Colgate University

Discussion Materials Prepared For

Investment Banking

February 19, 2011

“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer and member of FINRA and SIPC, and, in other jurisdictions, locally registered entities.

Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed.

These materials have been prepared by one or more subsidiaries of Bank of America Corporation for the client or potential client to whom such materials are directly addressed and delivered (the “Company”) in connection with an actual or potential mandate or engagement and may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with us. These materials are based on information provided by or on behalf of the Company and/or other potential transaction participants, from public sources or otherwise reviewed by us. We assume no responsibility for independent investigation or verification of such information (including, without limitation, data from third party suppliers) and have relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance prepared by or reviewed with the managements of the Company and/or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. These materials were designed for use by specific persons familiar with the business and affairs of the Company and are being furnished and should be considered only in connection with other information, oral or written, being provided by us in connection herewith. These materials are not intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to, any transaction or other matter. These materials do not constitute an offer or solicitation to sell or purchase any securities and are not a commitment by Bank of America Corporation or any of its affiliates to provide or arrange any financing for any transaction or to purchase any security in connection therewith. These materials are for discussion purposes only and are subject to our review and assessment from a legal, compliance, accounting policy and risk perspective, as appropriate, following our discussion with the Company. We assume no obligation to update or otherwise revise these materials. These materials have not been prepared with a view toward public disclosure under applicable securities laws or otherwise, are intended for the benefit and use of the Company, and may not be reproduced, disseminated, quoted or referred to, in whole or in part, without our prior written consent. These materials may not reflect information known to other professionals in other business areas of Bank of America Corporation and its affiliates.

Bank of America Corporation and its affiliates (collectively, the “BAC Group”) comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreign exchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and strategic advisory services and other commercial services and products to a wide range of corporations, governments and individuals, domestically and offshore, from which conflicting interests or duties, or a perception thereof, may arise. In the ordinary course of these activities, parts of the BAC Group at any time may invest on a principal basis or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions, for their own accounts or the accounts of customers, in debt, equity or other securities or financial instruments (including derivatives, bank loans or other obligations) of the Company, potential counterparties or any other company that may be involved in a transaction. Products and services that may be referenced in the accompanying materials may be provided through one or more affiliates of Bank of America Corporation. We have adopted policies and guidelines designed to preserve the independence of our research analysts. These policies prohibit employees from offering research coverage, a favorable research rating or a specific price target or offering to change a research rating or price target as consideration for or an inducement to obtain business or other compensation. We are required to obtain, verify and record certain information that identifies the Company, which information includes the name and address of the Company and other information that will allow us to identify the Company in accordance, as applicable, with the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) and such other laws, rules and regulations as applicable within and outside the United States.

We do not provide legal, compliance, tax or accounting advice. Accordingly, any statements contained herein as to tax matters were neither written nor intended by us to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on such taxpayer. If any person uses or refers to any such tax statement in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any taxpayer, then the statement expressed herein is being delivered to support the promotion or marketing of the transaction or matter addressed and the recipient should seek advice based on its particular circumstances from an independent tax advisor. Notwithstanding anything that may appear herein or in other materials to the contrary, the Company shall be permitted to disclose the tax treatment and tax structure of a transaction (including any materials, opinions or analyses relating to such tax treatment or tax structure, but without disclosure of identifying information or, except to the extent relating to such tax structure or tax treatment, any nonpublic commercial or financial information) on and after the earliest to occur of the date of (i) public announcement of discussions relating to such transaction, (ii) public announcement of such transaction or (iii) execution of a definitive agreement (with or without conditions) to enter into such transaction; provided, however, that if such transaction is not consummated for any reason, the provisions of this sentence shall cease to apply. Copyright 2010 Bank of America Corporation.

Notice to RecipientConfidential

Table of Contents

Investment BankingDiscussion Materials Prepared For Colgate University

1. Overview of Investment Banking

2. Role of an Analyst

3. Questions?

Appendix

A. Analyst Success Factors

B. Valuation Basics

C. Interview Skills and Preparation

Overview of Investment Banking

1

Overview of Investment BankingSo What Do Investment Bankers Do?

