The Insider's Guide To Investment Banking.pdf

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Contents Introduction .................................................... ............................................................................................................ ........................................................................ ................ 1 Part I:

What is Investment Banking?

Chapter 1:

What An Investment Investment Bank Is .................................................. .........................

(1.1) (1.2) (1.3) (1.4) (1.5) (1.6) (1.7) Chapter 2:

5 7 9 10 10 11 12 13

The Major Players Players ............................................................................ ................ 14

(2.1) (2.2) (2.3) Chapter 3:

Overview Of An Investment Bank ............................................. The Functions Of An Investment Bank ...................................... Investment Banking Corporate Ladder ........................................ How Investment Banks Make Money.......................................... Commercial Banking vs. Investment Banking ........................... Other Finance Participants ................................................... .......................................................... ....... Changing Nature Of The Industry ..............................................

5

By Size ...................................................... .................................. 14 By Region ................................................. ................................................................................... .................................. 16 League Tables .................................................... ......................... 18

What The Job Entails ..................................................... ....................................................................................... .................................. 19

(3.1) (3.2) (3.3) (3.4)

By Types Of Staffings (Projects) ................................................ By Types Of Work Performed .................................................... By Groups ................................................. ................................................................................... .................................. “Heard In The Bullpen” ....................................................... .......

19 25 28 31

Part II:

Why Investment Banking?

Chapter 4:

Publicly Available Positives .................................................... ............................................................................. ......................... 38

(4.1) (4.2) (4.3) (4.4) (4.5) Chapter 5:

Compensation .................................................... ......................... Exit Opportunities ....................................................... ................ Unparalleled Learning Experience ............................................. Pedigreed Colleagues And Future Network ................................ Prestige ...................................................... ..................................

38 40 41 42 43

Insider Positives Positives .................................................... ................................................................................................ ............................................ 44

(5.1) (5.2) (5.3) (5.4) (5.5) (5.6) (5.7) www.ibankinginsider.com

Learning To Deal With Stress ..................................................... Badge Of Honor ................................................. .......................................................................... ......................... Transferrable Skill Set ................................................ ................................................................ ................ Future Jobs Will Be Less Difficult ............................................. Full-Time Analyst Training ................................................. ........................................................ ....... A Humbling Experience ...................................................... ....... Leadership And Management .....................................................

44 44 44 44 45 45 45

(5.8) (5.9) (5.10) Chapter 6:

Publicly Available Negatives ................................................... ......................... 46

(6.1) (6.2) (6.3) (6.4) (6.5) Chapter 7:

Small, Exclusive Industry .................................................... ....... 45 Industry Expertise ....................................................... ................ 45 Ideal Starting Point ..................................................................... 4 5

Long Hours ........................................................ ......................... Stress ............................................... ........................................................................................... ............................................ Big Personality Bosses ................................................ ................................................................ ................ Lack Of Fitness And Overall Health .......................................... ................................... ....... Negative Public Image ................................................ ................................................................ ................

46 46 47 47 47

Insider Negatives Negatives ................................................... ............................................ 48

(7.1) (7.2) (7.3) (7.4) (7.5) (7.6) (7.7)

Pay Is Lower Across The Board ................................................. Large Amounts Of Administrative Work ................................... Unnecessary, Unrecognized, Or Irrelevant Work Completed .... Limited Ability To Control Work Flow ...................................... Investment Banking Is In A Volatile State ................................. Low Bank Loyalty ...................................................... ................ Unrealistic Expectations For Exit Opportunities ........................

48 48 48 49 49 49 49

Part III:

How To Get The Job

Chapter 8:

Step 1 – Evaluate Your Current Situation ..................................................... ................... .................................. 51

(8.1) Chapter 9:

Are You At A Target Or Non-Target School? ............................ 51

Step 2 – Excel In The Classroom ..................................................... ..................................................................... ................ 53

(9.1) (9.2) (9.3)

Major ............................................... ........................................................................................... ............................................ 53 Essential Classes ................................................ ......................................................................... ......................... 53 GPA ................................................. ............................................................................................. ............................................ 54

Chapter 10: Step 3 – Get Involved On Campus .................................................. ................ 55

(10.1) (10.2) (10.3) (10.4)

Join The Right Student Groups ................................................... Form Your Own Student Organization ....................................... Honors Societies And Distinctions ............................................. Student Government ................................................... ................................................................... ................

55 55 56 56

Chapter 11: Step 4 – Create And Perfect Your Resume .................................................... 57

(11.1) (11.2) (11.3) (11.4) (11.5) (11.6)

www.ibankinginsider.com

Format/Appearance ..................................................... ................ Detailed And Quantitative .......................................................... Results Driven .................................................... ......................... Finance Resume Structure .......................................................... Review Process (What An Insider Looks For) ........................... ........... ................ The Cover Letter ................................................ ......................................................................... .........................

57 59 60 60 64 66

Chapter 12: Step 5 – Network ........................................................................................ ....... 67

(12.1) (12.2) (12.3) (12.4)

Whom To Network With ............................................................ Where To Network ..................................................................... How To Network ........................................................................ Non-Target Strategy: Going Above And Beyond ......................

67 68 70 75

Chapter 13: Step 6 – Obtain Pre-Internship Internships ................................................... 79

(13.1) (13.2) (13.3) (13.4)

Types Of Internships ................................................................... How Different Internships Stack Up ........................................... How To Get These Internships ................................................... What To Take Away From Your Internships .............................

79 80 81 83

Chapter 14: Step 7 – Prepare For Junior Year Summer Analyst Interviews .................. 84

(14.1) (14.2) (14.3) (14.4) (14.5) (14.6) (14.7) (14.8) (14.9)

Action Item 1 – Talk To Experienced Peers ................................ Action Item 2 – Understand The Industry And The Job ............. Action Item 3 – Continue Networking ........................................ Action Item 4 – Master Your Story (Introduction) ..................... Action Item 5 – Prepare For Qualitative Questions .................... Action Item 6 – Study Technical Questions ............................... Action Item 7 – Conduct Mock Interviews ................................. Action Item 8 – Research The Banks ......................................... Interview Essentials .................................................... ................

84 84 85 86 88 89 89 90 90

Chapter 15: Step 8 – Obtain Your Junior Year Summer Analyst Internship .................. 92

(15.1) (15.2) (15.3) (15.4) (15.5) (15.6) (15.7) (15.8) (15.9)

Action Item 1 – Understand The Internship’s Importance .......... 92 Action Item 2 – Stay On Top Of The Recruiting Cycle ............. 93 Action Item 3 – Apply ................................................................ 93 Action Item 4 – Network ............................................................ 94 Action Item 5 – Continue Preparing For Your Interview ........... 96 Action Item 6 – Dominate Your Interviews ............................... 96 Action Item 7 – Follow-Up .........................................................102 Action Item 8 – Choose An Offer ...............................................103 So You Didn’t Get An Investment Banking Internship ...............105

Chapter 16: Step 9 – Excel During Your Summer And Secure The Full-Time Job ........108

(16.1) (16.2) (16.3) (16.4)

Getting Ahead .................................................... .........................108 Excelling On The Job ..................................................................109 Understanding The Summer Review Process .............................113 Receiving Your Offer .................................................................115

Chapter 17: Step 10 – Full-Time Recruiting ........................................................................116

(17.1) (17.2) (17.3)


Number Of Openings ..................................................................116 Recruiting Cycle And Structure ..................................................11 6 Assess Your Situation And Execute A Plan ...............................117

Chapter 18: Step 11 – I Did Not Get A Full-Time Job, Now What? .................................122

(18.1) (18.2)

Part IV:

You Still Want To Get Into Banking ..........................................122 You Want To Do Something Else Finance Related ....................123

How To Succeed On The Job And Next Steps

Chapter 19: How To Be A Successful Full-Time Analyst ...................................................125

(19.1) (19.2) (19.3) (19.4) (19.5)

Preparing For The Job .................................................................125 Full-Time Training ...................................................... ................125 First Impressions 2.0 ...................................................................126 Settling In ....................................................................................127 “Things I Wish I Would Have Known” ......................................130

Chapter 20: Banking And Beyond ........................................................................................134

(20.1) Making It A Career .............................................................. .......134 (20.2) Exit Opportunities ....................................................... ................134

Part V:

Technical Concepts & Interview Questions

Chapter 21: Technical Guide – Accounting, Valuation & More .......................................140

(21.1) (21.2) (21.3) (21.4) (21.5) (21.6) (21.7) (21.8) (21.9) (21.10)

Accounting Overview .................................................................140 Financial Ratios ..........................................................................144 Introduction To Valuation .................................................... .......146 Public Comparables Analysis .....................................................14 6 Transaction Comparables Analysis .............................................148 Discounted Cash Flow Analysis .................................................150 Capital Structure .........................................................................155 Options ...................................................... ..................................158 Mergers & Acquisitions ....................................................... .......159 Leveraged Buyouts .....................................................................162

Chapter 22: Qualitative Interview Questions & Answers ..................................................166

(22.1) (22.2) (22.3) (22.4) (22.5)

“Why…?” ...................................................................................166 Understanding The Job ...............................................................169 Character Attributes .................................................... ................171 Work & Personal History ..................................................... .......174 Macroeconomics & Microeconomics .........................................177

Chapter 23: Technical Interview Questions & Answers .....................................................180

(23.1) (23.2) (23.3) (23.4) (23.5)


Accounting – Basic ..................................................... ................180 Accounting – Advanced ....................................................... .......182 General Valuation – Basic ..........................................................186 General Valuation – Advanced ...................................................190 Comparables Analysis ................................................................192

(23.6) (23.7) (23.8) (23.9) (23.10)

Discounted Cash Flow Analysis .................................................195 Leveraged Buyouts ..................................................... ................200 Mergers & Acquisitions ....................................................... .......203 Capital Structure & Debt ............................................................205 Miscellaneous & Brain Teasers ..................................................21 2

Appendix A: Questions For The Interviewer ............................................................218 Appendix B: Email Address Formula List .................................................................219 Appendix C: Financial Crisis Overview ......................................................................221 In-Depth Table Of Contents ............................................................................................222 List Of Insider Insights ......................................................................................................231


Introduction Investment banking is no ordinary job and breaking into the industry is no ordinary task. We are here to help. This guide was compiled and written by a team of industry insiders (both current and past) with a simple purpose: to provide you (the reader) with a behind-the-scenes look at the investment banking industry and how to break in. Along with insight from our own team, we have surveyed and collected information from investment bankers of every rank at firms across Wall Street. Throughout this guide you will be exposed to their insights, experiences, quotes, and recommendations. In the pages that follow, we pull back the curtain to expose exactly what investment banking is, what the job entails, how to break in, and how to succeed once there.

How To Use This Guide The Insider’s Guide to Investment Banking is designed to accommodate individuals at all stages of the recruiting process and with varying degrees of industry knowledge.

Our approach is tailored for students from all types of schools and backgrounds. The guide provides specific content for both target and non-target students with differences clearly emphasized. Our guide can be read from cover-to-cover or used as a tool for reference. We recommend that individuals seriously considering a career in investment banking read this guide from front-to-back (it is vital to have a comprehensive understanding of the job and the recruiting process). For those more interested in our coverage of certain topics, feel free to jump around based on your individual needs by utilizing our In-Depth Table of Contents. Below we outline the basic structure of the guide and summarize important components: Part I: What Is Investment Banking? Chapters 1-3

Part I provides a comprehensive overview of the investment banking industry, the investment bank, and the role of the Analyst. Notable topics covered in Part I include: • • •

The role of investment banks, how they are structured, and how different groups interact Different types of investment banks and the pros and cons of working at each What a job in investment banking entails for the Analyst and what to expect on a day-to-day basis

Part II: Why Investment Banking? Chapters 4-7

Part II concentrates on the benefits and disadvantages of working as a junior employee in investment banking. We detail commonly-known pros and cons and have chapters devoted to lesser-known pros and cons that are only uncovered after working in the industry. Notable topics discussed in Part II include: • •

A comprehensive breakdown of investment banking compensation by level, year, and rank Dozens of well-known and insider pros and cons of the job


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Part III: How To Get The Job Chapters 8-18

Part III presents a comprehensive and chronological step-by-step action plan designed to help you secure a job in investment banking. Notable topics covered in Part III include: • • • • • • • •

The target school/non-target school distinction and its implications Academics and effective campus involvement A step-by-step guide to creating the perfect resume, complete with examples and a template Comprehensive networking overview, plan, and tools (including email templates) Different types of internships and how they are viewed by investment bankers An inside look at the interview process and tools needed to prepare A detailed breakdown of how to be a successful Summer Analyst Choosing a full-time offer and other full-time recruiting strategies

Part IV: How To Succeed On The Job And Next Steps Chapters 19-20

Part IV focuses on steps to take after securing a job in investment banking. Notable topics covered in Part IV include: • • •

Insight regarding how to be a successful full-time Analyst A detailed list of things full-time Analysts wish they had known before starting the job A breakdown of the most popular exit opportunities and the differences between each

Part V: Technical Concepts & Interview Questions Chapters 21-23

Part V contains complete coverage of the most important technical concepts used in investment banking as well as 150 need-to-know qualitative and quantitative interview questions and answers. Notable topics covered in Part V include: • • •

Technical guide covering accounting, corporate finance, and valuation concepts used on the job Qualitative interview questions and answers Technical interview questions and answers

Appendix A-C

In the Appendix, we provide extra materials particularly helpful when preparing for investment banking interviews, including: • • •

Questions to ask interviewers and investment bankers at recruiting events Bank email formulas A detailed breakdown of the 2008 financial crisis

Detailed Table Of Contents

Reference this section to pinpoint specific areas of interest, terms, and sub-sections. List Of Insider Insights

Reference this section to browse insider insight topics and locate specific insights throughout the guide. Call-Out Boxes

Throughout the guide we utilize various call-out boxes that emphasize and distinguish specific content:


2

Insider Insight

These boxes denote details, recommendations, tips, and words of wisdom provided by current and former investment bankers. Proprietary to iBanking Insider, these cannot be found anywhere else.

Quote

We have compiled relevant quotes from past and current investment bankers spanning various levels and banks. These first-person accounts provide commentary directly from the source.

Non-Target School

Developed by team members and insiders with non-target school backgrounds, these boxes distinguish recommendations, actions, processes, and strategies specific to non-target students.

E-Mail Template

We provide customizable email templates to aid in networking and recruiting.

Example

To aid in a comprehensive learning process, these boxes contain relevant examples.

Pros & Cons

List of positives ( ) and negatives () are provided throughout the guide.

From all of us at iBanking Insider, we hope this guide proves to be highly informative and useful. For additional resources, including answers to user-submitted questions, please visit our website at www.ibankinginsider.com. Here you can also find more information on our resume review services. Please feel free to contact us with comments, suggestions, or questions at [email protected].

See you on the inside. -The iBanking Insider Team


3

PART I What Is Investment Banking?


4

Chapter 1: What An Investment Bank Is Before obtaining a job at an investment bank, it is vital to have a clear understanding of what a bank does and why. In this chapter we will detail what an investment bank is, how it is structured, and where it fits within the larger finance space.

(1.1) Overview Of An Investment Bank What Is An Investment Bank? At its core, an investment bank is a financial institution that provides advisory services and helps clients raise capital (money). These clients include individuals, private and public corporations, and government entities. In its capital raising capacity, an investment bank acts as the middleman between clients with money to invest and those looking for an investment (both debt and equity). Investment banks often support transactions by providing their own capital on a temporary or permanent basis. •

•

When raising debt capital, an investment bank will often use its own funds combined with funds from other banks/investors to lend to the company seeking capital (i.e. the bank will agree to “buy” $50 million of a $500 million loan while finding investors for the other $450 million). When raising equity capital, an investment bank markets its client to large investors in order to amass potential buyers of the client company’s equity.

In its advisory role , an investment bank aids clients in making strategic decisions such as mergers and acquisitions ( “M&A”), restructurings, financings, and additional tactical uses of capital (i.e. special dividends, stock buybacks, etc.). Ancillary services provided by investment banks include “market making” (holding financial instruments in inventory and acting as both a buyer and seller) and the trading of various financial instruments (currencies, commodities, equity securities, fixed income securities and derivatives). Insider Insight 

Importance Of Understanding Investment Banks

Before landing a job in the industry, candidates must understand the inner-workings of an investment bank. Although this information may seem dry, it pays off when holding conversations with investment bankers and when trying to understand the different prospective jobs that exist within a bank.

How Investment Banks Are Structured Investment banks can be generally categorized into three main operating divisions: Investment Banking Division (“IBD”), Sales & Trading/Research, and Other. Often times, IBD and Sales & Trading/Research are classified as “Investment Banking Services” within the larger investment bank. This guide will concentrate on IBD: this division has the most new hire Analyst positions (and is the area in which most readers are interested). General references to “investment banking” will refer specifically to IBD.


