MA and Investment Banking Lecture 2 Investment Banking

M&A and Investment Banking Lecture 2 – Investment Banking Client Segments 1

Investment Banking Client Segments Corporate Financial Institutions Private Equity & Sovereign Wealth Funds Governments 2

Investment Banking Client Segments Corporate & Financial Institutions 3

Corporate Assets Cash Management Liabilities & Equity Lending Cash Debt Advisory Bond Risk Management Assets Convertible Acquisitions & Disposals Financial Investments Equity Hedging Asset and Liability Management 4 IPO Follow-on Offering

Asset base Intangible Assets Of which goodwill for € 15 bn Equity Investments (Equity method) Non-current Financial Assets Of which Equity investments in other companies for € 285 m (10% of Bayan Resources; 7% of Echelon; other) Consolidated Enel Group Subsidiaries Among which: a stake of 92% in Endesa, a stake of 68% in Enel Green Power and a stake of 66% in Slovenské elektrárne 5 Source: Company report

Financial Position € 4, 7 bn € 51, 1 bn € 2, 5 bn (€ 18. 5 bn) € 39, 9 bn Long-term loans 6 Source: Company report Short-term loans Current portion of long-term loans Liquidity Net Debt

Financial Institutions Assets Liabilities & Equity Advisory Cash Management Cash Deposits Advisory Loans Acquisitions & Disposals Financial Investments Hybrids Equity Hedging Asset and Liability Management 7 Risk Management IPO Follow-on Offering

Consolidated Balance Sheet Financial Assets Held for Trading Non-derivatives (Debt securities, Equity instruments, Units in investment funds, Loans): € 4 bn Derivative instruments: € 8 bn 8 Source: Company report Loans and Receivables with Banks Loans to Central Banks: € 2 bn Loans to banks: € 20 bn Loans and Receivables with Customers It includes: Current accounts, Mortgages, Credit Cards, Finance leases, Factoring, etc. Financial Investment It includes investments in Fondiaria Sai Spa (7%) and Mediobanca (9%)

Consolidated Balance Sheet Deposits form Banks Deposits from Central Banks: € 14 bn; Deposits from banks: € 33 bn 9 Source: Company report Deposits from Customers Current accounts and demand deposits: € 109 bn Time deposits: € 3 bn Loans: € 33 bn Others: € 6 bn Debt securities in issue: € 120 bn Financial Liabilities Held for Trading Of which, Derivatives for € 9 bn

M&A Firm Growth Organic Growth (i. e. : investing in technology, new products, new people) Bolt-on Acquisitions (i. e. : within the realm of a company’s existing operations) Alliances and Joint Ventures Strategic Acquisitions Types of M&A Transactions Overcapacity Deals e. g. : Daimler. Benz acquires Chrysler (1998) 10 Product/ Market Extension Financial deals in which a multi -business company sells a division to a financial acquirer Geographic Roll-ups GE acquires Nuovo AB In. Bev sells its Banc One buys Pignone in Italy theme park division scores of local (1993) to Blackstone (2009) banks in the 1980 s Source: Fleuriet, 2008. Investment banking explained. Mc. Graw-Hill M&A as a Substitute for R&D Between 1996 and 2002, Cisco acquires 62 IT firms Industry Convergence Deals Seat-Pagine Gialle merger with Tin. it (2000)

1980 – 2014 YTD Italian M&A Rankings by Transaction Value N. Date Acquiror Target Transaction value (USD bn) 1 Jan-07 Banca Intesa San. Paolo IMI 37, 6 2 May-99 Olivetti Telecom Italia 34, 8 3 Oct-07 Unicredito Italiano Capitalia 29, 5 4 Jun-05 Telecom Italia Mobile 28, 8 5 Aug-03 Olivetti Telecom Italia 27, 8 6 Oct-07 Enel Endesa 26, 4 7 Apr-11 Vimpel. Com Weather Investments 22, 4 8 Nov-99 Italian government (privatizat. )Enel 18, 7 9 Jan-11 Fiat (spin-off) Fiat - Auto Business 18, 5 10 Nov-05 Unicredito Italiano HVB 18, 3 11 Nov-00 Tin. it Seat Pagine Gialle 18, 2 12 Jun-08 E. ON Endesa Italia 14, 3 13 Jun-09 Enel Endesa (additional stake) 13, 5 14 May-08 Monte dei Paschi di Siena Banca Antonveneta 13, 2 15 Aug-05 Weather Investments Wind Telecomunicazioni 12, 8 16 Dec-99 Banca Intesa Banca Commerciale Italiana 12, 8 17 Oct-98 Credito Italiano Unicredito 11, 0 18 Oct-04 Investors Enel 10, 3 19 Jan-00 Assicurazioni Generali INA 10, 2 20 Oct-05 Vodafone Omnitel 10, 1 11 Note: as of August 2014

