STRICTLY CONFIDENTIAL

Investment Banking 101

University of Chicago

November 8, 2006

Table of Contents
SECTION 1 SECTION 2 SECTION 3 SECTION 4 APPENDIX A APPENDIX B APPENDIX C APPENDIX D

Overview of Investment Banking Role of Analyst and How to Get the Job Career Opportunities at UBS Investment Bank UBS Investment Bank: A Global Leader Understanding the Financial Statements Understanding Debt and Equity Valuing a Company Terms to Know

2 9 18 21 27 38 43 49

SECTION 1

Overview of Investment Banking

UBS Investment Bank

The Investment Bank is comprised of...

Investment Banking Revenue Generators Sales & Trading Asset Management Private Equity

Investment Bank

Research Analysts

Support Services

Information Technology/Operations General Corporate Services

What Is Investment Banking?

Investment Banking is primarily about two tasks:

Giving Advice

Raising Capital

Giving Advice
Investment Bankers act as advisors to industry leaders and key investors

Investment Bankers Advise Management Equity holders Debt holders

on Various Types of Transactions Mergers Acquisitions Divestures

Prospective buyers

Equity offerings IPOs follow-on offerings

Debt offerings

Additionally, much advisory work is done away from transactions

Raising Money
Investment Banks act as an intermediary between entities that require capital and investors

Provide Capital Banks Mutual Funds Hedge Funds

Money exchanged for Stocks, Sr Debt, Bonds, Mezzanine

Require Capital Corporations

Private Equity
Pension Funds Insurance Funds Individuals

Governments

Simply put, Investment Bankers get money for people who need itfrom people who have it

Where Do You Fit In?

At UBS, you will work in either an Industry Group or a Product Group

Industry Groups Consumer Products & Retail Energy and Power Financial Institutions Healthcare Global Industrial Group Real Estate Technology/Media/Telecom Transportation & Services

Product Groups Debt Capital Markets Group Equity Capital Markets Group Equity Corporate Finance Team Financial Sponsors Leveraged Finance Global Syndicated Finance Mergers & Acquisitions Private Equity Placement Group

Where Do You Want to Be?

Industry Group Product Group

Passion for a particular industry (i.e. Technology, Media)

Motivated to create a toolbox of skills (i.e. M&A, Equity, LBOs) Focus on building relationships with clients

Desire for a particular skill-set (i.e. M&A, Restructuring)

Would like to be a specialist

Focus on executing transactions

Interact with all product groups

Advise all industry groups

Think macrolook at the BIGGER picture!

Hone in on a particular skill-set!

SECTION 2

Role of Analyst and How to Get the Job

Hierarchy in Investment Banks: Welcome to the Bottom

Managing Director

Executive Director

Director

Associate Director/Associate

Analyst

You!

Team sizes can range from 3 to 5 people and consist of at least an Analyst, mid-level banker (AD or D) and a senior level banker (ED or MD)

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What Would You Do?

Role of an analyst at an investment bank Valuation work Comps Precedents DCF analysis Summarize research analyst views Earnings impact (Accretion/Dilution) of potential (or actual) M&A situations Company profiles Track news and key events Analyze industry trends Attend diligence sessions and management presentations General support for Associate and rest of team General administrative work like setting up meetings or conference calls Employ learned academic skills in real world business situation

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What Makes a Good Analyst?

Efficiency Ability to anticipate work that needs to be accomplished and be proactive Problem solving Strong work ethic Professional presentation and positive attitude Judgment (what makes sense for the client and the firm) Ability to manage expectations Outstanding communication skills Flexibility (including ability to manage expectations)

Personal Skills

Accounting (balance sheet, income statement, statement of cash flows)

Technical Ability

Finance (capital structure analysis: equity vs debt) Valuation techniques (comparable company analysis, precedent transactions, discounted cash flow)

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What Makes the Analyst Job Great (Besides the Hours)?