5

Investment Bank Divisional Breakdown

   



Sales & Trading / Research

Investment Banking Division

Other

Sales & Trading

Corporate Finance – Industry Groups

Financial Advisory / Private Client

Equities Commodities Currencies Government Securities Equity & Credit Derivatives







Convertible & Equity Linked Mortgage Backed / Asset Ba cked Fixed Incom e



   

Research   

Equities Commodities Credit

Financial Institutions (FIG) Industrials Aerospace & Defense Natura l Resources Real Estate / Gaming / Leisure (REGAL)

Technology / Media / Telecom (TMT) Financial Sponsors Municipal Finance Consumer / Retail Healthcare



   

Corporate Finance – Product Groups    

Leveraged Finance Mergers & Acquisitions (M&A) Restructuring Rat ings Advisory

Advisory services for individual investors

Asset Management Mana ge portfolios of various securities and a ssets

Insurance Services Provide individual and enterprise insurance services

Commercial Banking Bank a nd credit services for businesses

Private Equity & Merchant Banking Invest in and lend to compa nies using both bank and/or private capital

Capital Markets Equity Capital Markets  

 

Equities Convertible & Equity Linked Private Placements Derivatives

Debt Capital Markets     

Loan High Yield Municipal Finance Structured Credit Investment Grade

Retail Banking Bank and credit services for individuals (includes accepta nce of deposits)

Transaction Banking / Prime Brokerage Provides securities services and other services to professiona l investors

The “Chinese Wall” (Public vs. Private Information Barrier) There is an imaginary (sometimes even physical) divide between investment banking groups with access to private information and their colleagues restricted to only publicly available information. This wall is commonly referred to as the “Chinese wall” or “information barrier”. The wall is designed to prevent conflicts of interest within the bank itself as one investment bank will commonly offer different services on both sides of the public and private divide in a deal process. More specifically, this “wall” blocks IBD (the Corporate Finance department and Capital Markets group) from sharing private information with Sales & Trading/Research and other divisions of the firm (such as Wealth Management) that are restricted to public information. The wall is particularly relevant to bankers in IBD as they are frequently exposed to confidential information from their clients . This information includes projected financials, pending strategic moves (mergers, divestitures, etc.), and intimate corporate data (such as salaries).

There are stringent regulations on individuals with access to private information; within an investment bank large internal compliance teams monitor the interactions among different groups every day to ensure that the bank is following protocols and that private information is not being shared with the wrong individuals. Insider Insight 

Stock Trading Restrictions

Upon becoming an employee at an investment bank, there are tight restrictions on managing a personal stock portfolio. Each investment bank has a list of restricted stocks that cannot be traded by individuals that work in IBD (that list increases with the size of the bank). Also, day trading is usually not an option due to mandatory hold periods.


6

(1.2) The Functions Of An Investment Bank Investment banks provide a full suite of services: different divisions and groups work together to solve a client’s specific needs. Offerings from different groups complement one another and allow for customizable services. Below we outline the different functions of the Corporate Finance and Capital Markets departments (within IBD) as well as Sales & Trading/Research.

Corporate Finance The Corporate Finance department builds and manages a pool of clients with the ultimate goal of executing transactions for a fee. Senior bankers spend the majority of their time pitching new clients to win business, soliciting existing clients with new transactions, and overseeing the execution of transactions for new and existing clients. As displayed in the chart above, Corporate Finance is further divided into two sub-categories: coverage groups and product groups. Both groups work together to provide their clients with a full breadth of knowledge related to a proposed transaction: Coverage Groups (or Industry Groups)

Bankers in coverage groups function as industry experts and focus on maintaining relationships with clients in their specific industry. These teams typically lead pitching and prospecting efforts and often act as the liaison between the client and investment bank during a transaction. Along with focusing on a particular industry, bankers in coverage groups are expected to have a working knowledge of the various transaction services the bank provides. Coverage groups work on a myriad of transactions within one specific industry . Product Groups

Bankers in product groups focus on deal execution and function as liaisons (with the exception of M&A) between Capital Markets and the rest of the bankers on a deal. Expertise lies in a specific type of transaction, as product groups focus on one financial product (i.e. Leveraged Finance, Restructuring, M&A, etc.) within a variety of industries. A more in-depth look at coverage and product groups and their impact on the Analyst experience is covered in Section (3.3).

Capital Markets The Capital Markets group is responsible for raising money for clients across a broad spectrum of financial products. In a typical deal, a client company (issuer) will issue debt or equity that investors can loan or purchase. Capital Markets investment bankers reach out to relevant potential investors in their network and sell them various deal propositions: they seek to “fill a book” (raise the full amount of money requested by a client looking for capital). The selling process entails a back-and-forth negotiation between the Capital Markets banker and the investor. Investors will agree to invest (“sign up” for) certain dollar amounts at given prices. This process becomes a game of chess for the Capital Markets group as they attempt to fill an entire book at the most favorable terms for the issuer (client).


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Insider Insight 

The Role of Capital Markets

During a debt or equity deal, investors will often place investment orders for varying amounts at different prices. For example, in a bond transaction (debt), an investor could tell the Capital Markets banker that they will buy $50 million in bonds at a 10% interest rate, $25 million at a 9.5% interest rate, $10 million at a 9% interest rate, etc. One of the most important functions of the Capital Markets team is compiling all of these different orders and choosing the optimal structure/price.

Capital Markets bankers typically function across all industries but specialize in a certain financial product (for example, convertible debt , equities, high yield debt , leases, leveraged loans, preferred stock ). The Capital Markets group is technically a type of product group, but it is not classified in the Corporate Finance department. Relationship Between Corporate Finance And Capital Markets:

There is constant interaction between the Corporate Finance department and the Capital Markets group. During the pitch and initial phases of a deal, Capital Markets plays an auxiliary role by providing the Corporate Finance deal team with accurate, real-time market data used to assist in the deal process. Once a specific financial product (bonds, loans, preferred stock, etc.) is chosen and the deal is ready to be sold to investors, Capital Markets takes over. They play an integral role by raising money and selling the deal/product to actual investors. Below is an example to illustrate the relationship between the two groups: Example

A casino operator approaches an investment bank to raise $300 million in debt to expand an existing casino. Bankers from the Leveraged Finance group (a product group) will determine the best structure for the transaction (a bond or loan). Next, Leveraged Finance will work with the Real Estate, Gaming & Leisure group (a coverage group) to determine how to best position the company to investors. Finally, Capital Markets will be brought in to sell the debt to investors and, ultimately, fill the book (raise the full $300 million from a consortium of investors at the lowest possible interest rate/best terms). Throughout the process, the Real Estate, Gaming & Leisure group will oversee the transaction and manage the client’s interaction with various groups.

Sales & Trading/Research The primary role of the Sales & Trading department is “market making” (the process of buying and selling financial products, creating a marketplace that other players can enter). “Sales” refers to the role of the bank’s sales force: a group that calls institutional and High Net Worth investors to solicit trades and take orders. They communicate orders to the bank’s trading desks which then price and execute these trades (a process called “trading”). “Research” refers to equity and credit research, a division which plays an important role but typically does not generate material revenues. The Research department’s main function is to provide assistance (by providing industry knowledge or writing research reports) to traders, the sales force, and the Corporate Finance team, as well as serving outside investors with investment advice.


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Non-Target School

Some schools considered non-target for IBD recruiting ARE target schools for positions in Sales & Trading/Research. It is not unheard of for students set on working in IBD to use their university’s target status with these groups as a platform to break into the bank (later trying to transfer into IBD).

Other Departments Investment banks generally have other departments and groups that provide support for the different functions within the bank and offer services not covered by Sales & Trading/Research and IBD. These functions include private wealth management , investment management , prime brokerage, principal investing , credit and insurance services, and several others.

(1.3) Investment Banking Corporate Ladder Investment Banking Hierarchy Position

Role Overview

Tenure

Responsible for creating financial models, conducting research, putting together presentations, aggregating dat a, and performing countless administrative task s required for deal logistics  Integral in the undergraduate recruiting process. Conduct interviews, sort through resumes, and attend recruiting events. Help train new Analysts and interns  Typically interact with clients only during deals (via email or phone); not responsible for client management or relationship

2-3 years



Analyst



Associate

Responsible for managing day-to-day components of a deal, monitoring and reviewing Analyst work (including models and presentation materials), drafting memos, creating presentation “shells” (drafts), and u nderstanding more advanced techni cal concepts  Integral in undergraduate and MBA recruiting  Interact with clients frequently regarding deal logistics and often attend pitches/meetings

3-4 years



Vice President or Director

Senior Vice President or Executive Director

Responsible for overall deal execution (hitting deadlines, developing client strategies, coordinating meetings/conference calls, etc.), reviewing Analyst and Associate work, and orchestrating interaction with other groups within the bank  Involved with MBA recruiting and some undergraduate recruiting: mostly promote bank at events and conduct final round interviews  “Staffers” are usually VP-level employees (individuals assigned to ensure proper allocation of junior employee resources)  Begin to establish client relationships, attend most client meetings, point of contact for client regarding work or deal-related issues

3-5 years



Similar role to VP, but less responsible for technical and logistical aspects of deal process and more involved in establishing and maintaining client relationships. The Senior VP’s role will be more technical if no VP is on the deal team, or more client-focused if no MD is on the deal team  Sometimes involved with recruiting efforts by serving as a promotional tool for the bank; occasionally interview candidates during final rounds  Interact with clients daily: have established relationships and try to expand client base. Sometimes source and run their own deals

3-5 years



Managing Director

Responsible for managing client relationships and winning business, negotiating deal terms, running client meetings, and developing high-level deal strategies  Report group results and discuss strategies with investment bank’s senior executives, recommend hiring/firing decisions, and help determine pay. Sometimes interview candidates during final round  Have established, long-term client relationships; usually act as the client’s point of contact with the bank


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Undefined

Deal Teams On any given deal, investment bankers organize themselves into teams to best serve their clients. These teams are comprised of bankers from every level and from multiple groups (coverage groups and product groups). Structure varies slightly from deal-to-deal, but generally the “deal team” is comprised of two smaller teams (one coverage team and one product team). Each of these smaller teams will have one member from every level of the hierarchy detailed above (Managing Director, Senior VP, Vice President, Associate, and Analyst). Therefore, on a given deal there are usually two MDs, two VPs, etc, all working together to address a client’s needs. Ancillary deal team members may include senior employees from Capital Markets, Research, Credit Advisory, and other groups.

(1.4) How Investment Banks Make Money The Investment Banking Division makes money via two primary fe e types: advisory fees and underwriting fees.

1. Advisory Fees An advisory fee is charged to clients for advisory services and is usually based on a percentage of total deal value (<1-3%, subject to certain minimum thresholds), or a set fee. Examples of services on which a bank would earn an advisory fee include: “fairness opinions” (provide a professional opinion on valuation and deal terms of a completed transaction to ensure that the deal was fair), mergers, restructurings, and takeover defenses, among others.

2. Underwriting Fees Underwriting fees are charged to clients when a bank helps raise funds for various purposes through debt or equity transactions. These fees are based on a percentage of total deal value: 0.75-3.0% for debt transactions and 4.0-7.0% for equity transactions. Examples of these transactions include: bond offerings, follow-on offerings, IPOs, loan syndications, etc. Underwriting fees vary as banks offer two types of underwriting structures: best efforts and firm commitment. Best Efforts

The investment bank agrees to “try its best” to sell as much of a security as possible. The bank does not guarantee that it will sell all of the securities the client wishes to offer. This structure limits the underwriter’s risk (the client bears most of the risk ) but also limits the underwriter’s reward as this type of commitment garners a lower fee. Firm Commitment

The investment bank agrees to purchase all securities from the issuer and, in doing so, assumes risk of all unsold inventory. The client is guaranteed to receive the money it desires, and the bank attempts to sell off as many of the securities as possible to other investors in order to limit its own holdings. This higher risk warrants a much higher fee, often commission-based. Investment banks also make money by committing capital on a temporary basis to support the execution of transactions (often acquisitions). This is called a “backstop” and ensures the acquirer will have the funds needed to execute a transaction. The bank often never needs to fund the commitment itself as it attempts to syndicate/find investors willing to lend to its client.


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Bookrunners vs. Co-Managers

In most underwriting transactions, more than one investment bank will help a client raise money. Each bank is designated a specific title and role during a transaction; this role affects the amount of work a bank must complete and the fees it will earn. The two major roles include “bookrunners” and “co-managers”: there can be multiple bookrunners and/or multiple co-managers on a single deal. Bookrunners run the deal and take the lead in managing the overall deal process. There is often more than one bookrunner, in which case the “lead left bookrunner” is the bank that does the majority of the work and takes responsibility for most of the securities issuance. Investment banks acting as comanagers play a smaller role in the deal, handling tasks as delegated by the bookrunners and earning fewer fees from the transaction. Insider Insight

Lead-Left Bookrunner

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The term “lead left bookrunner” originates from the position of an investment bank’s logo on the bottom cover of a “prospectus” (legal document containing information related to a debt or equity offering). Banks are listed left to right, in order of their prominence on a deal.  Analysts working on transactions where their bank is a lead left bookrunner can expect to complete the majority of the work for that deal. The Sales & Trading division makes money by charging a fee (spread) on both sides of a market making transaction.

(1.5) Commercial Banking vs. Investment Banking Many prospective and soon-to-be investment bankers do not understand the distinction between commercial banking and investment banking. “Commercial banks” accept deposits from individual consumers and make loans to individuals and businesses. Typically, these loans are held on the commercial bank’s Balance Sheet. On the contrary (as described in detail above), investment banks are intermediaries that do not accept deposits; they advise clients, sell investments, execute transactions, and commit capital to clients. The investment bank’s goal is to hold a loan for the least amount of time possible prior to selling to investors (preferably 24-48 hours), as the process soaks up available capital that could be used to generate additional fees for the bank. Today, many investment banks are divisions of larger commercial banks (such as Bank of America, JPMorgan Chase, etc.). These banks typically have access to a larger Balance Sheet and can engage in transactions at a lower cost of capital (cheaper fees and/or better financing terms), providing an advantage in the marketplace over competitors. Note that although these banks have large Balance Sheets, they typically do not lend on their own and have other banks or investors join in on deals to diversify risk. Until 1999, commercial and investment banks were required to operate separately according to the GlassSteagall Act. The passing of the Graham-Leach-Bliley Act in 1999 repealed these provisions and allowed a single entity to provide both commercial and investment banking services. The 2008 financial crisis brought to light some of the dangers of this model as the combined banks took on risky behavior. As a result of the financial crisis, the two remaining independent/pure bulge bracket investment banks (Morgan Stanley and Goldman Sachs) decided to reorganize into bank holding companies: the same classification and treatment as commercial banks. This new classification limited their ability to take on risk but gave these two banks access to the benefits of the Federal Reserve’s various lending programs. In reality, Goldman Sachs and Morgan Stanley are “name only” commercial banks (they do not accept


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widespread consumer deposits or engage in material commercial lending practices). No “true” independent/pure play bulge bracket investment banks currently exist in the United States. Quote “ If someone that I’m interviewing or just talking to does not know the difference between investment banking and commercial banking, they are instantly out of consideration for a job with my team. You would be surprised how often it happens. ”

- Vice President, Bulge Bracket Investment Bank

(1.6) Other Finance Participants Investment banks typically interact with various types of investor groups, mainly venture capital funds, private equity funds, hedge funds, mutual funds, and other institutional investor groups . This set of firms is also known as the “buy-side”. Buy-side investors that focus on purchasing controlling stakes in companies are known as “Financial Sponsors”. In many cases, these Financial Sponsors are the bank’s direct clients; in other cases, these sponsors are involved in a transaction as a separate party (i.e. purchasing a client of the investment bank or providing funding to a client of the investment bank). We detail each of the major buy-side firms below:

Venture Capital Fund A venture capital fund is a group of investors that makes equity investments (privately negotiated deals between a company and the investor for the purchase of non-public shares in the company) in early stage and startup companies with high growth potential . These investors make long-term investments (5-10 years) and seek high returns resulting in exposure to high levels of risk. Investment banks typically have minimal interaction with these investors as companies in this stage are usually too small to solicit worthwhile investment banking transactions.

Private Equity Fund A private equity fund is a pool of investors (mostly composed of institutional money from pension funds and High Net Worth clients) that makes investments in later-stage companies. These firms tend to invest in a company’s equity (public and private), but they may also invest in a company through lending (an investment in debt). Private equity firms often buy controlling stakes in companies and use leverage to boost returns (a process known as a “leveraged buyout” or “LBO”). These investors typically target a five year time horizon before exiting an investment via a sale of the company or an IPO. Private equity funds are major clients of investment banks and interact constantly with an investment bank’s Financial Sponsors and Leveraged Finance groups. These funds look to investment banks to provide loans/commitments to support acquisitions of companies, to find new companies to purchase, and to help sell existing portfolio companies.

