayThe above chart raises questions about Avon and

Este Lauderwhy might they be so far aparton this metric when both sell cosmetics?

Source: Company reports

Notes:1 Includes Beiersdorf, Clorox, Colgate-Palmolive, Este Lauder, Kimberly-Clark, LOral

and P&G

2 Includes Beiersdorf, Clarins, Este Lauder and LOral3 Based on broker estimates; COGS calculated as purchases and variation in inventories,75% of personnel costs and depreciation; 2004 figures adjusted per IAS 18 to deduct

828mm in sales incentives and52mm in cash discounts to customers from net salesand SG&A in compliance with IFRS standards


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APPENDIX B

Understanding Debt and Equity


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What Is Debt?

Debt is one way a company can get cash to fund its business needs

How Does Debt Impact a Company?

A company typically has to pay interest

on debt

paying interest requires cash

Eventually, the company must repay the

debt

another alternative is borrowing new

debt to pay down the original debt

Debt

Debt is money that a company borrows

Companies typically borrow money by

issuing bonds or drawing on a credit line

(similar to a credit card)


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What Is Equity?

How Does Equity Impact a Company?

The equity holders of a company

together represent 100% of the

ownership of a company

Owners are entitled to a share of the

profits (after debt holders receive

interest)

Profits may be paid out in the form of

dividends

or equity holders may vote to reinvest

them in the company and grow the

business

Equity

Equity is an ownership stake in a

company

A company can raise money by offering

ownership stakes in the company in

exchange for cash

Equity is another way a company can get cash to fund its business needs


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Debt30%

Equity70%

Low Debt-to-Cap

Equity20%

Debt80%

What Is a Capital Structure?

Debt and Equity together form a capital structure

Building a Capital Structure Examples of Capital Structures

Debt = Total money borrowed

Equity = Total shares outstanding x share price

note: this is called a companys marketvalue

Together debt and equity show the total of alla companys fundingor Total Capitalization

A capital structure is built as follows: High Debt-to-Cap


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Why Would a Company Issue Debt vs Equity?

Debt and Equity each have strengths and weaknesses as a way of raising money

Debt Equity

Does not reduce (dilute) currentownership

Investors do not require as high a rateof return

because it is less risky for investors

Does not require interest payments

no bankruptcy risk

Requires stable cash flows to coverinterest payments

exposes company to bankruptcyrisk in bad times

Dilutes current ownership

if a company has 100 shares andsells another 100 shares (for a totalof 200 shares), the original

shareholders own half as much asbefore

Investors require a higher rate of returngiven less certainty of returns

Balancing these issues creates a unique optimal capital structure for every company


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APPENDIX C

Valuing a Company


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Three Key Valuation Methods

Bankers use three key methods to value companies

ComparableCompanyAnalysis

Determines value by looking at similar companies

similar scale, industries and markets

Use multiples to make apples-to-apples comparisons

PrecedentTransactions

Determines value by looking at transactions involving similar companies

Also uses multiples to make meaningful comparisons

Discounted CashFlow ( DCF )

The present value of a companys cash flows

Reveals the intrinsic value of a company


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What Are Multiples?

Multiples are used as a way to benchmark valuation for assets of different sizes

Example:House Prices onHillhouse Avenue

Example:

House PricesUsing Multiples

Imagine the street below with houses for saleare they all fairly priced?

Given that the houses are different sizes, it is more meaningful to look at theirprice as a multiplein this case price per square foot

$100K$750K $75K

$300K

$150K

$200K

$200K

$100K $200K$150K

$83$200 $100 $160 $110

$150$89 $67 $120$100


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Understanding EV/EBITDA and P/E

Just as real estate agents use price per square foot as a uniform measure for houses, investmentbankers use EV/EBITDA and P/E to compare companies of different sizes

EV/EBITDA P/E

P = Stock price

can also use market value of equity

E = Earnings per Share (EPS)

can also use net income

Tells you how valuable a companys stock isrelative to current EPS

expect companies with higher growth to bemore expensive (i.e., have a higher P/E)

EV = Enterprise Value

debt (minus cash) + market value of equity

represents all sources of funding

EBITDA = an approximation of cash flow

Tells you how valuable a company is based onhow much cash the operations generate relativeto how much funding they required

Different industries may rely more on one metric than the other depending on whethercash flow or net income is a more meaningful measure of performance


