M&A and Investment Banking

1. M&A and Investment Banking Course Introduction

2. Key Course Topics • Introduction to Investment Banking • History, Products and Services, Business Models, Clients and Segments • Introduction to Mergers and Acquisitions • Strategic Objectives, Regulation, Tactics, Negotiation, Valuation • Corporate Finance in Practice • Sell-side, Buy-side, LBOs, ECM, DCM, Distressed situations • Case studies

3. Rules of the Game • Course Structure • Interactive lessons • Case studies • Suggested additional readings • Student Evaluation • Class Participation 10% • Case Studies 15% • Final Exam 75% (oral only)

4. M&A and Investment Banking Lesson 1.1a – What is Investment Banking: Historical Perspectives

5. What is Investment Banking? From a historical point of view, the main activity of investment banks was “security underwriting” • Investment banks buy securities, such as bonds and stocks, from an issuer and then sell them to the final investors Today investment banking comprises a rather heterogeneous and complex set of activities, including underwriting and advisory services, trading and brokerage

6. Origins of Banking • First European banking institutions emerged in Genoa, Florence and Venice in early 12th century • First financial securities emerged in Italy in the 13th and14th centuries: • Stocks, options, warrants representing ownership position in corporate entities • Bonds and other forms of debt representing creditor claims on assets of corporate entities • The great ancestors of Investment banking (1200-1500): • The merchant banker: a merchant who extended his activities by offering credit to his clients, initially through the acceptance of commercial bills. Later, the merchant banker focused on trade finance, securities and equity investments in commercial partnerships • The financier: a lender to the prince. The Church prohibited usury but not lending to governments. Italian families such as the Bardi, Peruzzi and Medici and the Fuggers from Germany, financed the European kings and the Papacy • Later, Amsterdam became a major securities exchange (1600s) • Futures contracts and derivatives were traded • Tulip mania: the first recorded speculative bubble • At the peak of tulip mania, at the beginning of 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. However, in February 1637, the tulip bulb contract prices collapsed abruptly and the bubble burst

7. European Family Banks • Major international family investment banks emerged in the late 18th and early 19th centuries • Investment banks were initially private partnerships that pooled large amounts of capital to fund projects usually for governments (e.g.: military campaigns) • Main players: Rothschilds, Warburgs, (Germany), Baring Brothers, Kleinwort, Schroders (UK) and Lazards (France) • These family banks became universal banks offering a broad range of financial services and played a major role in the capitalization of the industrial revolution • London emerged as the dominant financial center of the western world after Napoleon’s defeat in 1815 • From London, European bankers started financing ventures in the US and established their American offices

8. The Emergence of Wall Street • In Mid-1800s New York became the largest securities market in the US and the financial Capital of the country • Prominent American families began to establish banking operations as an outgrowth of their successful mercantile activities: Junius Spencer Morgan and later his son John Pierpont (J.P.) Morgan, the Seligmans, the Lehman Brothers, Solomon Loeb, Abraham Kahn and Marcus Goldman • Banks came to be sought more by private sector corporations (rail and canal companies) than by their traditional clients, sovereign states • By 1900, the US had surpassed Great Britain as the foremost industrial power in the world • 1913 Federal Reserve Act • Established the US central bank, thereby supplanting the power of private financiers: “lender of last resort” • 1929 Wall Street Crash and beginning of the Great Depression • 1933 Glass-Steagall Act: separation of commercial banking (deposit taking and loan-making) from investment banking (securities dealing and underwriting) • Reasons for the G-S Act: Commercial Speculation. After the 1929 stock market crash commercial banks were accused of being too speculative in the pre-Depression era • Effects of the G-S Act: Creating Barriers. The G-S Act set up a regulatory firewall between commercial and investment bank activities. Financial giants at the time such as JP Morgan and Company, which were seen as part of the problem, were directly targeted and forced to cut their services and, hence, a main source of their income (e.g.: Separation of J.P. Morgan and Morgan Stanley)

