Investment Banking: How to Adjust an Industry Comparison Universe

By Matt Krantz, Robert R. Johnson

An investment banker’s job doesn’t end with an initial comparison universe. Creating the initial list using the GICS or even the list of competitors from the company’s CEO compensation list is a great starting point. You can even combine these approaches to come up with a master list.

But depending on the analysis you plan to do, you’ll need to winnow the list down a bit. There are times when certain companies may technically be rivals, but in reality, the companies aren’t really comparable. You’ll want to toss these outlier companies out of your industry comparison universe. A company may not be an appropriate peer for investment banking analysis when that company is

  • Not a pure-play competitor: There may be times when a company’s biggest competitor is actually a unit embedded inside a larger firm. When this happens, comparing a company against another company that gets most of its business from an unrelated area can be inappropriate.

  • At a different point in its lifecycle: Investors pay particular attention to the size of companies they’re comparing against. Some financials can be highly dependent on the size or market share of a company. For instance, it would be a bit outlandish to compare the revenue growth of a large company with a dominant market share with a company that just started.

  • Being propped up by artificial means: Periodically, a company in the industry may not really be operating on its own two feet. Companies that emerge from bankruptcy protection may have their debt wiped out, making their liquidity ratios not all that applicable. A company may get a bailout from the government or private investors, which can also skew its numbers. We’re looking at you AIG and GM.