Investment Banking- Understanding the Deal: The Pitch Process (II)

Banking Operations

In our last post we looked at why companies use investment bankers to sell or buy assets. In this post we try and understand what happens once a company decides to use an Investment Banker. What happens next?

Well they first need to look for a banker. So let’s go back to our earlier example taking the government’s stake sale in its Stuuti companies. Before they decided to shortlist Citibank, ICICI and HDFC, they hold a beauty parade where every banker worth their salt ‘parades’ their wares and offerings during a ‘pitch.’

Quite often you’ll find Investment Banking analyst friends working late on Saturday evening. When you ask them why, it’s quite likely they’ll utter the dreaded words, ‘pitch document’. The Pitch Document is the bread of Investment Banking, it’s the pizza base of that great Margerita. Without a great pitch document, all you are left with are handful of deals you managed to wing through your bosses contacts and even then you’re going to have to pitch for the deal. So what is a pitch document? It is a meeting backed up by a document where a banker convinces you, the client, why they are the best team to sell your asset. How do they do it?

The easiest way to explain this is to liken it to selling a pencil. If I have to sell you a pencil, what would I say? I need to tell you why this pencil is better than all the other pencils out there. I also need to tell you why this pencil costs as much as it does. For that I need to know what goes inside the pencil, how much those cost etc. If I need to sell the pencil on your behalf because you are my ‘client’ I need to know everything YOU know about the pencil. The price I sell the pencil at is the ‘value’ of the pencil. I have to explain to you what that value is and how I arrived at that value. I need to convince you I know everything there is to know about pencils, pencil making, the pencil industry, competing pencils so I can sell this pencil better than anyone else out there. So a usual Pitch Document consists of five elements.

1. Establishing my credentials – how many pencils have I sold before and to whom. Whose pencils have I sold and my expertise in selling these pencils. Perhaps I have someone who used to work in pencil manufacturing, Steadler maybe or Apsara, and knows the nuances of pencil making, has the inside track if you will.
2. Company Overview– I tell you a little bit about your company to show you that I know about your pencils. It’s a little counterintuitive I know but it shows I’ve done my homework and know what makes your pencils tick. I might also use this opportunity to tell you any risks I foresee with selling this pencil. Perhaps the pencil has an eraser that’s of an older technology or uses too much wood etc
3. Industry Overview– Here I showcase how much I know about pencils in general, trends in pencil making, what drives pencils usage, opportunities and risks in pencils which will help me forecast the market for pencils and therefore my clients potential market which will flow down to profitability and cashflows
4. Valuation– Once I have cashflows and industry numbers I put together the pencil’s valuation using both cashflows (DCF) as well as the value multiples of other pencils (Comparable PE and EV/EBITDA, EV/Sales multiples )in the market along with the value of what other pencils have been sold at in the past (Transaction multiples)
5. Potential Buyers of your pencil. Using my considerable industry knowledge I tell you who would be most interested in buying your pencil.

All this and more is taught in our FMVC as well as our Diploma in Corporate Finance, both of which are Mumbai’s best courses in Financial Modeling and Corporate Finance and Investment Banking.


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