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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