I can sum up what we do in two words and one picture: Ari Gold

We don’t create anything and we don’t buy anything; we just sell things that aren’t ours to begin with

If the business world were like Entourage, bankers would be the agents, private equity firms and large companies would be the studios, and companies would be the actors and movies

And If You Haven’t Seen Entourage…

– Think of investment bankers like real estate agents but for companies instead of houses

– Just as a real estate agent introduces buyers and sellers of property, bankers introduce buyers and sellers of companies and try to make a deal happen

– And just like real estate agents, the only thing at stake is our time – we have no money invested on either side

But What Will You Do as an Analyst or Associate?

– The above is the “high-level” view of what investment bankers do

– As a junior banker, you’re more like Lloyd: you grab coffee for Ari and take care of his grunt work____________________Source: MergersAndInquisitions.com.

2

Overview of Investment BankingThe Basics

Providers of Capital:Individuals

Pension FundsInsurance Companies

Asset ManagersCorporate Treasuries

WALL STREET

Users of Capital:CorporationsGovernmentsMunicipalities

3

Overview of Investment BankingFunctions of an Investment Bank

INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING

RESEARCH

INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADING

RESEARCH

PRIVATE CLIENTPRIVATE CLIENT ASSET MGMTASSET MGMT

Sell equity and debt securities,

provide research

Sell equity and debt securities,

provide research

AdviceFinancial planning Buy/sell securities

Sell equity and debt securities,

provide research

CORPS GOVTS MUNIS

CORPS GOVTS MUNIS

Individuals InstitutionsInvest indirectly by buying mutual funds, insurance policies, etc.

Invest dire

ctly Invest directly

Corporate Finance Services Strategic Advisory

Underwrite and Place Securities

4

Overview of Investment BankingMergers & Acquisitions Transaction

RESEARCHRESEARCH CAPITAL MARKETSCAPITAL MARKETS

CORPCLIENTCORP

CLIENT

Communicate

Strategize

Cooperate to originate

and/or financetransaction

and guide andunderstand

marketreaction

INVESTMENT BANKINGINVESTMENT BANKING

Advise Negotiate

Communicate

TARGETTARGET

SHAREHOLDERS OF EACH COMPANY

SALES & TRADINGSALES & TRADING

Cooperate to finance transactio

n and understan

dmarket reaction

5

Overview of Investment BankingDebt or Equity Transaction

CAPITAL MARKETSCAPITAL MARKETS

Constantcontact inorigination

and execution

Advise

CORPCLIENTCORP

CLIENT

I. BANKINGI. BANKING

OriginateAdviseDue diligence

TRADINGTRADING WALL STREETWALL STREET

SYNDICATESYNDICATE

SALESSALES

RESEARCHRESEARCH

Roadshow

$$$$

6

Overview of Investment BankingHow It All Works Together

Equity Capital Markets

Debt Capital Markets

InvestorsIssuersCorporate & Investment

Banking

Fixed Income Research

Equity Research

Sales and Trading

Information Wall

Syndicate

Seeking advice from bankers as well as access to permanent and working capital. Include Global Fortune 500 companies, as well as sovereigns, municipalities, and sponsors, who operate globally.

Separates private side of GBAM activities (left side) from public side of activities (right side). Compliance and legal ensure flow of information between the two sides does not occur. Consists of global

institutional firms such as mutual funds, pension funds, hedge funds, sovereign wealth funds, and central banks, as well as financial institutions and corporate clients.

Bankers are the relationship owners of issuing clients and sponsors. Investment Bankers typically work with CEOs & Boards as an advisor on firm strategy (M&A, divestiture) and Capital Raising. Corporate Bankers typically work with CFOs and Treasurers on working capital, treasury, and risk management solutions.

Form the capital raising function within the bank. Understands current market environment for capital and structures deals such that issuers are gaining the cheapest access to capital while investors are earning a fair return for respective risks. Origination and structuring of securities occurs here.

