|Understanding the Facts and Mechanics|
|http://www.sina.com.cn 2004/07/19 16:55 新浪教育|
Understanding the Facts and Mechanics of Major Transactions Well
In Corporate Finance
If you are seeking for a new associate position in corporate finance, you may want to spend time researching in-depth into a few high profiles or recent major mergers & acquisition deals. The specific knowledge you are seeking would be the rational behind the acquisition. If applicable, you want to find out why the acquired firm was willing to sell. The basis of valuation is always something that interests everyone, including investors, financial industry practitioners, industry people and employees of the companies in play. What were the valuations parameters cited by investment research analysts and financial columns (the leading financial newspapers or magazine such as The Wall Street Journal, Financial Times, Forbes, Barrons, etc.) and what were the controversies, (if any), surrounding the transaction?
You should clearly understand the financing methods employed by the acquirer. They usually involve utilizing cash, bank debt, raising funds through selling of assets, private equity, issuance of equities and/or debt securities, or combination of the above. Pay attention to changes in the capital structure before and after the acquisition and how the company intends to generate cash flows to pay off the debt.
Shortly after the merger acquisition, the combined company usually embarks on a series of cost cutting measures, initiatives to streamline business operations and divestiture programs.
In Equity Capital Market
If you are looking for a position in the equity capital market, you should look into a major initial public offering. The specific knowledge you are looking for are valuations and industry comparable factors, order taking methods, pricing mechanics, organization of selling group, investor type and market perception versus the actual after-listing performance.
Valuation: What were the valuation methods used in this case, such as P/E ratio, EV/EBITDA*, Price-to-book, P/E to sustainable growth rate, Price-to-Sales, etc.
*Arrived at by dividing the Enterprise Value (EV=Market Value + Debt-Cash) by the Earnings before Interest, Tax, Depreciation, Amortization (EBITDA).
Order Taking: What was the method chosen for this deal? An American-style book- building; first-come, first-serve; tender offer, etc. In some cases, the order taking method is inextricably linked to the pricing. In other transactions involving privatization of government-owned companies, it may have a special arrangement where a certain portion was set-aside for citizen retail investors.
Organization of selling group: Who were the lead manager and co-lead managers? Who was the global coordinator if it was a global offering deal?
In Securities Sales
If you are looking to pursue a career in securities sales, the preparation should include learning about two to three companies in different industries that interest you the most and be ready to discuss the following topics with confidence:
Every investment recommendation of a company must be accompanied by an investment theme. The investment theme is the central thesis that defines the merits of the company as an investment. It characterizes its business competitive advantage and factors that will help the company to achieve its financial targets.
Wal-Mart is a superbly-managed mass merchandiser that is expected to deliver 8 to 10 percent earning growth rate for the next 3 years, notwithstanding a low inflationary environment with anemic economic outlook in the U.S. It can achieve this above-industry growth rate through its continuous improvements in the inventory control program and cost savings through merchandize sourcing programs in China and S.E. Asia. The super-mart stores rollout in China is gaining momentum as the Chinese government has further relaxed foreign ownership restriction on mass merchandisers. Business in China is expected to contribute positively to earnings by the first quarter of 2003. With a P/E to growth rate at the mid-point of its historical range of 2.2 to 1.6, it offers a great opportunity for growth-oriented investors, and looks attractive even to value investors.
Relevant valuation tools
The investment research community has developed different valuation tools for different industries. This is necessary because some of the industries are capital asset intensive with substantial depreciation, such as capital goods manufacturers. Other industries may have little capital asset but with high research and development cost such as software companies. Even companies within the same industry may have very different strategies for achieving growth. For example, some companies rarely make acquisitions but rely on organic growth, whereas their competitors in the same business may rely on aggressive but disciplined acquisition programs to attain earning growth. The latter will have high amounts of goodwill amortization. Hence, applying the suitable valuation tools is essential in the accurate evaluation of companies in different industries.
The tables on previous pages illustrate how companies in an industry are evaluated relative to their peers in their industry group. The companies are evaluated comprehensively across the various measures, which reflect growth, earnings, returns, productivity, valuation and dividends.
Such analyses will enable investment professionals to make measured investment decisions. A probable scenario is when an investment committee decides to allocate further investment funds to big cap stocks in the consumer, cosmetics and household products sector, so as to take advantage of its relative stability in a very volatile market. The following are the typical steps in the decision making process:
Which are the stocks that still display good relative valuation? From the above tables, one could arrive at the following three names, Kimberly Clark, Procter & Gamble and Unilever PLC. They stand out as their key relative valuation measures-Relative Price Earnings (PE) Ratio, Price/Cash Earnings (CE), Price Earnings Ratio/Earnings Growth Rate(PEG) and Enterprise Value (EV)/EBITDA multiple-are clearly below their peers.
