An Introduction to Investment Banks, Hedge Funds, and Private Equity: The New Paradigm

Front matter......Page 2
Copyright
......Page 5
Dedication
......Page 6
Contents......Page 8
Target Audience......Page 10
The World Has Changed......Page 11
Section One: Investment Banking......Page 12
Section Three: Cases......Page 13
Acknowledgments......Page 14
SECTION I Investment Banking......Page 17

Overview of Investment Banking......Page 19
Case Focus......Page 20
Other Investment Banking Firms......Page 22
GM to Receive $14 Billion in Cash Over Three-Year Period
......Page 378
M&A Advisory......Page 24
Capital Markets Group......Page 27
Equity Capital Markets......Page 28
Debt Capital Markets......Page 29
M&A Group......Page 30
Equities......Page 31
Principal Investing......Page 32
Asset Management Division......Page 33
Co-Investments in Asset Management Division Funds......Page 34
Questions......Page 35
Fund of Funds......Page 37
Growing Hedge Fund Activism......Page 38
The Rainmakers: Investment Bankers and Power Brokers......Page 343
The Registration Statement......Page 39
Financial Innovation......Page 228
Mitigating Systemic Risk......Page 40
Due Diligence......Page 41
Gun-Jumping Rules......Page 42
The Glass-Steagall Act......Page 43
Separation of Commercial and Investment Banks
......Page 44
Commodities......Page 45
Chandler Act......Page 46
Recent Developments in Securities Regulations......Page 47
The Gramm-Leach-Bliley Act......Page 48
Regulation Analyst Certification......Page 49
Global Research Settlement......Page 50
Bear Stearns Collapse......Page 51
Japan......Page 52
1998-Present......Page 53
China......Page 54
Questions......Page 55
Capital Markets Financings......Page 57
Volkswagen Equity Derivatives......Page 527
Regulation......Page 62
CSX vs. TCI......Page 63
China's Financial Market......Page 64
Regulation FD......Page 65
Babies "R" Us
......Page 545
Equity Office Properties (EOP)......Page 347
Rationale for Issuing Optionally Converting Convertible Bonds
......Page 71
Summary......Page 72
Fees to Bankers......Page 73
Corporate Rationale for Completing Private Equity Transactions......Page 356
Brazil's IPO Market......Page 75
Green Shoe Overallotment Option......Page 76
Questions......Page 77
Mergers and Acquisitions......Page 79
PIPEs......Page 377
Creating Value......Page 80
Strategic Rationale......Page 81
The Rise and Fall of Kmart......Page 486
Credit Ratings and Acquisition Currency......Page 82
Social and Constituent Considerations......Page 83
Role of Investment Bankers......Page 84
Fairness Opinion......Page 85
Tender Offer......Page 86
Due Diligence and Documentation......Page 87
Market-Making......Page 88
Questions......Page 89
Tax-Free Reorganizations......Page 90
Carve-Out......Page 91
Takeover Defenses......Page 92
Risk Arbitrage......Page 93
Valuation......Page 94
Comparable Company Analysis......Page 95
Comparable Transactions Analysis......Page 96
Discounted Cash Flow Analysis......Page 97
Leveraged Buyout Analysis......Page 98
Sum-of-the-Parts Analysis......Page 99
Valuation Summary......Page 100
The Assignment......Page 102
ServiceCo LawnCare Segment......Page 106
Other Operations and Corporate Segment......Page 107
Competition......Page 108
Major Customers......Page 109
Questions......Page 111
Trading......Page 113
Investment Banking......Page 189
Pricing Securities Offerings......Page 114
Determining Purchase Price and Sale Price......Page 327
Benefits Revisited......Page 290
Equity Trading......Page 115
Paying for Research......Page 137
High-Water Mark......Page 117
Interest Rate Products......Page 119
Secondary Market......Page 120
Structured Credit......Page 121
Merger Arbitrage......Page 245
Bank Loans......Page 124
Proprietary Trading......Page 125
Impact of Financial Services Meltdown on Private Equity......Page 128
Questions......Page 129
Asset Management, Wealth Management, and Research......Page 131
The Aftermath of Bear Stearns......Page 419
Determining Financial Sponsor IRR......Page 325
The Credit Crisis......Page 133
Industry Concentration......Page 220
Research......Page 135