Research prepares independent views on Equity, Fixed Income, and Macro markets, valued by investing clients as well as internal Sales & Trading teams. Sales interfaces with institutional clients to provide access to the bank’s trading and product platform. Trading maintains market making activity in numerous equity, credit, rates, FX, commodity, and mortgage securities.

Role of an Analyst

7

Role of an AnalystInvestment Banking at Bank of America Merrill Lynch

Industry Focus

Global Corporate & Investment Banking

(“GCIB”)

Financial Sponsors

Consumer &

Retail(“C&R”)

Financial Institutio

ns(“FIG”)

Healthcare

Energy & Power

(“E&P”)

Global Industrial

s(“GIG”)

Media & Telecom(“M&T”)

Leveraged Finance

Private Equity

Real Estate

Mergers & Acquisitions

(“M&A”)

Debt Capital Markets(“DCM”)

Equity Capital Markets(“ECM”)

Product Focus

Typically a two to three year commitment as an Analyst with potential to remain with the firm depending on performance

Technology

8

Role of an AnalystBanking Hierarchy

What does everyone else do?

Directors and Managing Directors manage the teams, go to meetings, and do lots of strategic thinking/negotiating

VPs draw up pages and do strategic thinking; lots of meetings/presentation

Associates check the analyst’s work and tries to do VP-level work, occasionally presenting at meetings

What does an analyst do?

An analyst is the numbers and graphics maven

– Quantitative analysis (standalone operating models, merger models, LBO models, discounted cash flows, specialty models)

– Industry research

– Prepare presentations and pitches (board meetings, fairness opinions, management presentations, conference materials)

– Conduct due diligence and process results

– Organize roadshows for marketing transactions with corporate clients

Analyst

Associate

Vice President

Director

Managing Director

9

Role of an AnalystYour Role as An Analyst

FinancialAnalysis

IndustryResearch

Presentation Preparation

Transaction Execution

Client Support

Financial Statement Analysis

Comparable Company Analysis

Financial Forecasts and Projections

Modeling

Competitive Analyses

Background Description

Briefing Materials

Drafting and Editing

Graphic Design

Presentation Support

Drafting Documents

Due Diligence

Marketing Material Preparation

Roadshow Logistics

Acquisition Project Support

Strategic Studies

Special Projects

10

Role of an AnalystValuation Methodologies

ValuationMethodologies

Publicly Traded Comparable

Companies Analysis

ComparableTransactions Analysis

DiscountedCash Flow Analysis

Leveraged Buyout/Recap Analysis

Other

"Public Market Valuation"

Value based on market trading multiples of comparable companies

Applied using historical and prospective multiples

Does not include a control premium

"Private Market Valuation"

Value based on multiples paid for comparable companies in sale transactions

Includes control premium

"Intrinsic" value of business

Present value of projected free cash flows

Incorporates both short-term and long-term expected performance

Risk in cash flows and capital structure captured in discount rate

Value to a financial/LBO buyer

Value based on debt repayment and return on equity investment

Liquidation analysis

Break-up / Sum-of-the-Parts (SOTP) analysis

Historical trading performance

Expected IPO valuation

EPS impact (accretion / dilution analysis)

Dividend discount method

11

Role of an AnalystCore Competencies / Qualities

STRATEGIC THINKING BUSINESS RESULTS PEOPLE LEADERSHIP PERSONAL EFFECTIVENESS

Business Knowledge:

– Basic knowledge of products and sectors

– Knowledge of relevant tools, techniques and processes

Innovation & Creativity:

– Seek creative approaches to efficiently and effectively perform analytical tasks

Strategic Vision:

– Grasp macro factors impacting relevant industry and/or product

– Understand overall goals of transactions

Adaptability:

– Strive to better understand concepts and improve on areas of weakness

– Genuine interest in learning

Analytical Ability:

– Demonstrate strong quantitative abilities

– Rapidly process and synthesize information and identify key issues

Change Leadership: – Continually seek to do things

better Client Relationships:

