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How to DCF like a rock star
 

bankerella's picture
IB
(King Kong, 1,863
 
Points)
 on 7/13/12 at 12:30pm
Rock star

Interning in IBD? Here are the steps to running a DCF like a seasoned analyst.

1: Build out a basic DCF template and enter what data you know for sure.

2: Have your associate get a sense from the senior guys as to what final number will make the deal work.

3: Populate the drivers of the DCF (growth, etc.) with the most favorable assumptions you can imagine. (If you can look at these assumptions and still keep a straight face, you probably have room to make them a little more optimistic.)

4: If you can't get to the necessary final number by doing step 3, insert another row, call it synergies*, and plug it with whatever it takes to get to that final number.

5: Find supporting rationale for the plugs and assumptions (this is technically your associate's job, but they like you to take a first crack at it)

6: Wait for somebody senior to push back or question your judgment. They won't.

Bonus points if the supporting rationale isn't a total joke.

What do you guys think? Ever been on a deal (or endless series of pitches) like this?

* Or whatever else is appropriate for the situation you're modeling.

See my other WSO blog posts
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Comments

couchy's picture

yup, I've never seen a DCF

(King Kong, 1,365
 
Points)
 on 7/13/12 at 12:48pm

yup, I've never seen a DCF model taken seriously unfortunately....

sayandarula's picture

lol @ the indian in the pic.

O
(King Kong, 1,812
 
Points)
 on 7/13/12 at 12:48pm

lol @ the indian in the pic.

Money Never Sleeps? More like Money Never SUCKS amirite?!?!?!?

Tommy Too-toned's picture

sounds like a really neat

(Gorilla, 505
 
Points)
 on 7/13/12 at 12:52pm

sounds like a really neat job.

make up some numbers and punch them into excel.

Investment banking's such a joke

BlackHat's picture

Reasons why this is 100%

HF
 
Points)
 on 7/13/12 at 1:19pm

Reasons why this is 100% accurate/sad:

1) Buyers/sellers like to think there's methodology behind their irrationalities. It gives them something to hold on to when the deal completely falls apart.
2) Nobody likes to be responsible for their own fuck-ups, so we pay huge fees to bankers so we can shift some blame on them if we have to. Whatup Zuck?
3) 21 year old kids are coming up with the rationale behind how multi-billion dollar companies should be valued and everybody is completely okay with that.

Reasons why we like to focus on DCF analyses on the buy-side:

...

I hate victims who respect their executioners

Follow BH & Co. on Twitter: @DumbLuckCapital
twitter.com/DumbLuckCapital

ThunderRoad's picture

BlackHat: Reasons why this is

(Baboon, 154
 
Points)
 on 7/13/12 at 1:31pm
BlackHat:

Reasons why this is 100% accurate/sad:

1) Buyers/sellers like to think there's methodology behind their irrationalities. It gives them something to hold on to when the deal completely falls apart.
2) Nobody likes to be responsible for their own fuck-ups, so we pay huge fees to bankers so we can shift some blame on them if we have to. Whatup Zuck?
3) 21 year old kids are coming up with the rationale behind how multi-billion dollar companies should be valued and everybody is completely okay with that.

Reasons why we like to focus on DCF analyses on the buy-side:

...

Bankers can do the same thing with comps, cherry picking companies and making "pro forma adjustments" to arrive at the valuation they want.

I am wise because I know that I know nothing -Socrates

DoubleBottomLine's picture

couchy: yup, I've never seen

IB
 
Points)
 on 7/13/12 at 1:58pm
couchy:

yup, I've never seen a DCF model taken seriously unfortunately....

realizing this was a defining moment for me as an analyst. it facilitated the larger and more embarrassing realization about what an investment bank's value addition really is. and more importantly what it isn't.

i can't count the number of DCFs i saw that ultimately had no influence on deal pricing.

prop86's picture

valuation. more art than

O
(Monkey, 37
 
Points)
 on 7/13/12 at 2:53pm

valuation. more art than science; more bullshit than art.

adapt or die's picture

haha Indian rockstar... beat

(King Kong, 1,231
 
Points)
 on 7/13/12 at 3:05pm

haha Indian rockstar... beat it nerd

JDimon's picture

I don't know if I sound

(Orangutan, 252
 
Points)
 on 7/13/12 at 3:13pm

I don't know if I sound ridiculous, but I don't really think this is unethical. Everybody knows that IB's job is to sell. That's it. It's the acquirer's responsibility to have CFO types on staff who are smart enough to come up with their own valuations

There is already a book on you. That book is already being written. And if I talked to your friends, your teachers, your professionals, your family, I would know so much about you I wouldn't even have to meet you. You write the book the way you want to be

bankerella's picture

[quote=ThunderRoad Bankers

IB
(King Kong, 1,863
 
Points)
 on 7/13/12 at 3:54pm

[quote=ThunderRoad
Bankers can do the same thing with comps, cherry picking companies and making "pro forma adjustments" to arrive at the valuation they want.[/quote]

On a related note, if you ever have to make league tables for a presentation, here's how to save yourself some iterations with your seniors:

1: Start with a list of all the deals that got done in your space.
2: Exclude everything your bank wasn't on.

It all goes so much more smoothly when you realize that the seniors only stop iterating when they see a version that places them at the top of the league table. (As a young and stupid monkey, I wasted at least half a day on this issue before I saw the light.)

Some clients have a lot of fun with this. A few years ago there was a presentation making the rounds that had league tables cut and pasted from several bulge-bracket firms wooing the same client. It showed that they were all #1 in the same industry for the same period.