Hedge Funds And Mutual Funds Hedge funds are managed investment portfolios that typically make riskier investments in a wide range of assets: most commonly, very liquid assets in public markets . They are known for earning high returns by utilizing complex and advanced trading techniques not available to many other investor groups. The term


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“hedge” comes from a trading strategy which emphasizes offsetting trades to neutralize risk. Hedge funds can have a variety of investment strategies, with some firms holding investments for years at a time and others engaging in high frequency trading based on complex financial algorithms. Mutual funds are similar in practice to hedge funds but are limited in their ability to make certain speculative investments and are often less risky as a result. Hedge funds are only available to sophisticated investors while mutual funds are open to most individuals.

Investment banks solicit hedge funds and mutual funds when raising money for a client in an underwriting transaction. The Sales & Trading department maintains relationships with these funds to solicit trading ideas and to execute trades on their behalf.

(1.7) Changing Nature Of The Industry Wall Street has changed significantly since the “2008 financial crisis” (for more detail, see Appendix C ). Before pursuing or entering a job in investment banking, it is important to understand where the industry is headed. Below we outline material changes to the industry and its competitive landscape over the last several years. We detail the effect of these changes on future Analysts in Section (7.5).

Increased Regulation The aftermath of the 2008 financial crisis led to significant reforms on Wall Street aimed at protecting consumers and increasing transparency of the financial system. The major regulations include DoddFrank and Basel III: •

•

Dodd-Frank: Passed in July 2010, this bill restricts risky actions (proprietary trading), increases capital requirements, introduces new securitization laws, and establishes government agencies to oversee banking practices and monitor troubled financial institutions. This bill issued the most significant financial reform since the regulations following the Great Depression. Basel III: Agreed upon in 2010, these regulatory measures increase capital requirements for banks and establish new requirements regarding bank leverage and liquidity.

The full implications of these new reforms is yet to be seen, but it is safe to say that the investment banking industry will be subject to significantly more stringent regulation in the foreseeable future.

Loss Of Major Firms And Consolidation One of the most significant outcomes of the financial crisis was the bankruptcy and consolidation of several prominent investment banks: most notably, Bear Stearns, Lehman Brothers, and Merrill Lynch. The “disappearance” of these firms has reduced the number of bulge bracket banks and exemplifies the changing competitive landscape on Wall Street.

Wall Street Scrutiny Wall Street as a whole has come under fire from politicians and the general public in the aftermath of the financial crisis. Government bailouts and congressional testimonials shed light on the culture of “excess” and risk that was prominent across Wall Street. Because investment banks took public funds to remain solvent, their actions are closely monitored by the public to avoid misuse of taxpayer dollars. Scrutiny and subsequent regulation has helped decrease risk at investment banks, but (as a byproduct) has also lead to lower profits and thus lower pay for employees of these firms. In today’s environment where excessive bonuses are chastised and publicized, pay is much more closely tied to bank performance.


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Chapter 2: The Major Players In this chapter, we focus on the specific investment banks themselves. We discuss how they are grouped (within the broader categorization of both size and region), emphasize the differences between groupings, and detail which specific banks belong in each category. Our focus is on banks within the U.S., but note that there are slight variations to the below information when evaluating firms internationally.

(2.1) By Size Investment banks can range in size from thousands of employees to just a few individuals; bank culture and capabilities in these two scenarios are very different, as is the Analyst experience. Banks are categorized by size into bulge bracket, middle market, and boutique (which includes elite boutique). Although there is a generally agreed upon list of bulge bracket banks in the U.S., the dividing line blurs when looking internationally or distinguishing between middle market and boutique investment banks.

Bulge Bracket Recognized as the most prestigious and well-known banks, bulge bracket firms work on the largest deals, have the most employees, and provide the widest array of services to their clients. All of these banks have a global presence, with U.S. headquarters in New York City and geographic headquarters in major cities across multiple continents. These firms commonly execute deals over $1 billion, but deal sizes can be as low as $200 million: many banks have minimum thresholds in the low-hundred million dollar range. These thresholds exist because fees on smaller deals do not justify the resources and time of the larger banks. The banks in the following list are generally agreed to be “bulge bracket” in the United States:  

BAML Barclays

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Citi Credit Suisse

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Deutsche Bank Goldman Sachs

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JP Morgan Morgan Stanley

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UBS Wells Fargo

Pros & Cons         

Prestigious firm and “front-page” deals. Better exit opportunities with more headhunter exposure – these are among the first firms that headhunters reach out to regarding next steps for Analysts. Higher pay – these firms usually set the precedent for Analyst pay each year. Solid company infrastructure – well-established services within the bank make the Analyst’s life easier (i.e. Presentations, Copy Room, and Information Services). Most bulge bracket banks (excluding a few notable firms) are known for accommodating (and even helping) Analysts that pursue exit opportunities. Large Analyst classes provide better networking opportunities. Less intimate setting – you are an ant in the grand scheme of the firm; it is harder to get noticed and more likely that you get lost or stuck in a bad staffing situation. Usually associated with longer hours. More regimented structure – when trying to complete a deal or win business from clients, you will need to clear many internal hurdles and must complete a multitude of memos.


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Middle Market Middle market is the most amorphous investment bank categorization, with some firms acting more like boutique banks and others closely resembling bulge bracket banks. Most of these banks provide a full range of advisory and financing services to clients, but some do not offer all of the services that bulge bracket banks can provide. Middle market banks typically have a decent international presence but are not as global as bulge bracket banks. They range in size from several hundred employees to tens of thousands (in rare cases).

As a general rule, middle market deals range from $200 million-$1 billion (with occasional multibillion dollar transactions), but smaller middle market firms execute deals valued as low as $50 million. Examples of middle market banks include: Jefferies, RBC, Piper Jaffrey, Houlihan Lokey, HSBC, William Blair, RBS, BNP Paribas, Rothschild, Harris Williams, Macquarie and many more. Pros & Cons      

More intimate office setting often leads to more senior exposure. Leaner deal teams – Analysts get the opportunity to take on more responsibility. Less red tape – less time is spent working on materials required for internal compliance. Lower pay (although larger middle market firms usually pay e quivalent to or just below Street). Less well-known brand name – your friends and family may not have ever heard of your firm. Less willing to do “two and out” – middle market firms allow Analysts to work their way up within the firm more often, and therefore are not always accommodating of Analysts going through exit opportunity recruiting. Some firms may even threaten to fire you if they hear that you are going through the recruiting process.

Boutique Boutique banks are typically smaller than middle market banks and usually provide only advisory services; their small or non-existent Balance Sheets exclude them from providing financing services. The number of employees at boutique banks varies widely, but can be as high as a few hundred and as low as a dozen. These banks tend to be regional and have only a few major offices.

Most boutique banks execute smaller deals, typically below $100 million, and often specialize in a particular type of deal or focuses on a specific industry (i.e. healthcare, media, etc.). Examples of these types of banks include CSG Partners, Silicon Valley Bank, Soneshine Partners, Stone Key Partners, and thousands of others. Research boutique investment banks in your area to get a better idea of which firms are near you. Pros & Cons    

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Very intimate/lean deal teams – by nature, deal teams tend to be smaller at these smaller firms, leading to more responsibility and senior exposure for Analysts. Fewer hours – although this is not always true, many boutique banks have more laid-back cultures and give Analysts a better work-life balance. Significantly lower pay – usually in the form of lower bonuses. Lack of infrastructure – these firms typically do not have the same auxiliary services that bulge bracket and middle market firms have. Analysts will have fewer resources to help them on the job, and might find themselves printing and binding their own pitchbooks. Minimal buy-side exit opportunities – headhunters rarely reach out to Analysts at these f irms.


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Elite Boutique A few banks are designated as “elite boutiques”; these firms do bulge bracket deals ($1 billion+) and have global a presence despite being small in size and offering fewer services. A few well-known elite boutique banks have upwards of one thousand employees, but are considered boutique due to their small (or non-existent) Balance Sheet which prevents them from off ering financing and other services. Elite boutique investment banks are well-respected across Wall Street and are known for paying Analysts the same as bulge bracket banks. They also provide similar, if not better, exit opportunities compared to most other firms. Examples of elite boutique banks include: Moelis & Co., Lazard, Blackstone Investment Banking, Evercore, Centerview, Qatalyst, and Greenhill. Pros & Cons 

Share most of the same pros as bulge bracket banks – prestigious deals, better exit opportunities/headhunter exposure, strong name brand (within finance), and very accommodating for Analysts seeking exit opportunities.  Additional benefit of a lean/intimate deal teams, resulting in more Analyst responsibility.  Very little infrastructure coupled with high fees results in greater profits for the firm and often high bonuses for the firms employees.  These firms are uniquely positioned for growth, and upward mobility may be expedited.  Known for having longer hours/intense cultures – these firms often become pr estigious because of the intensity and drive of the senior bankers that work there. This can translate to much more work for the Analyst.  Limited/no exposure to financings – because most of these firms do not have financing capabilities, Analyst experience will come exclusively from advisory roles.  Relatively unknown outside of the finance world – these firms do not look as prestigious to nonfinance employers or the general public.

(2.2) By Region Investment banks span the globe, with the Analyst experience varying widely by region (even within a single investment bank). The biggest investment banks have a presence (usually in the form of a headquarters) in each of the major global finance hubs (U.S., South America, Europe, and Asia). To maximize relevance, we will concentrate on three groupings of regions: New York City, regional offices, and international offices. We will concentrate on bulge bracket banks and compare how a difference in location affects the life of an Analyst.

New York City New York City is the undisputed world headquarters of finance; any investment bank that is a major player has a strong presence here. Working in this city provides a distinct experience; finance is an integral part of the city’s history and culture.

Many banks have their headquarters in New York City with bulge bracket offices containing hundreds (even thousands) of employees working in the same building. The culture of the bank is much more prevalent in these headquarter offices: Analysts report feeling more like they are a part of the firm.


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Insider Insight

Working In New York City

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In New York City (“the city that never sleeps”) you can expect investment banking hours to be long. New York is known for a “work hard, play hard” mentality. Hours here are often worse than regional counterparts, but this fluctuates from bank to bank.  Most investment banks are no longer actually on Wall Street, and instead reside in Midtown. Offices are heavily populated from east coast and Ivy League schools, but there is also a large international presence.

Regional Offices Regional bulge bracket offices (also known as “satellite offices”) are much smaller than those in New York; office size ranges from 10-40 bankers (with a few offices topping 100+). These satellite offices are designed to establish a regional presence and service industries located outside of New York. Regional offices are typically populated with bankers focused on specific industries, regional Financial Sponsors, or non-industry specific regional coverage. In the past five years the vast majority of product specialist roles have been relocated from satellite offices to the main offices in New York.

Below is a list of major regional locations and the industries they tend to cover (note that offices may cover a variety of industries and that boutiques tend to have coverage in smaller cities such as Denver or Atlanta): • • • • •

San Francisco (Technology) Los Angeles (Media, Leisure) Houston (Energy) Chicago (Industrials, Consumer) Boston

Compared to New York, these offices are sometimes known for being “slower paced” and having a more laid-back attitude. They are often populated with students from top regional schools (i.e. Houston offices recruit heavily from UT – Austin and Rice; Chicago offices recruit heavily from M ichigan and Notre Dame; etc.). Non-Target School

Candidates from non-target schools outside of the New York a rea will have a much harder time breaking into roles in the city. Even some of the candidates from regional target schools often have a difficult time making their way to New York offices. Instead, most regional non-target school candidates end up at regional offices nearby their university (as this is where their network lies).

International Offices While New York acts as the main finance hub of the Americas, London fills a similar role for Europe (and Hong Kong for Asia). Working in these cities is similar to working in New York, with major bulge bracket banks all having large offices and presences here. Although New York, London, and Hong Kong are the most robust, large countries generally have their own sizeable finance hubs. These include Toronto, Sao Paolo, London, Frankfurt, Zurich, Dubai, Mumbai, Singapore, Hong Kong, Shanghai, Tokyo, and Sydney. Foreign banks often have their global headquarters in their respective countries (outside of the U.S.) in conjunction with maintaining a U.S. headquarters in New York City.


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Some students dream of working as an investment banking Analyst in an international office for a few years and then returning to the United States. It is extremely difficult for prospective Analysts to break into international offices from domestic universities. Understand that once you go to an international office, you become “that region’s guy” (for example, if you begin your career working as Analyst in your bank’s Hong Kong office, you become the “Asia guy” because your expertise lies in that region). Insider Insight

Working In International Offices

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The most likely route to move internationally is to work as an Analyst for two years in the United States and then request a third year abroad.  Students are often surprised that official international office languages tend to be English.

(2.3) League Tables “League tables” are charts that rank investment banks based on specific metrics such as number of deals completed, cumulative deal value, average deal size, percent of market share, and others. Parameters are often set to differentiate by region, deal size, industry, type of transaction , etc. These tables are one of the only ways that banks can numerically stack up against each other, but they are not taken as an absolute truth as many are manipulated and contain certain exclusions.

Example 1:

Source: Deal Logic, Wall Street Journal

Example 2:

Source: Deal Book, Thomson Reuters

Individual banks and groups within banks create their own league tables to market themselves to potential clients (group rank is included in many pitchbooks). These are often manipulated to reflect the most favorable outcome for the bank (i.e. setting specific dates, choosing different deal parameters, excluding certain competitors for a given reason, etc.). Several third-party companies create their own “unbiased” league tables, notably Deal Logic (WSJ) and Thomson Reuters. Insider Insight

Investment Banking League Tables

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It is not uncommon to see each bank at the top of most league tables it creates. A more accurate representation of “ranking” is the bank’s current reputation on Wall Street.  Group is particularly important for league tables; you might see one group at an investment bank at the top of its industry league tables and another group at the same bank at the bottom of its industry league tables. For example, a bank’s Consumer Group may be #1 among Consumer Groups on Wall Street, but the same bank’s Energy Group may be #10 among Energy Groups on Wall Street.


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Chapter 3: What The Job Entails This chapter focuses on what a job in investment banking actually entails for the Analyst: the types of projects on which you will work, the type of work you will perform, the difference between groups, and an inside look at the things you will come across as an Analyst. After reading this section, you should have a clearer understanding of what an Analyst does on a day-to-day basis.

