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  1. STRICTLY CONFIDENTIAL Investment Banking 101 University of Chicago November 8, 2006

  2. Table of Contents • SECTION 1 Overview of Investment Banking2 • SECTION 2 Role of Analyst and How to Get the Job9 • SECTION 3 Career Opportunities at UBS Investment Bank18 • SECTION 4 UBS Investment Bank: A Global Leader21 • APPENDIX A Understanding the Financial Statements27 • APPENDIX B Understanding Debt and Equity38 • APPENDIX C Valuing a Company43 • APPENDIX D Terms to Know49

  3. SECTION 1 Overview of Investment Banking

  4. UBS Investment Bank The Investment Bank is comprised of... Revenue Generators • Investment Banking • Sales & Trading • Asset Management • Private Equity InvestmentBank Support Services • Research Analysts • Information Technology/Operations • General Corporate Services

  5. What Is Investment Banking? Investment Banking is primarily about two tasks: Giving Advice Raising Capital

  6. Giving Advice Investment Bankers act as advisors to industry leaders and key investors Investment Bankers Advise… …on Various Types of Transactions • Management • Equity holders • Debt holders • Prospective buyers • Mergers • Acquisitions • Divestures • Equity offerings • IPOs • follow-on offerings • Debt offerings Additionally, much advisory work is done away from transactions

  7. Raising Money Investment Banks act as an intermediary between entities that require capital and investors Provide Capital Require Capital • Banks • Mutual Funds • Hedge Funds • Private Equity • Pension Funds • Insurance Funds • Individuals • Corporations • Governments Money exchanged for Stocks, Sr Debt, Bonds, Mezzanine Simply put, Investment Bankers get money for people who need it—from people who have it

  8. Where Do You Fit In? At UBS, you will work in either an Industry Group or a Product Group Industry Groups 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

  9. Where Do You Want to Be? Industry Group Product Group Desire for a particular skill-set(i.e. M&A, Restructuring) Passion for a particular industry (i.e. Technology, Media) Motivated to create a toolbox ofskills (i.e. M&A, Equity, LBOs) Would like to be a specialist Focus on building relationships with clients Focus on executing transactions Interact with all product groups Advise all industry groups “Think macrolook at the BIGGER picture!” “Hone in on a particular skill-set!”

  10. SECTION 2 Role of Analyst and How to Get the Job

  11. Hierarchy in Investment Banks: Welcome to the Bottom Managing Director Executive Director Director Associate Director/Associate Analyst You! 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)

  12. What Would You Do? Role of an analyst at an investment bank • 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

  13. What Makes a Good Analyst?

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. SECTION 3 Career Opportunities at UBS Investment Bank

  20. UBS Recruiting at the University of Chicago UBS recruits at University of Chicago for both our New York and our Chicago offices 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 We offer separate resume drops and interview schedules for each office

  21. APPENDIX A Understanding the Financial Statements

  22. The Three Financial Statements There are three key financial statements Balance Sheet Income Statement Statement of Cash Flows • Shows a company’s financial position at a single point in time • Shows how much a company makes over a period of time • Shows how much cash a company generates over a period of time Assets = Liabilities + Equity Revenue – Costs = Profit Profit + Non-Cash Costs = Cash Flow

  23. The Income Statement The income statement tells you the following information

  24. The Balance Sheet The balance sheet provides a snapshot of your financial position at a single moment in time

  25. 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” In Focus: Depreciation & Amortization Understanding depreciation & amortization is key to understanding accrual accounting—the rest is just details What is Accrual Accounting? What Is Depreciation & Amortization? • 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

  26. Depreciation—A Visualization $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 $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm $5mm The information below shows a visualization of how depreciation works The Initial Purchase The Estimate $100mm You borrow money to buy a factory for $100mm You estimate the factory will last 20 years Year 1 By Year 10 By Year 20 In Year 21 New Factory

  27. Statement of Cash Flows The statement of cash flows bridges accrual accounting and cash accounting

  28. What Is the Difference between Net Income and Cash Flow? Net Income and Cash Flow are each important in their own special way Beginner Advanced In theory, differences between net income and cash flow will balance out over the long run—but we can learn a good deal from the short-term differences

  29. Linking the Financial Statements Key to projecting a company’s future financial performance • Financial statements are interactive • with income and cash flow statements and prior year balance—can calculate most current balance sheet • with income statement and two years balance sheet—can 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

  30. How Do the Statements Link? The three financial statements are interlinked—this is why a financial model includes all three The above shows some key relationships, but by no means is all inclusive—this is what makes attention to detail in financial modelling so important

  31. 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 Source: Company reports Notes: 1 Includes Beiersdorf, Clorox, Colgate-Palmolive, Estée Lauder, Kimberly-Clark, L’Oréal and P&G 2 Includes Beiersdorf, Clarins, Estée Lauder and L’Oréal 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 Investment bankers use financial statements every day The above chart raises questions about Avon and Esteé Lauder—why might they be so far apart on this metric when both sell cosmetics?

  32. APPENDIX B Understanding Debt and Equity

  33. What Is Debt? Debt is one way a company can get cash to fund its business needs Debt How Does Debt Impact a Company? • 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) • 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

  34. What Is Equity? Equity is another way a company can get cash to fund its business needs Equity How Does Equity Impact a Company? • Equity is an ownership stake in a company • A company can raise money by offering ownership stakes in the company in exchange for cash • 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

  35. What Is a Capital Structure? Debt and Equity together form a “capital structure” Building a Capital Structure Examples of Capital Structures A capital structure is built as follows: High Debt-to-Cap • Debt = Total money borrowed • Equity = Total shares outstanding x share price • note: this is called a company’s “market value” Low Debt-to-Cap Together debt and equity show the total of all a company’s funding—or “Total Capitalization”

  36. 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

  37. APPENDIX C Valuing a Company

  38. Three Key Valuation Methods Bankers use three key methods to value companies

  39. What Are Multiples? $750K $200K $75K $150K $100K $200K $300K $100K $150K $200K $160 $200 $100 $110 $83 $89 $150 $67 $100 $120 Multiples are used as a way to benchmark valuation for assets of different sizes • Imagine the street below with houses for sale—are they all fairly priced? Example:House Prices on Hillhouse Avenue • Given that the houses are different sizes, it is more meaningful to look at their price as a multiple—in this case price per square foot Example:House Prices Using Multiples

  40. 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 • 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 • 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 company’s stock is relative to current EPS • expect companies with higher growth to be “more expensive” (i.e., have a higher P/E) 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

  41. Discounted Cash Flow Analysis Discounted Cash Flow analysis is driven by two key concepts—time value of money and free cash flow Understanding the Time Value of Money Understanding 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 • 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 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 dividends1 to shareholders Note: 1 Cash can also be reinvested to grow the business, making ownership share more valuable

  42. Discounted Cash Flow Analysis The table below shows an example of a discounted cash flow analysis Discount Rate Terminal Value • 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 • 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 DCF Example

  43. APPENDIX D Terms to Know

  44. 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

  45. 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

  46. 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 company’s 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

  47. Contact Information UBS Securities LLC 299 Park AvenueNew York NY 10171Tel. +1-212-821 3000 www.ubs.com UBS Investment Bank is a business group of UBS AGUBS Securities LLC is a subsidiary of UBS AG