– Understand overall goals and nature of specific client relationships

– Responsive in supporting client needs

Execution:

– Deliver required outputs on time and at required quality and accuracy

– Effectively work on several projects without sacrificing quality or service

Corporate Citizenship:

– Timely participation in mandated training programs

– Comply with policies and procedures

– Actively participate in efforts to improve institution and its reputation

Collaboration:

– Work well with others and share ideas

Talent Building: – Participate in recruiting and

training activities

Character:

– Behave in a way that leads others to trust you

– Calm and focused under pressure

– Demonstrate respect for individuals

Communication:

– Communicate effectively in formal and informal settings

– Proactively communicate and manage expectations

Courage:

– Confidence to speak up on issues

Decisiveness:

– Demonstrate good judgment – Seek out necessary

expertise to ensure decisions are made rapidly

Energy & Drive:

– Demonstrate personal commitment to the work

– Demonstrate positive attitude

Questions?

12

Questions?Resources

Books

– The Vault Career Guide to Investment Banking – should be your bible if you’re interviewing

– The Accidental Investment Banker: Inside the Decade that Transformed Wall Street by Jonathan Knee – one man’s foray into investment banking; gives a good history and overview through the lens of his experience

– Barbarians at the Gate By Bryan Burrough and John Helyar – story of the landmark LBO of RJR Nabisco

– Liars Poker: Rising Through the Wreckage on Wall Street By Michael Lewis – called “essential reading for a prospective investment banker interested in the sales and trading side”

Online

– www.mergersandinquisitions.com – amusing yet insightful answers to every question you ever had about investment banking and the finance world

– www.wallst-training.com/resources.html – overviews of more technical concepts, great for interview prep

– dealbook.nytimes.com – goings on in the investment banking world

– www.dealbreaker.com – Perez Hilton for investment bankers

Other: NYTimes, Wall Street Journal, The Economist, Financial Times, etc.

Appendix

Analyst Success Factors

13

Analyst Success Factors

A Great Analyst is Someone Who…

Tries to step into the shoes of the rank above

Has a positive attitude

Is eager to learn

Is reliable

Is responsible

Is accessible (carries Blackberry at all times, communicates well and on time)

Is proactive

Is resourceful

Asks insightful questions

Has an inquiring mind and is a thorough thinker

Is efficient, organized, has great attention to detail, and is self-sufficient/independent

Willing to do grunt work to highest standard

Leverages off peers and other analysts

Accepts the unpredictability of the schedule (don’t feel victimized by hours works and does not flaunt hours worked)

Needs little sleep, has great sense of humor!

Is always presentable and well-groomed

14

Analyst Success Factors

I. Business Acumen

Clearly understands the needs and complexity of the business they are serving

Develops a compelling sense of purpose and direction

Basic knowledge of products and sectors

Knowledge of relevant tools, techniques and processes

II. Quantitative/Technical Skills

Demonstrates strong quantitative ability

Rapidly processes and synthesizes information and identifies key issues

Delivers required output on time and at required quality and accuracy levels

Effectively works on several activities without sacrificing quality or service

Clear attention to detail

III. Leadership/Attitude

Collaborates well with others and shares ideas

Exhibits corporate citizenship; participates in mandated training programs, compiles with firm policies

Communicates effectively in formal and informal settings; proactive in managing expectations

Demonstrates good judgment and decision making capabilities

Has a positive attitude and strong commitment to the work

Behaves in a way that leads others to trust them

Is calm and focused under pressure

Works well amidst ambiguity

Results oriented

Your Report Card (Formal)

15

Analyst Success Factors

Things to Implement on the First Day

Attitude

Display a sense of urgency and be enthusiastic about everything you do

Demonstrate a positive attitude and be willing to learn as much as you can

Inspire Confidence

FIRST IMPRESSIONS ARE LASTING!!!

