Finance - The Science of Building, Selling & Buying Perpetuities

FINANCE: THE SCIENCE OF BUILDING, SELLING & BUYING PERPETUITIES

Michael Herlache MBA

Doctor of Business Administration Candidate

VP, M&A at AltQuest Group

Finance The Science of Building, Selling & Buying

Perpetuities

For my wife, Svitlana, whom is my treasure.

About the Author:

Contents

PERPETUITY SCIENCE:

Part I: Perpetuity Methodology

FOUNDATIONS OF VALUATION:

Part II: Tracking Value (Accounting)

Part III: Analyzing Value (Finance)

Part IV: Modeling Value

BUILD-SIDE:

Part V: How to Build a Perpetuity?

Part VI: Perpetuity Analysis

Part VII: Perpetuity Management

SELL-SIDE:

Part VIII: How to Sell a Perpetuity?

Part IX: The Middle Market

Part X: M&A Multiples

Part XI: Investment Banking Coverage Methodology

Part XI: M&A Origination Methodology

Part XII: Mandate/Target Matching Methodology

Part XIII: Deal Structuring

Part XIV: M&A Process

Part XV: Firm Building & Management

Part XVI: Deliverables & Coverage

BUY-SIDE:

Part XVII: How to Buy a Perpetuity?

CASES:

Part XVIII: Cases

Preface

Perpetuity Science

The Perpetuity Scientist vs. The Functional Specialist

Build-Side:

Sell-Side:

Buy-Side:

Part I:

Perpetuity Methodology

Chapter 1:

What is a Perpetuity?

Standard of Living: Perpetuities

The Goal

How to Get the Goal

Perpetuity

I. Building Perpetuities

II. Buying Perpetuities

III. Selling Perpetuities

The Lab of Perpetuities

Demand for Perpetuities

Types of Perpetuities

Risk (discount rate) on the following page:

Return:

Growth:

Margins (Cash flow):

Multiples:

Business: The Science of the Perpetuity

Introduction to Business

The Corporation’s Goal

What is Intrinsic Value?

How to Become Wealthy?

FOUNDATIONS OF

VALUATION

Part V:

Tracking Value

(Accounting)

Chapter 6:

Tracking Value with Accounts

Accounts and Accounting

Accounts, Accounting & Excel

Account Filings & Public Data

Account Statements: P&L

Account Statements: Balance Sheet

Account Statements: Statement of Cash Flows

Part VI:

Analyzing Value with

Models (Finance)

Chapter 7: Analyzing Value with Models

Analyzing Value

From Accounts to Models

Modeling

Modeling in Excel

Analysis of Account Statements

Part VII:

Modeling Value

Chapter 8: Finance with Excel

Finance with Excel

Excel Concepts Needed for Finance

Express Decisions with Excel

Using a Financial Model for Decision Making: The Investment Decision

Using a Financial Model for Decision Making: The Financing Decision

Wealth Maximizing Decisions

Cash is King

Cash Flow Definition (FCF)

Role of the Finance Professional

Capital Markets

Capital Markets and Information

Multiple Investment and Financing Decisions: Portfolio

Modeling a Strategic Alternative

Finance: Exchanging Value Through Time

Cost of Capital

Finding a Value in a Financial Model

Financing Alternatives: Loan Amortization

Analyzing the Strategic Alternative: Sensitivity Table

The Financing Alternative: Nominal vs. Real Cost

Strategic Alternatives Analysis

Cash Flows and Risk

Cost of Capital and Opportunity Cost

The Discount Rate

Value of Equity

Sources & Uses

Accounting Statements: Statement of Cash Flows

Valuation Methods: Total Enterprise Value (TEV) vs. DCF

Accounting Value vs. Finance Value

FCF and DCF

Portfolio Analysis and the Capital Asset Pricing Model (CAPM)

Ex Ante vs. Ex Post Returns

Portfolio Returns and The Efficient Frontier

The Efficient Frontier and the Optimal Portfolio

Security Market Line & CAPM

Security Market Line & Investment Performance

Risk Adjusted Performance

CAPM & Investment Performance

Excess Return

Beta & R^2

Alpha and Efficient Markets

CAPM and the Cost of Capital

Valuing Securities in Efficient Markets

Chapter 9: Financial Statement Modeling

Financial statement modeling best practices:

Financial Modeling Steps:

BUILD-SIDE

Part I:

How to Build a Perpetuity?

Perpetuity Science & The Perpetuity Scientist

Stage of the Perpetuity:

Chapter 31: How to Build a Benefit Stream?

Reasoning to Platform

Existing Platform to New Value Theme

Platform vs. Mod

The Value of Technology & Science

The Consumption Process & Growth Hacking

Chapter 32: How to De-Risk a Benefit Stream?

Part VIII:

Perpetuity Analysis

Market Analysis

Value Chain Analysis

Gap Analysis

Product/Platform Analysis

Chapter 10: How to Be a CEO?

Chapter 10: How to Be a Consultant?