(3.1) By Types Of Staffings (Projects) “Staffings” refer to projects that you are assigned to work on. Each group (or office) has at least one “staffer”, a more senior banker (typically a VP-level member of the group) who assigns work to the Analysts (and Associates). Not all staffings are created equal; there are various types, described in detail below:

Pitches A pitch is a presentation to a client (new or existing) with the intent of soliciting business. When a bank is pitching a client, they have not yet been hired. The end goal of a pitch is to have the client hire the bank and pay a fee for the services rendered. Below we outline four major types of pitches: 1. Introduction:

A high-level pitch to a new company or client that sells the bank’s team, its capabilities, and its experience. The end goal is to establish a relationship with a client (with the intention of winning future business). 2. Relationship Maintenance:

A high-level pitch designed to maintain a relationship with an existing client. The goal is to keep the bank on the forefront of a client’s mind in hopes that they will use the bank to fulfill any future business needs. These pitches will often take the form of an industry update or advice on general strategic moves. 3. Propose A Transaction:

These pitches are specific in nature; a bank will approach a client with a specific transaction in mind (i.e. acquire a specific target company, refinance a loan the client already has in place, IPO, etc.) . 4. Participation In A Bake-Off:

In a “bake-off”, a client will approach multiple banks regarding a specific pending transaction they plan to complete. The client will ask the various banks to pitch them on why their bank is best for the transaction. Banks will create presentations and the client will judge the banks on items such as their strategic plan, track record, fees, and existing relationships. Pitches are presented by senior bankers in the form of a “pitchbook”: a PowerPoint presentation that is used in print form. A typical pitch includes an executive summary, firm overview, team overview (including bios and previous transaction experience), market overview, client positioning , and details of the specific transaction being pitched. Transaction details vary widely depending on what specific


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service is being pitched; examples include a preliminary valuation analysis, a list of potential buyers or sellers, proposed financing structures, etc. Pitches vary in length: the amount of work and level of detail that goes into a pitch is much higher for a bake-off than an introductory or relationship-driven pitch. Making A Pitchbook The Ana lyst sits d own with a Vice President a nd Associa te to go over the ba ckground and purpose of the pitch

Post-conversation, the Associate a nd Vice President draw up pa ges for the Analyst to put t ogether (known as the “pitchbook shell”)

The Ana lyst is responsible for a ll compo nents of the pitchbook: cond ucting va luation an a lysis, sourcing da ta , tran scribing text, creat ing gra phics, a nd compiling a nd printing the presenta tion

Once a first draf t of the pitchbook is complete, Associa tes an d Vice Presidents check th e work a nd return a copy with noted chan ges (called a “markup” )

The Ana lyst then carefully corrects ea ch item noted , a process called “turning” a markup. This process repeat s until sign-off is eventu a lly received from a Ma na ging Director or Senior Vice President

NOTE: In rarer situations, Managing Directors and Senior Vice Presidents play a more active role in creating the pitchbook by providing markups and writing slides for the presentation. Pitchbook work is usually split between Analysts from multiple groups (i.e. product and industry groups), depending on which group has more availability. Insider Insight

Pitches

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Pitches are often the most time intensive and least rewarding staffings, but are also the most common: Many times they lead nowhere. Sometimes pitchbooks are not used during the pitch, despite days or weeks of work. Completing pitches is not as helpful for exit opportunity recruiting, and it is not looked upon with nearly the same value as live deals.  Bank and group culture (especially senior banker personality) can greatly influence the level of detail and length of a pitchbook.  Most pitchbooks leverage previous work, often pulling pages or even sections from older pitches. When creating a pitch, Analysts tend to do the least amount of work possible and utilize shortcuts. − − −

Deals The type of deal that an Analyst is working on drastically affects the type of work completed. Each deal has its own set of requirements, with different deal types providing different experiences (the experience gained on an M&A transaction is significantly different than that of a debt deal). Below we outline a few different deal types and discuss the deal closing process:


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Debt Deals

In a debt deal, an investment bank helps a client (the debtor) raise money from investors (creditors) for various purposes. The investment bank organizes a group of creditors to provide loans or bonds to the client to support its needs. Examples of why a company would execute a debt transaction include: •

•

•

•

Paying a dividend: Debt can be raised in order to pay out money (a special dividend) to equity holders in a company (this transaction is called a “dividend recapitalization” and is usually performed by a company owned by a financial sponsor). Financing an acquisition: A client will often approach an investment bank for financing to purchase another company. This also includes loans to financial sponsors to support LBOs. General corporate purposes: A company may need money to aid in its normal course of business (i.e. needing money for growth purposes, major capital expenditures, etc.). Refinancing a company’s existing debt: The client may have existing debt that is maturing soon or may want to take advantage of better (cheaper) interest rates. They may approach an investment bank to find investors to replace their old debt with new, cheaper debt.

Analysts working on debt deals become specialists in the financing process. As an Analyst on these deals, you spend the majority of your time learning about different debt structures and financing scenarios. You analyze what types and amounts of debt can be supported by the debtor, and model the future implications of a contemplated transaction. Analysts can expect to interact with rating agencies (S&P and Moody’s) and learn how to quickly comb through credit documents, understanding where to find important debt-related information (i.e. existing covenants, maturities, interest rates, etc.). You learn the ins and outs of financing models, including covenant analyses, acceptable leverage levels, and different debt structures and their significance. Once analysis is complete and structure is determined, Analysts spend the majority of their time creating marketing materials and selling the debt to investors alongside the debtor’s management team. Equity Deals

In an equity deal, an investment bank helps a client raise money from equity investors for various purposes. Common reasons a company may want to issue equity include: •

•

•

•

Raise permanent capital: The client may need capital for a variety of reasons, including general corporate purposes, paying off creditors, financing an ac quisition, growth opportunities, etc. Provide a means of currency: Once a company is public, its shares can be easily used as a currency of exchange for both growth and acquisition opportunities. Increase access to other funding sources: Public companies must adhere to stringent securities regulations which enhances transparency and increases credibility. This allows for quicker and easier access to other sources of funding. Enhance investor liquidity and exit opportunities: Public equity markets are extremely liquid and allow investors that have been tied up in private company stock to easily exchange or sell shares.

Common equity deals include initial public offerings ( “IPOs”), follow-on offerings, and private placements. •

IPO: Often one of the most publicized forms of equity deals, an IPO involves a private company marketing itself to public investors, “floating” a percentage of the company (number of shares available to the general public), listing on a public stock exchange (Nasdaq, NYSE, AMEX, etc.), and selling a designated number of initial shares to the marketplace. There are two possible forms of transactions in an IPO: A) existing shareholders can sell a portion of their holdings to the public market, and B) new shares can


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be issued and sold to the public market (diluting existing equity holders). After an IPO, the portion of the company floated can be bought and sold by both institutional and retail investors (the general public). Analysts working on IPOs spend a significant amount of time conducting due diligence (compiling questions for management, finalizing projections, and building a company model), determining valuation, drafting an S-1 (public prospectus), and clearing internal hurdles (restricted lists, committee approvals, etc.). Analysts also play a role in the marketing process by organizing the listing process, developing marketing materials for investors, updating valuation materials, targeting investors, coordinating interactions with other underwriters/managers, and teaching the bank’s salesforce about the client company. After a road show is launched, Analysts will be involved in pricing communications and the closing process. Insider Insight 

IPOs

IPOs are much less common today; the likelihood that an Analyst completes an IPO in their two year program is very low. Analysts working with companies in more growth-related industries (Technology, Clean Energy, etc.) generally have the best chance of completing one of these transactions.

Quote “ IPOs are some of the most rewarding transactions. I still frequently come across a company that I took public during my Analyst days. Seeing their ticker on CNBC always reminds me of that deal. ”

- Associate, Bulge Bracket Investment Bank •

Follow-on: A follow-on offering consists of selling additional shares of a company’s stock after it has already gone public (through an IPO). Unlike an IPO or private placement, the price of the shares in a follow-on offering is fairly predetermined (based on existing market prices).

Analysts working on follow-on offerings can expect to spend most of their time developing marketing materials for the company . Investment bankers do not focus on valuation as the public equity markets have been consistently valuing the company for as long as it has been public. Investment bankers focus on developing a sales strategy and marketing the company to institutional investors. •

Private placement: In a private placement, equity capital is raised by selling shares of the company in a privately negotiated transaction to a small, select universe of institutional or High Net Worth investors. The selling company can be either private or public (the public scenario is referred to as a private investment in public equity, or “PIPE”).

Analysts working on private placement transactions will encounter similar work to that of an IPO, with a few major exceptions. Private placements are discrete and involve a much less robust marketing process; only a handful of targeted investors are aware of the transaction. Additionally, Analysts will not be required to deal with the various regulatory hurdles involved in an IPO process. M&A Deals

In an M&A deal, an investment bank advises a buyer or seller on an acquisition, sale, or divestiture. “Consideration” (the form of payment used in the deal) can be a combination of debt and/or stock. The two major types of M&A deals include “buy-side” and “sell-side” deals.


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Buy-side: In this form of transaction, an investment bank is hired to find a potential acquisition target for a client interested in purchasing another company. Sell-side: In this transaction, an investment bank is hired by a company to sell a portion or all of itself to an interested buyer.

M&A deals can be further broken down into “targeted” or “broad”: •

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Targeted deals: Concentrate on a small number of potential buyers or sellers to keep the process efficient and quiet. Broad deals: Seek to maximize exposure and increase bidding competition by reaching out to a wide range of potential buyers or sellers.

Sell-side and buy-side processes are very different from each other and greatly affect the type and amount of work an Analyst completes. Insider Insight 

Buy-side & Sell-side Deal Workflow

Sell-side deals tend to occupy more of an Analyst’s daily time as they must interact with other companies during business hours. For this reason, buy-side work tends to fill an Analyst’s evening and night hours. •

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Buy-side Workflow: Analysts working on buy-side deals initially spend the majority of their time analyzing potential suitable acquisition targets. Once the universe of target companies is narrowed down, the shift focuses towards analyzing combined entities and the implications of the two companies merging ( targeted buy-side processes start here). Analysts become masters of merger models (accretion/dilution analysis, synergy analysis, etc.) and different valuation methods (discounted cash flows, precedent transactions, equity comparables, sum of the parts analysis, value creation, etc.) . Once an acquisition target is selected and the client decides to move forward with the acquisition, the shift focuses towards deal execution. Analysts are then involved in the diligence process, working with financing partners, negotiating a purchase agreement, finalizing a price, and conducting a fairness opinion. Sell-side Workflow: Analysts working on sell-side deals can expect to become experts on the companies they are selling. Unlike a buy-side process, the focus here is on marketing the client to potential buyers and obtaining the highest valuation/purchase price possible. Interaction with potential buyers and the client’s management team is frequent. A significant amount of the Analyst’s time is spent on administrative work in a sell-side deal (fielding requests for information from potential buyers, scheduling meetings, updating potential buyers lists, etc.). Preliminary work is focused on gaining an in-depth understanding of the company and its operations in order to help management create projections. Lots of time is spent creating marketing materials to show investors, while simultaneously reaching out to a long list ( broad sell-side) or selected list ( targeted sell-side) of potential acquirers. These marketing materials include the “teaser” (1-2 page company overview), “confidential information memorandum” (or “CIM”), “management presentation” (50+ page sales pitch), etc. Analysts learn how to evaluate different acquisition offers and their implications for the client. Ultimately, a single buyer is chosen and Analysts help finalize deal terms, legal documents, and final diligence with the acquiring company’s advisors. Quote “ Sell-side deals are awesome because the management team opens their books to you and shows you EVERYTHING. In a sense, you are paid to learn about their company. ”

- Analyst, Bulge Bracket Investment Bank


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Closing Process

Upon completion of a deal, the Analyst has a few major follow-up responsibilities (often a fun part of any deal). Below are the major closing deliverables/tasks: •

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Creating case studies and/or firm announcements: Once a deal has closed, the bank and group will want to showcase the accomplishment. Most firms require Analysts to send out an announcement containing the details of the deal that was completed and an attached case study showcasing the specifics of the transaction. Creating deal toys: Post-closing, it is the Analyst’s job to come up with a unique “deal toy” (or “Lucite”) design. These are plastic trophies/mementos that commemorate the closing of a deal. Analysts will coordinate with a manufacturer regarding all aspects of the deal toy from design to shipment. Insider Insight 

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Deal Toys

Deal toys are not all fun and games: senior bankers want clients to have these in their offices as a constant reminder of past interactions and the investment bank in general.

Organizing the closing dinner: Investment banks commonly celebrate the completion of a deal by organizing a large dinner with the client and other parties involved in the process (lawyers, other advisors, etc.). Analysts are often responsible for planning and coordinating the event and are sometimes able to attend.

Internal/Infrastructure Projects Internal projects are assignments that do not involve a client. These projects are for internal purposes and can vary greatly by type as well as amount of work required. Types of projects include conducting weekly updates (industry updates, transaction tracking, firm updates), tracking specific deals, organizing files on the drive, compiling lists of companies for potential deal sourcing, organizing weekly team calls , creating reports for senior management, and many more. Example

An Analyst in the Consumer Group is responsible for tracking and sending out a weekly update of transactions that occurred in his specific industry (M&A, refinancings, IPOs, etc.). He also keeps track of equity, loan, and bond pricing for all major companies in the industry to create industry averages and compare relative company performance. On top of this, the Analyst uses Factiva to conduct an industry “news run” for the past week, which he then summarizes and transcribes onto one page. The Analyst inputs this information into set templates and graphics and creates a multi page PowerPoint presentation which is sent to the entire Consumer Group every Monday morning. Many of these internal tasks rotate monthly, quarterly, or yearly and are quickly handed off to the most junior banker in the group (i.e. 1 st year Analysts or summer interns).


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Insider Insight

Working On Internal Projects

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For new Analysts, internal projects are good ways to gain exposure to Managing Directors. However, once you are an established Analyst, try to hand-off these projects whenever possible; internal projects are in addition to any other deals, pitches, or work.  It is common for an Analyst to complete this work during lulls in daily tasks or over the weekend (usually Sunday evenings). Favors

Junior bankers are often asked to do favors by more senior employees. It is also common to get requests from ex-Analysts who now work as junior employees at firms that are clients of the bank (especially buyside firms). Examples of these tasks include downloading and sending equity research (known as “pulling” research), sending buy-side Associates prior projects they created while at the bank, and pulling a LIBOR curve for a client, among others. Insider Insight 

Performing Favors

On rare occasions, Analysts may need to perform favors related to the personal endeavors of senior bankers; you should embrace these favors as rare opportunities to earn brownie points.

(3.2) By Types Of Work Performed Analysts perform various types of work when staffed on projects. The type of work performed can be broadly categorized as administrative, technical, qualitative, and research. Different staffings will require the Analyst to perform varying combinations and degrees of these work types.

Administrative Work Administrative work consists of clerical, logistical, and organizational tasks necessary to keep a project or deal running. Examples of tasks include scheduling meetings and conference calls, taking and transcribing notes to distribute to the deal team, coordinating pitchbook printing and arranging couriers, faxing senior bankers, maintaining logs for M&A transactions, pulling information from data rooms, acting as a liaison between your team and third-party service providers (i.e. data rooms), creating deal toys, printing internal materials, ordering food, and many others.

Analysts perform countless administrative tasks on a daily basis. Students tend to focus on the more glamorous and technical aspects of the job and often neglect to recognize the amount of administrative work required . However menial you may find these tasks, they are absolutely vital to running any deal. Recognize and embrace this work as a significant part of your job description; in more grueling deals, administrative tasks can take up to 80 hours of your week. Insider Insight

Administrative Work

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Being efficient at administrative tasks can help alleviate stress and free up more time for other vital work.  Do not neglect these tasks; people assume that all work will be correct, and errors indicate that you are an incompetent Analyst.  Do not complain. Although this work is rather menial, you are paid well to do it.


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Technical Work Technical work involves finance, accounting, and arithmetic-related operations. As an investment banker, this includes building models, performing valuation analyses, creating graphs, comparing data, calculating financial metrics (such as EBITDA or Beta), analyzing comparable companies and precedent transactions, compiling debt trading levels, and many other operations. The job will entail varying degrees of technical analysis (this is why the position is titled a “financial analyst ”).

99% of technical work is performed in Excel. Analysts will become masters of this program and learn the ins and outs. Non-Target School

Non-target students (particularly those at universities without finance programs) are much less likely to have classes that expose them to the technical aspects of the job, including thorough experience with Excel. Becoming familiar with these topics and this program ahead of recruiting is necessary. Technical work is the most mentally stimulating and most difficult work that the Analyst completes . Learning and sharpening this skill set is one of the main draws of a job in investment banking. Through technical tasks, Analysts add significant value to a deal, and it is here that prior financial knowledge and training are most applicable. Insider Insight

Technical Work

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Complex math is typically not required in investment banking, but technical tasks re quire knowledge of sometimes complex Excel functions.  Most technical skills can be (and are) learned on the job, especially when coupled with a solid accounting and financial knowledge base.  Technical work can be more of an art than a science. It involves lots of judgment calls, especially related to assumptions (these become better with experience). Below we will outline the most common types of technical work: Financial Modeling

The major (and most coveted) technical task performed by an Analyst is building financial models (or “modeling”). Models are created for purposes of valuation or to more generally analyze historical and projected financial performance. The Analyst is generally responsible for running all aspects of a model : changing assumptions, updating the time period, creating financing scenarios, and (most importantly) ensuring there are no errors. Model types include LBOs, financings, mergers, and discounted cash flow ( “DCF”) analyses. Models vary greatly in size and complexity and can take anywhere from a few hours to more than a week to create. There are two major structures of models: mini-models and full (three-statement) models. The biggest difference between the two types is that mini-models do not incorporate a company’s Balance Sheet and make simplifying assumptions about changes in working capital (calculating the change in working capital is a major reason the Balance Sheet is included in a full model).


