Palika bazar and Investment Banking
Nice write-up mate ! I couldn't agree more !
Palika bazar and Investment Banking
Most MBA aspirants / students at one point or the other get obsessed with the idea of either Business Consulting or Investment Banking. The reasons are usually weak. They do not have an idea either about consulting or Investment Banking. But it is their dream to be a consultant / I banker because it is the dream of every one else to be the consultant or I Banker. If everyone wants to be an I Banker / Consultant , it must be a great career option. Most people go by social proof when they do not know what is really in store.
Lot of engineers want to be Investment Bankers because they are interested in finance and are good in numbers thanks to the engineering education. Well no , this is just the bullshit they tell HR people. Actually it is the competitive instinct of your average engineer which eggs him on to be an Investment Banker. The average engineer has been honing his competitive instinct since kinder garden , egged on by Mommy and Dadda to be the topper in class. He has been since then lying , manipulating , scheming along with studying hard to be the topper. By now when he is an adult , it is not his liking for mathematics and interest in finance but his competitive instinct which wants him to be the I banker.
Success in I banking has very little to do with mathematical abilities or interest In finance. Till the wannabe MBA is in analyst / associate role , his success depends on Stamina , more than anything else. He has to carry on the intellectually simulating tasks of proof reading pitch books for correct font size. The carrot is to be a Vice President or MD one day who are actually the I Bankers.
And at the VP and MD level also, mathematical abilities and interest in finance are hardly what separates a winner from a loser. Investment Banking business is very much similar to buying or selling denim jackets in Palika Bazar. Instead of Denim Jacket you have a business , to be sold or bought. You have an estimate of the value of the jacket. The seller also has an estimate of value. You may have mathematical models that will give you an estimate about the value of the jacket. But your success depends on your ability to drive a bargain. You have to sense what is the estimate of value in mind of seller , how desperate he is to sell , is a police raid approaching soon that will make him sell cheap etc etc. You will throw a drama and walk away from him before he yells and calls you back to sell at your quoted price. Being good at mathematical model would reduce you to a laptop excel junkie. Infact a good I banker will not have time to wait for excel modeling team to give him a mathematical estimate. He has to estimate his value on the spot using his business instincts ( its an art if you cant do it then you cannot learn it), as windows of opportunity open only for a limited period of time.
Palika Bazar and Investment Banking - GetUpdated.in
I am CA.
Can anyone tell me M & A courses that are globally recognised?
anyone working in investment banking in India knows what the salaries and total comp are in investment banking at VP / AVP level? I am planning to make a transition from US to India and any information will be helpful. Is there a difference between boutiques and Multinational banks?
On LBO or IPO, i understand the question is why go for LBO when you can go for IPO? two things:
1. IPO is a very lengthy process and often takes months to complete...by this time the merger may have fallen through.
2. Secondly, LBO makes more sense to the acquirer as he himself does not need to pledge anything of his own. In a sense, he uses the target to finance the acquisition. Also, the Debt Equity ratio of the Acquirer may be low, in which case it can afford to take on some loan in its balance sheet.
Would like to add in here a point or two
1. LBO uses debt financing, which is comparitatively cheaper than equity financing
2. LBO takes the assets of the acquired company to be used by the acquiree, to raise loans for takeover/buyouts.. Its like "Bheeshma" telling Arjun the way to defeat him.
Disagree over one point in here.
In LBO's, you have a huge debt. if at that time, the profits dip, and that happens consistently, the company cannot pull out of debt and goes bankrupt. Happened for a series of Buyouts in the 1980's and 1990's coz of which LO's became infamous!
So its not a SAFE way to take over a company. High risks, high gains proposition.
PS: Ppl can read over KKR in Wikipedia. He was the pioneer for LBO's!
No offense, but some of whats stated is not entirely accurate. My understanding is so :
LBO does use debt financing. But it does not use the assets of the company being acquired for raising money. The assets of the company are owned by the company's shareholders and they will not agree to give it as collateral for a third party to acquire the company.
The money is raised by issuing high risk bonds. These bonds ("Junk bonds") do not guarantee payments but offer attractive interest rates. Without junk bonds, there are few options to raise money for an LBO. Few, if not none, banks and other conventional lines of credit will be willing to lend money to a PE/LBO firm to take over a company at a hefty premium to its current market valuation.
The premise of an LBO is to acquire an inefficiently run company or a company with diversified lines of business, by issuing cheap bonds, which appeal to certain institutional investors (who have allocated some capital in their investment portfolio to high yield debt), who then buy the bonds.
The proceeds of the bond sale are used to buy the company and remove the current management. In the normal scenario, the company's management itself advises the LBO firm on the company's business model, strengths and weaknesses. The acquirer handsomely rewards the old management team with large bonus payments/retirement packages.
Using the information and experience shared by the old management team and its own knowledge on the industry & financial management, the LBO firms appoints a new management from its own ranks, who are experts in restructuring businesses. The new team identifies business lines which are being inefficiently run and either improves performance with new measures or spins off the business line into another entity, which is sold later. In many cases, it does both : improves performance to an extent that makes the line profitable and then sells it to a company which is a player in that industry for a large profit.
An LBO is meant to clean large, diversified business into smaller, lean mean profitable companies. The US business landscape, was at the time littered with many such firms, which were inefficiently run with less than committed management. The LBO industry began in the late 1970s and ended around 1989, with the biggest LBO deal made till then - the RJR Nabisco-KKR deal of 25 billion USD. It also turned out to be KKR's most spectacular failure, earning negative returns and saddling them with massive debt. The could not improve RJR Nabisco's tobacco division and found no buyers. The deal hemmoraged their financials for a long time.
KKR created and brought to life the LBO concept. But without Michael Milkin's junk bonds, it is unlikely that LBOs would have taken off the way they did. MM had as much a role as Henry Kravis.
LBOs are an example where, a set of market conditions, goverment regulations (or lack of the same), ambitious, risk taking and intelligent entreprenuers create a new industry/new wealth. And just as the conditions that saw the LBO phenomenon wore away, so did the phenomenon. Which is to say that since 1988, we have not seen the frantic pace and large quantity and value of deals as that of 1980 to 1988.
LBOs were abused in the later half of their golden age. Since 1985, deals were made between managements keen on selling off the company in return for large compensation (at the expense of shareholder & employee interests), bond buyers eager for high interest debt and LBO firms focusing on simply stripping off the company to its nuts and bolts, selling it off for profits, rather than genuinely attempt to improve corporate performance, reduce waste and sell at a premium.
IPOs are not necessarily lengthy. Timing the market is the challenge. The IPO should ideally be when the market is most bullish and appetite for new securities is high. The motivations for an IPO and LBO are totally different. An IPO is to raise money for the issuing company's capital expenditures or for retirement of large debt. The LBO case has been discussed above.
In an LBO, the LBO firm is taking a lot of risk. But a good part of the risk is transferred to the bond holders as the bond agreements do not guarantee payments. Aside from the DE ratio, a company that generates large FCF is also fair game for LBO. (FCF - free cash flow). This number is more important than the debt equity ratio.
Harsha.v SaysThis is to subscribe.
Dude, you can subscribe to a thread by clicking on "Thread Tools" "Subscribe to this thread" above the first post on this page.
Posting just for subscribing effectively, amounts to spamming.
Regards and Cheers
Speaking of KKR, they are planning to set up an office in India. So all you high-potential private equity guys out there, get your grey striped formal suits dry-cleaned and ready. You might get that call you've been waiting for.