As an Analyst, you will have the opportunity to
Work with talented and reputable senior bankers Gain insight into finance, business and a career in Investment Banking Work at a top firm with a strong global platform Be a part of an international team, i.e. cross-border deals Work on deals that change the face of an industry Learn the fundamentals that will make you a good banker Be challenged by a steep learning curve Meet and interact with clients at various levels from junior executives through CFOs and CEOs

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There are Many Routes to Wall Street

There is no right formula, but there are ways to maximize your chances of getting a job
Talk to as many people as you can

find out about their experiences and their views seek out classmates who have interned in Investment Banking

focus on how the various banks differentiate themselves in terms of culture, prospects and responsibility given to Analysts

Positioning yourself
It is important to present yourself as having a portfolio of skills and qualities There are several skills and qualities that banks look for technical ability and a strong interest in finance familiarity with Excel strong interpersonal skills ability to work within teams relevant work experience a record of success/achievement

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Qualities that Investment Banks Look for in Candidates

A Strong Interest in Finance
Take courses that demonstrate your interest in finance Convey to an interviewer/contact person that you understand: what investment banking is what an analyst does why you would be a strong candidate for that particular bank

Coursework or Work Experience

Where you used Excel, and if possible, built models Where you have learned to read financial statements That demonstrates that you are comfortable with numbers That shows you are comfortable in front of people (e.g., sales position, leading a seminar, student government) Any work experience during the summer or while attending school that demonstrates your strong work ethic

A Team Player
Team-driven job accomplishments on resume Other obvious team experiences and team successes The objective is to demonstrate that you work well with others

A Record of Success and/or Achievement

Academic GPA, scholarships/honors, test scores

Leadership of student organizations or teams

A high level of athletic accomplishment Community service with a record of achievement

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What Can You do to Develop Some of these Qualities?

Do Your Homework
Understand what Investment Banking is and what an Analyst does so you can decide if it really is for you

talk to individuals who work or have worked within the industry read industry guides such as Vault and Wet Feet each Investment Bank has its own unique culture focus on the places where you fit best and go after those firms

Understand the different firms so that you can choose well

Enroll in Applicable Courses

Take as many finance and accounting courses as possible so that you:

become familiar with financial terminology progress further along the learning curve increase the likelihood of securing a full-time offer

Enrolling in these courses further demonstrates your interest and commitment to the industry

Read the Financial Press

Pick an industry or industries that are of interest to you

familiarize yourself with that industry and a few companies within that sector

Understand an industry and be able to talk about it intelligently Suggested readings: Wall Street Journal, Financial Times, The Economist, Fortune, Business Week, Forbes, etc.

Develop Your Story

You are marketing yourself, and you need to explain clearly why you want to be a banker Point to examples that show you will be successful once you become an Analyst A large extent of an investment banking interview is about testing judgment

what is the reasoning behind the decisions you have made and what have you learned from those experiences investment banks are looking for individuals who can demonstrate that they possess good judgment

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Helpful References
Books About Investment Banking
Auletta, Greed & Glory on Wall Street Bhatawedekhar, Vault Guide to Finance Interviews Brealey & Myers, Principles of Corporate Finance

Burroughs, Barbarians at the Gate

Greenberg, Memos from the Chairman Knee, The Accidental Investment Banker: Inside the Decade that Transformed Wall Street Lott & Prior, Vault.com Career Guide to Investment Banking Naficy, The Fast Track Pratt, Valuing a Business Reed, The Art of Mergers and Acquisitions Rolfe & Troob, Monkey Business: Swinging Through the Wall Street Jungle Smith, Comeback Stewart, Den of Thieves Wall Street Journal Editors, Who's Who and What's What on Wall Street Wasserstein, The Big Deal

