NORTHWESTERN UNIVERSITY



NORTHWESTERN UNIVERSITY

KELLOGG SCHOOL OF MANAGEMENT

INVESTMENT BANKING COURSE

FINANCE 461, SECTION 71

FALL QUARTER 2006

WEDNESDAY at 6:00 pm-WIEBOLDT HALL

Professor: David Stowell

E-mail: d-stowell@kellogg.northwestern.edu

Telephone: 847 441-0649 (home); 847-467-0291 (office)

Office: # 447 Jacobs Center

Classroom: Wiebolt

Office Hours: Wednesday 3:30-5:30 pm; 9-10 pm

COURSE DESCRIPTION

This course focuses on investment banking firm organizational structure, products, risks, earnings, regulations, innovations and competition. The functions of the “banking” business (M&A and financings, including equity, bonds and convertibles), the “sales and trading” business (client-related sales and trading and proprietary trading) and other investment banking businesses will be analyzed. In addition, new, innovative Wall Street securities and advisory products will be reviewed. Finally, investment banking relationships with LBO funds, hedge funds and corporate and institutional clients will be explored.

REQUIRED TEXT

Tearing Down the Walls, by Monica Langley (A Wall Street Journal Book published by Free Press in May 2004) is required reading and chapters 1-10 must be read before the first class. There is also a course packet containing additional required reading material. This will be supplemented by readings posted on Blackboard.

GRADING

1. Class Participation (15% weighting)

Classroom comments and questions should demonstrate knowledge of the topic being discussed and facilitate learning for the entire class. Be prepared to be “cold called”, so make sure you have completed assigned readings prior to class. Name plates must be brought to every class: participation points will be lost if name plates are not displayed. Class participation in discussing Tearing Down the Walls represents one third of participation points. Class participation in discussing three case questions (see below) also represents one third of participation points. The remaining points come from participation in all remaining classes.

2. Case Discussion Questions (15% weighting)

A one page response to questions (see questions posted under Assignments in Blackboard) based on your reading and related research should be posted on Blackboard prior to classes #3, #5 and # 7 (exhibits are allowed, if relevant). The purpose of the questions is to ensure comprehension and application of assigned readings and to facilitate class discussion.

3. Class Presentation on financial and M&A market developments (20% weighting)

One group presents each week.

4. M&A Case Paper (20% weighting)

A group paper on an M&A transaction will be due during class # 6 (see description under Assignments in Blackboard).

5. Final Exam (30% weighting)

GRADING PHILOSOPHY

The following is necessary to achieve the highest grade:

• Participation in class discussions

• Teamwork

• Awareness of current financial and merger market conditions

• Effective use of all electronic news media

• Meeting class deadlines

• Class attendance and punctuality

• Name plates at every class

• Insightful and efficient verbal and written communication

• Total adherence to the Honor Code

HONOR CODE

Weekly presentations on market developments and the mid-term case will be completed by groups. These and other group activities must adhere to the Honor Code in every respect, including each group member having a full understanding of any written material that includes a student’s name. For example, even though one student may do the principal work on a spreadsheet, all group members are expected to fully understand the spreadsheet and be able to answer questions regarding it or any other aspect of the group’s product. The Honor Code will, of course, also apply to all individual work as well.

CLASSROOM POLICY

Students should demonstrate respect for the professor and fellow students during the class period. Students, therefore, should refrain from distracting behavior such as disruptive eating, side conversations or using laptops to surf the Web or check e-mail.

SUMMARY COURSE OUTLINE

Class #1

Sept 20

(A) Introduction to Investment Banking

Topics: Course organization and requirements

Overview of investment banking

Historical evolution of the securities industry

Readings: Securities Industry Timeline posted on Blackboard

Structure of an Investment Bank

Investment Bank Organization posted on Blackboard

(B) Competition, Products and Services

Topics: Competitive landscape in investment banking

Principal products and services

Readings: Underwriting Volume and Fee Analysis for 2006 on Blackboard

M&A Rankings for 2006 on Blackboard

Morgan Stanley as a Business

Tearing Down the Walls - Langley (chapters 1-10)

Class #2

Sept 27

(A) Investment Banking Products, Earnings and Risk Analysis

Topics: Analysis of revenue and profit generation

VAR analysis

Readings: Goldman Sachs FY 2005 Financial Statements and Business Overview

Tearing Down the Walls (chapters 11-20)