ECM & DCM Equity Capital Markets Raise equity capital for companies Initial public offerings Follow-on offerings ABBs Private placements Debt Capital Markets Fixed income capital raising 12 Corporate plain vanilla Perpetual debt Mezzanine finance High-yield bonds Structured-finance products Source: Fleuriet, 2008. Investment banking explained. Mc. Graw-Hill Collateralized debt obligations Project finance

1980 - 2014 YTD Italian ECM Rankings by Amount of Proceeds 13 Note: as of August 2014

Derivatives Derivate Contracts Definition: security whose price is dependent upon or derived from one or more underlying assets Usage: Hedging vs. Speculation Provide leverage Pure speculation Risk management/hedging Exposure to non-traded underlying assets (e. g. : weather) Option (derivate contract linked to a specific condition or event) Markets: Over-The-Counter (OTC) derivatives vs. Exchange-traded derivative contracts (ETD) Derivative Contracts Types Forwards 14 Futures Options (put/call) Put: ERG-LUKOIL Call: Unicredit cashes Swaps Warrants (interest rate / currency)

Investment Banking Client Segments Private Equity & Sovereign Wealth Funds 15

Private Equity Definition: Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet Private Equity Investment by Age of the Portfolio Company Angel Investing Youn g 16 Early Stage Venture Capital Later Stage Venture Capital Age of Firm Source: Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1 Cheffins, B. R. , Armour, J. , 2007. The Eclipse of Private Equity. ECGI - Law Working Paper No. 082/2007. Available at SSRN: http: //papers. ssrn. com/sol 3/papers. cfm? abstract_id=982114 Buyouts Matur e

Private Equity Typical Stages of a Private Equity Fund Organisation/ Fund-raising Investment Management Harvest Years 0– 1. 5 17 Years 1 – 4 Years 2 – 7 Source: Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1 Years 4– 10

Private Equity The Private Equity Process Venture Capital and Private Equity Firms Investor s Provide capital Portfolio Companie s Identify and screen opportunities Transact and close deals Monitor and add value Raise additional funds Use capital Money Limited Partners Pension funds Individuals Corporations Insurance Companies Foreign Endowments Return of principal plus 75– 85% of capital gain Money Gatekeepers 1% Annual Fee 1. 25– 3% annual fee General Partners 15– 25% of capital gains (carried interest) Entrepreneurs Opportunity creation and recognition Execution Value creation Harvest IPOs/Mergers/ Alliances Equity 18 Source: Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1

Brief History of Private Equity Private equity finance can trace its roots back to private financing of railroad and textile mills in the 19 th century Many subsequent government programs War Finance Corporation 1918 Granted credit to essential war industries Advanced over $71 million In post-war years it financed railroads and agriculture Reconstruction Finance Corporation 1932 Lent money to “all businesses hurt by the Depression, large and small” 19 Source: Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1

Brief History of Private Equity Smaller War Plants Corporation 1942 Assisted smaller businesses in wartime with capital expenditures “Encouraged large financial institutions to make credit available to small enterprises” Georges Doriot founds American Research and Development 1946 First VC firm Famous for backing Digital Equipment Corporation Small Business Administration Proposed in 1952 by President Eisenhower Created by the Small Business Act of 1953 Investment Company Act of 1958 creates Small Business Investment Company (SBIC) Program Started because Federal Reserve found small businesses could not find the credit they needed to keep pace with technology advancements 20 Source: Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1

Brief History of Private Equity 1960 s bull market helps VC firms realize harvests Buyout arena also prospers First LBO: Lewis Cullman and buyout of Orkin Exterminating Company 1970 s was a bleak decade for private equity Poor IPO market Passage of Employee Retirement Income Security Act (ERISA) of 1974 “Prudent Man” rule The end of the 1970 s set the stage for growth in private equity “Prudent Man” rule clarified Capital Gains Tax reductions IPO market becomes strong 21 Source: Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1

Brief History of Private Equity Historical Venture Capital and Buyout Annual Investment Levels, 19751989 Venture Capital 22 Buyout s Source: Thomson Venture. Xperts database – Cendrowski et al. (2012); Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1

