Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions is a handbook for aspiring investment bankers. It addresses three main topics: valuation, leveraged buyouts, and corporate mergers and acquisitions. The sections on valuation describe three methodologies that are based on comparable companies, precedent transactions, and discounted cash flow, respectively. Written by industry practitioners rather than professors of finance, Investment Banking is better characterized as a technical how-to instruction manual than as an academic textbook. As a teaching manual for beginning investment bankers, the book has great merit.
Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions is a handbook for aspiring investment bankers. It addresses three main topics: valuation, leveraged buyouts (LBOs), and corporate mergers and acquisitions (M&A). The sections on valuation describe three methodologies that are based on comparable companies, precedent transactions, and discounted cash flow, respectively. Notwithstanding the book’s all-embracing title, it deals only with the corporate finance activities of investment banks. Investment Banking does not cover the underwriting of securities or the sales and trading functions, except tangentially as they apply to the financing of LBOs.
Written by industry practitioners rather than professors of finance, Investment Banking is better characterized as a technical how-to instruction manual than as an academic textbook. Coauthors Joshua Rosenbaum and Joshua Pearl are associated with UBS and Deutsche Bank, respectively. Their book describes in detail how investment bankers perform valuation, create LBOs, and orchestrate M&A.
Potential readers should be aware that Rosenbaum and Pearl limit their scope to the basic steps of structuring straightforward investment banking transactions. For example, in making cash flow projections, they prescribe the common practice of extrapolating historical numbers into the future. According to the authors, “Past growth rates, profit margins, and other ratios are usually a reliable indicator of future performance, especially for mature companies in non-cyclical sectors.” A more advanced treatment of the subject would discuss potential pitfalls of relying on historical numbers, which are at best a proxy for future results. Similarly, when the authors show how to calculate an enterprise-value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple, they focus on multiples for comparable companies or for precedent transactions. A lengthier discussion would be required to provide perspective on the risk that in an ebullient market, the multiples paid in recent deals may be excessive.
Throughout the book, the discourse is at a somewhat basic level. For instance, Rosenbaum and Pearl define the difference between goods and services, which is unnecessary for many potential readers. The authors also demonstrate how to calculate an internal rate of return, a staple of introductory finance courses.
These points do not necessarily represent weaknesses in Investment Banking; they simply help define the book’s purpose and indicate how useful it might be. As a teaching manual for beginning investment bankers, Investment Banking has great merit. The chapters on LBOs and the M&A sale process constitute an outstanding primer, in both clarity and comprehensiveness. From this perspective, that the book was written by industry practitioners is a distinct advantage. Furthermore, an accompanying website offers downloadable Microsoft Excel spreadsheet templates that are likely to be helpful to anyone interested in acquiring certain skills used by investment bankers.
—J.H.T.