(B) Securities Regulation

Topics: Principal regulators, regulatory impact

Readings: The Laws that Govern the Securities Industry

Gramm-Leach-Bliley Act of 1999

Sarbanes – Oxley Act of 2002: Summary

Recent SEC Reforms to Act of 1933

Class #3 Answers to Discussion Questions regarding Kmart, Sears and ESL Case Due

Oct 4

(A) Credit Rating Agencies

Topic: Interaction with rating agencies

Readings: Introduction to Moody’s

Standard & Poor’s History

Moody’s Framework for Assessing Hybrid Securities

(B) Wall Street and Corporate Interaction with Hedge Funds and LBO Funds

Topics: Hedge Funds and LBO Funds: impact on corporations and the securities industry

Sears and Kmart Merger: hedge fund ESL’s role

Reading: “Kmart, Sears and ESL: How a Hedge Fund Became one of the World’s Largest Retailers” case study

Class #4 Guest Lecturer: Cary Kochman, Co-Head U.S. Mergers & Acquisitions-UBS

Oct 11

(A) Hedge Funds

Topics: Market Volatility and Crisis Management

Impact of Long-Term Capital Markets (“LTCM”)

Prime Brokerage

Readings: Long-Term Capital Management (“LTCM”): Too Big to Fail?

(B) Mergers and Acquisitions (Part 1)

Topics: Mergers and Acquisitions

Valuation Models

Reading: M&A is an Integral Driver to Maximizing Shareholder Value

Class #5 Answers to Discussion Questions on P & G Acquisition of Gillette Case Due

Oct 18

(A) Mergers and Acquisitions (Part 2)

Topic: M&A Valuation and Judgement

Reading: UBS M&A material posted on Blackboard

(B) Mergers and Acquisitions (Part 3)

Topic: Procter & Gamble Acquisition of Gillette

Reading: “The Best Deal Gillette Could Get?: P&G’s Acquisition of Gillette” case study

Class #6 M&A Case Paper Due

Oct 25

(A) Client Relationship Management

Topics: Client Relationships with Investment Banks

Reading: Important Investment Banking Relationships-Greenwich Associates

(B) Equity Financings

Topics: Equity Financings

Readings: Clues to an Attractive Equity Offering

IDD – “Forget Raising Capital; Block Trades Rule”

Private Placements

Class #7 Answers to Discussion Questions regarding Google’s IPO Due

Nov 1

(A) IPOs and Preferred Stock Financings

Topics: IPOs

Preferred Stock

Readings: Deloitte - “Strategies for Going Public”

IDD – “Google Goes It’s Own Way”

Introduction to Preferred Stock

(B) Debt Financings

Topics: Debt Financings

High Yield Financings

Reading: What is a High Yield Bond?

Class #8

Nov 8

(A) Convertible Financings

Topic: Convertibles

Reading: What are Convertibles?

Convertible Arbitrage note posted on Blackboard

(B) The Role of Exchanges

Topics: New York Stock Exchange

Nasdaq

Chicago Mercantile Exchange

Readings: Securities and Commodities Exchange Definitions

Principal US Securities and Commodities Exchanges

Chicago Mercantile Exchange IPO prospectus

Class #9

Nov 15

(A) Share Repurchase Strategies

Topics: Repurchase strategies and special dividends

Readings: Choosing the Optimal Capital Structure

Microsoft’s $75 billion Cash Reward

(B) Innovation on Wall Street

Topics: Derivative transactions and hybrids

Readings: Marshall & Illsley material posted on Blackboard

Class #10

Nov 29

A) New Product Development and Fostering Creativity

Topics: New product development and fostering creativity

Readings: Nikkei Put Warrants chapter on Blackboard

(B) Course Review

Final Exam

Dec 6

REQUIRED BOOK

Tearing Down the Walls – Langley (Required Reading)

RECOMMENDED BOOKS ABOUT INVESTMENT BANKING

Barbarians at the Gate – Burrough and Heylar

When Genius Failed – Roger Lowenstein

Goldman Sachs: Culture of Success – Endlich

Liar’s Poker -- Lewis

Greed and Glory on Wall Street – Auletta

Den of Thieves -- Stewart

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