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Insider Insight

Financial Modeling

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Modeling skills are highly relevant for buy-side roles and will be tested in buy-side interviews. These firms seek out Analysts with strong modeling skills as this is a major component of what junior buy-side Associates do on a daily basis.  Full models involve extensive accounting know-how, especially regarding the detailed interaction of the three financial statements.  Models are one of the key ways to interact with the Chief Financial Officers (“CFOs”) of smaller clients. When building or adjusting assumptions, you will often go straight to the company’s source: the CFO. Equity Comparables

In equity comparables analysis, valuation is obtained by averaging forward (projected) trading multiples (Enterprise Value/EBITDA, Enterprise Value/Revenue, Price/Earnings, etc.) of comparable public companies and applying those averages to the company you are valuing (i.e. find average EV/EBITDA of seven competitors and multiply that average by your c ompany’s projected EBITDA to come up with an Enterprise Value). The comparables are created by compiling the historical and projected financial metrics needed to calculate these trading multiples. They are also necessary for evaluating your company’s operating performance relative to its peers. Some of these metrics include Revenue, EBITDA, Net Income, Capital Expenditures, capitalization, and share count. Analysts utilize these metrics to calculate comparable benchmarks such as EBITDA Margin, Net Income Margin, EPS growth, leverage multiples (Total Debt/EBITDA, Net Debt/EBITDA), and Enterprise Value, among others. Debt Trading Comparables

In debt trading comparables, similar companies’ debt structures and financial metrics are analyzed to assess what levels of leverage/debt structures they currently sustain. These are used in debt deals to determine realistic financing expectations for the company you are dealing with, including maximum leverage, assumed interest rates on debt, necessary covenants, and overall structure. For example, if the average leverage (Debt/EBITDA) of your client company’s five closest competitors is 4.5x, your client company can likely sustain this same amount of debt. Precedent Transaction Comparables

In a precedent transactions analysis, valuation is obtained by analyzing historical transactions similar to the one you are contemplating, and then applying average transaction multiples to your company’s financial metrics (EBITDA, Net Income, etc.). The theory is that, all else equal, your transaction should garner the same valuation as similar historical transactions. Common multiples used for comparison purposes include EV/EBITDA, EV/Revenue, etc. Similar to equity comparables, the average multiple is multiplied by your company’s financial metrics to reach a valuation.

Qualitative Work Qualitative work is “non-technical” in nature and includes creating presentations and memos, writing, and formatting. Analysts can expect to spend a significant amount of time doing this type of work.

Specific qualitative tasks include writing overviews for company and industry trends, giving explanations of analytical work, profiling companies, and creating marketing materials (management presentations,


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CIMs, pitchbooks). Each of these work products encompasses a massive amount of formatting: they will be presented to other individuals inside and outside of the bank, and appearance is extremely important. Associates do much of the heavy lifting when it comes to creating the basis for qualitative work, but Analysts still spend a significant amount of time word processing and creating presentations. Associates map out most presentations in detail, with Analysts expected to compile and create them (the latter takes far more time). Insider Insight

Qualitative Work

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Qualitative work is subjective, so expect many iterations from the entire chain of command on your deal team as differing opinions go up the ladder.  Plagiarizing is generally not frowned upon, especially when creating overviews of companies and industries.  It is common to leverage prior work to increase efficiency, particularly when creating page layouts and inputting content.

Research Both qualitative and technical work is dependent on research in order to find vital information that will act as inputs. Associates usually offer advice regarding where to find information, but the Analyst is ultimately responsible for gathering and aggregating data. Research is such a significant and vital part of the job that many banks have dedicated research teams available to junior bankers. These teams have access to vast resources and paid subscription databases not available to the public. Common research tasks performed by Analysts include pulling equity research re ports, combing through company websites, searching through company financials, tracking down available market information, creating public information books ( “PIBs”), looking up fund sizes and past transactions, and countless others. Insider Insight

Conducting Research

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Utilize research services at your firm and plan ahead; try to work in parallel with these teams for maximum efficiency.  Researching can be a huge time drain if you linger; spend the appropriate amount of time searching for pieces of data and then move on (some things are not publicly available or simply do not exist).  Over time, Analysts get much faster at conducting research as they learn where to look for information and how to utilize firm resources.

(3.3) By Groups The type of work that an Analyst performs on a day-to-day basis is highly dependent on the type of group they work in. Although a lot of the fundamental research, administrative, technical, and qualitative tasks will not be very different, the overall deal experience will vary greatly. As discussed in Section (1.1), we will distinguish between two main types of groups: industry (or coverage) groups and product groups (further divided into Corporate Finance and Capital Markets; for purposes of this document). The two groups interact intimately on almost any deal; the industry group provides industry expertise and likely has the client relationship, while the product group specializes in the type of transaction being performed. www.ibankinginsider.com

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Industry/Coverage Groups Industry groups do just as their name implies: they concentrate on a specific industry. Exact industry groupings vary by bank but generally include Technology, Media, Real Estate, Consumer, Financial Sponsors, Energy, Business Services, Industrials, Financial Institutions, Healthcare, and other more specialized industries.

Investment bankers in industry groups focus exclusively on their respective industry. They are expected to form industry expertise that encompasses a working knowledge of industry trends, the competitive landscape, valuation metrics of public companies in the space, and historical transactions. While the focus is on their industry, bankers in industry groups get exposure to a wide variety of deal types. Quote “ Although I concentrated on the retail industry, so far I have been part of an IPO process, a large M&A transaction, and multiple debt deals. Being in a coverage group has given me a well-rounded experience. ”

- Analyst, Middle Market Investment Bank For industry bankers, much time is spent trying to generate new business by pitching new and prospective clients. Therefore, Analysts in industry groups tend to be much more involved in the pitch process but also gain valuable insight into the details of the company and its competitors. When industry groups are excessively busy, Analysts in the product group will take on a larger role in developing the pitchbook. At the Analyst level, technical work is often split with the product group, with the industry group handling most of the initial company analysis (public comps, precedent transactions, operating model) and the product group usually controlling the M&A/LBO model (depending on the type of deal). Industry group Analysts control the operating model due to their company-specific knowledge. They are able to leverage industry and company expertise to choose insightful assumptions when formulating a company’s financial projections.

Product Groups – Corporate Finance Corporate Finance product groups specialize in a specific type of transaction, such as M&A, Leveraged Finance, or Restructuring (each of which is considered a product), across various industries.

The main focus for Corporate Finance product bankers is on execution of a transaction. They tend to provide only ancillary roles when creating pitch materials but run most of the process once a deal is mandated and goes “live”. Analysts in these product groups are often known for developing stronger technical skills, particularly with respect to their product’s transaction models (but this point is debated). Since the Corporate Finance product group usually runs the deal process, the Analyst is responsible for the majority of administrative tasks and is the point person for deal logistics. Below is a brief description of the major Corporate Finance product groups: Mergers & Acquisitions

The M&A group facilitates broad and targeted buy-side and sell-side transactions for clients, as well as divestitures, spin-offs, and asset sales.


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Leveraged Finance

The Leveraged Finance group structures debt financings (high yield, leveraged loans, etc.) and performs credit analysis for clients to address a variety of needs including acquisitions, refinancings, dividend recapitalizations, and project financings, among other things. Restructuring

The Restructuring group works with creditors (i.e. funds that have invested in a company’s debt) and debtors (i.e. the companies themselves) to address current or anticipated distressed situations (i.e. pending bankruptcy) by advising on credit negotiations, seeking acquirers, or determining a new capital structure.

Product Groups – Capital Markets Investment bankers in Capital Markets focus on the market as a whole (debt or equity, depending on group) and analyze overall market trends across various industries. Debt Capital Markets (DCM) Debt Capital Markets provides clients with advice on raising debt and executes debt-related securities transactions: fixed income (preferred stock), high yield (bonds), and syndicated finance (loans). DCM acts as a gateway for clients to access a global investment pool.

Equity Capital Markets (ECM) Equity Capital Markets provides clients with advice on equity and executes equity-related securities transactions: private placements (private equity investments), equity-linked (options, convertibles, derivatives), and equities (stocks). The ECM group helps clients by structuring offerings, determining valuation, and facilitating transactions.

Compared to Corporate Finance, the work in Capital Markets has a less technical focus, especially in terms of modeling. The Capital Markets group plays a limited role in pitches aside from providing pricing expertise. Capital Markets Analysts are typically brought in during the later stages of a deal, providing execution support for exact security pricing and interacting with the sales f orce and trading desks to ensure the best terms possible on a deal. In the United States, the Capital Markets group is located almost exclusively in the Tri-state area (New York, New Jersey, Connecticut). Insider Insight

Product vs. Industry Groups

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When considering which type of group to join, it is important to determine whether or not you want to be focused on a specific industry and experience multiple deal types or master a deal type and learn about multiple industries.  It is a common misconception that product groups feed into better buy-side jobs. In reality, it is much more group and bank specific.


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(3.4) “Heard In The Bullpen” In this section we cover subjects that are commonly discussed in the “bullpen”, a term referring to the area of the office where most Analysts sit. This inside look will shed light on investment banking culture and other lesser-known aspects of being an Analyst.

Bonus Season And Reviews Come June/July, Analysts tend to discuss bonus expectations with fellow Analysts in their office, in other regions, and at other firms. Everyone is anxious to see if the long hours they put in and sacrifices they made will pay off. For a detailed description of the bonus review process, see Section (19.5); for a detailed description of bonus numbers, see Section (4.1). Insider Insight 

Bonus Timing

Goldman Sachs and Morgan Stanley pay Analysts a “stub” bonus in January or February of their first year. This bonus is pro-rated for the fraction of the year the Analyst has been working fulltime. It is not until January/February of the second year that the Analyst receives a full bonus.

Culture Overall bank culture plays a major role in the Analyst experience and differs by bank and specific group. It is important to get a feel for the stereotypes that exist when evaluating different firms; oftentimes they exist for a reason. Most banks engage in non-work related activities to build teamwork and promote a better work-life balance. These range from official bank sponsored events (holiday parties, happy hours) to unofficial interactions (fantasy sports leagues, going out to bars). A unique culture and bond exists among the Analysts themselves, especially those in the same class (Analysts that start at the same time or share the same level are said to be in the same “Analyst class”). Analysts often build strong camaraderie despite having very different interests and personalities. This is due to the sheer amount of time they spend together in the office as well as the shared experience that an Analyst class will endure together. These experiences range from training to dealing with the often harsh environment of the job (stress, long hours, etc).

Auxiliary Staff Support Prospective bankers are usually surprised to learn that even junior bankers have access to a host of auxiliary staff (especially at bulge bracket banks). These groups include: additional staff to support Analysts in presentation work and graphics support (“ Presentations”), research/information services, print/copy services, and sometimes an outsourced service team (usually stationed in India). Each team contains experts in their respective tasks and helps make the Analyst’s life easier. Analysts are responsible for staffing and managing these different groups.

Face Time “Face time” refers to always being seen in the office and “showing face”, particularly when Analysts do not have any meaningful work to complete. The underlying rationale is that the more Analysts are seen around the office, the more it appears they are working hard and are dedicated to the firm. It is not uncommon to see junior bankers hanging around until after their superiors leave, despite being done with their work. Face time exists in varying degrees depending on firm and culture, but (in general) a lot of


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this pressure is created by the Analysts themselves. As a result of face time, Analysts often fear being away from their desk for prolonged periods, avoid taking vacations or vacation days, and minimize going out for lunch/dinner for too long (or at all).

Friday Night Specials A “Friday night special” refers to receiving a staffing on Friday afternoon, usually implying that the weekend will be spent in the office. Unfortunately, getting staffed on Fridays is not uncommon; investment banking is a client-focused job, which means that banks are at the whim of their clients. These staffings are more common on Friday as this is when senior bankers often look at their next week’s schedule and begin to plan ahead before heading home for the weekend. Quote “ I’ll never forget this one weekend where my parents came to visit me in New York. Receiving an email from an MD on Friday at 3:30pm regarding a bake-off pitch due that next Wednesday was about the worst thing possible. Needless to say, I didn’t see much of my parents that weekend… ”

- Analyst, Boutique Investment Bank

All-Nighters Sometimes Analysts must pull all-nighters to complete tasks that have strict deadlines (i.e. an MD needs a presentation before a 9:00am flight). These all-nighters are often unavoidable; senior bankers do not intend to make Analysts stay up all night. Analysts expect to pull a few all-nighters each year (these are more common when working on a live deal), but this can fluctuate based on firm, group, or economic environment. Insider Insight 

Pulling All-Nighters

After having pulled an all-nighter, it is not uncommon for Analysts to either: A) leave to get a few hours of sleep and return in the early afternoon or B) go home early the next afternoon/evening. This luxury is not always possible depending on the circumstances.

“The Red Light Of Doom” Every Analyst can relate to the red flashing light on their BlackBerry (one of the worst feelings for a junior banker), signifying a new email or text; it could reveal hours of new work. Analysts are always on call and are given a work cell phone to receive emails in real-time, even when away from the computer. They are expected to respond to emails immediately (within 5-10 minutes) during normal waking hours.

Red Pen Markups When an Associate or VP reviews and corrects an Analyst’s work, it often comes back in the form of a red pen markup (no, the pen is not ALWAYS red). The page will have words or sections crossed out, things noted to add, and wording to change. Changes can range from only needing to fix a few words to pages covered in red ink with entire sections needing to be removed or re-worked. Investment bankers are perfectionists: it is common to go back and forth multiple times, even on a simple slide. Every word will be carefully chosen.


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Insider Insight

Turning Comments

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Sometimes a markup is unclear, illegible, inconsistent, or even wrong; this is where an Analyst’s judgment comes into play. When turning comments, Analysts will often help each other decipher handwriting before asking superiors for clarification.  Diligent Analysts often highlight the edits on the markup (or a copy of the markup) as they make the changes to ensure that none are missed.

Data Room And Lucite Companies Spoil You As an Analyst, third party service providers will spoil you. These include “data room” providers (companies that act as liaisons between clients and investors by hosting confidential content on a secure server) and “Lucite/deal toy” manufacturers (companies that produce plastic trophies/mementos that commemorate the closing of a deal). These companies are always looking to generate business, and Analysts play an integral role in choosing which company to use when creating a Lucite or setting up a data room. They will bring free food, take Analysts out to dinners or sporting events, and even buy bottles at nightclubs.

ALT + Tab Yes, Analysts work 100+ hour weeks, but there will often be down time (even if just in 10 minute increments). The notorious keystroke “Alt + Tab” quickly switches between programs, instantly giving the impression that an Analyst was working in Excel rather than browsing the internet. Master this keystroke!

Attention To Detail Investment bankers hate mistakes, and therefore love Analysts that pay attention to detail. Check, double check, triple check, quadruple check your work: Analysts go to seemingly extreme lengths to ensure work is correct.

A Day In The Life Below we detail a typical day in the life of an Analyst (both weekday and weekend). Weekday

This example profiles an Analyst in the Media group (coverage group) who is working on a live sellside advisory transaction for a company in his industry. This is a realistic depiction of what an average day will entail; it has not been sugar coated or exaggerated. • •

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7:45am – Wake up and immediately check my BlackBerry. 9:00am – Arrive at the office, grab coffee, more thoroughly read through emails that came overnight, and check financial news. 9:30am – Double check changes I made to the model yesterday. Ensure there are no errors, operating and financing assumptions are correct, etc. 10:15am – A fellow Analyst from training asks for updated Media equity comparables for another deal that he is on. I run Capital IQ to update the file with numbers from yesterday’s market close and send the attached file to him. 10:30am – Receive markup of management presentation I worked on the previous night (left it on the VP’s chair). Unfortunately, the markup is extensive and my Associate and I need to


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redo major sections of the presentation. We discuss it for five minutes and the Associate asks if it is possible to see a draft of the changed presentation by 3:00pm so that he can review it before we give it to the VP. 11:30am – Take a break from adjusting the management presentation to get on a call in my VP’s office with the management team and our M&A team. The call is meant to update the client on buyer outreach. At the end of the call, the client asks when they can see the next draft of the management presentation. The VP promises to send it over this evening for them to review in the morning; a 10:00am call is scheduled for tomorrow to discuss the changes. 12:00pm – Send out a meeting invitation for tomorrow morning’s call regarding the management presentation to my deal team, the M&A team, and the management team. 12:05pm – Go back to turning the management presentation. 1:00pm – A fellow Analyst asks if I want to go grab lunch, but I do not have time. I hand him $10 and ask him to get me whatever he is getting. 1:15pm – I notice that one of the changes in the management presentation markup will require some population and GDP data. I email a request to the Info Desk (research) so they can pull the information while I continue working on the other changes. 1:20pm – My fellow Analyst comes back with food. I quickly scarf it down at my desk while I check Yahoo! Finance and ESPN.com. 1:30pm – Receive an email from a Media Analyst that I have never met from the San Francisco office. His MD is currently on a flight to New York for a meeting tomorrow morning. He would like me to print books and have them couriered to his MD’s hotel tonight ahead of tomorrow’s meeting. This will only take me a few minutes, but it interrupts my concentration on the management presentation. 2:00pm – The client’s CFO calls my VP for an impromptu discussion about the model. Upon further review, he wants to tweak some assumptions that we discussed last week. The VP calls my Associate and me into his office to be on the call. The changes are pretty basic, but there are a lot of them; this will take me at least an hour. I need to make the changes now because it will affect certain pages in the management presentation. 3:00pm – Finish the changes to the model and send it to the Associate for approval before pasting the output pages into the management presentation. While he’s reviewing, I go back to making my VP’s changes to the management presentation from earlier. 3:15pm – Receive the necessary data from the Info Desk and integrate it into the presentation. 3:30pm – The Associate has finished reviewing the model and gives me the go ahead to paste in the model output pages into the management presentation. 3:45pm – Receive an email addressed to several Analysts in our group. It looks like an MD has a client meeting on Friday where he will be discussing a long list of acquisition opportunities for the company. Unfortunately, there is a list of about 30 companies for which he needs one-page profiles. Our staffer has decided to split the task among five Analysts (six profiles each) and the VP on this deal has requested the first draft of the profiles by tomorrow night (great, I have to do this on top of the management presentation; I will get to this later). 4:00pm – Finish changes to the management presentation, print it out, and hand it to the Associate for review. I swing by a friend’s desk to ask if he wants to grab coffee; we take a 15 minute walk around the block to get some fresh air. 4:30pm – Receive an email confirmation that the print job for the Analyst in San Francisco is complete. I go down to “flip the books” (review the printed presentations) and notice that the page numbers stop after the first page. I check the PDF at my computer and notice that the error is in the document, so I call the Analyst in San Francisco immediately to inform him of his error. He does not answer his phone so I shoot him an email. He only sent me the PDF, so I do not have the power to make the change myself (re gardless, I would not want to get involved in his work in order to avoid any chance of blame). The Associate is looking


