Investment Banking 101

November 8, 2006
University of Chicago
STRICTLY CONFIDENTIAL
1
Table of Contents
SECTION 1 Overview of Investment Banking 2
SECTION 2 Role of Analyst and How to Get the Job 9
SECTION 3 Career Opportunities at UBS Investment Bank 18
SECTION 4 UBS Investment Bank: A Global Leader 21
APPENDIX A Understanding the Financial Statements 27
APPENDIX B Understanding Debt and Equity 38
APPENDIX C Valuing a Company 43
APPENDIX D Terms to Know 49

SECTION 1
Overview of Investment Banking
3
UBS Investment Bank
The Investment Bank is comprised of...
Revenue
Generators
Support
Services
I
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B
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Research Analysts
Information Technology/Operations
General Corporate Services
Investment Banking
Sales & Trading
Asset Management
Private Equity
4
What Is Investment Banking?
Investment Banking is primarily about two tasks:
Giving Advice Raising Capital
5
Giving Advice
Investment Bankers act as advisors to industry leaders and key investors
Investment Bankers Advise on Various Types of Transactions
Mergers
Acquisitions
Divestures
Equity offerings
IPOs
follow-on offerings
Debt offerings
Management
Equity holders
Debt holders
Prospective buyers
Additionally, much advisory work is done
away from transactions
6
Raising Money
Investment Banks act as an intermediary between entities that require capital and investors
Simply put, Investment Bankers get money for people who need itfrom people who have it
Provide Capital Require Capital
Corporations


Governments
Banks
Mutual Funds
Hedge Funds
Private Equity
Pension Funds
Insurance Funds
Individuals
Money exchanged for
Stocks, Sr Debt,
Bonds, Mezzanine
7
Industry Groups Product Groups
Where Do You Fit In?
At UBS, you will work in either an Industry Group or a Product Group
Consumer Products & Retail
Energy and Power
Financial Institutions
Healthcare
Global Industrial Group
Real Estate
Technology/Media/Telecom
Transportation & Services
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
8
Where Do You Want to Be?

Industry Group Product Group
Passion for a particular
industry (i.e. Technology, Media)
Desire for a particular skill-set
(i.e. M&A, Restructuring)
Motivated to create a toolbox of
skills (i.e. M&A, Equity, LBOs)
Focus on building relationships
with clients
Interact with all product groups
Think macrolook at the BIGGER
picture!
Would like to be a specialist
Focus on executing transactions
Advise all industry groups
Hone in on a particular skill-set!
SECTION 2
Role of Analyst and How to Get the Job
10
Hierarchy in Investment Banks: Welcome to the Bottom
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)
Managing Director
Analyst
Executive Director
Director
Associate Director/Associate
You!
11
What Would You Do?
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
Role of an analyst at an investment bank
12
What Makes a Good Analyst?
Personal
Skills

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)



Technical
Ability

Accounting (balance sheet, income statement, statement of cash flows)
Finance (capital structure analysis: equity vs debt)
Valuation techniques (comparable company analysis, precedent transactions, discounted cash flow)

13
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
14
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
15
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
16
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
Understand the different firms so that you can choose well
each Investment Bank has its own unique culture
focus on the places where you fit best and go after those firms
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

17
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
SECTION 3
Career Opportunities at UBS Investment Bank
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UBS Recruiting at the University of Chicago
Positions:
IBD summer intern
New York office
Chicago office

Key Dates:
Internship Career Fair: Thursday, January 11, 2006
Resume Drop: TBD
Interviews: Monday, January 29, 2006
UBS recruits at University of Chicago for both our New York and our Chicago offices
We offer separate resume drops and interview schedules for each office
APPENDIX A
Understanding the Financial Statements
21
The Three Financial Statements
Shows a companys
financial position at a
single point in time
Balance Sheet
Shows how much a
company makes over a
period of time
Income Statement
Shows how much cash a
company generates over a
period of time
Statement of Cash Flows
Assets = Liabilities + Equity Revenue Costs = Profit
Profit + Non-Cash Costs =
Cash Flow
There are three key financial statements
22
The Income Statement
Line Item $mm Comment
Revenue (or Sales)