See my other WSO blog posts

leveredarb's picture

but why bother with all this

(King Kong, 1,231
 
Points)
 on 7/13/12 at 4:12pm

but why bother with all this shit...

if i was the client id call all bankers into a room and just tell them:

"Ok so I think your all equally retarded and useless, because if you were smart you would be on the buyside, so just submit me your price, the lowest offers wins the mandate"

Wonder why ppl dont do this :p

JDimon's picture

leveredarb: but why bother

(Orangutan, 252
 
Points)
 on 7/13/12 at 4:29pm
leveredarb:

but why bother with all this shit...

if i was the client id call all bankers into a room and just tell them:

"Ok so I think your all equally retarded and useless, because if you were smart you would be on the buyside, so just submit me your price, the lowest offers wins the mandate"

Wonder why ppl dont do this :p

I'm guessing they do. But here's what I'm guessing: Say you're a company trying to sell yourself. Your goal is to sell yourself for as much as possible and to minimize the fees you have to pay to the bank for doing the deal. But mostly your goal is to sell yourself for as much as possible. So bankers probably just compete on trying to find buyers that will pay the most - and however much more the buyer is willing to pay is the amount you can negotiate towards being your banks fees

There is already a book on you. That book is already being written. And if I talked to your friends, your teachers, your professionals, your family, I would know so much about you I wouldn't even have to meet you. You write the book the way you want to be

ThunderRoad's picture

leveredarb: but why bother

(Baboon, 154
 
Points)
 on 7/13/12 at 4:39pm
leveredarb:

but why bother with all this shit...

if i was the client id call all bankers into a room and just tell them:

"Ok so I think your all equally retarded and useless, because if you were smart you would be on the buyside, so just submit me your price, the lowest offers wins the mandate"

Wonder why ppl dont do this :p

I knew a guy in the corp dev team at a large corporate, and he said they used to play "banker bingo" whenever listening to pitches. Everyone would listen for buzz words and at the end they would compare.

http://www.wallstreetoasis.com/forums/which-office...

Clients are generally smart enough to know what's BS and what's not. Many of them were bankers themselves earlier in their careers. To some extent it's a big kabuki dance. They know what their company is worth, they're just looking for a good salesman.

I am wise because I know that I know nothing -Socrates

BTbanker's picture

BlackHat: Reasons why this is

IB
 
Points)
 on 7/13/12 at 8:21pm
BlackHat:

Reasons why this is 100% accurate/sad:

1) Buyers/sellers like to think there's methodology behind their irrationalities. It gives them something to hold on to when the deal completely falls apart.
2) Nobody likes to be responsible for their own fuck-ups, so we pay huge fees to bankers so we can shift some blame on them if we have to. Whatup Zuck?
3) 21 year old kids are coming up with the rationale behind how multi-billion dollar companies should be valued and everybody is completely okay with that.

Reasons why we like to focus on DCF analyses on the buy-side:

...

Can we please keep this on the DL for another 5 years?

"A man generally has two reasons for doing anything. One that sounds good, and the real one." - J.P. Morgan

Newspeak's picture

I would tend to agree with

IB
(Orangutan, 340
 
Points)
 on 7/13/12 at 8:55pm

I would tend to agree with the sentiments here but, just to play devil's advocate, bear in mind that there is typically a buyside advisor AND a sellside advisor. Both have an incentive to push the valuation in opposite directions. The IB with the buyside mandate is going to tweak the numbers to push the valuation down. The IB with the sellside mandate is going to push it up. They use the valuations as arguments, in order to make bids and reserve prices.

Part of the negotiating process is looking at the other bank's model and trying to argue that your assumptions make more sense/are more realistic. I don't think anyone actually thinks that revenue in 2022 is going to be exactly 3% higher than the year before or that COGS are going to be an exact, constant percentage of revenue every year for the next 7 years. It's just a guess. It's a set of assumptions to be argued for or against during the negotiations.

My question for you is, what would be a better way of determining the worth of a company in an M&A transaction or equity raise? The exact future cash flows from a business are inherently unpredictable but at least with a DCF or other model, you're not just taking a shot in the dark.

mhurricane's picture

bankerella: [quote=ThunderRoa

 
Points)
 on 7/13/12 at 10:52pm

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.

frgna's picture

Three words: perpetuity

O
 
Points)
 on 7/15/12 at 5:08pm

if you like it then you shoulda put a banana on it

bankerella's picture

frgna: If you make good

IB
(King Kong, 1,863
 
Points)
 on 7/15/12 at 6:49pm

See my other WSO blog posts

frgna's picture

bankerella: frgna: If you

O
 
Points)
 on 7/15/12 at 8:33pm

if you like it then you shoulda put a banana on it

frgna's picture

frgna: bankerella: frgna:

O
 
Points)
 on 7/15/12 at 8:38pm

if you like it then you shoulda put a banana on it

valiant7002's picture

BlackHat: Reasons why we like

O
 
Points)
 on 7/16/12 at 11:04am
BlackHat's picture

valiant7002: BlackHat: Reas

HF
 
Points)
 on 7/16/12 at 11:13am

I hate victims who respect their executioners

Follow BH & Co. on Twitter: @DumbLuckCapital
twitter.com/DumbLuckCapital

JimmyDormandy's picture

BlackHat: valiant7002: Bl

VC
 
Points)
 on 7/17/12 at 2:17pm

"Jesus, he's like a gremlin; comes with instructions and shit"

Financier4Hire's picture

Reading through this older

PE
(King Kong, 1,086
 
Points)
 on 9/4/12 at 1:04am

"The future isn't what it used to be "-Yogi Berra

"Perhaps you've failed to take into account my hidden assets"-007


The coolest cat on WSO
My BLOG

bankerella's picture

Financier4Hire: Reading

IB
(King Kong, 1,863
 
Points)
 on 9/4/12 at 1:28am

See my other WSO blog posts

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