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through the management presentation, but I use my spare time to look for some high-level formatting that I can perfect. 4:45pm – The SF Analyst calls me back frantically, thanks me, and sends the updated file to the Copy Room to be reprinted. He asks me to keep checking in with the Copy Room to make sure it is done as quickly as possible; the MD wants to have the presentation at the hotel before he gets there. 5:00pm – The Associate swings by to discuss his comments/new markup of the management presentation. He spoke with the VP who wants to add a few pages to the market overview section, including some maps and detailed graphics. He also wants updated transaction comparables to discuss on tomorrow morning’s call with the client. The rest of his changes are fairly straight forward. 5:10pm – Call the Analyst from the M&A group on our deal requesting the transaction comparables that we need. He says that he updated them last week and will only need to check for any deals that happened in the last few days. Timing will not be an issue. 5:15pm – Draft a detailed email with instructions for the Presentations team regarding the graphics and map that I need for the management presentation. I scan and fax the markup pages incorporating the elements I need from them. I explain that it is urgent and if there are any issues to call me. 5:20pm – A member of the Presentations team calls me and explains that they are backed up and will not be able to start working on my project for at least an hour. I explain the urgency but it is futile. I explain this to my Associate: he says to go ahead with the other changes in the meantime, and give the book to my VP when I am done. 5:40pm – Copy Room informs me that the SF Analyst’s print job is complete. I call a courier service before heading down to flip the books. Luckily, it looks like they are okay. 6:00pm – The courier has arrived. I run down to the lobby with the box of presentations and hand it to the courier. I hand him a piece of paper with the MD’s name on it and confirm that he is going to the correct hotel. Once he drops off the package, he is instructed to call me. 6:15pm – Finished the Associate’s requested changes and triple checked my work, but still have not received the slides from the Presentations team. I print out a copy of the deck and bring it to my VP; I tell him that we are waiting on a few of his requested additions, but the rest of the book is complete. He is not very happy. He tells me that he will markup the presentation and give me his changes before heading home. 6:30pm – The courier calls me and tells me that the package has been delivered. I email the SF Analyst and tell him that the books are waiting at the front desk for his MD. 6:45pm – The other Analysts on my floor are ordering Italian food on Seamlessweb.com. Two others are walking across the street to get Indian food; I decide to quickly go with them. As we walk into the restaurant, I feel my phone vibrate, and it is an email from my VP. He has some changes to the presentation and wants to discuss them before leaving. I tell my fellow Analysts that I need to head back to my desk and ask them to grab me food. 7:00pm – Sit down with my VP and Associate to go over the new changes to the deck. He wants to add several slides showing the model assumptions and wants to tweak a few of the model output pages. The VP informs me that he will be heading home but will review the next draft of the presentation “remotely” (while logged in from home). 8:30pm – Finish making changes to the management presentation/model, and the Presentations team emails me with the completed graphics. I incorporate these and triple check my work before sending the updated presentation to my Associate for his sign off. 8:45pm – The Associate gives me the go-ahead to send the presentation to the VP. 9:00pm – After taking a short break, I start working on my six company profiles. Each of these should take 30 minutes to an hour. I technically have until tomorrow evening, but who knows what tomorrow’s day will entail. 10:30pm – The VP says that the management presentation looks good. I send it off to the deal team and the client so everyone has time to review it ahead of tomorrow’s call.


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•

•

1:00am – Have made good progress on the profiles (five down, one to go) and decide that I want to go home; I can finish the last bit of work tomorrow. 2:00am – After doing a 10 minute workout in my apartment and watching an episode of Breaking Bad , it is time for bed. Tomorrow is another day.

Weekend

This example profiles a typical weekend for an Analyst in the Leveraged Finance group. On Friday, a private equity firm contacted an MD in the Financial Sponsors group. The sponsor is looking at potentially acquiring a retail clothing company and wants to get the bank’s financing views (what debt structure the bank recommends, the expected interest rates, and the fees the bank would charge). The private equity firm sent over projected financial statements and requested feedback by the end of next week. The VP on the deal team wants to see a mini model and debt comparables by Monday afternoon (therefore the Associate wants to see it on Monday morning). Saturday •

•

•

•

•

•

11:00am – Get into the office a bit earlier than usual. I am hoping to complete the mini model today and get out by 2:00pm (I am going to the Knicks game at 5:00pm). 11:05am – Order brunch online; typically it takes longer to deliver on the weekends and I know that I will be hungry by noon. 11:15am – Although I do not plan on starting the debt comps until tomorrow, I email a friend from training (an Analyst in the Consumer group in Chicago). I ask him if he has seen the debt comps for the specific companies I need in any deals/presentations that he has worked on recently. It is good to reach out now because an Analyst’s availability is unpredictable over the weekend. If he finds something, it could save me hours. 11:20am – Pull up an old mini model that I did a few weeks ago for a similarly structured debt pitch. The Associate wants to see three different financing structures, so I will need to build this into the model. Since I have a good model to reference, this should not be difficult to complete in a few hours. 2:00pm – Look at the clock and realize that I will probably not get out of here for another hour or so. As always, things are taking longer than I expected. 3:15pm – The mini model is working correctly, and everything should be good to go. I still have not heard back from my friend in the Chicago office, but hopefully he will get back to me before tomorrow morning. Even though I did not make it out by 2:00pm, this was not a bad day considering I got to sleep in and have the whole afternoon and evening to myself.

Sunday •

•

•

•

•

12:00pm – Wake up and check my phone; my friend in the Consumer group was able to track down two of the six company debt comps that I need. Not bad. 12:30pm – Roll into the office after a long night out with friends. Unfortunately I did not catch up on sleep despite waking up late. Many Analysts are in the office – I convince a few of them to grab food from Five Guys with me. 1:00pm – Start working on the debt comps. I begin with the easier stuff: updating the debt comps for the two companies that my friend sent over. I still need to dig through the financial statements and update figures for the most recent filings. 2:30pm – Move to the other four debt comps. Depending on a company’s debt structure, each comp will take between 20 minutes to two hours. 6:00pm – Finish updating the comps. I print out the mini model and debt comps and leave them on my Associate’s chair for him to see tomorrow morning. I head home to relax before a busy week ahead.


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Part II Why Investment Banking?


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Chapter 4: Publicly Available Positives In this chapter we provide insider knowledge on the better-known benefits of working in investment banking. Aspiring Analysts knowingly cite these as reasons why they want the job: we call these “publicly available positives” .

(4.1) Compensation It is no secret that investment bankers make good money; few jobs offer the same level of pay right out of college. Below, we dive into factors that affect pay and shed light on specific compensation numbers by position and rank.

Factors that Affect Compensation The following factors affect an investment banker’s compensation, in descending order of influence (most important  least important): 1. How well the market does (general economic landscape) is THE most important determinant of overall compensation: the better the overall economic environment, the more deals are completed (and hence more fees are earned for the bank). 2. How well the bank does compared to other banks, and particularly how well a banker’s division (IBD) does within the larger investment bank: if the investment bank has a good year and IBD closes lots of deals, expect a better bonus. 3. How well a banker’s group does (or office does if they are a generalist): groups that earn more fees for the bank will tend to get higher bonuses (or more top rankings to give junior bankers). 4. How well a banker performs, benchmarked against his peers: many readers will be surprised to see this is last. Insider Insight 

Workload & Pay In Down Markets

When the overall market is stagnant and deals are not closing, bonuses will be lower. However, the workload (especially for Analysts) does not necessarily die down: pitches are f requent in this environment as banks struggle to find deals and earn fees. This can be an unfortunate mix for an Analyst.

Most bulge bracket banks pay VERY similar bonuses to their respective junior employees to attract and keep talent: difference in pay from one bank to the next is usually within ~$5,000. The average of bulge bracket bank compensation is called “Street” pay. Typically, middle market banks pay slightly below Street pay. Middle market salaries are usually on par with the rest of Wall Street; the smaller overall compensation comes mostly from lower bonuses. Note that some larger middle market firms are known for paying Street, though. Compensation at boutique banks fluctuates widely, but overall pay is often significantly lower than Street. This is usually reflected in both lower salaries and significantly lower bonuses . Elite boutique banks (described in Section (2.1)) are an exception to this generalization: they are known for paying Street (to slightly above Street) pay.


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Insider Insight

Overtime Meals



Most investment banks pay for Analyst dinners during the week (when working beyond dinner, which is every night) and all meals on the weekends. Weeknight stipends range from $20-$30 and total weekend stipends range from $40-$75.  Analysts looking to save money will often purchase two meals with their dinner stipend and save one for lunch the next day.

Junior Bankers Junior bankers (Analysts and Associates) have virtually no control over bank or group deal flow. Accordingly, compensation is not tied directly to the deals they work on (however, the fees from these deals impact the larger bonus pool). Since junior bankers have such limited control over the bonus pool, pay fluctuations are relatively small from person-to-person and bank-to-bank. Analyst

Below is a breakdown of bulge bracket Analyst compensation data. These figures represent averages over the last several years: Base Salary

Bottom-Tier

Bonus Mid-Tier

Top-Tier

Total Compensation

1st Year Analyst

$70k

$30k-$40k

$45k-$60k

$50k-$70k

$100k-$140k

2nd Year Analyst

$80k

$30k-$45k

$55k-$75k

$65k-$85k

$110k-$165k

3rd Year Analyst

$90k

$35k-$50k

$60k-$75k

$80k-$100k

$125k-$190k

Note: 1st year Analysts typically receive a signing bonus of $10,000 at larger firms (sometimes lower at boutique and middle market banks). This bonus is not reflected in the figures above. As a general rule, bonuses typically range from 50%-100% of base salary. Top bucket 1st year Analyst bonuses have reached as high as the $90,000 area (2006-2007), but have been as low as the $40,000 area during the financial crisis. Lower-tier (or bottom bucket) Analysts often face the threat of being fired, hence the drastic drop in bonus numbers in this tier. Insider Insight

Analyst Rankings & Bonuses



Sometimes, the influence of just one person can make or break an Analyst’s ranking (and hence, bonus size). Because of this, Analysts should try to maintain good standing with all of the senior members of their group: if one person is adamant that you are a poor employee, it will likely be reflected in a lower ranking.  Investment banks usually assign a set number of top/middle/bottom rankings per group based on the group’s performance that year. It is possible to work just as hard as an Analyst in another group but receive a lower bonus because your group had fewer top-tier slots or fiercer competition among Analysts. Associate

Below is a breakdown of bulge bracket and larger middle market Associate compensation data. These ranges represent top-tier and lower-tier compensation over the past several years (hence the wide range):


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Base Salary

Bonus Range

Total Compensation

Average Compensation

1st Year Associate

$110k-$125k

$55k-$145k

$165k-$270k

$200k

2nd Year Associate

$120k-$145k

$70k-$160k

$190k-$305k

$250k

3rd Year Associate

$130k-$160k

$90k-$190k

$220k-$350k

$290k

Note: Associates have been known to receive little-to-no bonus in very poor years. Over the past several years, Associate base salaries have been increasing and bonuses have been shrinking (this varies from bank-to-bank). Well-known bulge bracket banks have sometimes been known to promise 3rd year Associates all-in compensation in the $450k area.

Senior Bankers Unlike junior bankers, senior bankers (Vice President and above) play a client-facing role and are responsible for sourcing and closing deals. Senior bankers have direct control over how much money the firm makes; accordingly, their compensation is tied to deal flow, and they experience very wide fluctuations in pay. Insider Insight 

Senior Banker Compensation

Bonuses for senior bankers tend to become a much larger percentage of total compensation, especially moving up the corporate ladder (salaries do not increase nearly as much). This gives an investment bank flexibility to pay employees less during off years.

Vice President • •

All-in pay ranges from $250k to $750k . This range covers entry-level Vice Presidents in a bad year to those higher-level VP’s that are soon-to-be-promoted.

Senior Vice President •

All-in pay ranges from $300k to $1.25 million .

Managing Director •

•

All-in pay can fall as low as $300k if Managing Directors are given zero bonus (typically in very poor years), but normalized pay ranges from the $700k to $3 million area. Well known Managing Directors that close lots of deals ( “big hitters”) can make $10 million+ in stellar years.

(4.2) Exit Opportunities Investment banking opens the doors to countless exit opportunities, ranging from other jobs in high finance to business school. For a more detailed look at exit opportunities, see Chapter 20.

The Buy-side It is common knowledge that investment banks are often the gatekeepers for positions with private equity firms, venture capital funds, and hedge funds (some of the most lucrative corporate jobs in the world). Beyond money, candidates are lured by the promise of a better lifestyle (including better hours) and the opportunity to obtain investor expertise. www.ibankinginsider.com

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The typical path to a career in the buy-side is outlined below: Investment Banking (2-3 years)

Buyside (2-3 years)

Business School (2 years)

Buyside (indefinite)

Although the above graphic outlines returning to a buy-side role after obtaining an MBA, candidates with this level of experience (post-business school) are highly qualified to go back into investment banking or to seek out a corporate job (with the potential to work their way up to the executive level, such as CEO, CFO, COO, etc.).

Business School Business schools look highly upon individuals with investment banking backgrounds, and top candidates at well-known banks often feed into some of the best MBA programs. Investment banking and buy-side senior employees often help junior bankers break into their business school alma maters. Although it is more difficult to go straight into business school after only working a few years, some ex-Analysts DO get into good programs (especially when their experience is coupled with a good GMAT score).

Other Banking provides a unique technical skill set that qualifies bankers for a variety of corporate finance and other jobs. Corporations often prefer to hire former investment bankers for their internal finance and corporate development departments where modeling and financial analysis are required. Also, investment banking provides many important advantages for entrepreneurs: namely, capital and an inside look at how businesses run. Banking can provide a quick and worthwhile foundation for those interested in starting their own business.

(4.3) Unparalleled Learning Experience Investment banking Analysts have the opportunity to learn far more in a few years than many working individuals learn in double the time. The responsibility and senior banker exposure that junior bankers experience, along with the qualitative and technical skills gained, are extremely valuable going forward in an Analyst’s career.

Responsibility The responsibility and difficulty of the work in investment banking necessitates quick learning. There are very few jobs where entry level employees (often in their early twenties) play such an integral role in a deal process. Analysts run the presentations and underlying technical work of every deal, from start to finish, and are required to make important judgment calls.

Hours Investment bankers work extremely long hours, experiencing in one year what nine-to-five workers do in two years (or more). In most cases, working more translates to learning more.


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Teamwork Everything in investment banking is done in teams. Each deal or pitch involves bankers from every level working together in a deal team. For more information regarding a deal team, see Section (1.3).

Material Deals Investment banking Analysts work on real deals, often with material outcomes for the investment bank’s clients. Analysts do not merely provide auxiliary services; their work is an underlying factor in large decisions that may involve millions of dollars, change the marketplace, and affect the lives of thousands of individuals.

Technical Skills As detailed in Section (3.2), Analysts develop complex technical skills including, but not limited to, modeling, accounting, valuation, and general corporate finance. These hard skills follow a junior banker long after their Analyst career.

