2013

Introduction to Investment Banking

Markis Capital Limited

What is Investment Banking? 2

Giving Advice Raising Capital

? ?

ex. Fubon FHC 4

Source: Fubon FHC IR Presentation

ex. Fubon Securities 5

Source: Fubon FHC IR Presentation

Financial Services Landscape 6

Commercial Bank

Custody

Lending

Operations

Asset Management (Buy-Side)

Investment Team

Operations

Investment Bank (Sell-Side)

Global Research

Sales & Trading

(Markets)

Investment Banking

Operations

Merchant Banking

Private Equity

Venture Capital

Insurance

Investment Team

Distribution

Front, Middle, Back Office 7

Front Office

Investment Banking

Markets

Sales & Trading

Research

Private Wealth Management

Middle Office

Risk Management

Compliance

Operational Risk analysis

Back Office

Operations

Technology

HR / Training

Finance / Treasury / Audit

Equity Research Research Analyst, Research Associate/Assistant

Sales & Trading Research sales, sales trader, dealer, dealer assistant

Corporate access, desk analyst

IBD: Corporate Finance, Advisory

PWM: Private Wealth Management

The "Culture" of I-Banking 9

Bonus-oriented culture "Total Comp" basis

Prestige Front office vs. back office, star analysts

Challenge "only the top candidates", long hours, BSD,

"work hard, play hard"

Fame "advisor" to major companies, front page

transactions, In-the-know, on the inside.

"Benefits" global travel, overtime meals, overtime taxi,

training & development, etc.

The Chinese Wall 10

Individuals Pension Funds Insurance Companies Asset Managers Corporate Treasuries Sovereign Wealth Funds

Corporations Governments Municipalities

Providers of Capital

Investment Banking

Chinese Wall

Sales & Trading

Research

Users of capital

Public side Private side

Strategic advisory Securities

underwriting

Corporate Finance 11

Basic Structure 12

Investment Bank (Sell-Side)

Global Research

Economics & Investment

Strategy

Fixed Income Research

Equity Research

Quantitative Research

Sales & Trading (Markets)

Equities

Fixed Income

Commodities

FX

Investment Banking

Capital markets

Advisory

Operations

IT

Compliance

HR

Legal

Overview of Investment Banking 13

Capital Markets

o Equity capital-raising o Initial public offerings (IPOs) o Follow-on offerings o Equity-linked (convertible)

o Debt capital-raising o High-grade or investment grade o High-yield o Syndicated loans o Tax-exempt

o Mergers & Acquisitions o Buyside o Sellside o Spin-offs / Splitoffs / Carve-outs o Hostile defense o Hostile takeovers / proxy fights o Joint Ventures

o Restructuring

Capital Markets Advisory

Underwriting Process 14

Source: Financial Markets + Institutions (2006)

Corporate Finance Activities

Value Company (Financial Models)

Write Selling Memo

Conduct Due Diligence

Identify and Contact Buyers

Create Management Presentation

Negotiate with Buyers

Close Transaction

Value Company (financial

models)

Conduct Due Diligence

Draft terms and determine price

offered

Negotiate with Seller

15

Represent Companies for Sale Represent Companies Buying Other Companies

Advisory Services on M&A, Foreign Exchange, Valuation, Financial

Strategy, Issuing Debt and Equity, etc.

Industry or Product Groups

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

16

Industry Groups Product Groups

Investment Banking Corporate Titles 17

Managing Director

Analyst

Executive Director

Director

Associate Director/Associate

What Does An Investment Banker Do? 18

Financial Analysis Communication

o Management, Board of Directors o Internal Committees

Identify Potential Investors Negotiation / Structuring Transactions Due Diligence Documentation

Client Relationship Management o Ongoing dialogue on financial

markets, industry developments, new products

o Long-term relationship as advisor to Senior Management and Boards

Idea Generation and Problem

Solving o Strategic Alternatives o Capital Raising o Optimizing Capital Structure o Risk Management, Dividend Policy

Assessment Of Opportunities

Origination Execution

Banking Skill Sets 19

Financial Modeling Intricate (LBOs, structuring) to simple (comps)

Writing/Presentations Selling memos, management

presentations, commitment memos, Roadshows,

Prospectus (or other filings)

Research Gathering data, understanding legal aspects,

capital markets process & procedures

Communication & "Rain-making" bringing in business, acts

as the relationship manager and client expert.

