Tips on critical thinking when looking at a CIM
Hello,
This can be even a challenge for senior bankers when trying to win a deal as a buy-side advisor when being asked what the investment risks are when looking at a CIM.
I read many 60+ pages CIM and sometimes, it is hard for me to understand what the risks are. Perhaps I have not done one investment on my own so I cannot determine what being mentioned in a CIM can be a risk.
If you are working on a buy-side gig, could you please share some tips on how to critically think about how to determine something mentioned in a CIM can be a potential risk to a buyer?
Thank you!
Very high level conceptual view - you have (a) revenue and cost drivers, and (b) a business plan / forecast. What would need to go wrong or south with (a) to impact (b) = risks
What the above poster said.
Read the business overview section first. Then the industry. And then go to the financials. See what are the big line items there, and think critically about what would impact them. Once you've gone through enough CIMs, this comes more naturally. Before that, you can dig up the publicly listed companies in that space and read through their risks section in their annual reports. Not all risks might be mentioned, that's why critically think
Bankers' job is to sell whatever the f they get their hands on, so you have to think what things they will be omitting from CIM. Imagine your self really as a buyer and this becomes very easy actually.
- Unmaterialized addbacks and synergies
- The multiple you're paying
- EBITDA to free cash flow conversion (i.e. EBITDA is nice but what if the business spends 80% of on it on maintenance capex every year?)
- Management skin in the game post-transaction (who is staying and who is rolling equity)
- Client concentration
- % of recurring/repeat revenue vs contracted revenue
f you look at EBIT, doesn't that get rid of the third problem, because D&A is reflective of CapEx?
D&A is reflective of historical capex, not go-forward. If you underinvested in capex historically you will have a low PPE base to depreciate, while your projected capex will be a lot higher since you need to fix all the old equipment etc.
It’s all about cash flow right at the end of the day: you need it to service/pay down debt (to make LBO math work) or grow business (either inorganic or organically).
Now think about the Company’s strategy and how they actually make money. What can go wrong with that? Is it losing a key customer? Competition eroding pricing power? Inflation eroding margins? Poor M&A integration? There’s a ton of things but I always found it helpful to frame this way
Thank you everyone for your responses. For me when I read a CIM, it is basically a sale material from the sell-side advisor to the buy-side and they will make things so glamorous. I am looking to get into the buy side in a different sector and learning how to look at these CIMs and spot out some investment risks, either on the quantitative or on the quality move components.
Few other things I like to look at:
- Key growth drivers: Riding market growth? Taking market share? New products / services? Price increases?
- Margins: Is there operating leverage / efficiency to larger scale?
- Differentiation: What do they do better / differently from every competitor and how sustainable is this gap? Is it a better product/service, lower price point, brand recognition, intellectual property, etc.?
- Market: how big is it, is it growing, what are major risks/threats/tailwinds etc.?
One question the buy side team asked during one of our calls was what is unique about our business and I was sure we did not address that question well. I guess to know something is unique, one has to see enough of businesses to determine whether the one you are looking at is unique. This is tough for me…
This is the "Differentiation" point the post above mentions. It speaks to the competitive landscape and moat which is pretty important.
Imagine you're the seller and you wanted to make the CIM look as beautiful as possible, what negative aspects of the business would you try to gloss over / dress up the most
Imagine the entire cim was built by 22 year old analysts on 3 hrs sleep. The financial section was built by a junior team member who couldn't even tell you what the business does (he just cares about getting his model to not ref and turning a product that makes his vp happy). The vp and above likely have never looked at the model.
Scrutinize and see what is simply just banker speak.
I understand your point of view but we do review our work at my bank from top to bottom grunt workers like myself but at some points, I have to agree with you that there is a reason why we do not win many deals…
Long way: Read enough CIMs in a given industry (plug for specialized vertical teams/funds) and you will start to develop a view of everything that you should be getting from a CIM. Using this mental model, the holes are the risks/areas for further DD.
Short way: Rabbit nailed it, but would add working capital, capex and other cash flow drivers that can absolutely fuck you. Unknown unknowns (government decides to give away free money for 2 years) are not worth worrying about beyond answering that one IC member who actually lived through stagflation's questions.
Bonus: In healthcare, befriend a lawyer and get instincts for which structures do and do not comply with Stark and Kickback.
Is there any way I can find CIMs as a student, can't seem to find any even on the sec (okay if dated back like 10+ years)
Check de-SPAC investor presentations (i.e. when a SPAC announces it's merging with a target). Those are basically shorter-form CIMs and are all made public via 8-Ks.
Ex: https://s26.q4cdn.com/607044225/files/doc_presentations/2020/MultiPlan-…
To challenge yourself with the above example: MultiPlan is currently being sued for material omission / misrepresentation of material information. What information seems missing from the deck?
Cheers.
Are CIMs now all built in ppt instead of word docu in the US?
This ask isn't for me, but I was curious and took a look through the presentation.
I would assume there is an issue either with the actual use of funds or drivers of P&L/growth. Most likely an issue with the latter. Given this is a multi-product company, is based on customer contracts (recurring revenue) and they seem to talk a lot about Adj. EBITDA so I'm going to guess that the real issue is somewhere in here. Looks like they reconcile Adj. EBITDA, and talk through this Non-GAAP Measure... so let's see about customers and revenue.
Slide 11: Looks like historical revenue grows massively between 2015-2019, but they omit years 2016-2018 in this view. However, on slide 24, you can see the annual revenue from 2016-2019. Looks like revenue is increasing 2016-2018, then drops off in 2019 to levels below 2016. The question--IMO--is what happened? From the revenue mix between top 10 customers and all others, it looks like Top 10 lost around 1.4% of ground which--as a proxy not knowing what happened in the 'All Others' customers or new customers were added or if there were upsells/downsells--lowered revenue by ~$60m in 2019A. My guess then on omission is that a top 10 customer either churned or somehow was a downsell, but since they added new customers (aka new revenue), they could conceal this churn or downsell. If that customer represented a large part of revenue or concentration, then it would call into question the claims of 'very sticky customer base' and the claim that 'MultiPlan is the preferred partner' for top customers. They specifically say they are the preferred partner for the top 4 customers and my guess is either one of those churned or maybe 1 or more in the remaining 6 of the top 10.
I know this is very back of the napkin, but my best guess.
Punchline: Typically the biggest areas of risk--IMO--are with non-gaap measures, claims of revenue growth/sustainability/etc., and uses of capital.
Happy to be proved wrong, if this is totally off base.
You all have been awesome! Please keep going. I have learned a lot.
Hypothetically speaking, under time pressure in an interview, do the interviewers know in advance what the investment risks are from the given CIM?
Necessitatibus nobis quam sed. Occaecati qui fugit aut et assumenda. Amet id suscipit modi tempore nisi et eum.
Rem unde dolorem officia deserunt occaecati. Velit qui voluptas magni maiores. Fuga molestiae porro sequi quibusdam nam maiores nobis. Commodi ea est omnis aspernatur qui optio. Nihil pariatur fugiat vero dignissimos autem.
Provident autem reiciendis similique aut quas minus omnis. Est ut nobis et assumenda quaerat. Cumque pariatur expedita perspiciatis non et vel aliquid. Velit ratione voluptates aut. Suscipit deserunt minima dicta qui et. Rerum molestiae explicabo nemo ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Sunt consequatur fugiat consequuntur voluptatum aliquam accusantium. Rerum beatae ipsa et omnis ratione tempore sit. Iure autem nam temporibus ad autem ducimus deserunt. Libero qui cum at fuga amet et aperiam.