The dynamic environment of investment banks, hedge funds, and private equity firms comes to life in David Stowell's introduction to the ways they challenge and sustain each other. Capturing their reshaped business plans in the wake of the 2007-2009 global meltdown, his book reveals their key functions, compensation systems, unique roles in wealth creation and risk management, and epic battles for investor funds and corporate influence. Its combination of perspectives-drawn from his industry and academic backgrounds-delivers insights that illuminate the post-2009 reinvention and acclimation processes. Through a broad view of the ways these financial institutions affect corporations, governments, and individuals, Professor Stowell shows us how and why they will continue to project their power and influence. * Emphasizes the needs for capital, sources of capital, and the process of getting capital to those who need it. * Integrates into the chapters ten cases about recent transactions, along with case notes and questions* Accompanies cases with spreadsheets for readers to create their own analytical frameworks and consider choices and opportunities.
Section One: Investment Banking
Chapter 1 – Overview of Investment Banking
Organizational Structure of an Investment Bank
Investment Banking Division
Client Coverage Bankers
Capital Markets Group
Equity Capital Markets
Debt Capital Markets
Mamp;A Product Group
Trading Division
Fixed Income, Currencies and Commodities (FICC)
Equities
Non-Client Related Trading and Investing
Principal Investing
Proprietary Trading
Asset Management Division
Co-Investments in Asset Management Division Funds
Referenced Case Studies – Investment Banking in 2008 (A): Rise and Fall of the Bear; Investment Banking in 2008 (B): A Brave New World
Chapter 2 – Regulation of the Securities Industry
Introduction
Section One: U.S. Regulations
Early Investment Banking
The Growth of Investment Banking
Limited Regulation
The Securities Act of 1933
The Registration Statement
The Investment Prospectus
New Liabilities
Gun-Jumping Rules
The Glass-Steagall Act (formally, the Banking Act of 1933)
Separation of Private Banks into Deposit and Investment Banks
Separation of Commercial and Investment Banks
Securities Act of 1934
Public Utility Holding Company Act
Chandler Act
Maloney Act
Investment Company Act of 1940
Section Two: Recent Development in Securities Regulations
Gramm-Leach-Bliley Act
Sarbanes-Oxley Act
Bear Stearns Collapse
Section Three: Securities Regulations in Other Countries
Japan
1947 – 1992
1992 – 1998
1998 – Present
United Kingdom
Pre-1986
1986 – 1997
1997 – Present
China
Pre-1992
1992 – 1998
1998 – 2005
2005 – Present
Chapter 3 – Financings
Capital Markets Financings
Financing Considerations
Financing Alternatives
Debt Financing
Bonds
Loans
Private Placements
Asset Backed Securities
Commercial Paper
Equity Financing
Initial Public Offerings (IPOs)
Follow-On Offerings
Convertible Securities
Rationale for Issuing Convertible Bonds
Convertible Bond Example
Convertible Market
Fees to Bankers
Distribution Alternatives
Shelf Registration Statements
""Green Shoe"" Over-Allotment Option
Referenced Case Studies – Freeport McMorRan: Financing an Acquisition
Chapter 4 – Mergers amp; Acquisitions
Strategic Rationale
Synergies
Credit Ratings and Acquisition Currency
Regulatory Considerations
Social and Constituent Considerations
Role of Investment Bankers
Other Mamp;A Participants
Fairness Opinion
Acquisitions
Merger
Tender Offer
Proxy Contest
Due Diligence and Documentation
Breakup Fee
Alternative Sale Process
Preemptive
Targeted Solicitation
Controlled Auction
Public Auction
Cross-Border Transactions
Tax-Free Reorganizations
Corporate Restructurings
IPO
Carve-Out
Spin-Off
Spit-Off
Tracking Stock
Valuation
Comparable Company Analysis
Comparable Transaction Analysis
Discounted Cash Flow Analysis
Leverage Buyout Analysis
Breakup Analysis