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Discounted Cash Flow Analysis

Discounted Cash Flow analysis is driven by two key conceptstime value of money and free cashflow

Understanding the Time Value of Money Understanding Free Cash Flow

Free cash flow is cash flow available to allproviders of capital (lenders/shareholders)

Calculated as:

EBITDA

+/ Change in Working Capital

Capital Expenditures

= Free Cash Flow

Money today is worth more than money tomorrow

Why might this be the case?

if you owe me $100 and pay today, I caninvest it

if you pay me $100 in one year, I lose a yearof investing it

so I will take the money now, thank you

or you can pay me interest until youpay me

A company can be described as paying back itsequity holders over time by generating cash flow

Free cash flow is all the cash flow available to payinterest to lenders or dividends1 to shareholders

Note:1 Cash can also be reinvested to grow the business, making ownership share more valuable


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Discounted Cash Flow Analysis

The table below shows an example of a discounted cash flow analysis

Discount Rate Terminal Value

Cuts off projections at a certain point in time

difficult to know business will perform in 20 or 30 years

Effectively a set of simplifying assumptions

typically based on cash flow in last year of projections andexpected free cash flow growth thereafter

The discount rate represents an investors expected rate ofreturn if they invested money today

Bankers use the WACC (Weighted Average Cost of Capital)formula as a discount rate takes debt and equity returns intoaccount

DCF Example

$mm 2006 2007 2008 2009 2010Terminal

Value

Free Cash Flow 100 120 140 180 200 450

Discount Factor (@8%) 1.00 0.93 0.86 0.79 0.74 0.68

PV of Free Cash Flow 100 111 120 143 147 306

PV = 927


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APPENDIX D

Terms to Know


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Terms to Know

Product group

investment banking group that focuses on a method of transaction or financing tool mergers & acquisitions, equity capital markets, debt capital markets

cover all industry groups

Industry group

investment banking group that focuses on a specific industry

consumer products, media, telecom, global industrial

covers all product groups

Premium

the amount at which something is valued above its par or nominal value

Discount

the amount at which something is valued below its par or nominal value

Bull market

characterized by prolonged rise in prices of stocks, bonds, or commodities

buy market with high trading volumes

considered a good market because investors make money

investors charge ahead like bulls

Bear market

characterized by prolonged period of falling prices for stocks, bonds, or commodities

sell market due to anticipation of declining market activity

interest rates on bonds increase during such a period

investors choose to avoid risk, buy bonds

considered a bad market because investors lose money

investors hibernate like bears


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Terms to Know

Equity value

equity value = share price x number of shares outstanding value of shareholders interest

Enterprise value

enterprise value = equity value + debt cash

includes all forms of capital

main difference between equity value & enterprise value:

enterprise value includes net debt (debt cash)

EBIT (Earnings Before Interest & Taxes)

also called operating income income from operations before the ef fects of financing and taxes

measure of profitability independent of capital structure

EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)

income from operations before the ef fects of financing, taxes, and non-cash expenses

proxy for free cash flow, but a poor one

Multiples

also called ratios

provide a measure of relative valuation to an underlying financial (operating) statistic equation: valuation statistic/operating statistic

Enterprise Value/Revenues, Enterprise Value/EBITDA, P/E

allow for relative comparisons between similar companies

Margins

equation: operating statistic/revenues

Gross Profit/Revenues, EBITDA/Revenues, EBIT/Revenues, Net Income/Revenues


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Terms to Know

Free cash flow

cash flow available to all providers of finance

one measurement used in forecasting future performance

EBITDA is a proxy for free cash f low, but a poor one

Working capital

working capital = current assets current liabilities

funds invested in a companys cash

finances the cash conversion cycle of a business:

time required to convert raw materials into finished goods, finished goods into sales, and accounts receivables into

cash

WACC (Weighted Average Cost of Capital)

used in determining discount rate employed to calculate the net present value (NPV) of future cash flows in discountedcash flow (DCF) analysis

return commensurate with risk of the investment

Time value of money equations

present value (PV) = FV/(1 + r) future value (FV) = PV * (1 + r)

note: r = discount rate


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Contact Information

UBS Securities LLC299 Park Avenue

New York NY 10171Tel. +1-212-821 3000

www.ubs.com

UBS Investment Bank is a business group of UBS AGUBS Securities LLC is a subsidiary of UBS AG

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