9. Post II World War • Investment bankers, not commercial bankers, emerged as principal counselors to corporations • Underwriting syndicates continued to be dominated by few bulge bracket firms: Morgan Stanley, First Boston, Dillon Read and Kuhn Loeb (1940s), Morgan Stanley, First Boston, Salomon Brothers and Merrill Lynch (1970s) • Emergence of Private Equity (1970s) • Merchant banking in its modern context refers to using one's own equity (often accompanied by external debt financing) in a private transaction, as opposed to underwriting a share issue via publicly traded securities on an exchange • Bull Market of the 1980s and the 1990s: deregulation and globalization • Corporations’ allegiance to single banks began to be challenged in favor of multiple banking relationships • Creation of a mortgage and asset backed securities market; Junk bond (high yield) market; Financial engineering • 1986 Big Bang (London SE) • Introduction of electronic exchange; broker/dealer dual capacity; member firm ownership by outside corporations  London as primary SE; Globalization of banking • 1999 Gramm-Leach-Bliley Act (Glass-Steagall Act repeal) • Reasons for the G-S Act repeal: Diversification and Transparence • Diversification offers the banking industry the potential to reduce risk, so the restrictions of the G-S Act could have actually had an adverse effect • Big banks are more transparent; self-regulation • Effects of the G-S Act repeal: Global universal banks • Retail banks started to merge (cross-border) with investment banks and stock brokers creating global universal banks able to offer the full range of banking services

10. 21st Century • Early 2000s characterized by: • Loose oligopoly with each firm having multiple product lines + Consolidation of existing banks • Hour-glass structure of the industry: many small firms on a regional basis, few and often changing middle-bracket firms, and a stable set of “bulge-bracket” firms • 2007 subprime crisis and credit crisis • Collapse of IBs such as Bear Stearns and Lehman Brothers • Governments bailouts • A global recession starts • 2010-2011 EU sovereign debt crisis • Policy reactions: austerity measures • LIBOR scandal •  Barclays Bank fined for attempted manipulation of the LIBOR and EURIBOR rates (Jun2012) • Financial crisis debate: • IBs business model • Capital requirements • Proprietary trading (Dodd–Frank Wall Street Reform: Volcker rule ban on proprietary trading) • Financial products regulation (derivatives) • Credit rating • Executive pay • …

11. Financial Crisis Timeline 1980s Latin American debt crisis 1987 - Black Monday 1997-99 Asian Financial Crisis - Devaluations and banking crises across Asia 1998 Russian Financial Crisis (Ruble crisis) 1998 LTCM bail out 1873-79 Long Depression (EU and USA) Following the Second Industrial Revolution speculation 2007-12 Global financial crisis including the 2010 European sovereign debt crisis 1637 Tulip Mania (The Netherlands) 1973-74 Oil crisis and stock market crash 1637 1873-79 1973-74 1997-99 2007-12 1980s 1929-mid40s early 1990 early 2000 Emergence of Private Equity Global Universal Banks Lehman Brothers collapse, Government bailouts, etc. – New Model? 1929 Wall Street Crash and Great Depression 2001 Bursting of dot-com bubble - Speculations concerning internet companies crashed 1999-2002 Argentine economic crisis  1989-91 USA Savings and Loan Crisis 1990 Japanese asset price bubble collapsed 1990-1994 Swedish banking crisis European Family Banks Emergence of Wall Street bankers G-S Act Separation of commercial and investment banks

12. M&A Historical Trends Overview $Bn Crisis Growth Crisis Growth Crisis Growth Crisis Correlation with Equity Indexes LatAm debt crisis Fourth Merger Wave (1980–1990) • Changes in antitrust policy • Deregulation (financial, air transport, broadcasting sectors) • New financial instruments (high yield bond) • Hostile takeovers Fifth Merger Wave (1993–2000) • International expansion to compensate for low organic growth • Development of new technologies (i.e. internet with consequent creationof new end markets) Sixth Merger Wave (2003–2008) • Industry consolidation (i.e. Telecom sector) • Huge availability of liquidity on banks/corporates balance sheets • Saving and Loans crisis • Tech and dot-com bubble • Financial crisis • Subprime mortgages loans • European Sovereign debt crisis Source: Thomson SDC from 1980 through 1995; Dealogic, from 1996 through 2011; Thomson SDC for 2012 and 2013 Note: M&A volumes refer to announced deals.