Valuation Summary
Takeover Defenses
Shareholder Rights Plan
Other Defenses
Risk Arbitrage
Referenced Case Study – The Best Deal Gillette Could Get? Procter amp; Gamble’s Acquisition of Gillette
Chapter 5 – Trading
Client-Related Trading
Pricing Securities Offerings
Research
Sales
Equity Trading
Prime Brokerage
Securities Lending
Margin Financing
Fixed Income, Currencies and Commodities (FICC) Trading
Interest Rate Products
Credit Products
Structured Credit
Credit Default Swaps
Bank Loans
Commodities
Currencies
Proprietary Trading
Risk Monitoring and Control
Value-at-Risk (VaR)
Referenced Case Studies – A Tale of Two Hedge Funds: Magnetar, Peloton, CDOs, and the 2008 Financial Crisis; Kmart, Sears, and ESL: How a Hedge Fund Became One of the World’s Largest Retailers
Chapter 6 – Asset Management, Wealth Management and Research
Asset Management
Wealth Management
Hedge Fund Investments
Private Equity Investments
Research
Paying for Research
Conflicts of Interest
Regulation FD
Chapter 7 – Credit Rating Agencies, Exchanges and Clearing and Settlement
Credit Rating Agencies
Asset-Backed Securities and Criticism Against Credit Rating Agencies
Monoline Insurers’ Relationship with Credit Agencies
Credit Rating Advisory Services Provided by Investment Banks
Exchanges
Specialists
Futures Exchanges
Over-the-Counter Market
Clearing and Settlement
Securities Settlement
Derivatives Settlement
Investment Banking Services
Chapter 8 – International Banking
Euromarkets
Japan’s Financial Market
Mamp;A in Japan
Equity Financing in Japan
Trading Securities in Japan
China’s Financial Market
Mamp;A in China
Equity Financing in China
Trading Securities in China
International Investment Banking Activity in China
Emerging Financial Markets
Bonds
Syndicated Loans
Equity
Mamp;A
Global IPO Market
Brazil’s IPO Market
Russia’s IPO Market
India’s IPO Market
China’s IPO Market
American Depository Receipt (ADR)
Standardized International Financial Reporting
International Investors
Chapter 9 – Convertible Securities and Wall Street Innovation
Convertible Securities
Hedge Funds and Delta Hedging
Zero Coupon Bonds
Mandatory Convertibles
Wall Street Innovation
Nikkei Put Warrants
Accelerated Share Repurchase Program
Chapter 10 – Investment Banking Career Opportunities and Trends
Investment Banking Division
Analysts
Associates
Vice Presidents
Managing Directors
Trading and Principal Investments Division
Client-Related Trading
Proprietary Trading
Institutional Sales
Equity Sales
Fixed-Income Sales
Prime Brokerage Sales
Private Wealth Management
Asset Management
Research
Principal Investments
Other Investment Banking Functions
Operations
Finance
Investment Banking Trends
Securitization
Credit Crisis of 2007 – 2008
Bear Stearns
Short-Term Financing by Investment Banks
Structured Investment Vehicles
Leverage at Investment Banks
Capital Ratios
New Power Brokers in the Capital Markets
Credit Default Swaps
Bridge Loans
Investment Banking Future
Section Two: Hedge Funds and Private Equity
Chapter 11 – Overview of Hedge Funds
Leverage
Growth
Composition of Investors
Industry Concentration
Performance
2008 Slowdown
Market Liquidity and Efficiency
Financial Innovation
Illiquid Investments
Lock-Ups, Gates and Side Pockets
Comparison with Private Equity Funds and Mutual Funds
High Water Marks and Hurdle Rates
Public Offerings
Fund of Funds
Referenced Case Study – A Tale of Two Hedge Funds: Magnetar, Peloton, CDOs, and the 2008 Financial Crisis
Chapter 12 – Hedge Fund Investment Strategies
Equity-Based Strategies
Equity Long/Short
Non-Hedged Equity
Directional Strategies
Macro
Emerging Markets
Arbitrage Strategies
Fixed Income-Based Arbitrage
Convertible Arbitrage
Relative Value Arbitrage
Event Driven Strategies
Activist
Merger Arbitrage
Distressed Securities
Summary
Referenced Case Study – Kmart, Sears, and ESL: How a Hedge Fund Became One of the World’s Largest Retailers