Brief History of Private Equity Private equity boomed throughout the 1980 s Leveraged buyout boom of the late 1980 s Mammoth takeovers such as KKR 1988 acquisition of RJR Nabisco However, returns started to plummet as more players entered the arena Economic recession of the early 1990 s also drove down returns In the mid-1990 s, investors seemed enamored with “new economy” IPOs Venture capital skyrockets; Buyouts also began to rise Historical Venture Capital and Buyout Annual Investment Levels, 19952000 Venture Capital 23 Buyout s Source: Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1

Brief History of Private Equity Dot-com bubble bursts on March 13, 2000 For several years, private equity funding levels remained low Golden age of private equity (2003– 2007) Credit boom subsequently triggered a leveraged buyout binge In 2007, Blackstone completed a $4 billion initial public offering to become one of the first major private equity firms to list shares in its management company on a public exchange 2007 -2008 subprime loans crisis and credit crunch halted the private equity boom 24 Source: Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1

Historical Private Equity Returns Historical Returns to Venture Capital and Buyout Funds 25 Source: Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1

Top 20 Global Private Equity firms 26 Source: Private Equity International. 2013. PEI 300

The Blackstone Group Alternative Asset Management Private Equity Real Estate Hedge Fund Solutions Credit Businesses Closed End Funds Financial Advisory 27 Source: Company website Blackstone Advisory Partners (M&A activity, spin-offs, private placements, structured products and other transactions) Restructuring & Reorganization Park Hill Group (raising capital for alternative investment managers)

The Future of Private Equity Four Scenarios of the Future of the Private Equity Industry “Fair” Returns Disappointing Returns 28 Constant Investor Base Turnover in Investor Base Recovery Back to the Future A Brocken Industry The Limited Partners Desertion Source: Lerner, J. , 2011. The Future of Private Equity. European Financial Management, Vol. 17: 3

Sovereign Wealth Funds Definition: state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports. The definition of sovereign wealth fund exclude, among other things, foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes, state-owned enterprises in the traditional sense, government-employee pension funds (funded by employee/employer contributions), or assets managed for the benefit of individuals. SWFs by Funding Source 29 SWFs by Region Source: Lerner, J. , 2011. The Future of Private Equity. European Financial Management, Vol. 17: 3; Sovereign Wealth Fund Institute, as of November 2010

Top Sovereign Wealth Funds 30 Source: Sovereign Wealth Fund Institute, as of August 2014

Investment Banking Client Segments Governments 31

Government Privatizations Privatization Definition: giving up of control, by the general government over a State Owned Enterprise (SOE), primarily by the disposal of shares and other equity in this enterprise Direct sale of financial assets Indirect sale (the sale of shares is not done directly by the government but by a public corporation - e. g. : public holding corporation - or any kind of government agency) Specific case: restitution of assets to former owners (in kind or through financial compensation) Proceeds to Government Extent of Competition 32 Source: Dupuis, J. , 2005. Privatisation And Nationalisation. TFHPSA Conference paper Benefits to Customers

Government Privatizations – International Perspective 1961 Adenauer government in the Federal Republic of Germany launched the first large-scale, ideologically motivated "denationalization" program of the postwar era Sale of majority stake in Volkswagen; sale of a large stake in VEBA 1984 -1997 Thatcher’s privatizations as a basic economic policy in the UK British Telecom initial public offering in November 1984 A series of increasingly massive share issue privatizations between the mid 1980 s and early 1990 s reduced the role of SOEs in the British economy to essentially nothing after the Tories left office in 1997, from more than 10 percent of GDP 18 years earlier Objectives: (1) raise revenue for the state, (2) promote economic efficiency, (3) reduce government interference in the economy, (4) promote wider share ownership, (5) provide the opportunity to introduce competition, (6) subject SOEs to market discipline, (7) develop the national capital market Privatizations in France, Spain, Italy, Germany during the 1990 s Japan: few privatizations but truly enormous The three Nippon Telegraph and Telephone share offerings executed between February 1987 and October 1988 raised almost $80 billion, and the $40 billion NTT offer in November 1987 remains the largest single security offering in history 33 Source: Megginson W. , L. , Netter, J. , M. , 2001. From State To Market: A Survey Of Empirical Studies On Privatization. Journal of Economic Literature

