targets.
Investment bankers, in large part, are hired due to their contacts in the business community and their ability to use financial modeling analysis to find deals that make economic sense. In Chapter 14, we explore many of the tools used by investment bankers to identify companies that are ripe for a buyout and discover ways to pair them up with the buyers.
Putting Investment Banking to Work
CEOs may be good at the things they do — such as controlling costs, finding new products, tapping new markets, and playing golf — but when it comes to investment banking operations, including tapping investors for money or cooking up M&A deals, CEOs often find themselves well out of their comfort zone.
Because investment bankers are dedicated to being the conduit between companies and investors’ money, they’re expected to be the experts on all things financial. Investment bankers must be able to go beyond just what a company’s management team is telling them in order to independently understand a business situation. Starting in Chapter 15, you discover some of the most advanced skills that the best investment bankers have.
Staying in compliance with the rules
Perhaps the most important thing for investment bankers to do is stay out of jail. And these days that seems to be tougher than it sounds, as regulators are routinely fining investment bankers for not complying with the rules. It’s a sensitive area because the investment banking business is filled with rules and regulations. Running afoul of these regulations is usually a one-way ticket to jail, or at least enough to be prevented from engaging in investment banking in the future. You find out how to avoid wearing jailbird pinstripes in Chapter 15.
Looking beyond the published financial statements
Financial statements can sometimes be the only things investment bankers can trust. Company management has a big incentive to puff their chests and try to act like their companies are performing better than they really are. And even investors can be misleading, aggravating for change at the company even if things are going fine.
But despite the value of financial statements to investment bankers, these documents, too, need to be looked at with at least an ounce — and at times pounds — of skepticism. Although it’s not common, executives at companies sometimes attempt to fudge the numbers to mislead investors or (gasp!) investment bankers. When a company’s performance is faltering, and investors are likely to be disappointed, some dishonest executives and accountants may decide to distort the financial results through liberal interpretations of accounting or outright fraud.
Individual investors, who may not take the time to read the financials, can often fall for such accounting gimmicks. But investment bankers are held to a much higher standard and are generally considered to be above the tricks. In Chapter 16, you find out some of the ways investment bankers can look for accounting sleight of hand in the financial statements and avoid getting duped.
Making adjustments to financial statements for comparability
Accountants don’t like surprises. Some accountants may be startled if a pen they thought had blue ink turns out to be black. But although the predictability of accountants may be subject for good-natured ribbing at cocktail parties, that uniformity is essential in financial analysis.
To accurately compare and contrast companies in different industries — something investment bankers have to do frequently — the companies’ financials must be subject to the same ground rules. Accounting rules usually do a pretty good job aligning the financials of different companies. Generally accepted accounting principles (GAAP) are a set of accounting standards that attempt to create a measure of performance that is somewhat comparable across industries.
But despite the value of GAAP, it’s up to investment bankers to take greater efforts to make sure that the financial results of companies are truly apples-to-apples comparisons.
In Chapter 17, you find out ways that investment bankers are able to modify and adjust the financial results of companies to make their results comparable. These techniques, as well as everything you read about in this book, all come into play when you try your hand at an investment banking analysis case study in Chapter 18.
Chapter 2
The Purpose of Investment Banking: What Investment Bankers Do
IN THIS CHAPTER
Investment banking is the grease that oils the capitalistic machine. Businesses, entrepreneurs, governments, schools, and other institutions that hope to build and expand need cash to make it happen. But in the financial version of the chicken-and-the-egg dilemma, sometimes the people with the great plans don’t have the cash to get started.
And that’s exactly where investment bankers come in. Investment bankers find ways to put together investors with money, who would like a return on that money, with the people building projects.
Investment