Industry Related Websites

www.ubs.com/graduates www.vault.com www.wetfeet.com www.investmentbanking.net

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SECTION 3

Career Opportunities at UBS Investment Bank

UBS Recruiting at the University of Chicago

UBS recruits at University of Chicago for both our New York and our Chicago offices Positions: IBD summer intern New York office Chicago office

Key Dates:

Internship Career Fair:

Resume Drop: Interviews:

Thursday, January 11, 2006

TBD Monday, January 29, 2006

We offer separate resume drops and interview schedules for each office

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APPENDIX A

Understanding the Financial Statements

The Three Financial Statements

There are three key financial statements

Income Statement Shows how much a company makes over a period of time

Balance Sheet

Statement of Cash Flows Shows how much cash a company generates over a period of time

Shows a companys financial position at a single point in time

Revenue Costs = Profit

Assets = Liabilities + Equity

Profit + Non-Cash Costs = Cash Flow

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The Income Statement

The income statement tells you the following information
Line Item Revenue (or Sales) Cost of Goods Sold ( COGS ) Gross Profit Selling, General & Administrative Costs ( SG&A ) EBITDA1 Depreciation & Amortization ( D&A ) Operating Profit (or EBIT)2 Interest Taxes Net Income Earnings per Share ( EPS )
Notes: 1 Earnings Before Interest, Taxes, Depreciation and Amortization 2 Earnings Before Interest and Taxes

$mm 100 (40) 60 (30) 30 (5) 5 (5) (6) 14 $1.40

Comment How much you get paid for the items you sell How much the items you sell cost you How much you have left after paying for items you sell How much it costs to market your goods and run your business A proxy for how much cash your business generates A non-cash cost (more on p.7) How much profit the operations of your company generates Interest you pay on debt Income tax you pay How much you have left after all costs are paid for Net income divided by the number of shares in this case, there would be 10,000,000 shares

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The Balance Sheet

The balance sheet provides a snapshot of your financial position at a single moment in time
Line Item Current Assets Cash 10 20 15 Cash on hand Money your customers owe a company Goods on shelves or in a warehouse waiting to be sold Factories and warehouses and such Accounts Receivable Inventory Long-Term Assets Plant, Propert y & Equipment ( PP&E ) TOTAL ASSETS Current Liabilities Accounts Payable 15 10 125 170 $mm Comment

Assets

Liabilities

Money a company owes its suppliers Debt that must be paid back within a year Debt that must be paid back over a longer period of time than one year

Short-Term Debt Long-Term Liabilities Long-Term Debt TOTAL LIABILITIES Paid-In Capital

95 120 10 40 50 170

Your initial investment in your company Net income you reinvested in your company (e.g., used to buy new factories)

Equity

Retained Earnings TOTAL EQUITY TOTAL LIABILITIES + EQUITY

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In Focus: Depreciation & Amortization

Understanding depreciation & amortization is key to understanding accrual accountingthe rest is just details What is Accrual Accounting? Example: In 2004, you buy a sweater for $30 to sell in 2005
rather than take a charge for $30 in 2004, you

What Is Depreciation & Amortization? Example: You buy a factory for $100mm
you pay cash upfront

wait to take a charge until 2005

this principle is called matching

You expect to use the factory for 20 years So, even though you pay $100mm cash in the first year, you spread the expanse equally over 20 years on your income statement
i.e., $5mm/year for 20 years this $5mm annual cost is called Depreciation

Accrual accounting matches a cost to when you benefit from it (e.g., when you sell something)

In short, depreciation takes a large, one-time cost and matches it over time to sales of goods produced by the factory

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DepreciationA Visualization
The information below shows a visualization of how depreciation works The Initial Purchase The Estimate