Senior Exposure Analysts are constantly in contact with experienced and high-level employees. This includes executives of client corporations as well as Managing Directors within the Analyst’s own deal team. Often times, the Analyst will be the main liaison between the client and bank for the technical aspects of a deal (i.e. the point person for the model, interacting with the client’s CFO). These interactions develop confidence and teach an Analyst how to interact with senior executives. Quote “ In my first six months on the job, I spoke constantly with the CFO of a large technology company. We would walk through the model together as we tweaked assumptions and developed our valuation story to sell to strategic buyers. ”

- Analyst, Middle Market Investment Bank

(4.4) Pedigreed Colleagues And Future Network Investment banks populate their Analyst classes with students from the top colleges in the world. Being among these students has its advantages: not only do you learn from the best and brightest, but you also build a network of people that are poised for success. Insider Insight 

Learning From Colleagues

When working at an investment bank, you will be surrounded by many accomplished and intelligent individuals. Learn from your colleagues of every rank: Analyst to MD. Keep in contact with fellow Analysts, and build and maintain your network of industry insiders. Many of these individuals will go on to do interesting things in finance and other fields.


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(4.5) Prestige Investment banking has always been surrounded by a cloud of mystery and prestige, especially in the eyes of the general public (though lately this has faltered). The media often likes to portray the lifestyle of a Wall Street employee as lavish and high profile. Yes this does exist, but VERY few bankers come anywhere close to fitting this mold. The main factors of investment banking that produce a sense of prestige are: • • • •

High compensation Difficulty of obtaining the job Prime offices and office locations Chance to work on high profile deals (large transactions, Fortune 500 clients, senior executives) Insider Insight

Displaying Humility



Many new bankers are surprised to find that the average employee is much more boring than Gordon Gekko: smart and ambitious (but down to earth), wise with money, and family-oriented.  Interviewees and new Analysts should avoid flashy behavior, especially in front of senior investment bankers.


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Chapter 5: Insider Positives Beyond the publicly available positives, there are many lesser-known benefits to working in investment banking. These benefits are less obvious and are often unknown without an insider’s view. For this reason, we refer to these as “insider positives”.

(5.1) Learning To Deal With Stress Although the Analyst job is very stressful, learning to deal with it is a valuable skill. Analysts are constantly staffed on multiple projects at any given time, so learning to multitask is essential. In addition, Analysts learn to manage deadlines and prioritize efficiently; not every project c an be completed on time. The Analyst must also learn to problem solve by accepting and completing tasks that they do not know how to accomplish. Although stressful at first, this helps Analysts become more resourceful. Most Analysts will experience one or more “fire drills”, projects (such as models or presentations) that need to be completed in an extremely short time frame. These test and train an Analyst’s judgment as they are forced to make quick decisions in pressured situations.

(5.2) Badge Of Honor Completing an investment banking Analyst program is a form of to “earning your wings”. As mentioned in the previous chapter, the high barriers to entry along with the difficulty of the job itself are common knowledge. Future employers, colleagues, and business partners will respect your experience and will know you are smart and hard working. Regardless of what job an Analyst chooses to pursue postinvestment banking, this badge will exemplify their ability to handle any tough task or situation.

(5.3) Transferrable Skill Set Many of the skills learned during investment banking are highly applicable to whatever a junior banker decides to do down the road. Technical skills (valuation, modeling, accounting) and other deal-related knowledge (processes, deliverables, etc.) are highly relevant for other jobs in finance. More general skills (presentations, communication, and organization) are transferrable to a broad range of jobs and other areas of life. Working as an Analyst builds business acumen: this includes how to write emails, address managers, lead calls, etc.

(5.4) Future Jobs Will Be Less Difficult Not many jobs are comparable to investment banking in terms of long hours, intensity, lack of sleep, and stress. Analysts experience one of the harshest corporate environments that exists, and future jobs will likely be more inviting. Insider Insight 

Boredom With Future Jobs

Some bankers complain of intellectual boredom after leaving banking. Once accustomed to dealing with high-level employees and running major components of deals, it c an be tough to take on a more normal, junior corporate position. Some people underestimate their fondness of the fast-paced environment.


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(5.5) Full-Time Analyst Training A major benefit that is often overlooked by incoming Analysts is the full-time summer training program offered by most major investment banks. Full-time training typically consists of a 4-8 week paid professional training program in New York City (a more in-depth description of what training entails is discussed in Section (19.2)). Analysts gain valuable knowledge, build their network, and receive many useful training materials to keep for future reference.

(5.6) A Humbling Experience Being an Analyst is a humbling experience. The investment banking atmosphere opens Analysts’ eyes to how many smart and hard working people exist. The humility that is developed from this work environment is a useful attribute for any job going forward.

(5.7) Leadership And Management As mentioned in Section (3.4), Analysts manage a team of auxiliary staff that specializes in various tasks to make their lives easier. From this experience, Analysts learn how to manage the distribution of tasks among different individuals as well as how to communicate directions and monitor progress. Also, fulltime Analysts will have summer interns that report directly to them and look to them for advice and directions.

(5.8) Small, Exclusive Industry As an investment banker, Analysts become members of a small, and sometimes exclusive, group: they are one of only a few thousand people in the field (specifically IBD). If staying in finance, Analysts gain a valuable skill set that the vast majority of people in the world do not have.

(5.9) Industry Expertise The nature of the work in a coverage group requires Analysts to gain industry expertise and gives them an in-depth knowledge of that industry in just a few years. Also, Analysts often form ties and relationships with industry insiders.

(5.10) Ideal Starting Point Investment banking is a very good option for those without a set career in mind. This job exposes Analysts to a variety of industries and opens many doors due to the various reasons stated above, including: • • • • •

Skill set that is transferrable to other finance and non-finance-related jobs Known difficulty of obtaining the job gives Analysts an edge in recruiting for other positions Well-established network of successful people opens doors in the future Interaction with senior employees at client firms can lead to jobs with these companies Industry expertise and specialization prepares Analysts well for corporate jobs in those industries


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Chapter 6: Publicly Available Negatives In this chapter, we provide insider knowledge on the commonly known negative aspects of working in investment banking. These are the unpleasant parts of the job that people are aware of; we refer to these as “publicly available negatives”.

(6.1) Long Hours It is common knowledge that junior investment bankers work exhaustive hours, upwards of 120 hours in a week under extreme circumstances. During a typical week, Analysts can expect to work 80-100 hours; “normal” days consist of arriving at the office around 9am and leaving between 10pm-2am. Quote “ The worst deal I ever worked on was a sell-side for a company that specialized in healthcare technology. There was a 3-month period where I must have been averaging at least 110 hours per week. Looking back on it, I don’t know how I survived. ”

- Analyst, Elite Boutique Investment Bank

Insider Insight 

Leaving The Office Early

Although the job is hour-intensive, it is not unheard of to see established full-time Analysts occasionally leave right after dinner. Workflow typically comes in waves, sometimes giving Analysts a few slower days or weeks.

On the weekends, Analysts are always on-call; it is not uncommon to work both Saturday and Sunday, but at a minimum Analysts can expect to work a good portion of at least one weekend day. On the weekends, most Analysts will catch up on sleep, arriving at the office around lunch time. Insider Insight 

Working Weekends

Most prospective Analysts understand that the job will require working during the weekends, but few truly understand the implications. Make sure you fully consider what it means to work most weekends after working all week, as well. For a full discussion regarding long hours and working weekends, refer to Section (19.5).

(6.2) Stress Investment banking is a pressure-intensive environment with high expectations. The overall stress of the job is sometimes overwhelming; it is common to be juggling various projects while watching work continue to pile up. One of the most stressful aspects of the job is unpredictability: as an Analyst you have very little control over your schedule. New staffings can arise at any moment, and deals presumed dead can come back to life.


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Quote “ One of the biggest stresses of the job is the fear of what might be coming next. Just when you think you are wrapping up a project or that you are done for the day, something new can pop up. I try to avoid making too many set plans because I constantly need to cancel things last minute. ”

- Analyst, Boutique Investment Bank

Insider Insight 

“Red Light of Doom”

As discussed in Section (3.4), a stress all junior bankers can relate to is the blinking “red light of doom” on their BlackBerrys as it may be a sign of new or additional work.

(6.3) Big Personality Bosses Many Type-A personalities are drawn to investment banking because of its competitive nature. Be prepared to work with big ego individuals that are extremely demanding and often micromanage work. It is not uncommon to for senior bankers to yell and curse when an Analyst messes up.

(6.4) Lack Of Fitness And Overall Health Without special focus, fitness and health are some of the first things to go for many Analysts. Reasons include: eating takeout for nearly every meal, difficulty establishing a consistent gym regiment, lack of sleep, excessive caffeine intake, and living an overall sedentary lifestyle. Additionally, many people resort to eating junk food to deal with stress. We offer tips to help stay in shape in Section (19.5). Insider Insight 

Establishing A Gym Regiment

After building credibility with co-workers, establishing a gym regiment is not uncommon. Analysts can work out during lunch or leave the office after dinner for a quick workout before returning to complete their work.

(6.5) Negative Public Image Recently, investment banking has been the target of negative press regarding claims of corruption, excessive pay, and government bailouts. Although this has little effect on an Analyst, it may deter some people from pursuing jobs in the industry.


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Chapter 7: Insider Negatives In this chapter, we dive into negative aspects of investment banking that most industry outsiders are not aware of: we call these “insider negatives”.

(7.1) Pay Is Lower Across The Board Pay across Wall Street is down (even if only slightly), with many industry veterans of the belief that it will never again reach previous levels. Since the financial crisis and subsequent regulatory changes, investment banks can no longer take on the same levels of risk that were once commonplace. Without high-risk, high-reward opportunities, profits are generally going to be lower (per capita) than before, leading to lower pay (note, this is all relative; investment banking pay is still much higher than most other corporate jobs). Quote “ Lower pay is not limited to Analysts; the decline in compensation has created motivation and morale problems for some mid-level and senior-level bankers. ”

- Vice President, Bulge Bracket Investment Bank

(7.2) Large Amounts Of Administrative Work As discussed in Section (3.2), Analysts spend lots of time completing administrative tasks such as scheduling meetings, staying organized, filing documents, and finding buried information. The abundance of administrative (and sometimes menial) work is often overlooked by prospective bankers.

(7.3) Unnecessary, Unrecognized, Or Irrelevant Work Completed Every so often, an Analyst must complete work that he knows is irrelevant or unnecessary. Many business prospecting efforts (pitches) must be done even when the Analyst knows there is no chance of winning the business. Analyst work going unrecognized is another common scenario. More often than not, senior bankers will have no idea how long it took to complete certain task. In rare instances, senior bankers are even unaware of which Analyst completed work for them (this is more common with pitches or random projects where the Analyst may not have any interaction with the Managing Director). Insider Insight 

Working On Unused Materials

Many Analysts can relate to staying up late working on a pitchbook, only to attend the client meeting and never use the materials. It is not uncommon for only a few select pages to be used and the rest of the meeting to be a casual conversation.


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(7.4) Limited Ability To Control Work Flow Analysts have limited control over what they work on and with whom they work. Even if an Analyst is proactive and tries to get on certain types of deals or deal teams, work flow is ultimately controlled by the staffer. As we mention in Section (19.3), try to get on good terms with the staffer as this may help give Analysts some control.

(7.5) Investment Banking Is In A Volatile State Since the 2008 financial crisis, the investment banking industry has been under intense scrutiny: • •

• •

Hiring pools are smaller (and shrinking) Some banks are moving away from the 2-year Analyst program, making it more difficult for Analysts to transfer to the buy-side There are increasing amounts of red tape, making the job itself more difficult Constant risk of layoffs

(7.6) Low Bank Loyalty Investment banking is characterized by little-to-no bank loyalty. Many senior bankers can easily be incentivized to switch firms, with loyalty lying at the group-level (sometimes entire groups switch firms together). Examples of these en masse moves include: • • •

Jefferies Aerospace & Defense transferred to Lazard (May 2008) Barclays Energy Group transferred to UBS (June 2009) UBS Healthcare Group transferred to Jefferies (September 2011)

(7.7) Unrealistic Expectations For Exit Opportunities Many individuals enter investment banking with the intention of exiting for greener pastures after two years. In many cases, exiting to a private equity firm is just “Banking 2.0” in terms of the type of work completed (and in some cases, long hours). Also, exit opportunity recruiting is not a simple task: it can last for over a year and requires a large amount of studying and constant interaction with headhunters (eating away at the limited free time Analysts have). Ultimately, there are not enough buy-side jobs for every investment banker, once again narrowing down the playing field. Very few exit opportunities outside of buy-side roles are “promotions” from a position as an investment banking Analyst. Pursuing a job in corporate finance offers very few roles that will act as an “upgrade” from the Analyst program. The lifestyle may be better, but it is very likely that junior bankers will take a pay cut and their overall responsibility will go down.


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Part III How To Get The Job


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Chapter 8: Step 1 – Evaluate Your Current Situation Understanding your current situation is the first step towards breaking into investment banking. Recognize where you are in the recruiting process and how your specific background will affect your strategy.

(8.1) Are You At A Target Or Non-Target School? Your approach to landing a job at an investment bank will be very different depending on what university you attend. Not all colleges are treated equally for recruiting purposes. Below we dive into the two broad categorizations of undergraduate schools: “target” and “non-target”.

Target Schools A target school can generally be defined as a university where investment banks actively recruit students. Banks post job opportunities through the college’s career center, host information sessions on campus, hold interviews on campus, and are integrated with relevant campus student groups. In summary: if you go to a target school, investment banks come to you. Within the target school category is a subset called “regional target schools” . Regional offices of larger investment banks actively recruit from these universities. Regional target schools are high caliber colleges: their students tend to qualify for New York-based investment banking jobs (but will have to go out of their way to recruit for positions outside of their school’s region). The distinction between target and non-target school (and even between target and regional target) can be blurry. As an ultimate test, if a bank comes to your school to recruit, then your school falls into the target category. Below is a select list of target and regional target schools:        

Amherst Boston College Brown BYU Carnegie Mellon Columbia Cornell Dartmouth

       

       

Duke Emory Georgetown Harvard Indiana Michigan MIT Notre Dame

Insider Insight 

Northwestern NYU Princeton Rice Stanford Swarthmore UC Berkeley UChicago

       

UCLA UPenn USC UT – Austin UVA WashU Williams Yale

What Makes A Target School A Target School

Year after year, target school candidates prove to be successful investment banking Analysts, causing the investment bank to continue recruiting at these universities and further solidifying their status as “target schools”. In addition, many current investment bankers have attended target schools themselves and look favorably upon prospective students from their alma maters.

Non-Target Schools Unlike target schools, non-target schools generally do not have a strong presence on Wall Street (especially in IBD), and most major banks do not actively recruit on their campuses. Instead, candidates from non-target schools must be proactive in their pursuit of positions on Wall Street. www.ibankinginsider.com

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Non-target schools are not necessarily academically weak universities; investment banks only have so many resources devoted to recruiting and cannot recruit on every campus. These schools may be smaller, lack finance programs, be lower in national rankings, etc. Despite the disadvantage of not having campus recruiting, many students from non-target schools make it into Wall Street each year by working hard and networking well. If you go to a non-target school, additional actions will be necessary to break into the industry. The largest hurdle for these students is getting a first round interview. Once they pass this obstacle, non-target students are often just as competitive in the recruiting process, as well as on the job. Non-Target School

In Part III in particular, we highlight many differences required to get a job in investment banking as a student from a non-target college. Non-target students: pay close attention to these highlighted areas as your experience and strategy will differ significantly compared to students from target schools.


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Chapter 9: Step 2 – Excel In The Classroom An important factor in the Analyst recruiting process is educational background. Investment banks look for students with business and finance knowledge or with backgrounds that convey a genuine interest in the finance field. Choosing the right major or conveying an interest in finance is a vital step towards breaking into the industry. Below, we explore important academic factors that investment banks take into consideration, including major, essential classes and GPA expectancy.

(9.1) Major No particular major is required to get a job in investment banking. However, certain majors are preferred by investment bankers and tend to funnel into the industry due to their relevance to the job. More important than your major, though, is conveying a keen interest in finance. Heavily targeted majors are those in the areas of Finance, Business, Accounting , and Economics. Relevant minors and concentrations ( Accounting , Finance, Math, Statistics, etc.) are also viewed favorably. Technical majors such as Mathematics, Engineering , and Physics are also desirable to recruiters, especially when coupled with a minor in accounting or finance. This combination conveys technical aptitude as well as an interest in finance. Non-Target School

It is especially important that non-target students have a highly relevant major: bankers want to see that you are familiar with the industry and the technical aspects of the job. Whereas target school students with less relevant majors are still considered, non-target students with less relevant majors are usually not in the running. Majors categorized as liberal arts (unassociated with economics) are viewed as non-relevant by investment bankers: students pursuing these majors will have a harder time breaking in. Examples include Political Science, Communications, and English majors. Bankers who review resumes categorize these as “easier” and expect a near-perfect GPA. However, it is not impossible for these students to break into Wall Street, especially if they show commitment and a genuine interest in the job. As a liberal arts major, it is essential to learn the relevant accounting and finance concepts independently. Insider Insight 

Pursuing Non-Finance Minors

Non-finance related (but interesting) minors are a good way to stand out when coupled with a relevant major. These help convey passions, display well-roundedness, and often serve as talking points during interviews.