One could then focus on the fundamentals as projected by the earnings estimations. Unilever PLC would be distinguished by its strong projected earnings growth of 25% FY2001.
But funds requiring investments to pay dividends will not find this stock attractive as their dividends and yield are significantly lower than their peers in the industry.
Thus if dividends are not a major concern, Unilever PLC could be the stock chosen at this stage. But before any decision is taken, there are more questions to be addressed:
How confident is one with the numbers provided in the above tables? Are the numbers provided in the above analysis too aggressive, out of line with market projections and consensus? One might have to do some scenario analysis to evaluate the downside risks if the projected growth does not take place.
What are the risks factors, macro, industry and company specific in the horizon that could derail the fundamentals? Are risks pertaining to Unilever PLC’s fundamentals more pronounced and apparent? What are the profit margins of the various companies, and what are the risk factors that would have a negative impact on this critical component? How does the balance sheet look like, e.g. its debt equity ratio versus its peers and industry? What impact does projected interest rate movements have on the balance sheet and business operations/profitability?
What are the fundamental driving factors behind the strong earnings growth projections? Are the assumptions realistic?
Thus a company’s numbers relative to its peers and industry is a good starting point to have a good macro overview of its strengths and competitive positioning, although one has to look further into company-specific factors as well (e.g. Business Composition, Management Team, Differentiating Factors, Risks-discussed further below) before making an investment decision.
Relative to its growth potential:
This is another useful valuation parameter in addition to the ones seen above. In this ratio, one compares the Price Earnings Ratio (PEG) of a stock to its growth rate (PEG). This ratio ranges from less than 1.0 for cyclical stocks to above 2.0 for businesses with sustainable growth. At the height of the technology stock boom, PEG ratios for some high profile technology stocks have exceeded 4.0 for some high profile technology stocks. The PEG ratio was used to justify and compare the high P/Es of the various Internet tech stocks and justify their lofty valuations. All these collapsed when the “Growth?leg of the valuation collapsed.
Be familiar with the key businesses that make up the company and their respective revenue and profit contributions. The other important aspect is to understand what businesses will contribute to the future growth of the company.
Is the management team doing a good job in enhancing shareholders?value? What is the management team’s performance on corporate governance? Will the same management team continue to be in place over the next 2 to 3 years to carry out the key initiatives? Is there a succession plan with identified candidates with proven record within the organization? Will the company continue to attract and train new talent?
How different is this company compared to its peer group? What are some things that this company is able to do so well? What are the key differentiating factors? Some of the examples may include brand marketing, execution capability, creation of shareholders?value, etc.
Price target and earning expectation:
Typical, a 12-to-18-month price target is established when an analyst put a stock on his recommended list. The purpose is to allow investors to gauge the upside given a time frame. The price assumption always hinges on certain estimates, such as earnings expectations, earnings and turnover growth, margins expansion, market conditions, etc. The price is the final manifestation when things fall in place.
No stock recommendation will carry much credibility if the risks associated with the investment were not highlighted and explained. The risk analysis examines some of the possible scenarios where the investment thesis may be derailed. In the previous example of Wal-Mart, the risk factors could be that the rollout of stores in the various cities in China may be delayed due to lease negotiation with provincial governments. The other example of risks may be that, given the less efficient transportation and distribution system in China, Wal-Mart may be unable to obtain further significant cost savings from inventory control for its operation there. Hence, the merchandiser may fail to meet its profitability forecast in the first quarter of 2003.
In The Fixed Income Division
If you are looking to join the fixed income division of a global financial institution, you should be familiar with the following key drivers of this massive US$36 trillion market.
Be familiar with the various credit rating agencies such as Moody’s, Standard & Poor, and Fitch. The following are the ratings by Moody’s and it illustrates the investment and credit quality of the bonds.
Bonds and preferred stock which are rated “Aaa?are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt edged? Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Bonds and preferred stock which are rated “Aa?are judged to be of high quality by all standards. Together with the “Aaa?group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in “Aaa?securities; or fluctuation of protective elements may be of greater amplitude; or there may be other elements present which make the long-term risk appear somewhat larger than the “Aaa?securities.