Be available (check voicemails and emails; let people know where you are; call in when you are out)

Be accurate (CHECK YOUR WORK)

Be reliable

Have an opinion

Career Development

Be proactive and introduce yourself to the members of the group

Establish a regular dialogue with your staffer

– What types of projects/sectors have you worked on?

– What types of projects/sectors would you like get more exposure to?

Establish a regular dialogue with your mentor

16

Analyst Success Factors

Take Ownership

Know the Objective

Why is the team working on this project? What’s the goal for the bank? What’s the history with the client? What’s the angle?

Demonstrate Basic Knowledge of the Company / Industry

Know key financial data (revenue, EBITDA, equity value, enterprise value, trading multiples, etc.)

Read a few research reports on your company to get up to speed

Who are the major competitors and end markets?

Focus on Quality Control

Read work that comes in from other groups. Check it.

Read the details that senior people don’t have time to read (that’s how you get invited to meetings)

Train Yourself

Never delegate something that you can’t do yourself

Study every piece of analysis that crosses your desk until you understand it

Pick your way through the model

Seek out and study precedents

Read training manuals

Email

Run spell check (set email to run auto check)

Check the attachment before hitting send

Be careful of “Reply to All” (especially for distribution lists)

Use a professional tone / be conservative (e-mail can be interpreted differently)

NO PERSONAL EMAILS

Voicemail

Sending: Organize thoughts beforehand and get to the point

Receiving: Check voicemail often

Meetings

Always consider logistics in advance (building access, dial-in numbers, conference room reservations)

17

Analyst Success Factors

Communication

STOP

18

Analyst Success Factors

Organization

Actively Manage Your Time

Map out all of the steps of task at hand

– Estimate the time it will take to complete each step

– Communicate the schedule / allow teammates to plan accordingly

Budget time for associates to review and give comments before distributing to broader team

Manage Conflicts Early

Communicate time conflicts early and often – most conflicts can be managed

Don’t decide yourself what’s more important

Keep Lists

Write everything down (first casualty of fatigue is memory)

Review and prioritize your lists daily

Read your list often during the day

Organize As You Go

Don’t push it off until later

Keep your desk and projects organized and easily accessible

Save copies of all e-mails

Valuation Basics

19

Valuation BasicsFirm Value vs. Equity Value

EnterpriseValue =

Net Debt

Equity Value+

20

Valuation BasicsAirline Public Comparables

($ in millions, except per share amounts)

____________________(1) Enterprise Value = Market Value of Equity + Short-term Debt + Long-term Debt + Preferred Equity + Minority Interest - Cash and Marketable Securities.(2) Estimates obtained from Wall Street research and calendarized when necessary.(3) Earnings estimates and EPS growth obtained from FactSet Fundamentals and calendarized when necessary.

Public comparables give a useful understanding of the company’s strengths and weaknesses against a peer group

Adj. FactSet Consensus 5-Year

Price as of Market Enterprise Adj. EV / EBITDAR (2) Price / Earnings (3) Growth

Company 1/20/2011 Value Value (1) 2011E 2012E 2011E 2012E Rate (3)

Legacy MajorsDelta Air Lines $11.61 $9,304.8 $23,523.8 4.7x 4.5x 5.4x 4.6x 3.0%United Continental 24.18 8,334.8 19,606.9 3.3 3.0 5.1 4.8 3.0%AMR Corp. 7.53 2,644.1 13,558.7 5.1 4.8 NM 9.5 7.5%US Airways 10.25 1,936.6 9,140.8 4.5 4.3 4.3 3.8 3.0%Alaska Air Group 61.25 2,365.8 3,684.8 3.8 3.6 8.6 8.4 9.0%Hawaiian Airlines 7.50 388.6 1,143.4 3.1 2.8 7.6 7.2 6.7%