Government Privatizations – International Perspective China (late-1970 s) and India (1991) privatizations In response to highly disappointing SOE performance In both cases it has thus far not figured prominently in the reform agenda Latin America has truly embraced privatization Chile’s program was the Latin America’s first - 1990 Telefonos de Chile Mexico’s program: by June 1992, the government had privatized 361 of its roughly 1, 200 SOEs and the need for subsidies had been virtually eliminated Brazil: sold several very large SOEs (CVRD in 1997 and Telebras in 1998) but there is still room for privatizations Privatization in sub-Saharan Africa: a stealth economic policy (few governments have openly adopted an explicit SOE divestment strategy) Some exceptions: Nigeria, South Africa After the collapse of communism in 1989 -91 former Soviet-bloc started privatizing SOEs as effort towards market economy The cumulative value of proceeds raised by privatizing governments exceeded $1 trillion sometime during the second half of 1999 (Gibbon, 2000. Privatisation International) 34 Source: Megginson W. , L. , Netter, J. , M. , 2001. From State To Market: A Survey Of Empirical Studies On Privatization. Journal of Economic Literature

Privatizations: XX Century Largest Share Offerings 35 Source: Megginson W. , L. , Netter, J. , M. , 2001. From State To Market: A Survey Of Empirical Studies On Privatization. Journal of Economic Literature; Thomson Reuters. Note: (1) Indicates a group offering of multiple companies that trade separately after the IPO.

Italian Privatization Program 1990 s – early 2000 s Drivers: Size: The need for fiscal adjustment State-owned enterprises’ value added as % of GDP declined from 19 to 2, 6% in the period 1990/end-2002 The need for developing capital markets and equity culture, also through strengthening institutional investors and market infrastructures Improvement in corporate efficiency Over € 120 bl. sold (1992 -2003) Methods: Trade Sale; Stable core of shareholders; Public offering; Sale to employees Impact of the Privatization Program (1992 -2003) Market Value of partially and fully privatized companies as % of total market capitalization (as to end - 2003) Increase in stock market capitalization (1979 – 2003) 900, 000 800, 000 700, 000 600, 000 500, 000 400, 000 300, 000 200, 000 100, 000 80% 70% 60% 50% 40% 30% 20% 10% 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 % GDP (LH) 36 in €m (RH) For further information see the presentation: Policy Dialogue on Corporate Governance in China by Adolfo Di Carluccio Ministry of Economy and Finance of Italy (Shanghai, China 25 - 26 February 2004 )

Major Italian Privatizations 1993 -2002 Corporation (Group) 1993 Italgel Cirio-Bertolli-De. Rica Credito Italiano (IRI) SIV (EFIM) Total for Year 1994 IMI – First Tranche COMIT (IRI) Nuovo Pignone (ENI) INA – First Tranche Acciai Speciali Terni SME – First Tranche Total for Year 1995 Italtel Ilva Laminati Piani Enichem Augusta (ENI) IMI – Second Tranche SME – Second Tranche INA – Second Tranche ENI – First Tranche ISE Total for Year 1996 Dalmine Nuovo Tirrena SME – Second Tranche INA – Third Tranche IMI – Third Tranche ENI – Second Tranche Total for Year 1997 ENI – Third Tranche Aeroporti di Roma Telecom Italia SEAT Editoria Banca di Roma Total for Year 37 Public offering Auction Public offering Private agreement 32. 89 54. 35 69. 33 47. 25 100. 00 32. 00 Auction Private agreement Accept takeover bid Private agreement Public offering Auction 40. 00 100. 00 70. 00 19. 03 14. 91 18. 37 15. 00 73. 96 Auction Accept takeover bid Conv. Bond issue Public offering 84. 08 91. 14 15. 21 31. 08 6. 94 15. 82 Public offering Core investors + Public offering + bond issue 17. 60 45. 00 Gross Proceeds (€m) 223 160 930 108 1, 422 927 1, 493 361 2, 340 322 373 6, 377 516 1, 298 155 472 176 871 3, 253 191 7, 106 156 283 62 2, 169 259 4, 582 7, 742 6, 833 307 39. 54 11, 818 61. 27 854 36. 50 980 20, 940 Method of Sale Private agreement Public offering Auction Percentage Sold 62. 12 58. 09 100. 00 Corporation (Group) 1998 SAIPEM (ENI) Method of Sale Percentage Sold Gross Proceeds (€m) Public offering 18. 75 589 ENI – Fourth Tranche Public offering 14. 83 6, 711 BNL Public offering 67. 85 3, 464 Total for Year 1999 ENEL 10, 764 Public offering 31. 70 16, 550 Autostrade Auction + public offering 82. 40 6, 722 Mediocredito Centrale Auction 100. 00 2, 037 Total for Year 2000 Aeroporti di Roma 25, 382 Direct sale 51. 20 1, 327 Finmeccanica Secondary public offer 43. 70 5, 505 COFIRI Direct sale 100. 00 504 Banco di Napoli Tender share to takeover bid 16. 20 493 Total for Year 7, 933 2001 ENI – Fifth Tranche Accelerated block building 5. 00 Total for Year 2002 Telecom Italia 2, 721 2, 907 Placement with institutions Total for Year Total 1993– 2000 Source: Goldstein, A. , 2003. Privatization In Italy 1993 -2002: Goals, Institutions, Outcomes, And Outstanding Issues. CESifo Working Paper No. 912 3. 50 1, 400 1, 498 92, 072