$5mm
$5mm $100mm $5mm $5mm

$5mm
$5mm $5mm $5mm

$5mm
$5mm $5mm $5mm

$5mm
$5mm $5mm $5mm

$5mm
$5mm $5mm $5mm

You borrow money to buy a factory for $100mm

You estimate the factory will last 20 years

Year 1
$5mm

By Year 10
$5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm

By Year 20
$5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm

In Year 21

New Factory
$5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm

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Statement of Cash Flows

The statement of cash flows bridges accrual accounting and cash accounting

Line Item

$mm

Comment

Cash Flow from Operations

Net Income Plus: D&A Less: Change in Working Capital Cash Flow from Operations

14 5 (9) 10

See p. 5 See pp. 7 and 8 Ignore for now How much cash your operations generate

Cash Flows from Investing

Less: Capital Expenditures Cash Flow from Investing

(5) (5)

Cash paid for new factories and such How much cash you spend investing in your business

Cash Flows from Financing

Less: Dividend Paid Plus: New Debt Cash Flow from Financing

(2) 20 18

Dividends paid to stockholders Borrowed cash How much cash financing your business costs

Net Change in Cash

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How much your cash on your balance sheet increases/decreases over a given period

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What Is the Difference between Net Income and Cash Flow?

Net Income and Cash Flow are each important in their own special way

Event Buy a sweater for $30 to sell

Net Income

Cash Flow

Beginner

No impact

$30

Sell for $50

+$50 in revenue $30 in COGS $20 in net income

+$50

Advanced

Buy a Factory for $100mm

No impact

$100mm

$10mm Profit in goods produced by Factory

+$10mm in gross profit $5mm in depreciation $5mm in net income

+$10mm

In theory, differences between net income and cash flow will balance out over the long runbut we can learn a good deal from the short-term differences

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Linking the Financial Statements

Key to projecting a companys future financial performance
Financial statements are interactive with income and cash flow statements and prior year balancecan calculate most current balance sheet with income statement and two years balance sheetcan calculate cash flow statement Key interactions net income (income statement) first line of cash flow less dividend provides change in shareholders equity on balance sheet net change in cash (bottom of cash flow)indicates change in cash on balance sheet cash and debt (on balance sheet)average over one year determines interest income and expense (respectively) on income statement

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How Do the Statements Link?

The three financial statements are interlinkedthis is why a financial model includes all three

Income Statement
Revenue Cost of Goods Sold Gross Profit SG&A EBITDA Depreciation & Amortization Operating Profit Interest Taxes Liabilities Assets Cash

Balance Sheet

Statement of Cash Flows

Net Income Plus: Depreciation & Amortization Less: Change in Working Capital

Accounts Receivable Inventory PP&E

Capital Expenditures Dividend Paid New Debt

Accounts Payable Short-Term Debt Long-Term Debt

Change in Cash

Net Income Equity Paid-in Capital Retained Earnings

The above shows some key relationships, but by no means is all inclusivethis is what makes attention to detail in financial modelling so important
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How Bankers Use Financial Statements

Financial statements are basic to much of the work investment bankers do

Some Uses of Financial Statements Profitability margin benchmarking Base for forward projections
(% )
60

Example: Benchmarking

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HPC Mean = 45.0% 1

Accretion/(dilution) analysis Financing models Valuation multiples Potential value creation models Source of data on key industry trends And much, much more

37.6

37.2

35.0

Cosmetics Mean = 32.8% 2

33.6

30

25.7

15

0 Avon
Source: Company reports

L'Oral

Beiersdorf

Clarins

Este Lauder

Notes: 1 Includes Beiersdorf, Clorox, Colgate-Palmolive, Este Lauder, Kimberly-Clark, LOral and P&G 2 Includes Beiersdorf, Clarins, Este Lauder and LOral 3 Based on broker estimates; COGS calculated as purchases and variation in inventories, 75% of personnel costs and depreciation; 2004 figures adjusted per IAS 18 to deduct 828mm in sales incentives and 52mm in cash discounts to customers from net sales and SG&A in compliance with IFRS standards

Investment bankers use financial statements every day

The above chart raises questions about Avon and Este Lauderwhy might they be so far apart on this metric when both sell cosmetics?
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APPENDIX B

