MUST KNOW Valuation Methods in an IB interview?
Thanks everyone! Would love your input.
I'd like your advice because I'm willing to learn and brush up on any valuation methods that absolutely must be known for a full-time interview. I just don't want to waste my time on one that typically does not get brought up in an ib interview.
gonna guess DCF, precedent transactions and comparable companies
is LBO Valuation a need to know?
The Ever Vaunted Valuation Skill-Set of Bankers? (Originally Posted: 10/02/2013)
Chaps,
I've never done an M&A stint, had the option to but passed on it. So I sit here doing distressed debt research querying this key skill set that jnr bankers get and are heralded for: valuation.
I've seen the toils of their labour and still can't pin down, in my mind, what is so special and why it's so desired. Because, frankly, all of the valuation techniques aren't hard, potentially labour intensive? yes. Flabbergastingly unattainable without said M&A experience?....no?
Notwithstanding what the above may imply, I am not claiming that valuation is the only skill learned. Just wanted to get that in before all hell breaks loose.
Educate me.
A deep understanding of valuations goes beyond knowing the fundamental mechanics of valuation methodologies. Real M&A deal experience will be invaluable going forward because it will provide exposure to a variety of situations where you need to account for additional details beyond FCF, WACC, etc., such as impact of target NOL's on buyer's future cash flows. Valuation is more than just numbers. Knowing the reason behind the value impact of certain strategic decisions is great and having more deal experience, with these special adjustments added to your cookie cutter models, will give you a larger pool of valuation knowledge points to consider when evaluating investment opportunities on the buyside. Sorry for the bad English.
Throwaway is absolutely right. There are a ton of important factors to watch out for that almost anyone in a strong M&A setting will know cold, such as application of NOLs, stock sales vs. asset sets vs. 338(h)(10) elections and the relevant tax implications, understanding relevant EBITDA adjustments and which ones you should be paying for, how to negotiate a working capital peg, identifying and carving out contingent liabilities in contracts, negotiating reps and warranties in contracts, escrows etc. etc. Those are all hugely important no matter where you work (from your debt perspective, most of those early ones will have very meaningful cash flows impacts).
But beyond those specific situations, I think even more important is the M&A process itself. Everyone assumes that you can plug your technical skills into an M&A process and be fine, but the nuances you learn from doing a few of them start to finish are invaluable. One very basic example is understanding nuances around competitive dynamics and how banks will try to maintain or manufacture competitive tension with a buyer. This can be VERY important! The difference between a buyer believing your process is competitive and they need to pay up to win vs. believing it is weak and they are the only buyer left can be the difference between keeping that 1 last buyer 20-30% above the next bidders vs. having to sell near the seller's threshold price (and conversely for a buyer the difference between knowing when to bid a lot for a company you really want and knowing when you can get a good deal).
Unfortunately it's the kind of thing you only realize how important it is after you have learned it, then you wonder how anyone else could possibly approach a deal without that type of knowledge. While it's common for everyone on the outside to downplay these factors (aka about 80% of the people who post on here but actually have no experience in this area), the reality is it is extremely important. People from M&A groups / with good M&A experience don't just get the best jobs because it looks good on their resume, they get them because they are actually better qualified to do deals.
Well said. I totally agree on the deal experience, definitely something that can only be learned by being involved, and very important to assess the parties involved, their motivations etc. in the context of valuation. I think some of the points you mention are M&A specific (reps and warranties, contingents liabils) and very important in that context, but for the general use of valuation for either myself or an equity guy, not wholly relevant. For example, my knowledge of the nuances of pref and common stock is limited, as for the companies i look at, it just doesn't apply.
You deserve a banana point or whatever, alas, i spent them all on throwing shit at children who dilute the quality on this site.
Agree with what's been said so far. Experience helps you understand a process, understand what's market, and understand how to apply set frameworks to different, fluid situations.
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