A New Season of Privatization for Italy ? Italian Government Corporate Holdings (2014) 38 Source: Companies Reports and Websites;

Governments: Debt Management Sovereign Debt Management Definition: process of establishing and executing a strategy for managing the government’s debt in order to: Raise the required amount of funding Achieve the government risk and cost objectives Meet any other sovereign debt management goals (e. g. : developing and maintaining an efficient market for government securities) A government’s debt portfolio is usually the largest financial portfolio in the country New frontier: Asset and Liability Management (manage the business and financial risks by matching the financial characteristics of the liabilities to the assets) Debt Management Risks Market Risk Credit Risk Settlement Risk Rollover Risk Operational Risk Liquidity Risk 39 For further information see: IMF, 2001 and 2003. Guidelines for Public Debt Management

1980 - 2014 YTD Italian M&A Rankings by Transaction Value N. Date Acquiror Target 1 Jan-07 Banca Intesa San. Paolo IMI 37, 6 2 May-99 Olivetti Telecom Italia 34, 8 3 Oct-07 Unicredito Italiano Capitalia 29, 5 4 Jun-05 Telecom Italia Mobile 28, 8 5 Aug-03 Olivetti Telecom Italia 27, 8 6 Oct-07 Enel Endesa 26, 4 7 Apr-11 Vimpel. Com Weather Investments 22, 4 8 Nov-99 Italian government (privatizat. )Enel 18, 7 9 Jan-11 Fiat (spin-off) Fiat - Auto Business 18, 5 10 Nov-05 Unicredito Italiano HVB 18, 3 11 Nov-00 Tin. it Seat Pagine Gialle 18, 2 12 Jun-08 E. ON Endesa Italia 14, 3 13 Jun-09 Enel Endesa (additional stake) 13, 5 14 May-08 Monte dei Paschi di Siena Banca Antonveneta 13, 2 15 Aug-05 Weather Investments Wind Telecomunicazioni 12, 8 16 Dec-99 Banca Intesa Banca Commerciale Italiana 12, 8 17 Oct-98 Credito Italiano Unicredito 11, 0 18 Oct-04 Investors Enel 10, 3 19 Jan-00 Assicurazioni Generali INA 10, 2 20 Oct-05 Vodafone Omnitel 10, 1 40 Note: As of August 2014 Transaction value (USD bn)

1980 - 2014 YTD Italian ECM Rankings by Amount of Proceeds 41 Note: As of August 2014

References Cendrowski, H. , Petro, L. W. , Martin, J. P. , Wadecki, A. A. , 2012. Private Equity: History, Governance, and Operations. Wiley Finance: Module 1 (chapters 1 -5) Das, U. S. , Papapioannou, M. , Pedras, G. , Ahmed, F. , Surti, J. , 2010. Managing Public Debt and Its Financial Stability Implications. IMF Working paper Fleuriet, 2008. Investment banking explained. Mc. Graw-Hill: chapter 4, 18 Fraquelli, G. , Erbetta, F. , 1999. Privatization in Italy: an analysis of factors productivity and technical efficiency. Ceris-CNR, Working Paper. No. 5/1999 Goldstein, A. , 2003. Privatization In Italy 1993 -2002: Goals, Institutions, Outcomes, And Outstanding Issues. CESifo Working Paper No. 912 IMF, 2001 and 2003. Guidelines for Public Debt Management Lerner, J. , 2011. The Future of Private Equity. European Financial Management, Vol. 17: 3 Megginson W. , L. , Netter, J. , M. , 2001. From State To Market: A Survey Of Empirical Studies On Privatization. Journal of Economic Literature 42