Investment Banking

BNFN3304 Investment Banking Spring 2019/2020

Test 1: 13th April 2020
Instructions:
1. Please read the mini case carefully and answers all the questions.
2. This test have 14 questions which carry a total marks of 35. The overall mark for this test is 12%.
3. This is an open book test and you are allowed to refer to any of the relevant materials.
4. Your answers must not be 85% similar to your friend and failure to comply with this will cause a deduction in your marks.
5. You need to type (I2 TNR- 1.5 spacing) and submit your answers to Blackboard by 14th April 2020 at 4:30 p.m. Late submission due to unexcused reason will result in 1% deduction in the overall marks.
6. There is not limitation of the number of pages for your answer. Please make sure your answer have a valid justification and correct.

BNFN 3304 Investment Banking Test 1: Spring 2020

MINI Case: Leverage Buyout (LBO) Network Multinational Corporation (NMC) with Systemic Company
On February 2010, Network Artificial Intelligence Corporation (NAIC) has started the process of buyout with Systemic Company which is the company’s supplier for chipset, CMOS battery and expansion card. This business deal is expected to be completed within 6 months with a financing structure as below. NAIC company has started operating in 2000 with a paid up capital of $50 million as a technology company. It has been listed in 2006. After more than 10 year operating, the cash flow is showing a strong and stable inflows. Furthermore, NAIC is the first and the leading company in the technology industry with a strong asset base to be used for collateral for financing. Table 1 summarize part of the financial valuation of the company by an intern at investment bank, Mariam Kurbi.

Table 1. Summarize valuation information on Network Artificial Intelligence Corporation

Mariam, who is an intern, need to look into NAIC’s internal analyst presentation, and reports from Thomson Reuters and Morgan Stanley to get a view of what the company is doing in terms of their revenue growth, profitability growth and other factors. The analysis model needed to be build must also come up with three different scenarios and not just match their overly optimistic estimates.
NAIC has spoken with its bank that is willing to provide up to 160 million in secured debt financing at the cost of 12%. NAIC thinks that this should reflect well the overall cost of debt of Systemic Company after the LBO and this should be more than enough debt to achieve the efficiency goals of the LBO. However, there are several conditions given to the NAIC by its bank to fulfil.
• NAIC must not exceed the current debt and limit the dividend payment to borrowers.
• NAIC must pay taxes of 28% and comply with the business law
• The total debt to EBITDA for the fourth quarter should be less than 0.75 and the EBITDA should be at least $2.5 million
• NAIC must not merger and consolidate with other company after the merger with Systemic Company.
• NAIC and its affiliate should not undertake any business transaction which can detriment the creditors.
NAIC has an investment horizon of 5 years. After that, it needs to return the fund/capital to its investors. To accomplish that, it hopes to conduct trade sale of Systemic Company. NAIC has plan several exit strategy which can monetize its capital.
Now Mariam is also looking at Systemic Company information before going further into the deal. She will look into the two marketing material provided by the target company. As she was reading the two materials, she also need to do the due diligence report. After two long day of analysing the two companies, Mariam finally finish her report. She was asked to present it along with other valuation analysis (Comparable company analysis, precedent transaction analysis and DCF analysis).

Based from the following information, answer the following questions:
1) How much is the offer price/purchase price for Systemic Company? (1 mark)
2) What type of sponsor is NAIC? Justify your answer. (1.5 marks)
3) NAIC will finance the buyout using the debt and equity. How much is the percentage of debt and equity? (1 mark)
4) How do you see the risk in its financing structure? Comment on the source of fund
(2.5 marks)
5) What type of merger is this? Justify your answer. (2 marks)
6) What should Mariam do, if she needs to analyse several possible scenario outcome for the buyout deal for NAIC? Explain in detail the tools needed to carry out this analysis using the information you find from the mini case. (3 marks)
7) Why do you think bank put some covenants to the debtors? Explain of the bank debt covenants being imposed on NAIC and list it according to the types of it. (2.5 marks)
8) Why NAIC have to pay a syndicated fees and what do you understand about this?
(2 marks)
9) What is your opinion with regards to the way NAIC is using majority of its fund from the buyout? What is the reason behind it? (4 marks)
10) NAIC is thinking some of the ways to exit from the market. In your opinion, what are the (2) TWO best strategies for NAIC to monetize its capital. (4 marks)
11) Explain the term of goodwill and how does it impact the value of the company?
(2 marks)
12) Using the information from the mini case above, explain the THREE (3) factors which increase the success of the buyout deal from the point of acquirer company side. (4.5 marks)
13) What are the two marketing material Mariam was looking into? Explain in detail about it (4 marks)
14) How do you think Mariam will display her overall valuation analysis using different valuation techniques to her boss? (1 mark)