Average 4.1x 3.8x 6.2x 6.4x 5.4%Median 4.1 4.0 5.4x 6.0x 4.8%

Low Cost CarriersSouthwest Airlines $12.79 $9,555.4 $10,955.9 4.6x 4.0x 14.4x 13.5x 8.3%JetBlue Airways 6.49 2,058.8 5,135.5 5.8 5.6 13.0 14.0 20.0%AirTran 7.47 1,119.8 3,431.1 7.2 7.2 18.6 19.4 9.8%Allegiant 47.13 909.1 833.7 5.1 4.5 11.8 9.7 10.3%

Average 5.7x 5.3x 14.5x 14.2x 12.1%Median 5.4 5.0 13.7 13.8 10.0%

Recent Aerospace Sector Acquisition Transactions

LTM EBITDA Multiple

Strategic Sponsor____________________Source: Company filings and Wall Street research.(1) Transaction announced in March 2010 and still not closed.

Valuation Basics

21

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Acquisition comparables give a useful understanding of where the deal “fits” compared to similar transactions

2009 2010

Summary of Analysis

Advantages

22

Valuation BasicsDCF Analysis

Disadvantages

A Discounted Cash Flow Analysis (“DCF”) establishes the “intrinsic value” of the operating assets of a business

A DCF is an analysis which represents the present value of each of the (1) free cash flows of the business over the projection period and (2) terminal value

– Free Cash Flows (“FCF”): Cash flows available to all providers of the capital to the business

– Terminal value: Portion of the total value of the business beyond the specific forecast period

Given the central role of long-term assumptions in the DCF, the results of a DCF should be presented as a range of values as opposed to a single point estimate

DCF is more flexible than other valuation approaches in terms of its ability to incorporate the unique attributes of a business, but it is also very sensitive to estimates of cash flow, terminal value and discount rate

Provides an objective framework for assessing risk and cash flows to estimate value

Requires users to analyze key drivers of value

May be used when no “pure play” comparable companies are available

Extremely sensitive to cash flow projections which may be unrealistic

Terminal value may be distorted by incorrect estimations of either long-term cash flow or reasonable terminal multiples

Validity of the discount rate depends of assumptions for beta and the market risk premium

23

Valuation BasicsDCF - Methodology

Derive an ImpliedValuation Range

Forecast FreeCash Flow

EstimateTerminal Value

EstimateCost of Capital

Identify components of free cash flow

Develop historical perspective

Determine forecast assumptions and scenarios

Decide forecast horizon, typically 5 to 10 years

Prepare forecast

Determine best way to estimate terminal value

Exit multiple

Perpetuity

Exit multiples implied by comparable acquisitions

Perpetuity growth rate should be consistent with inflation predictions

Examine terminal value contribution to analysis

Develop target capital structure

Estimate cost of equity(CAPM)

Estimate cost of non-equity sources of capital

Determine appropriate tax rate

Calculate WACC

Calculate present value of operating assets by discounting cash flows and terminal value to present

Adjust value to reflect other assets (e.g. cash) and liabilities (e.g. debt) to result in value of equity

Perform sensitivity analyses

Interpret results within decision context

24

Valuation BasicsDCF - Calculating Free Cash Flow

EBITLess: (–) Cash Taxes Equals: (=) Net Operating Profit After Tax (NOPAT)

Add: (+) Depreciation & Amortization(+) Other noncash charges

Less: (-) Capex(-) Change in net working capital

Equals: (=) Unlevered Free Cash Flow

EBITLess: (–) Cash Taxes Equals: (=) Net Operating Profit After Tax (NOPAT)

Add: (+) Depreciation & Amortization(+) Other noncash charges

Less: (-) Capex(-) Change in net working capital

Equals: (=) Unlevered Free Cash Flow

Unlevered Free Cash Flow Illustrative Unlevered FCF Calculation

Unlevered Free Cash Flow is the cash generated:

By all of the operating assets employed in the business

Before the effects of financing (i.e. unlevered)

Thus, FCF represents the cash available to be distributed to all providers of capital

Why Unlevered Free Cash Flow vs. Discounted Earnings…

Near term, cash flow can differ substantially from accounting earnings

Capex vs. depreciation

Non-cash items included in earnings

Earnings are more easily manipulated than cash flow

Provisions / accruals

Revenue recognition policies

Inventory accounting (LIFO vs. FIFO)