Bonds and preferred stock which are rated “A?possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Bonds and preferred stock which are rated “Baa?are considered as medium-grade obligations (i.e. they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Bonds and preferred stock which are rated “Ba?are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
Bonds and preferred stock which are rated “B?generally lack characteristics of the desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small.
Bonds and preferred stock which are rated “Caa?are of poor standing. Such issues may be in default or there may exist present elements of danger with respect to principal or interest.
Bonds and preferred stock which are rated “Ca?represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
Bonds and preferred stock which are rated “C?are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Interest Rate Yield Curve
The graphic representation of the various interest rates at the various tenors of a particular government bond market gives a snapshot of interest rate expectations over time. Changes in the yield curve over time are closely analyzed by market professionals.
Following is an example of the US yield curve, shaped by US Treasuries. Note the following:
1.The yield curve is shaped by very specific securities, whose yield is taken as a benchmark for that period.
2.There are many outstanding 3 months bills as well as 30 year bonds, but only one specific one will be picked to be reflected on the yield curve.
3.The US government has stopped issuing 30 year bonds, thus the main liquidity for a long term USD benchmark is taken over by the 10 year bond.
4.When market participants mention that the yield curve has moved up or down, or the long end or short end of the curved has moved, it simply points to the changes in yield of the various benchmarks.
Tue., 13 Aug . 2002, 10:36pm EDT
The yield curves of the other major economies are shaped by the government bonds of the respective countries, such as the JGBs of Japan, Gilts of United Kingdom, and Bunds of Germany.
Interest Rate Movements
The U.S. treasury yields are volatile (and correspondingly, the treasury prices), and this would in turn have an impact on the benchmark yield curve, and bonds that are priced off these benchmarks. The following two charts show the movement in yields of the U.S. 2 year and 5 year note over between 2001 and 2002.
Prices of corporate and emerging market bonds are quoted as spreads (interest differential) over relevant yield curve benchmarks in inter bank dealings. These spreads represent the additional yield over the benchmarks and reflect the additional investment risks the paper carry. The U.S. treasury benchmarks represent the lowest USD fixed income investment risk available to investors. Credit spreads will fluctuate and can be volatile, depending on the underlying fundamentals of the emerging economy or corporate. The greater the risks, the higher the yield, and correspondingly, the lower the price of the bond.
The following two charts depict the spreads over treasuries of the Hanvit bond maturing in 2005. Note how the spreads moved in the period April 2001 to September 2002, from a high of 800 basis points in April 2001 to above treasuries to below 300 basis points above treasuries in September 2002. This move is caused by the improved outlook and fundamentals of the Hanvit credit and would have resulted in significant profits for the investor who invested in the Havit 2005 bond in April 2001, provided the USD benchmarks did not erode the gains.
Korea: Korea vs Hanvit
Note that investments in Fixed Income securities consist of 2 types of risk. I)Interest rate risks-affecting the overall underlying markets/benchmarks and II) Spread risks-specific to the investment itself, e.g. the Korean corporate Havit , that will move in accordance to the credit risk of the underlying. Returns on bond investment incorporates these two components of risks. Traders can trade away the underlying interest rate risks by hedging in the interest rate futures market. The table on the previous page is an example a Bond Investment Return Calculation, illustrating the tightening of spreads and with the benchmark interest rate remaining constant.
The G7 bond markets, e.g. U.S., Japan, accounts for the major flows of the fixed income markets. Outstanding fixed income issues as of year 2001 amounted to over US$36 trillion, and over 50% of these were issued by sovereigns or agencies sponsored by them. The bulk were domestic issues, catering to the savings and investment requirements of the local markets. Turnover of USD treasuries amount to over US$20 billion daily.
Be aware of some of the key characteristics of these markets and credit events in recent times, E.g. what happened in Argentina and Brazil in 2002. Although this market often grabs the news headlines, it is relatively small compared to the major G7 government bond markets.
Have an idea how bond portfolio managers and traders manage their interest rate risks. The interest rate futures contracts, such as the Eurodollar futures or forward contracts, are the key instruments used by professionals to hedge interest rate risks. Market players also utilize derivative instruments to hedge risks.
What Are The Key Trends In The Global Bond Markets Currently
The markets are seeing a rising trend of securities being issued by private companies, a result of the disintermediation between the banks and corporate borrowers. With the exception of Japan, due to surpluses run up by the major economies, they are also issuing less public debt securities.
In The Foreign Exchange Division
If you are looking to join the foreign exchange division of a global financial institution, you should be familiar with the following key drivers, basic transaction mechanics, and market conventions of this market.