Chapter 13 – Shareholder Activism and Impact on Corporations
Shareholder-Centric vs. Director-Centric Governance
Activist Hedge Fund Performance
Activist Hedge Fund Accumulation Strategies
Changing Rules that Favor Activists
Daniel Loeb and 13D Letters
Lehman Brothers’ Erin Callan vs. David Einhorn of Greenlight Capital
Carl Icahn vs. Yahoo
CSX vs. TCI
Bill Ackman vs. McDonald’s, Wendy’s, Ceridian, Target and MBIA
Summary
Referenced Case Studies – McDonald’s, Wendy’s, and Hedge Funds: Hamburger Hedging?; Porsche, Volkswagen and CSX: Cars, Trains and Derivatives
Chapter 14 – Risk, Regulation and Organizational Structure
Risk
Incremental Risk
Leverage
Regulation
Short Selling
Transparency
Risk Tolerance
Systemic Risk
Bank Exposure to Hedge Funds
Mitigating Systemic Risk
Investor Risks
Regulation
Alternative Regulatory Approaches
Organizational Structure
Domicile
Legal Entity
Open-Ended Partnership
Referenced Case Study – Porsche, Volkswagen and CSX: Cars, Trains and Derivatives
Chapter 15 – Hedge Fund Issues and Performance
2008 Summary
Fund of Funds
Absolute Return
Benefits Revisited
Transparency
Fees
Taxes
High Water Mark
Searching for Returns
Future Developments
Merging of Functions
Hedge Fund Performance
Chapter 16 – Overview of Private Equity
Characteristics of a Private Equity Transaction
Target Companies for Private Equity Transactions
Private Equity Transaction Participants
Structure of a Private Equity Fund
Capitalization of a Private Equity Transaction
Assets Under Management
Private Equity Goes Public
History
Equity Bridge Loans
Covenant-Lite Loans and PIK Toggles
Club Transactions and Stub Equity
Teaming Up with Management
Private Equity Investment in Public Equities (PIPEs)
Leveraged Recapitalizations
Secondary Market for Private Equity
Fund of Funds
Impact of Financial Services Meltdown on Private Equity
Chapter 17 – LBO Financial Model
Determining Cash Flow Available for Debt Service
Determining Financial Sponsor IRR
Determining Purchase Price and Sale Price
LBO Analysis Example
Forecast Revenue, Margins, Damp;A, CapEx, Working Capital, Interest Rate and Tax Rate
Calculate Acquisition Multiples
Determine Target’s Capitalization after Acquisition
Determine Cash Flow Available for Debt Service
Calculate Credit Ratios
Calculate Equity Value, IRR, and Multiple of Investment on Projected Exit Date
LBO Analysis Post Credit Crisis
Referenced Case Study – The Toys ""R"" Us LBO
Chapter 18 – Private Equity Impact on Corporations
Private Equity-Owned Companies: Management and Productivity
Private Equity-Owned Company Failures
Hawaiian Telecom Communications (HTC)
Washington Mutual, Inc (WaMu)
Scorecard During 2008
Private Equity Purchase Commitment Failures
BCE, Inc
Huntsman Corporation
Private Equity Portfolio Companies Purchased During 2006-2007
TXU Energy (TXU)
Equity Office Properties (EOP)
Hospital Corporation of America (HCA)
Harrah’s Entertainment (Harrah’s)
Freescale Semiconductor (Freescale)
Univision
Private Equity Value Proposition for Corporations
Corporate Rationale for Completing Private Equity Transactions
Alternative to an IPO
Corporate Orphans
Ignored Public Companies
Operating or Financial Weakness
Mandated Divestitures
Private Equity as an Alternative Model of Corporate Governance
Private Equity Influence on Companies
Pressure on Corporate Performance
Changing Capital Structure
Reduction in Public Market Capitalization
Mergers and Acquisitions
Referenced Case Study –Cerberus and the U.S. Auto Industry
Chapter 19 – Organization, Compensation, Regulation and Limited Partners
Organizational Structure
Closed End Funds
Exits
Compensation
Preferred Returns
Timing Issues
Clawbacks
Taxes
Regulations
Using Intermediaries
Perception and Reality
Limited Partners
Defaults
Disclosure
Fees
Secondary Market
FASB 157
Chapter 20 – Issues and Opportunities
PIPEs
Equity Buyouts
Loans
Mamp;A Advisory
Capital Markets Activity
Hedge Fund and Real Estate Investments