Off-balance sheet financing and special purpose vehicles

Valuation Basics

Acquisition funded mostly with debt

"Leverage" of 3.0 to 5.0x EBITDA

Smaller amount of equity (typically, 30-40% — 60-70% Debt)

Value created primarily through "deleveraging"

Strong cash flows need to service debt

Viable "exit strategy" in 3-5 years

Common sources of debt financing

Bank debt (senior)

– Term loans and revolving credit facility

High yield bonds (subordinated)

Generally supplies a "floor valuation"

What can a " financial sponsor" afford to pay?

Targets often underperforming or "out of favor" companies

LBO Analysis

A leveraged buyout occurs when a financial sponsor acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage. The cash flow is used to de-lever the company increasing the implied equity value.

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Valuation BasicsLBO - Capital Structure Alternatives

Components of Capital

Senior Debt

Revolving

Term

Sample inputs

30%–50% of total capital

LIBOR + 200–400

5–8 years

Typically supplied by an investment or commercial bank

Usually secured/most restrictive covenants

Amortizing 5- to 8-year tenor

First in line at liquidation

Lowest coupon

Subordinated Debt

Senior/sub notes

Discount notes

Sample inputs

25%–35% of total capital

T + 350–650

7–10 years

Typically supplied by an investment/commercial bank or mezzanine fund

Riskier debt/typically unsecured

Primarily bullet structures

Typical tenor is 10-year

High coupon

Mezzanine Securities

Sub. Debt (conv.)

Preferred stock

PIK

Warrants

Sample inputs

0%–35% total capital

High teens/low 20s

7–10+ years

Typically supplied by an investment or commercial bank or a mezzanine fund (often sponsor-affiliated)

Multiple forms: Convertible debt, exchangeable debt, convertible preferred stock, PIK securities and warrants

Expected IRR in the 15%–20% range

Common Equity

Sample inputs

20%–40% of total capital

20%–30% IRR

5–7 year horizon

Typically supplied by a financial sponsor

Highest risk/cost of capital

Sometimes "stapled" to high-yield paper to attract broader investor group

Minimum annual returns >20%

Interview Skills and Preparation

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Interview Skills and PreparationOverview

Interview is the most important element in the job search process

Opportunity for you to determine if investment banking and, more specifically, if “XYZ Bank” is a good “fit”

General Pointers

Be prepared: Know as much about the investment bank and position as possible

Know yourself

Be honest

Have a positive attitude

Demonstrate interest

Professionalism

Practice

Ask good and relevant questions

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Interview Skills and PreparationWhat Investment Banks Typically Desire in an Analyst

Strong communication skills (written and oral)

Motivation, enthusiasm, knowledge of firm and industry

Accomplishment (academic as well as personal)

Teamwork, group skills, respect for individuals

Strong work ethic and integrity

Quantitative/technical skills

Self-confidence and positive attitude

Time management skills, ability to multi-task

Creativity

Personality (sense of humor, cheerfulness and flexibility in new situations)

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Interview Skills and PreparationGeneral Takeaways

Do your own due diligence

Do you like the type of work required of a successful analyst?

Are you comfortable with the lifestyle? (long hours, stressful at times, multi-tasking)

How do you feel about New York city or other locations? (NYC is expensive, crowded)

Cultural fit of investment bank? (group dynamics, diversity, individuality, professionalism)

Opportunities? (training program, responsibilities, deal flow, international, transaction mix)

Be prepared

Talk with friends, family, professors, recruiters, and schedule office visits and externships

Read annual reports, research, recruiting literature, articles and Web site

List differences between firms and key criteria for making your own decision

Understand what investment banks do and your role in the process

Understand yourself, what motivates you, your strengths and weaknesses and be able to articulate those points

Practice interviewing – thinking it and speaking it can be entirely different

Make the decision for yourself, not someone else – and avoid the “herd mentality”

Relax, trust yourself, and have fun!