Before that, here is a list of major currencies traded in the global foreign exchange(FX) markets and their corresponding codes:
FX rates are expressed in terms of one currency’s value relative to another. One Chinese Yuan is one Chinese Yuan, but its real value is when it is expressed relative to another currency. In the global FX markets, this has invariably been the U.S. Dollars(USD), but the EURO(EUR) has also emerged as a major reference currency, as statistics compiled by Bank for International Settlements(BIS) shows.
As mentioned earlier, currencies are quoted relative to each other, thus, they are quoted in pairs. The convention for the currency market is for currency pairs to be quoted with reference to currencies such as U.S. Dollars(USD), Euro(EUR), Sterling Pound(GPB), and Australian Dollar(AUD). As the US economy dominates the world, and most global trade is carried out in USD, the USD reference currency trades account for half of the Foreign Exchange Markets transactions. The EUR and JPY reference trades formed the two other significant blocks, according to the folloeing numbers from BIS in the previous table. The EUR is growing in importance as a reference currency and in the FX dealing convention, all other major currencies are quoted against it. So in the case of USD versus EUR, it is quoted as EUR/USD by the inter-bank markets, i.e. how much amount of USD needed to buy 1 EUR. In addition to convention, transactions in the FX markets are quoted in a certain format. The following are illustrations of the major currency pairs:
USD and EUR Currency Pairs-Market Quote Convention
The FX rate of any particular country is always a key concern of the finance officials and businesses of the respective countries. When investors evaluate any investment proposals, the stability and strength of the investment currency is of key importance. The ability to hedge this exposure is critical. Businesses want to be competitive and a lower FX rate does help. But central banks have to contend with imported inflation, maintaining growth, amongst other considerations, thus their FX strategy will be more complex as the FX rate is only one component of their monetary policy equation.
There are times when events are beyond the capacity and ability of the central banks to control. The Asian Financial Crisis in 1997 forced the currencies of Indonesia, Malaysia and Thailand to weaken significantly, and the central banks of the respective countries were not in a position to counter the massive capital flows against it; thus, their respective currencies were effectively devalued. Singapore, which was in a strong fiscal position, also saw its currency weaken significantly due to her proximity to the weaker neighbors. The following table illustrates the magnitude of the loss in numbers:
There are numerous factors that affect the strength of one country’s currency against another. The following are some frequently mentioned factors:
Economic growth or weakness. A strong economy relative to another would typically result in a relatively stronger currency. The U.S. is the world’s biggest economy and the focus of the market is typically on the strength of the USD (or U.S. economy) versus the rest of the world’s currencies.
Global capital flows. The relative strength of an economy would typically result in attracting investment capital flows. For instance, the strength of the USD from 1995 to 2001 is highly correlated to the strong performance of USD financial assets and US economy.
Speculators, traders and sentiments contribute significantly to the volatility of the FX markets. In the well known case of the GBP peg in 1992, the major players in the FX market actually challenged the Bank of England, no less, and forced a devaluation of the GBP, making billions in the process. At the end of August 1992, the “Quantum Fund?led by George Soros shorted USD 7 billion worth of pound sterling and bought Deutsche Mark worth USD 6 billion. The sterling was under tremendous pressure and subsequently devalued in spite of interventions by the Bank of England. Finally, the British government was forced to quit the Exchange Rate Mechanism of European Community (ERM). George Soros gained his global fame and known as “The Man Who Broke the Bank of England”and “The Man Who Earned 1.5 Billion Dollars within A Week?
