Spreading comps is a type of financial statement analysis and possibly the most frequent task junior investment bankers will get in their early days.
In fact, it’s the stereotypical “oh, can’t we find an intern to do that” kind of task, because it’s time consuming, mindless grunt work – or at least it is to any analyst with half a brain.
But for you interns it’ll be a whole new experience and something you’ll approach with trepidation – unless of course you realize how simple they are…
Spreading comps simply involves comparing a bunch of companies based on a handful of financial metrics, most notably value multiples (eg EV/EBITDA). It gets trickier within certain industries where the financial metrics of concern grow and deviate away from simple value multiples. But don’t worry, your group will handhold you through this.
Before I continue I’d like to head off any students thinking “Can’t a computer just do the calculations?”.
Well the answer is yes, there are databases filled with all the info – and calculations already done for us when we run a simple company search, eg CapIQ.
But the problem with these programs is they’re terrible at rendering the kind of precise financial calculations senior bankers demand.
You see, although these computer programs scour the financial statements like any good intern, they don’t do all the adjustments like add backs or take into account footnotes littered with references to non-recurring charges etc (explained below).
So although these computer calculations are quite good, they’re not banker-good (aka perfect). And at $10 an hour you are a cheap way to get accurate results.
Also, every time I presented comps as an intern I was asked how I arrived at every freaking metric – so by doing them myself I was able to show the ‘how’, and didn’t simply say “Computer says yes!” like a Little Britain travel agent!!
Let’s get back to Spreading Comps 101
At the heart of any spread is our client company or some other target company – we want to see how they are performing, valued, structured etc against similar companies. ‘Similar’ can mean same industry, same size, same debt structure etc, depending on the situation (IPO v M&A etc).
It’s important to realize that ‘similar’ is a subjective decision, and one that your mentor will often make for you by saying “spread these 5 companies”.
But if they leave it in your hands then be careful to select companies that are similar along the lines that matter most to your end analysis.
Although the end result (a couple metrics for each company) seems simple enough, getting there can be difficult.
Spreading comps you see, is as easy as the company’s financials and structure is simple…meaning if you get handed a couple of Enron-esque or transparent-as-the-Fed types of companies you could be in for a world of pain when it comes to finding the numbers you need to do things like add backs, multiples calculations etc.
(eg me in the first week of my internship all those years ago…hello hidden non-recurring charges, off-BS v on-BS dramas, complicated debt structures, dozens of dense language confusing-as-hell footnotes etc…ouch!).
The intern who will impress bankers the most is not necessarily the intern who comes up with the metrics fastest, but rather the one who can show their full calculations for every metric and explain how they arrivedat each answer when interrogated by a senior banker.
Eg explaining how they deciphered what footnote 12 meant, showing how they added depreciation back in at Point B etc.
ie banking is just like math class – you’ll get rewarded for showing working out!
Check out our common investment banking internship tasks list now to discover the 38 other tasks young investment bankers will be asked to do from Day 1 and exactly how to crush them.