13. 2013 Global Top 10 Banks Ranking Based on Fees 3% 7% 7% 6% 5% 5% 4% 4% 4% 2% Market Share (1) Source: Financial Times. Notes: (1) Calculated as the % of fees against the total amount of fees globally.

14. Total Investment Banking Fees Evolution -Breakdown by Region FY2002 Total Investment Banking Fees: $35.7bn 2014LTM Total Investment Banking Fees: $85.8bn • Total Investment Banking market growth of ca.+140% • The fastest growing region is Asia Pacific with ca. +400% between 2002 and 2014 • Americas still represents the biggest market Source: http://markets.ft.com/investmentBanking/tablesAndTrends.asp; Dealogic

15. M&A and Investment Banking Lesson 1.1b – What is Investment Banking: Main services offered

16. The Product/Client Matrix

17. Services: Advising • Advisory services and M&A Advising • Advisor to Clients • Corporations or Financial Institutions: M&A advisory (target, strategy, deal structure, financing method, valuation, negotiations) • e.g.: LVMH / Bulgari; Enel / Endesa • Governments: advisory on privatizations • e.g.: Telecom Italia privatization • Advisor to Financial Investors • Sales relationships with institutional investors. Investment banks offer investment ideas and liquidity services (e.g.: prime brokerage) • Research (macroeconomic, fixed income or securities research)

18. Services: Capital Raising • Role in primary markets Capital Raising • Equity Markets • Initial Public Offerings (IPOs), Follow-on Offerings, Accelerated Book Buildings, Block Trades, Convertible Bonds, other Hybrid Securities • e.g.: Prada IPO; Unicredit capital increase; Enel Green Power IPO • Debt Markets • Investment grade and High Yield Bond, Mortgage - Backed Securities (MBS), Asset - Backed Securities (ABS) • e.g.: Telecom Italia bond issue

19. Services: Trading Securities • Role in secondary markets Trading Securities • Capital Markets • Securities, derivatives, currencies, other • Public regulated markets vs. OTC markets

20. M&A and Investment Banking Lesson 1.2 – Investment Banking Business Models

21. Investment Banking Business Models Overview Global Universal Banks Global Investment Banks Global Boutiques Domestic Universal Banks Local Boutiques 1 2 3 4 5

22. Overview - Traditional IBs vs. Universal Banks • Traditional Investment Banks • “Residual” definition: banking activity not classifiable as commercial banking (commercial banking: deposits taking and loans making) • Core IB activities: underwriting & advisory services • Other: sales and trading • Universal Banks • Perform both Commercial Banking activities (lending) & Investment Banking activities (underwriting and advisory) • Universal Banking Synergies - integrated approach, one-stop shop • Potential conflict of interests - e.g.: commercial bank might use its lending power to force a firm to use its underwriting or advisory services

23. Overview - The “One Bank” Approach • Advantages • Provide clients with advice and solutions across all asset classes and global markets through a single point of contact – the Relationship Manager • Involve specialists in areas such as corporate finance and real estate to address the full extent of clients financial interests • Give all clients access to opportunities that are usually only available to major corporate clients and institutional investors Client e.g.: Credit Suisse; UBS Source: Credit Suisse website

24. Overview - Business Model Matrix Full range Global Universal Banks Domestic Universal Banks Global Investment Banks Product Offering Local Boutiques Global Boutiques Mono product Mono Country Global Geographic Reach

25. Global Universal Banks – Business Segments 1 • Commercial Banking • Provides lending, treasury services, investment banking and investment management services clients including corporations, municipalities, financial institutions and not-for-profit entities • Investment Banking • Provides clients with strategic advice, lends money, raises capital, helps manage risk, makes markets and extends liquidity • Securities Services • Helps institutional investors, alternative asset managers, broker dealers and equity issuers optimize efficiency, mitigate risk and enhance revenue • Treasury Services • Provides innovative payment, collection, liquidity and investment management, trade finance, commercial card and information solutions to the world’s leading companies, governments, regional banks and global financial institutions • Asset Management • Provides institutional, high-net-worth and individual investor clients with high quality global investment management in equities, fixed income, real assets, hedge funds, private equity and cash liquidity • Private Banking • Offers a diverse range of services spanning investments, wealth structuring, trust and estate planning, credit, banking and risk management