有各种各样的债券评级公司评估金融市场的债券。你应该熟悉以下几家国际著名的信用评级公司：穆迪(Moody’s)、标准普尔(Standard & Poor)和惠誉国际信用评级有限公司(Fitch)。下表是穆迪公司对债券的投资信用等级的评估指标。
评为Aa级的债券表示根据各种标准评判，其品质优良。Aa级与Aaa级债券通称为高品质债券。其被评为较最佳等级低，是因为保障边际(margins of protection)不如Aaa级充足，或保障因素的波动可能较大，或可能呈现其他因素，使长期风险较Aaa级债券稍高。
美国国债收益率曲线有颇大的波动幅度(与此相对应，国债的价格也经常发生变化)，而且这将反过来作用于基准收益率曲线(benchmarks yield curve)。此外，债券的价格也是以收益率曲线作为标准的。下面两个图表显示了在2001至2002年度的某个时段中，2年期国债与5年期国债的收益率曲线的变化情况。
在银行与机构投资者的交易盘市场，公司发行的债券和新兴市场债券(emerging market bonds)的报价是基于相关收益率曲线基准的利差(spreads/interest differential)。这些利差代表了在基准之外附加的收益率，反映了额外的投资风险。美国国债基准(US treasury benchmarks)是指投资者在固定收入债券投资方面所经受的最低风险。债券信用差额将上下波动而且可能不稳定，这要看一些新兴经济体或新兴公司的基本面状况(underlying fundamentals)如何。
下面两个表描述了韩汇银行 2005年到期债券的利差。请注意利差在2001年4月至2002年9月间是如何变化的：从2001年4月高于国债800个基点的利差到2002年9月高于国债将近300个基点的利差。这种利差的变化是由于韩汇银行提高了其企业业绩的前景预测和改进了基本面的措施(improved outlook and fundamentals)所致，在美元不贬值的前提下，在2001年4月投资韩汇银行2005年到期债券的投资者获得了相当可观的利润。
Korea: Korea vs Hanvit
请注意债券投资包括两种类型的风险：1)利率风险——影响整个市场(underlying markets)和基准利率；2)利差风险——具体到投资本身，例如韩汇银行，利差风险是根据信用风险而变化的。债券投资回报结合了以上两种风险。债券交易商可以在利率期货市场上(interest rate futures market)通过对冲(hedging)规避利率风险。前面的表格是一个债券投资回报计算(Bond Investment Return Calculation)实例：利息率的基准保持不变的前提下，分析了利差缩小的状况。
七大工业国的债券市场(G7 bond markets)，例如：美国的债券市场和，日本的债券市场，就占据了国际债券市场流通的主要部分。2001年，它们发行的未清偿债券达到360兆美元，其中超过50%的部分是由国家或是它们的代理机构发行的。此外，绝大多数的债券是在国内发行的，主要是为了满足当地市场的储蓄和投资需求。美国债券市场的日成交量达到美元2000亿。
你知道债券基金经理和债券交易商是如何管理利率风险的吗？他们通过运用利率远期契约，例如欧洲美元期货或远期契约(Eurodollar Futures or Forward Contracts)作为风险规避(hedging)的有效金融工具。至于在市场上具体操作的行家，他们也通过使用金融衍生工具来规避风险。
最近全球债券市场上私营公司发行债券的势头趋于看涨，这是因为银行和公司借款者(corporate borrowers)之间产生“脱媒现象”(disintermediation)或者叫“逆中介化现象”(即指资金需要者采取发行证券而不是采取向金融机构借款的方式筹措资金)。日本是个例外，但是由于主要经济的资金积累过剩日本政府也发行较少数量的公共债券(public debt securities)。
如果你想加入国际金融机构的外汇交易市场(global foreign exchange)业务部门，你应该熟悉以下的重要推动因素、基本交易方法以及外汇市场的操作惯例。
外币交易的汇率是以一种货币与另一货币的相对价值来表现的。1元的人民币就是1元的人民币，而它的真正价值只有当它被另一种货币的价值表达时才得以体现。国际清算银行(BIS，Bank of International Settlement)的统计显示：在国际金融市场，美元一直作为其他货币的参照货币，而欧元作为另外一种参照货币也在逐渐崛起。
曾经也发生过一些超出了中央银行能力控制范围的事件。1997年发生的亚洲金融危机(Asian Financial Crisis)使印度尼西亚、马来西亚、泰国的货币急剧贬值，这几个国家的中央银行不能应付巨大的资本流动(capital flows)，它们的货币因此都相应地贬值了。新加坡当时虽然经济实力很强，但是由于受到邻国货币贬值的影响，新加坡币也未能幸免。
·投机者、交易商和市场信心(sentiments)对外汇交易市场的波动影响巨大。大家所熟知的1992年英镑钉住汇率制事件中，外汇交易市场的操盘手实际上已经挑战了英国央行(Bank of England)，不仅如此，他们甚至迫使英镑贬值并从中获利达数十亿英镑。(乔治·索罗斯领导的“量子基金”在1992年8月底，短期内作空卖出了70亿美元的英镑，购进了60亿美元的德国马克。结果，尽管英格兰银行不顾一切地买进，英镑还是狂跌了，这迫使英国政府撤出了欧共体的汇率机制。这么一来，索罗斯突然有了国际声望，被称为“击败了英格兰央行的人”和“一周内挣了15亿美元的人”。)
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