20

Sales & Trading / Markets 21

Basic Structure 22

Investment Bank (Sell-Side)

Global Research

Economics & Investment

Strategy

Fixed Income Research

Equity Research

Quantitative Research

Sales & Trading (Markets)

Equities

Fixed Income

Commodities

FX

Investment Banking

Capital markets

Advisory

Operations

IT

Compliance

HR

Legal

Sales & Trading

Foreign Institutional

Investors (FINI)

Custodian Broker

23

vs.

Client Type

Business Scope

Product Range

Risk Control

Culture

Research Scope

Perspective

Global Resources

Internal Control

Access to FINI

vs.

Securities Firm Market Share 25

Aug-13 % Aug-13 %

1 13.184 26 1.1022 8.573 27 0.9513 5.208 28 0.8774 5.205 29 0.8185 4.960 30 0.7396 3.583 31 0.7357 3.413 32 0.6318 3.385 33 0.5829 3.275 34 0.508

10 3.117 35 0.49211 3.039 36 0.45012 2.725 37 0.44913 2.279 38 0.44314 2.070 39 0.40615 1.851 40 0.38716 1.802 41 0.32017 1.780 42 0.31318 1.631 43 0.30619 1.475 44 0.29820 1.341 45 0.27721 1.335 46 0.25822 1.271 47 0.24623 1.173 48 0.22524 1.165 49 0.18425 1.162 50 0.182

Head of Equity/FX/Fixed Income

Head of Research Head of Sales

Chief Investment Officer

Analysts

Sales

Sales Traders

Dealers

Fund Manager

Sales Traders

Dealers

Analysts

26

Tools of a Trader (I'm kidding) 27

Example: Commodities Org Chart

Investor

Corporate

Light structuring

Product design

Complex structuring

Commodities

Trading Structuring Sales

Proprietary Trading

Market making

Desk analysts

Research Origination

Physical deals

Private

transactions

Fundamental

analysis

Price forecasts

Product design

Mid office

Back office

Credit

Legal

Compliance

Others

Hedge Funds

Institutional Clients

Retail clients

Cash

Derivatives

Equity

Fixed Income

Credit

IBK Investor

Sales DCM, ECM

M&A

Strategic

investments

Strategic

divestments

Corporate

Sales Flow

Hedging

Budget Hedging

Prime

Brokerage

Futures and

Options

Others

Origination

Financing

Public

Sector

: Sell Side

Head of Equity/FX/Fixed Income

Head of Research Head of Sales

Analysts

Sales

Sales Traders

Dealers

Buy Side

Buy SideSales Traders

Buy Side

29

: Buy Side

Chief Investment Officer

Fund Manager

Sales Traders

Dealers

Analysts

Sell Side

30

/ 31

32

Breadth of Hedge Fund Investment

Strategies 33

Equity Hedge

30.02%

Equity Market Neutral

2.23%

Equity Non-Hedge

4.51%

Emerging Markets (Total)

4.03%

Distressed Securities

4.70%

Convertible Arbitrage

3.32%

Event-Driven

13.77%

FI: Arbitrage 2.57%

FI: Diversified 1.78%

FI: High Yield 0.79%

FI: MBS 2.63%

FI: Convertible Bonds

0.08%

Macro 10.68%

Merger Arbitrage 1.40%

Market Timing 0.37%

Regulation D 0.24%

Sector (Total)

4.77%

Short Selling

0.30%

Relative Value Arbitrage

11.80%

Equity Research 34

Basic Structure 35

Investment Bank (Sell-Side)

Global Research

Economics & Investment

Strategy

Fixed Income Research

Equity Research

Quantitative Research

Sales & Trading (Markets)

Equities

Fixed Income

Commodities

FX

Investment Banking

Capital markets

Advisory

Operations

IT

Compliance

HR

Legal

36

The Role of Research 37

Sell-side

=

=

= (Reg AC, Reg FD, etc.)