Systemic Risk......Page 275
Questions......Page 140
Bear Stearns......Page 141
Asset-Backed Securities......Page 142
Monoline Insurers' Relationship with Credit Rating Agencies
......Page 144
Credit Rating Advisory Services Provided by Investment Banks
......Page 145
Specialists......Page 146
Derivatives Exchanges......Page 147
Nikkei Put Warrants......Page 179
Clearing and Settlement......Page 150
Lampert's Kmart Play......Page 496
Questions......Page 151
Club Transactions and Stub Equity......Page 231
Euromarkets......Page 153
Leverage......Page 154
U.S. Retail Toy Industry in 2005......Page 173
Transparency......Page 291
TCI and 3G Take a Position......Page 155
Private Equity Portfolio Companies Purchased During 2006-2007
......Page 156
International Investment Banking Activity in China
......Page 157
Hospital Corporation of America (HCA)......Page 158
Cerberus-New Beast of the Investment Community......Page 160
Distressed Securities......Page 246
GM's Supplier Relationships......Page 564
Global IPO Market......Page 162
Russia's IPO Market......Page 164
China's IPO Market......Page 165
Standardized International Financial Reporting......Page 167
International Investors......Page 168
Questions......Page 169
Hedge Funds and Delta Hedging......Page 171
Citigroup Providing $25 Billion Syndicated Funding Facility
......Page 562
Non-Unit Structure......Page 176
Pershing Square's Initial Involvement: Wendy's and McDonald's
......Page 177
Wall Street Innovation......Page 178
Accelerated Share Repurchase Program......Page 184
Questions......Page 187
Analysts......Page 190
Key Stakeholders: Beantown, Wall Street, DC, and Main Street......Page 191
Inside the Wall
......Page 441
Client-Related Trading......Page 192
Future Developments......Page 293
Institutional Sales......Page 193
Calculate the Equity Value, IRR, and Multiple of Investment on Projected Exit Date
......Page 278
Private Wealth Management......Page 194
Asset Management......Page 195
Principal Investments......Page 196
Finance......Page 197
Credit Crisis of 2007-2008......Page 198
Short-Term Financing by Investment Banks......Page 200
Structured Investment Vehicles......Page 201
Compensation......Page 202
New Power Brokers in the Capital Markets......Page 204
Credit Default Swaps......Page 208
Investment Banking Future......Page 209
Questions......Page 211
SECTION II Hedge Funds and Private Equity......Page 213
Overview of Hedge Funds......Page 215
Leverage......Page 216
Valuation of the Deal......Page 457
Performance......Page 221
2008 Slowdown......Page 223
Market Liquidity and Efficiency......Page 226
Equity Bridges......Page 308
McDonald's Management and Franchisees Respond
......Page 229
LBO Analysis Post-Credit Crisis......Page 339
Freescale Semiconductor (Freescale)......Page 233
Questions......Page 234
Equity Long/Short......Page 235
Non-Hedged Equity......Page 237
What a Nightmare......Page 468
Global Macro......Page 238
Placing the Equity and Convertible Offerings
......Page 443
Wendy's......Page 239
Merging of Functions......Page 241
Rating Agency Concern......Page 516
Domicile......Page 281
Questions......Page 254
Shareholder Activism and Impact on Corporations
......Page 256
A Dream Deal......Page 363
Closed-End Funds......Page 364
Activist Hedge Fund Accumulation Strategies......Page 260
Changing Rules That Favor Activists......Page 264
The Regulators: International, National, and Local......Page 265
Conclusion......Page 466
Bank Debt and the Cov-Lite Craze......Page 270
Risk, Regulation, and Organizational Structure......Page 273
The Unusual Weekend......Page 485
Bank Exposure to Hedge Funds......Page 277
The Deal and Its Details......Page 560
Secondary Markets for Private Equity......Page 282
Questions......Page 284
Hedge Fund Performance......Page 285
Questions......Page 297
Overview of Private Equity......Page 299
Target Companies for Private Equity Transactions......Page 301
Capitalization of a Private Equity Transaction......Page 303
Assets Under Management......Page 304
History......Page 305
Teaming Up with Management......Page 310
Leveraged Recapitalizations......Page 312