100

How much you get paid for the items you sell
Cost of Goods Sold ( COGS )

(40)

How much the items you sell cost you
Gross Profit

60

How much you have left after paying for items you sell
Selling, General & Administrative Costs ( SG&A )

(30)

How much it costs to market your goods and run your business
EBITDA
1


30

A proxy for how much cash your business generates
Depreciation & Amortization ( D&A )

(5)

A non-cash cost (more on p.7)
Operating Profit (or EBIT)
2


5

How much profit the operations of your company generates
Interest

(5)

Interest you pay on debt
Taxes

(6)

Income tax you pay
Net Income

14

How much you have left after all costs are paid for
Earnings per Share ( EPS )

$1.40
Net income divided by the number of shares
in this case, there would be 10,000,000 shares
Notes:
1 Earnings Before Interest, Taxes, Depreciation and Amortization
2 Earnings Before Interest and Taxes
The income statement tells you the following information
23

Line Item $mm Comment

Current Assets




Cash 10 Cash on hand
Accounts Receivable 20 Money your customers owe a company
Inventory 15 Goods on shelves or in a warehouse waiting to be sold
Long-Term Assets




Plant, Property & Equipment ( PP&E ) 125 Factories and warehouses and such
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TOTAL ASSETS

170




Current Liabilities




Accounts Payable 15 Money a company owes its suppliers
Short-Term Debt 10 Debt that must be paid back within a year
Long-Term Liabilities




Long-Term Debt 95 Debt that must be paid back over a longer period of time than one year
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TOTAL LIABILITIES

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Paid-In Capital 10 Your initial investment in your company
Retained Earnings

40
Net income you reinvested in your company (e.g., used to buy
new factories)
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TOTAL EQUITY

50


TOTAL LIABILITIES + EQUITY

170



The Balance Sheet
The balance sheet provides a snapshot of your financial position at a single moment in time
24
In Focus: Depreciation & Amortization
Understanding depreciation & amortization is key to understanding accrual accountingthe rest is
just details
What is Accrual Accounting? What Is Depreciation & Amortization?
Example: You buy a factory for $100mm
you pay cash upfront
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
Example: In 2004, you buy a sweater for $30 to
sell in 2005
rather than take a charge for $30 in 2004, you
wait to take a charge until 2005
this principle is called matching
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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$5mm $5mm $5mm $5mm $5mm
$5mm $5mm $5mm $5mm $5mm
$5mm $5mm $5mm $5mm $5mm
$5mm $5mm $5mm $5mm $5mm
DepreciationA Visualization
The information below shows a visualization of how depreciation works
The Initial Purchase The Estimate
Year 1 By Year 20 By Year 10 In Year 21
You borrow money to buy a factory for $100mm You estimate the factory will last 20 years
$100mm
$5mm $5mm $5mm $5mm $5mm $5mm
$5mm $5mm $5mm $5mm $5mm
$5mm $5mm $5mm $5mm $5mm
$5mm $5mm $5mm $5mm $5mm
$5mm $5mm $5mm $5mm $5mm
$5mm $5mm $5mm $5mm $5mm
New Factory
26
Statement of Cash Flows
The statement of cash flows bridges accrual accounting and cash accounting

Line Item $mm Comment


Net Income 14 See p. 5
Plus: D&A 5 See pp. 7 and 8
Less: Change in Working Capital (9) Ignore for now
Cash Flow from Operations 10 How much cash your operations generate
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Less: Capital Expenditures (5) Cash paid for new factories and such
Cash Flow from Investing

(5)

How much cash you spend investing in your business

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Less: Dividend Paid (2) Dividends paid to stockholders
Plus: New Debt 20 Borrowed cash
Cash Flow from Financing

18

How much cash financing your business costs

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Net Change in Cash

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

27
What Is the Difference between Net Income and Cash Flow?
Net Income and Cash Flow are each important in their own special way
Event
Net Income Cash Flow