26. Global Universal Banks – Geographical Footprint 1 Source: Companies websites.

27. Global Universal Banks – Key Financials 1 Net Revenues ($bn) Net Income ($bn) Total Assets ($bn) Total SHs Equity ($bn) – ROE(1) (%) 4.0% 6.7% 10% 8.5% 0.6% 1.2% 1.8% 4.9% Source: Companies reports. Notes: (1) Computed as Net Income of the year divided by Total SHs Equity of the year

28. Global Investment Banks – Business Segments 2 • Investment Banking • Investment Banking provides a broad range of financial products and services, with a focus on businesses that are client-driven, flow-based and capital-efficient. The products and services include global securities sales, trading and execution, prime brokerage and capital raising and advisory services, as well as comprehensive investment research • Private Banking • Private Banking offers comprehensive advice and a broad range of financial solutions to private, corporate and institutional clients. Private Banking comprises the wealth management clients and corporate and institutional clients businesses • Asset Management • Asset Management offers products across a broad range of investment classes, from alternative investments such as hedge funds, private equity, credit, index, real estate, and commodities, to multi-asset class solutions including equities and fixed income products, as well as emerging markets

29. Global Investment Banks – Geographical Footprint 2 Source: Companies websites.

30. Global Investment Banks – Key Financials 2 Net Revenues ($bn) Net Income ($bn) Total Assets ($bn) Total SHs Equity ($bn) – ROE(1) (%) 9.9% 10% 1.2% 5.5% 3.8% 5.5% Source: Companies reports. Notes: (1) Computed as Net income of the year divided by Total SHs Equity of the year

31. Global Boutiques 3 Business Segments Geographical Footprint • Financial Advisory • Advisor on strategic transactions such as mergers, acquisitions, restructurings and other financial matters • Asset Management • Provides investment management and advisory services to institutional clients, financial intermediaries, private clients, and investment vehicles around the world Key Financials Net Revenues ($m) Net Income ($m) Total Assets ($m) Total SHs Equity ($m) – ROE(2) (%) (1) 14% 26% 5.2% 3.9% (1) (1) (1) (1) (1) (1) (1) Source: Companies websites and reports. Notes: (1) Referred to the financial years ended on 31 March (2) Computed as Net Income of the year divided by Total SHs Equity of the year

32. Domestic Universal Banks – Business Segments 4 • Domestic Commercial Banking • Based on a model that supports and enhances regional brands, upgrades local commercial positioning and strengthens relations with individuals, small businesses, SMEs and non-profit entities. It includes also private banking, bancassurance and industrial credit • Corporate and Investment Banking • Provides services in M&As, structured finance and capital markets as well as leasing, factoring and merchant banking. It also operates in the public finance sector as partner for public administration, public utilities and the execution of infrastructure • International Banking • These Italian Universal Banks have a growing European presence, especially in the countries of Central-Eastern Europe • Asset Management • Italian leading asset management firms • Financial Advisory

33. Domestic Universal Banks – Key Financials 4 Net Revenues ($bn) Net Income ($bn) (2) (1) Total Assets ($bn) Total SHs Equity ($bn) – ROE(3) (%) 1.4% n.m. 3.2% n.m. Source: Companies reports. Notes: (1) Mainly related to: goodwill impairment, Impairment of PPA, loan loss provisions. (2) Mainly related to a decrease in operating income, especially due to the negative performance of the interest margin and a significant increase in net adjustments to loans. (3) Computed as Net Income of the year divided by Total SHs Equity of the year

34. Local Boutiques 5 • The structure (limited number of people based in Milan) includes professionals with backgrounds gained in some of the leading international investment banks, management consulting firms and large corporations • These Italian Local Boutiques are involved in many corporate finance transactions as advisors of large industrial groups, both Italian and international, entrepreneurs’ families and private equity funds • Their activity is mainly focused on advisory, applied to different areas such as mergers & acquisitions, transactions on regulated capital markets, debt and equity restructuring, fund raising