Fund of Funds......Page 314
The Dream Becomes a Nightmare......Page 567
Questions......Page 322
LBO Financial Model......Page 323
Introduction......Page 328
Determine Target's Capitalization after Acquisition
......Page 331
Determine Cash Flow Available for Debt Service
......Page 335
Calculate Credit Ratios......Page 336
Private Equity-Owned Companies: Management Practices and Productivity
......Page 341
Hawaiian Telecom Communications (HTC)......Page 342
TXU Energy (TXU)......Page 344
Harrah's Entertainment (Harrah's)......Page 349
Univision......Page 353
Private Equity Value Proposition for Corporations......Page 354
Mandated Divestitures......Page 357
Private Equity as an Alternative Model of Corporate Governance
......Page 358
Private Equity Influence on Companies......Page 359
Reduction in Public Market Capitalization......Page 360
Questions......Page 361
Exits......Page 365
Bankruptcy and Inefficient Financial Markets......Page 367
Timing Issues......Page 0
Taxes......Page 369
Using Intermediaries......Page 370
Perception and Reality......Page 371
Fees......Page 372
FASB 157......Page 374
Questions......Page 375
Hedge Fund and Real Estate Investments......Page 380
GM a Power......Page 533
Annex Funds......Page 381
CDO Market Evolution......Page 476
Asian Private Equity Activities......Page 382
Strategic Alliances......Page 383
Focus on Portfolio Management......Page 384
Comparison of Private Equity Firms......Page 387
Profile of The Carlyle Group......Page 389
Future Issues and Opportunities......Page 392
The New Landscape......Page 394
Section III. Case Studies......Page 397
Investment Banking in 2008 (A): Rise and Fall of the Bear
......Page 399
Long Term Capital Management......Page 401
Bear Stearns Asset Management......Page 407
Bear's Last Weekend......Page 415
Gramm-Leach-Bliley and the Fall of Glass-Steagall
......Page 421
Lehman Brothers......Page 424
Merrill Lynch......Page 428
Goldman Sachs and Morgan Stanley......Page 431
Metals Heating Up
......Page 435
Enter Freeport-McMoRan
......Page 437
Role of the Investment Banks
......Page 440
FCX Post-Allocation
......Page 445
The Best Deal Gillette Could Get?: Procter & Gamble’s Acquisition of Gillette......Page 451
Deal Structure: An "All-Stock," 60/40, No-Collar Acquisition......Page 454
The White Squire from Omaha: Warren Buffett, Gillette Investor......Page 465
A Tale of Two Hedge Funds: Magnetar and Peloton
......Page 467
CSX Equity Derivatives......Page 528
Magnetar's Structured Finance Arbitrage Trade......Page 470
The 2007-2008 Financial Crisis......Page 471
The CDO Market......Page 472
Rating Agencies......Page 475
ESL: The Hedge Fund That Could Not Be Categorized......Page 493
November 2004 Decision: Should Kmart (under ESL's Control) Acquire Sears?
......Page 497
McDonald's, Wendy's, and Hedge Funds: Hamburger Hedging? Hedge Fund Activism and Impact on Corporate Governance
......Page 505
A Tale of Two Activists: Carl Icahn and William Ackman......Page 506
McDonald's......Page 509
Unlocking McDonald's Real Estate Value......Page 517
Aftermath of McDonald's Rejection......Page 521
The Truce......Page 523
Roadblocks and Hurdles......Page 563
Background......Page 529
Porsche and Volkswagen: Brothers Reunited......Page 531
Dilemma......Page 535
The Toys "R" Us LBO
......Page 537
Emergence of Club Deals in a Maturing Industry......Page 539
Dividends and Fees Paid to Private Equity Firms......Page 540
Infant, Toddler, and Preschool Market......Page 543
Overview of Toys "R" Us
......Page 544
CEO Wagoner's Tough Task Remaking Company......Page 556
Toys "R" Us Strategic Review and Sale
......Page 550
Bain Capital......Page 553
The Assignment......Page 554
"What's Good for GM?"
......Page 555
Cerberus Capital Management to the Rescue   hellip Maybe
......Page 558
Cerberus-Led Consortium to Buy 51 Percent of GMAC Equity
......Page 561
Cerberus Builds an Even Bigger Auto Stage......Page 566
Exhibit Sources
......Page 569
References
......Page 577
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H
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