Understanding Debt and Equity

What Is Debt?
Debt is one way a company can get cash to fund its business needs

Debt Debt is money that a company borrows

How Does Debt Impact a Company? A company typically has to pay interest

Companies typically borrow money by

issuing bonds or drawing on a credit line (similar to a credit card)

on debt
paying interest requires cash Eventually, the company must repay the debt

another alternative is borrowing new

debt to pay down the original debt

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What Is Equity?
Equity is another way a company can get cash to fund its business needs

Equity Equity is an ownership stake in a company A company can raise money by offering ownership stakes in the company in exchange for cash

How Does Equity Impact a Company? The equity holders of a company together represent 100% of the ownership of a company Owners are entitled to a share of the profits (after debt holders receive interest) Profits may be paid out in the form of dividends or equity holders may vote to reinvest them in the company and grow the business

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What Is a Capital Structure?

Debt and Equity together form a capital structure

Building a Capital Structure A capital structure is built as follows:

Examples of Capital Structures High Debt-to-Cap

Debt 80%

Debt = Total money borrowed

Equity 20%

Equity = Total shares outstanding x share price note: this is called a companys market value

Low Debt-to-Cap
Debt 30%

Equity 70%

Together debt and equity show the total of all a companys fundingor Total Capitalization

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Why Would a Company Issue Debt vs Equity?

Debt and Equity each have strengths and weaknesses as a way of raising money

Debt

Equity

Does not reduce (dilute) current ownership Investors do not require as high a rate of return because it is less risky for investors

Does not require interest payments no bankruptcy risk

Requires stable cash flows to cover interest payments exposes company to bankruptcy risk in bad times

Dilutes current ownership if a company has 100 shares and sells another 100 shares (for a total of 200 shares), the original shareholders own half as much as before Investors require a higher rate of return given less certainty of returns

Balancing these issues creates a unique optimal capital structure for every company
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APPENDIX C

Valuing a Company

Three Key Valuation Methods

Bankers use three key methods to value companies

Comparable Company Analysis

Determines value by looking at similar companies similar scale, industries and markets Use multiples to make apples-to-apples comparisons

Precedent Transactions

Determines value by looking at transactions involving similar companies Also uses multiples to make meaningful comparisons

Discounted Cash Flow ( DCF )

The present value of a companys cash flows Reveals the intrinsic value of a company

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What Are Multiples?

Multiples are used as a way to benchmark valuation for assets of different sizes Imagine the street below with houses for saleare they all fairly priced?
$100K $750K $75K $200K $150K

Example: House Prices on Hillhouse Avenue

$200K
$300K $100K $150K $200K

Given that the houses are different sizes, it is more meaningful to look at their price as a multiplein this case price per square foot
$83 $200 $100 $160 $110

Example: House Prices Using Multiples

$89 $150 $67 $100

$120

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Understanding EV/EBITDA and P/E

Just as real estate agents use price per square foot as a uniform measure for houses, investment bankers use EV/EBITDA and P/E to compare companies of different sizes

EV/EBITDA EV = Enterprise Value

debt (minus cash) + market value of equity represents all sources of funding

P/E P = Stock price

can also use market value of equity

E = Earnings per Share (EPS)

can also use net income

EBITDA = an approximation of cash flow Tells you how valuable a company is based on how much cash the operations generate relative to how much funding they required

Tells you how valuable a companys stock is relative to current EPS

expect companies with higher growth to be

more expensive (i.e., have a higher P/E)

Different industries may rely more on one metric than the other depending on whether cash flow or net income is a more meaningful measure of performance
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Discounted Cash Flow Analysis

Discounted Cash Flow analysis is driven by two key conceptstime value of money and free cash flow Understanding the Time Value of Money Money today is worth more than money tomorrow Understanding Free Cash Flow Free cash flow is cash flow available to all providers of capital (lenders/shareholders) Calculated as: EBITDA +/ =
or you can pay me interest until you