35. Top Banks’ Key Stats Evolution in the Last 20 years Market Cap ($bn) (1) Return on Average Total Equity (%) (1) Price to Earnings (1) Source: Factset as of 29 July 2014. Notes: (1) Goldman Sachs IPO in 1995

36. Investment Banking Business Models: Drivers Full range Global Universal Banks Domestic Universal Banks Global Investment Banks Product Offering Local Boutiques Global Boutiques Mono product Mono Country Global Geographic Reach • Drivers of the Banks’ Performance • Regulation • Economic growth, new markets • Technology

37. Focus on capital: Core Tier 1 and Tier 1 Ratios Source: FY2013 Reports.

38. 27.6x 25.7x 25.3x 25.2x 22.6x 21.8x 21.0x 20.5x FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 Average Total Assets / Average Total Equity Leverage has been the key profitability driver of banks in the last decade… Evolution of Leverage for Selected European Banks There is a secular trend towards lower leverage and lighter balance sheets as a result of changes in regulations, especially Basel III Source: SNL.

39. …we estimate the secular decrease in leverage to bring on average to a 4% reduction in RoAE Illustrative comparison between 2006-07 RoAE and the maximum potential RoAE(1) assuming reduction of leverage ca.4% Total Source: SNL. Note: (1) Maximum potential RoAE = Best 06/07 RoAA / Leverage (latest available)

40. Global Markets Emerging markets account for the smallest share but also the fastest growth in the global financial stock. Stock of Debt and Equity Outstanding, 2010(1) % of Total, End of Period 100%=US$212 Trillion Compound Annual Growth Rate,2000–2010(%) (2) Source: Bank of International Settlements; Dealogic; SIFMA, S&P; McKinsey Global Banking Pools; McKinsey Global Institute analysis; Roxburgh, C., Lund, S., Piotrowski, J. 2011. Mapping global capital markets 2011. McKinsey Global Institute. Notes: (1) Based on a sample of 79 countries. (2) Central and Eastern Europe and Commonwealth of Independent States.

41. Global Markets Nominal GDP in US$bn 10,000+ 5,000–10,000 2,000–5,000 1,000–2,000 500–1,000 200–500 100–200 50–100 20–50 10–20 0–10 Source: CIA and FBI World Factbook, March 2012

42. Global Markets In 1999, Cross-border Investing was Taking Hold Cross-border Investments had Grown Substantially by 2009 WesternEurope Russia and Eastern Europe WesternEurope Russia and Eastern Europe 4.3 63.1 0.5 64.0 26.8 North America 29.0 Japan 35.3 40.8 22.7 North America Other Asia Japan 7.0 7.9 Other Asia Middle East, Africa, and RoW 6.6 1.7 LatAm 4.0 Middle East, Africa, and RoW 1.8 LatAm Australia and New Zealand 1.5 Australia and New Zealand 0.5–1% (US$0.2–0.4) Total Domestic Financial Assets, 1999 (US$ in Trillion) 1–3% (US$0.4–1.0) World GDP, 1999 = US$35 Trillion 3–5% (US$1.0–1.8) Total Value of Cross-border Investments(1) Between Regions % of World GDP (US$ in Trillion) 5–10% (US$1.8–3.5) 10%+ (US$3.5+) • IBs global services to home multinationals • Investments/acquisitions from emerging economies in developed markets • e.g.: Volvo acquired by Zhejiang Geely Holding (China); Valentino Fashion Group acquired by Mayhoola for Investments ( Qatar) Source: CIA and FBI World Factbook, March 2012; International Monetary Fund; McKinsey Global Institute analysis Notes: (1) Includes total value of cross-border investments in equity and debt securities, loans and deposits, and foreign direct investment.

43. Technology • Access to information - Changed the rules of the business • IBs’ investments in technology - A barrier to entrance

44. References • Fleuriet, 2008. Investment banking explained, McGraw-Hill: chapters 1-5 • Nanda, Delong and Roy, 2002. History of Investment Banking, Harvard Business School • Morrison, A.D., Wilhelm, W.J., 2007. Investment Banking: Past, Present, and Future. Journal of Applied Corporate Finance, Volume 19 Number 1