Part IX:

Perpetuity Management

Chapter 15: Perpetuity Management

The Purpose of the Company

How Companies Create Value

Strategy & Finance

Valuation Drivers

The Role of the CEO

Perpetuity Management

Valuation

Perpetuity Management with Discounted Cash Flows

Growth or Restructuring

Perpetuity Management Process

Measuring Value Added: ROIC vs. Market Return

Measuring Value Added: Economic Profit & NPV

Valuation in the Public Markets

Real Markets & Financial Markets

Perpetuity Planning & Control (i.e. Management)

Value Metrics

Perpetuity Planning & Control (i.e. Management) in Practice

Value Metrics: Market Value Added & Total Return to Shareholders

Value Metrics: DCF vs. Earnings Multiple

Cash Flow

Perpetuity Management Capability

Perpetuity Lifecycle

Chapter 16: Valuation Methodologies

1. Public Company Valuation

2. Comp Companies –

3. Precedent Transactions

4. Discounted Cash Flow (DCF)

Notes:

Chapter 17: Framing Valuation

Chapter 18: The Market for Perpetuities

SELL-SIDE

Part X:

How to Sell a Perpetuity?

Chapter 19:

Investment Banking

Notes:

Traditional Investment Bank Responsibilities:

Junior Banker:

Mid Banker:

Senior Banker:

Chapter 20:

How to Become an Investment

Banker Methodology

Getting Started in Investment Banking

Part XI:

The Middle Market

Chapter 21:

The Middle Market

Overview of Middle Market

Part XII:

M&A Multiples

Chapter 22:

M&A Multiples

Part XII:

Investment Banking

Coverage Methodology

Chapter 29:

Investment Banking Coverage

Methodology

Chapter 30: Index Building & Benchmarking

Chapter 31: Financial Data Sources

Chapter 32: Industry or Sector Newsletter

Chapter 34: Industry or Sector Report

Chapter 35: Rolodex Building

Part XIII:

M&A Origination

Methodology

Chapter 23:

M&A Origination Methodology

Step 1: Database Utilization & Emails Collected

Step 2: Email Inquiry

Step 3: Offer & Price Inquiry

Step 4: Phone Call Request (by Sellers) or Meeting Request

Step 5: Phone Call or Meeting

Step 6: Add Backs Calculated and Teaser Created

Step 7: Contact Buyer List & Deal Put on M&A Marketplaces

Step 8: NDAs Signed with Buyers

Step 9: Teaser with Name Given to Buyer

Step 10: IOI from Buyer

Step 11: Buyer Seller Meeting

Step 12: Purchase Agreement Given to Seller

Step 13: Signed Purchase Agreement with Different Terms

Step 14: Enter Due Diligence

Step 15: Complete Due Diligence

Step 16: Closing & Checks Cut

Chapter 24:

Mandate/Target Matching

Methodology

Chapter 25:

Deal Structuring

Part XIV: M&A Process

Chapter 26:

M&A Process

From Origination to M&A Execution

Building the Buyer Shortlist

The Teaser

The NDA

Teaser With Name of Business & Financials

The CIM

The IOI (Indication of Interest)

The Buyer/Selling Meeting

The LOI (Letter of Intent)

Due Diligence

The Purchase Agreement

Pitchbook Table of Contents (exploring strategic alternatives to win a

mandate):

Sell side after winning the mandate:

Confidential Information Memorandum (CIM) Table of Contents:

M&A Banker’s Role: M&A banker is hired to run a process:

Auction Process:

Controlled Sale:

Targeted High Level Solicitation:

Closed Negotiation:

Presentation and Packaging

Buyer Qualification:

Marketing:

Pitching:

Bake Off to Win Mandate:

The Pitchbook to Win Business:

Part XV: Investment Bank

Management

Chapter 27:

How to Build a Boutique Investment

How to Advise on Strategic Alternatives?

Chapter 27:

Running the Boutique Investment

Part XVI: Investment

Banking Deliverables

Chapter 28:

Investment Banking Deliverables

Chapter 36: Adjusted EBITDA

Chapter 37: Valuation

Chapter 38: Teaser

Chapter 39: CIM (Confidential Information

Memorandum)

Chapter 39: Purchase Agreement

BUY-SIDE

Part XVII:

How to Buy a Perpetuity?

Chapter 40:

The Principle of Investing

Chapter 41:

How to Become the Next Warren

Buffett

Chapter 42:

The Operating Model

Chapter 43:

Financial Buyer aka Private Equity

Leveraged Buyout (LBO) Analysis:

Notes:

Construction of LBO Model

Reverse LBO:

PE transaction rationale:

Credit officer meeting:

PE work:

PE interview:

Chapter 44:

Strategic Buyer aka Corporation

(Merger)

Merger Analysis:

Notes:

Merger Modeling

Dilution is proforma decrease in EPS. What causes dilution?

Collars:

Chapter 45:

Perpetuity Science & Portfolio

Theory

Chapter 45:

How to Start a LMM Search Fund

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Buying and Selling a Home

Buying and Selling Homes

Buying & Selling IP

Military Home Buying and Selling

Bai ( buying & selling )

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