38

39

Equity Research Methodology 40

1. Review Public Information

2. Conversations w/ company management for detailed

information

3. Prepare 3-yr Prelim Earnings Model

4. Review Financial Assumptions

5. Assessment

6. Finalize Earnings Model

Minimum initiation requirements 41

Company description

5-year P&L, cash flow, balance sheet (2-3 years forecast)

Most recent results, commentary

Risks

Rating, price target

Compliance analyst certification (Reg AC), editorial,

compliance review, restricted list

Report Submission Process 42

1. Submit initiation form

2. Upload model

3. Draft report

4. Research Recommendation Committee (RRC)

5. Editorial

6. Compliance

Valuation Considerations

10-15 year projection, PV versus

current

Asset-Based Valuations

P/E, P/B, EV/EBITDA, Efficiency,

Margins

ratios vs. peers

company value (multiples history)

High/low in cycle

current P/E justification

Valuation vs. TAIEX

P/E, P/BV, Div Yield, FCF Yield,

EV/EBITDA, EV/Sales

private market values for firms

individual units

break divisions as standalone

entities (sum of the parts)

calculate relative value for each

division

Arrive at blended valuation

Risk Assessment

TP over 12 months

Risk Ranking

43

Industry Analysis 44

1. Define Scope of Industry

2. Identify Key Players

3. Determine Size Metric to Use (Revenues, Market Cap, Net Income, Capacity, etc.)

4. Collect Annual Historical Data for Key Players

5. Forecast Growth for key players

6. Forecast TAM (Determine concentration ratio of key players)

7. Calculate CAGR

8. Check reasonableness of assumptions

45

-

Operations / Talent Development 46

47

Competency Model 48

Strategic Thinking

Business Knowledge

Innovation and Creative Thinking

Business Results

Execution

Analytical Ability

People Leadership

Talent Building

Team Leadership

Collaboration

Personal Effectiveness

Communication

Energy & Drive

Decisiveness

Character

49

Research Assistant

Research Associate

Research Analyst

Star Analyst

Training Curriculum Topics 50

New Hire Orientation - Company's Value, Principles & Leadership, brand and history,

core businesses, global/regional structure

Managing Your Time

Developing your Personal Communication Style

Collaborative Negotiations

Performance Management

Mechanics of Business Writing / Presentation Skills

7 Habits of Highly Effective People (Steven Covey)

Financial Environment

Financial Skills Intro to Corporate Finance, Market Data and Economics, Financial

Analysis, Operational Risk, etc.

Product Knowledge Derivatives, FI, Equities, Capital Markets, Valuation, etc.

Desktop Applications Word, Excel, PowerPoint,

Research Applications - research website, analytics, report/model upload platform

Interesting Reading 51

Liar's Poker (1990) Michael Lewis

Monkey Business: Swinging Through the Wall Street Jungle (2001) John Rolfe and Peter Troob

The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders (1988) Connie Bruck

Den of Thieves (1992) James B. Stewart

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (1990 & republished 2010) Ron Chernow

Best Practices for Equity Research Analysts: Essentials for Buy-Side and Sell-Side Analysts (2010) James J. Valentine

(2013) (2003)

Periodicals: Institutional Investors, Asia Money, FinanceAsia, Bloomberg Markets, Bloomberg Businessweek, The Economist, Forbes, Fortune, Harvard Business Review,

Movies 52

Trading Places (1983) - Comedy

Wall Street (1987)

Barbarians at the Gate (1993)

Boiler Room (2000)

Capitalism: A Love Story (2009) documentary

Inside Job (2010) - documentary

Wall Street: Money Never Sleeps (2010)

Margin Call (2011)

Too Big to Fail (2011)

Arbitrage (2012)

Online Resources 53

http://www.opalesque.com/ - About Hedge Funds

http://www.wallstreetoasis.com/ - Wall street forum

http://www.mergersandinquisitions.com/ - another blog

http://www.efinancialcareers.hk/ - Job Website

http://chandoo.org/wp/ - Excel modeling tips

http://www.careers-in-finance.com/ - Career website

http://www.cfasociety.org/taiwan/Pages/default.aspx - CFA

(Teddy H. Tsai) (Director & CEO)

801 2092

: +886-7-241-2329 123 : 0910723698

: teddy.tsai@markis.tw : http://www.markis.tw

Q&A

54