2008 Losses
Boom and Bust Cycles
Annex Funds
Limited Partner Pull-Backs
Risk Factors
Asian Private Equity Activities
Profile of The Carlyle Group
Strategic Alliances
Private Equity IPOs
Focus on Portfolio Management
Comparison of Private Equity Firms
Future Issues Affecting Private Equity
Section Three: Case Studies
Investment Banking in 2008 (A): Rise and Fall of the Bear
Bear Stearns
Long Term Capital Management
The Credit Crisis
Bear Stearns Asset Management
The Calm Before the Storm
Run on the Bank
Bear’s Last Weekend
Investment Banking in 2008 (B): A Brave New World
The Aftermath of Bear Stearns
Gramm-Leach-Bliley and the Fall of Glass-Steagall
Lehman Brothers
Merrill Lynch
Goldman Sachs and Morgan Stanley
Freeport-McMoRan: Financing an Acquisition
Metals Heating Up
Enter Freeport-McMoRan
Role of the Investment Banks
Inside the Wall
Outside the Wall
Placing the Equity and Convertible Offerings
Mandatory Convertible Preferred Shares
FCX Post-Allocation
The Best Deal Gillette Could Get? Procter amp; Gamble’s Acquisition of Gillette
A Dream Deal
Deal Structure: An ""All-Stock"", 60/40, No-Collar Acquisition
Valuation of the Deal
Key Stakeholders: Beantown, Wall Street, DC, and Main Street
The Razor Boss of Beantown: James Kilts, Gillette CEO
The Rainmakers: Investment Bankers and Power Brokers
The Regulators: International, National, and Local
The White Squire from Omaha: Warren Buffett, Gillette Investor
Conclusion
A Tale of Two Hedge Funds: Magnetar, Peloton, CDOs, and the 2008 Financial Crisis
What a Year
What a Nightmare
Magnetar’s Killer Bet
The 2007 – 2008 Financial Crisis
The CDO Market
Rating Agencies
Correlation
CDO Market Evolution
Bank Debt and the Cov-Lite Craze
Kmart, Sears, and ESL: How a Hedge Fund Became One of the World’s Largest Retailers
The Unusual Weekend
Flash Forward: November 2004
Case Focus
The Rise and Fall of Kmart
Bankruptcy and Inefficient Financial Markets
Financial Buyers vs. Strategic Buyers
Private Equity
Hedge Funds
ESL: The Hedge Fund That Could Not Be Categorized
2002 – 2003 Decision: Should ESL Seek to Gain Control of Kmart during Bankruptcy?
Lampert’s Kmart Play
November 2004 Decision: Should Kmart (under ESL’s Control) Acquire Sears?
McDonald’s, Wendy’s, and Hedge Funds: Hamburger Hedging? Hedge Fund Activism and Impact on Corporate Governance
Growing Hedge Fund Activism
A Tale of Two Activists: Carl Icahn and William Ackman
Pershing Square’s Initial Involvement: Wendy’s and McDonald’s
Wendy’s
McDonald’s
McDonald’s Management and Franchisees Respond
Rating Agency Concern
Unlocking McDonald’s Real Estate Value
Aftermath of McDonald’s Rejection
The Truce
Retrospective
Porsche, Volkswagen and CSX: Cars, Trains and Derivatives
Using Derivatives to Obtain Control Positions
Volkswagen Equity Derivatives
CSX Equity Derivatives
CSX Collides with TCI and 3G
Background
TCI and 3G Take a Position
Porsche and Volkswagen: Brothers Reunited
Cash-Settled Options
Stealth by Swaps
Dilemma
The Toys ""R"" Us LBO
Case Focus
Emergence of Club Deal in a Maturing Industry
Dividends and Fees Paid to Private Equity Firms
U.S. Retail Toy Industry in 2005
European Retail Toy Industry
Infant, Toddler, and Preschool Market
Overview of Toys ""R"" Us
Toys ""R"" Us – United States
Toys ""R"" Us – International
Babies ""R"" US
Toysrus.com
Challenging Times for Toys ""R"" Us
Toys ""R"" Us Strategic Review and Sale
The Toys ""R"" Us Club
KKR
Bain Capital
Vornado Realty Trust
The Assignment
Cerberus and the U.S. Auto Industry
Introduction
""What’s Good for GM?""
GM a Power
GM Hard Times
Effect on Suppliers
CEO Wagoner’s Tough Task Remaking Company
Cerberus Capital Management to the Rescue…Maybe
Cerberus – New Beast of the Investment Community
The Deal and Its Details
Roadblocks and Hurdles
GM’s Supplier Relationships
Cerberus Builds and Even Bigger Auto Stage
The Dream Becomes a Nightmare
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