Buy a sweater for
$30 to sell

No impact

$30

Sell for $50

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

+$50


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

29
How Do the Statements Link?
Income Statement Balance Sheet Statement of Cash Flows

Revenue Assets Net Income
Cost of Goods Sold Cash Plus: Depreciation & Amortization
Gross Profit Accounts Receivable Less: Change in Working Capital
SG&A Inventory
EBITDA PP&E
Depreciation & Amortization Capital Expenditures
Operating Profit Liabilities Dividend Paid
Interest Accounts Payable New Debt
Taxes 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
The three financial statements are interlinkedthis is why a financial model includes all three
30
37.6 37.2
35.0
25.7
33.6
0
15
30
45
60
Avon L' Oral Beiersdorf Clarins Este Lauder
(
%
)
Cosmetics Mean

= 32.8%
2
HPC Mean = 45.0%
1
3
How Bankers Use Financial Statements
Financial statements are basic to much of the work investment bankers do
Some Uses of Financial Statements Example: Benchmarking
Profitability margin benchmarking
Base for forward projections
Accretion/(dilution) analysis
Financing models
Valuation multiples
Potential value creation models
Source of data on key industry trends
And much, much more
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?
Source: Company reports
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
APPENDIX B
Understanding Debt and Equity
32
What Is Debt?
Debt is one way a company can get cash to fund its business needs
How Does Debt Impact a Company?
A company typically has to pay interest
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
Debt
Debt is money that a company borrows
Companies typically borrow money by
issuing bonds or drawing on a credit line
(similar to a credit card)
33
What Is Equity?
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
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
Equity is another way a company can get cash to fund its business needs
34
Debt
30%
Equity
70%
Low Debt-to-Cap
Equity
20%
Debt
80%
What Is a Capital Structure?
Debt and Equity together form a capital structure
Building a Capital Structure Examples of Capital Structures
Debt = Total money borrowed


Equity = Total shares outstanding x share price
note: this is called a companys market
value
Together debt and equity show the total of all
a companys fundingor Total Capitalization
A capital structure is built as follows: High Debt-to-Cap
35
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
APPENDIX C
Valuing a Company
37
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

38
What Are Multiples?
Multiples are used as a way to benchmark valuation for assets of different sizes
Example:
House Prices on
Hillhouse Avenue
Example:
House Prices
Using Multiples
Imagine the street below with houses for saleare they all fairly priced?
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
$100K
$750K
$75K
$300K
$150K
$200K
$200K
$100K
$200K
$150K
$83
$200
$100
$160
$110
$150
$89
$67
$120
$100
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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 P/E
P = Stock price
can also use market value of equity
E = Earnings per Share (EPS)
can also use net income
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)
EV = Enterprise Value
debt (minus cash) + market value of equity
represents all sources of funding
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
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
40
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 Understanding Free Cash Flow
Free cash flow is cash flow available to all
providers of capital (lenders/shareholders)
Calculated as:
EBITDA
+/ Change in Working Capital
Capital Expenditures
= Free Cash Flow
Money today is worth more than money tomorrow
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
of investing it
so I will take the money now, thank you
or you can pay me interest until you
pay me

A company can be described as paying back its
equity holders over time by generating cash flow
Free cash flow is all the cash flow available to pay
interest to lenders or dividends
1
to shareholders
Note:
1 Cash can also be reinvested to grow the business, making ownership share more valuable
41
Discounted Cash Flow Analysis
The table below shows an example of a discounted cash flow analysis
Discount Rate 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
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
DCF Example
$mm 2006 2007 2008 2009 2010
Terminal
Value
Free Cash Flow 100 120 140 180 200 450
Discount Factor (@8%) 1.00 0.93 0.86 0.79 0.74 0.68
PV of Free Cash Flow 100 111 120 143 147 306
PV = 927

APPENDIX D
Terms to Know
43
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
44
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
Margins
equation: operating statistic/revenues
Gross Profit/Revenues, EBITDA/Revenues, EBIT/Revenues, Net Income/Revenues
45
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
46
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