Why might this be the case?

if you owe me $100 and pay today, I can

invest it
if you pay me $100 in one year, I lose a year

Change in Working Capital Capital Expenditures Free Cash Flow

of investing it
so I will take the money now, thank you

pay me

A company can be described as paying back its equity holders over time by generating cash flow
Note: 1 Cash can also be reinvested to grow the business, making ownership share more valuable

Free cash flow is all the cash flow available to pay interest to lenders or dividends1 to shareholders

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Discounted Cash Flow Analysis

The table below shows an example of a discounted cash flow analysis

Discount Rate
The discount rate represents an investors expected rate of return if they invested money today Bankers use the WACC (Weighted Average Cost of Capital) formula as a discount rate takes debt and equity returns into account

Terminal Value
Cuts off projections at a certain point in time

difficult to know business will perform in 20 or 30 years

Effectively a set of simplifying assumptions

typically based on cash flow in last year of projections and expected free cash flow growth thereafter

DCF Example
Terminal Value

$mm

2006

2007

2008

2009

2010

Free Cash Flow Discount Factor (@ 8% ) PV of Free Cash Flow PV = 927

100 1.00 100

120 0.93 111

140 0.86 120

180 0.79 143

200 0.74 147

450 0.68 306

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APPENDIX D

Terms to Know

Terms to Know
Product group investment banking group that focuses on a method of transaction or financing tool mergers & acquisitions, equity capital markets, debt capital markets cover all industry groups Industry group investment banking group that focuses on a specific industry consumer products, media, telecom, global industrial covers all product groups Premium the amount at which something is valued above its par or nominal value Discount the amount at which something is valued below its par or nominal value Bull market characterized by prolonged rise in prices of stocks, bonds, or commodities buy market with high trading volumes considered a good market because investors make money investors charge ahead like bulls

Bear market characterized by prolonged period of falling prices for stocks, bonds, or commodities sell market due to anticipation of declining market activity interest rates on bonds increase during such a period investors choose to avoid risk, buy bonds considered a bad market because investors lose money investors hibernate like bears
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Terms to Know
Equity value equity value = share price x number of shares outstanding value of shareholders interest Enterprise value enterprise value = equity value + debt cash includes all forms of capital main difference between equity value & enterprise value: enterprise value includes net debt (debt cash) EBIT (Earnings Before Interest & Taxes) also called operating income income from operations before the effects of financing and taxes measure of profitability independent of capital structure

EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) income from operations before the effects of financing, taxes, and non-cash expenses proxy for free cash flow, but a poor one
Multiples also called ratios provide a measure of relative valuation to an underlying financial (operating) statistic equation: valuation statistic/operating statistic Enterprise Value/Revenues, Enterprise Value/EBITDA, P/E allow for relative comparisons between similar companies equation: operating statistic/revenues Gross Profit/Revenues, EBITDA/Revenues, EBIT/Revenues, Net Income/Revenues

Margins

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Terms to Know
Free cash flow cash flow available to all providers of finance one measurement used in forecasting future performance EBITDA is a proxy for free cash flow, but a poor one Working capital working capital = current assets current liabilities funds invested in a companys cash finances the cash conversion cycle of a business: time required to convert raw materials into finished goods, finished goods into sales, and accounts receivables into cash

WACC (Weighted Average Cost of Capital) used in determining discount rate employed to calculate the net present value (NPV) of future cash flows in discounted cash flow (DCF) analysis return commensurate with risk of the investment
Time value of money equations present value (PV) = FV/(1 + r) future value (FV) = PV * (1 + r) note: r = discount rate

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Contact Information

UBS Securities LLC 299 Park Avenue New York NY 10171 Tel. +1-212-821 3000

www.ubs.com

UBS Investment Bank is a business group of UBS AG UBS Securities LLC is a subsidiary of UBS AG

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