(9.2) Essential Classes Taking essential classes is another way to convey your interest in finance and to learn relevant knowledge required for the job. Regardless of major, it is essential to take the below classes before starting an internship or job in investment banking :


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•

•

•

Basic accounting – usually 1-2 quarters or semesters of managerial accounting should suffice. At a minimum, you need to know what a company’s three financial statements are, what they look like, and how they interact. Basic finance, with an emphasis on valuation – one class is most likely enough; banks have rigorous training programs to fill any gaps. If your school does not offer any finance classes, you need to engage in a self-study program. We recommend various resources in Section (16.1). Algebra – anything math related that is more complex will be done by a computer (in Excel). Insider Insight

Academic Classes That Get You Ahead



Additional classes that will get you ahead include: basic financial modeling, in-depth valuation courses, and more advanced accounting. Not many schools offer financial modeling classes, so taking a third-party training course is another way to stay ahead of the competition.  Advanced math classes are mostly irrelevant for investment banking (prospective students do not often realize this).

(9.3) GPA Aside from work experience, GPA is the most important factor of a resume in the investment banking recruiting process. When reviewing candidates’ resumes, investment bankers usually set the bar for acceptable GPAs at 3.5 or higher. Anything above this number makes the first cut, with higher numbers looked upon even more favorably. GPAs between 3.0 and 3.5 fall into a grey area; at this point, prior experience or other factors from a candidate’s resume may bridge the gap to break the 3.5 barrier. When looking at GPA, bankers consider difficulty of major and slide the threshold accordingly. As discussed above, technical majors such as Engineering are c onsidered harder while liberal arts majors such as Communications are considered easier. For example, a Political Science major with a 3.3 is much different than an Electrical Engineering/Computer Science major with a 3.3. NOTE: References to GPA are based on the 4.0 GPA scale, most common to universities in the U.S. Insider Insight

GPA Considerations



On your resume, round GPA to one decimal point (if more favorable). For example, an individual with a 3.46 should round to a 3.5.  Many colleges offer “easy A” classes that may not be relevant to finance or your major but help boost GPA: take these.


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Chapter 10: Step 3 – Get Involved On Campus Investment bankers like well-rounded candidates, and students who show initiative in joining campus organizations (especially those related to finance) have a better chance of getting into Wall Street. There are many benefits to campus involvement, including resume building, networking opportunities, and the ability to demonstrate leadership, accountability, and responsibility. Being involved in more than just academics while maintaining a high GPA shows that you can handle a demanding schedule (an important skill for the job).

(10.1) Join The Right Student Groups Highly relevant student organizations include general undergraduate business groups and finance-specific (or finance-related) organizations. Try to join the largest and most well-known business organizations on campus as these usually have access to the best resources and largest number of employers. Seek out groups that interact with the investment banks (workshops, round tables, networking) and join them. Insider Insight 

   

Student Group Considerations

During the recruiting process, alumni from your respective college will usually review your resume and quickly discern whether the groups you are involved in provide meaningful value. We discuss this more in Section (11.5). Business and finance clubs are often gatekeepers for meeting industry professionals in investment banking. The networking opportunities that these groups provide are vital. It is better to be ACTIVELY involved in only a few groups (working your way up to leadership positions), rather than being in 10 groups as a general member. It is beneficial to hold finance-type leadership positions (such as Treasurer) as these require skills relevant for the job. Involvement in student groups is important, but do not spread yourself too thin: commitment to student groups is no excuse for a low GPA. If forced to choose between a higher GPA and more student group involvement, GPA should almost always take precedence.

(10.2) Form Your Own Student Organization The main benefit of starting a campus group lies in the leadership and responsibility it requires. Starting a student group is a good way to convey passion and personality. Founding a lack-luster club for your resume’s sake is not recommended: bankers will usually see through this when discussing it with you. Non-Target School

Without a large presence on Wall Street, there is a higher likelihood that your school does not have well-established finance clubs. This gives you a perfect opportunity to create a meaningful club or have a top position with a relevant club on your campus. Reaching out to investment banks as a representative for your organization is an extremely effective networking tool.


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(10.3) Honors Societies And Distinctions Many schools offer honors and fellowship programs that link students with valuable resources and networks. These distinctions signify that you are at the top of your class and they are instantly recognized on an applicant’s resume.

(10.4) Student Government Student government, although not directly related to investment banking, shows leadership and an inclination to make important decisions. Bankers like students that demonstrate leadership capabilities.


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Chapter 11: Step 4 – Create And Perfect Your Resume Perfecting your resume is one of the most important steps in landing an internship or job in investment banking. Before you can get your foot in the door, you need to get your resume selected from a pool of hundreds (or thousands) of applicants. Serious candidates should dedicate a significant amount of time to perfecting their resume. Get the opinions of multiple people; the more eyes the better. Bankers spend only 30 seconds looking at each resume, so it needs to be aesthetically pleasing, concise, and well-organized. Investment banking and finance-specific resumes have four defining attributes: 1. 2. 3. 4.

Appropriately formatted Detailed and quantitative Results driven Properly structured

We refer to a resume with #2 and #3 applied as being “financed up”. These two attributes distinguish a good finance resume from others and will make you stand out. ***A RESUME EXAMPLE/TEMPLATE IS PROVIDED ON THE NEXT PAGE. THIS RESUME WILL BE REFERENCED THROUGHOUT THIS CHAPTER.***

(11.1) Format/Appearance Format and appearance are extremely important parts of a finance resume. Analysts and Associates spend much of their time on the job checking for formatting errors and are very good at catching mistakes. This means your formatting needs to be perfect. In addition, you must make the relevant parts of your resume stand out; knowing what to highlight is essential. Insider Insight 

Importance Of Resume Formatting

If you cannot format a resume correctly when given all the time in the world, bankers will assume that you cannot format well on the job.

Quote “ I have thrown out dozens of resumes over the years because of a typo or inconsistent formatting. If you don’t care about details when you’re selling yourself to me, you won’t care about details when I’m trying to sell my banking services to a company. ”

- Vice President, Bulge Bracket Investment Bank Follow the below guidelines to ensure that you have a well-formatted resume: • • •

• • • •

The resume should never exceed one page Your general font should be no smaller than 9pt and margins should be .5” or larger Your name should be center aligned on the top of the document and should be in a font that is larger than your general font Dates and locations should be right-aligned, and all other information should be left-aligned Major section headers should be bolded and underlined (Education, Work Experience, etc.) Employers and organizations should be bolded When describing experience and roles, list information in bullet format


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Joseph T. Schmoe 5555 Walnut Street | Philadelphia, PA 19104 (555) 555-5555 | [email protected] EDUCATION The Wharton School, University of Pennsylvania Philadelphia, PA Bachelor of Science in Economics, Concentrations in Accounting and Finance, Class of 2014 September 2010 – Present Cumulative GPA: 3.53 | Major GPA: 3.76 | SAT I: 2260 (800 M, 720 W, 740 V) Relevant Coursework: Corporate Finance, Financial & Managerial Accounting, Corporate Valuation • •

PROFESSIONAL EXPERIENCE Booteek Capital Investment Bank New York, NY Investment Banking Summer Analyst June 2012 – August 2012 Engaged in pitches and industry analysis related to all aspects of the gaming industry, including online gaming, regional casinos, destination casinos, and g aming equipment manufacturers Created mini models for discussion materials intended to show buyout opportunities of multiple casino operators and gaming equipment manufacturers to financial sponsors Analyzed strategic alternatives for $2bn+ regional casino operator which involved creating an LBO model and evaluating potential debt capacity, investor returns and creating forecasts based on a profitability assessment of each casino location and its market •

•

•

Lynch Barney Philadelphia, PA Wealth Management Intern November 2011 – March 2012 Leveraged firm databases and conducted independent research to generate over 100 client leads with a focus on acquiring west-coast based individuals with net worth greater than $5 million Personal efforts resulted in 15 new client conversions, translating to over $50 million dollars in new AUM for the firm. Presented the results and client acquisition strategies to a team of three Vice Presidents •

•

Food Retailers, Inc. Seattle, WA Marketing Intern June 2011 – August 2011 Responsible for developing and implementing print advertising strategies targeting 300 west coast suburban locations with a $25,000 budget Compiled data for 1,000+ advertising campaigns and conducted analysis on successful strategies •

•

LEADERSHIP Undergraduate Finance Group Philadelphia, PA Vice President September 2012 – Present Responsible for oversight and management of governing body for an organization with a membership base of 2,200 Implemented new professional speaker series and increased corporate sponsors by 57% • •

International Investment Society Philadelphia, PA Treasurer September 2011 – May 2012 Responsible for managing an annual budget of $10,000 and overseeing all group expenses Migrated accounting system to an online platform and reduced expenses by over $1,000 • •

EXTRACURRICULAR ACTIVITIES Wharton Business Abroad, South America May 2012 One of 20 applicants accepted for 2-week course; studied microfinance strategy and interacted with local businesses •

Member of the Wharton Private Equity Club

September 2012 – Present

Mentor for West Philadelphia Student Mentorship Program

January 2011 – Present

SKILLS & INTERESTS • • •

Fluent in Spanish and English Proficient in Bloomberg, Capital IQ, and MS Office Interests include fly fishing, s occer, completing international triathlons, and performing stand-up comedy


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(11.2) Detailed And Quantitative A great finance resume must: 1. Be detail oriented 2. Include specific numbers 3. Use finance terms We dig into each component in greater detail below. Let us start with the example of a basic wealth management internship description and build on it: •

Generated leads and made sales calls to get new clients

1. Detail Oriented When describing your experience, be as detailed as possible: include anything that provides one more level of specificity. You want to emphasize relevant points and make your descriptions more interesting. Continuing with our example, you see below that we incorporate geographic concentration and explain what type of clients we reached out to: •

Generated client leads, concentrating on west-coast based individuals with a high net worth

2. Specific Numbers Include specific numbers wherever and whenever possible. The more the better, especially if they are material, relevant, or impressive. Providing numbers helps paint a full picture by quantifying your experiences and proving relevancy. If you worked on deals, what size? If you generated leads, how many? If you were president of a student group, how many members did you manage? Furthering our wealth management internship example, we describe how much was contributed in terms of phone calls, clients, net worth, etc.: •

Generated over 100 client leads, concentrating on west-coast based individuals with net worth greater than $5 million

3. Finance Terminology Use finance terms whenever possible. In some cases, you may have to stretch what work you actually performed to fit the finance terminology mold. For example, call physical presentations “pitchbooks” or technical work related to lending “underwriting”. Try to incorporate the below words into your resume:    

Acquisition Analysis Assets Capital

   


Comparable(s) Credit DCF Diligence

   

Distressed LBO Leverage Memo

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   

Merger/Acquisition Model Pitchbook Present Value

   

Projections Research Underwriting Valuation

Insider Insight 

Finance Terminology on Your Resume

Be selective when using more advanced finance terms on your resume. Some of these words increase the likelihood that you will get grilled on those topics during an interview. However, it looks doubly impressive when you are able to answer questions related to these topics. When exaggerating, use this guide to become well-versed on the relevant topics listed on your resume.

Notice in the example below that we were able to add multiple finance terms to our sales-related internship example, an experience that involved no real finance work: •

Leveraged firm databases and conducted independent research to generate over 100 client leads. Concentrated on acquiring west-coast based individuals with net worth greater than $5 million

(11.3) Results Driven After providing a detailed description of what you have c ontributed to the job or organization, you must communicate the results of these efforts. What were the fruits of your labor? What benefit did your firm experience as a result of your work? Try to quantify and pinpoint numbers, even if it requires rough estimations. If results cannot be quantified, include relevant next steps or changes that were enacted as a direct result of your work. Investment bankers are results-driven and love to see that you can produce. Below we add results to our wealth management example: •

•

Leveraged firm databases and conducted independent research to generate over 100 cli ent leads with a focus on acquiring west-coast based individuals with net worth greater than $5 million Personal efforts resulted in 15 new client conversions, translating to over $50 million dollars in new AUM for the firm

Stress Exposure To Senior Employees If you had any interaction with senior employees (Partners, Managing Directors, Vice Presidents, or managers), communicate this through your resume. Employers want to see that you can interact well with senior employees and that you took on responsibility. •

•

Leveraged firm databases and conducted independent research to generate over 100 cli ent leads with a focus on acquiring west-coast based individuals with net worth greater than $5 million Personal efforts resulted in 15 new client conversions, translating to over $50 million dollars in new AUM for the firm. Presented the results and client acquisition strategies to a team of three Vice Presidents

(11.4) Finance Resume Structure Your resume should convey the following (in order of importance): • • • • •

You are smart You have relevant experience You are hardworking (willing to put in the hours) You pay close attention to detail You can multitask


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The structure outlined below will best position you to reflect these qualities in an organized and concise manner.

Major Sections 1. 2. 3. 4. 5. 6.

Name and Contact info Education Professional Experience Leadership Extracurricular Activities Skills & Interests

1. Name And Contact Info

At the top of the page, include your full name and (below that) your physical address, email, and phone number. 2. Education

Mandatory • •

•

Name of university and the location Major and concentration or minor, GPA, expected graduation date. Round GPA to one decimal point if it is more favorable (i.e. 3.46 rounds up to 3.5) Honors and academic awards (if applicable)

Optional (but recommended for cases in parentheses) • • • •

•

Major GPA (if it looks more favorable than overall GPA) SAT I scores (if they are above 2100) GMAT score (if above 700) Relevant coursework; limit this to five classes (accounting or finance-related courses; include grades in specific classes if overall GPA and major GPA are both below 3.5) Study abroad or other educational programs Insider Insight



Importance Of SAT Scores

SAT scores are taken into consideration more than you would imagine. Very high SAT scores are respected and can even make up for a lack of experience or a non-stellar GPA.

Exclude •

Anything related to high school unless unbelievably impressive or prestigious (i.e. went to one of the highest ranking prep schools or were the Valedictorian)

3. Professional Experience • • •

•

Limit this section to 2-3 relevant jobs and internships Describe full-time summer positions and more applicable jobs or internships in more detail Unless highly relevant (or you are lacking current experience), avoid putting pre-college jobs on your resume. If you must resort to this, embellish as much as possible It is especially important in this section to concentrate on “financing up” your resume; provide specific details and numbers and focus on results produced


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•

Limit your description to three bullets unless the job significantly outweighs the others that you are highlighting (i.e. a previous investment banking internship, private equity experience, etc.)

Start with a summary bullet describing your role and tasks performed: •

Engaged in pitches and industry analysis related to all aspects of the gaming industry, including online gaming, regional casinos, destination casinos, and gaming equipment manufacturers

Tailor each of the next two bullets to describe a specific project or task, the work you did for it, and the results. Use action words such as “built, created, constructed, determined, performed, analyzed, generated, etc.” to emphasize the nature of your work: •

•

Created mini models for discussion materials intended to show buyout opportunities of multiple casino operators and gaming equipment manufacturers to financial sponsors Analyzed strategic alternatives for $2bn+ regional casino operator which involved creating an LBO model and evaluating potential debt capacity, investor returns and creating forecasts based on a profitability assessment of each casino location and its market

4. Leadership Roles • •

•

•

•

Limit this section to 2-3 leadership roles The total number of professional experiences and leadership roles should be no more than six entries If possible, focus on leadership positions with finance or business-related organizations. Related social organizations or student government are also good reference points Once again, it is important to concentrate on “financing up” this section; provide specific details/numbers and focus on results produced Limit descriptions to 1-2 bullets (unless you need to fill space due to a lack of professional experience)

In the first bullet, describe what your role was in the organization followed by a brief overview of what the organization does (if it is not obvious). Emphasize details that legitimize the group and your responsibilities (i.e. membership base, number of people you managed, third parties you interacted with, etc.): •

Responsible for oversight and management of governing body for an o rganization with a membership base of 2,200

Next, describe specific achievements during your tenure. Include events that you planned, programs or committees you created, membership growth, additional funding you received, etc. Use numbers where possible: •

Implemented new professional speaker series and increased corporate sponsors by 57%

The more responsibility you can convey in your “Leadership” section, the better. The best possible leadership role would be President, Vice President, or Treasurer of a large finance or business-related student group. Other significant leadership roles include forming a finance-related club, joining the executive board of your business fraternity, working in student government, becoming President of a philanthropic organization, and countless others.


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5. Extracurricular Activities • •

•

•

•

This section should be very brief, 1-3 lines total Describe more important extracurricular activities with a maximum of one bullet. List out the activities in which you are involved Include non-academic (but school-related) activities here. These include workshops that you attended, fraternities/sororities/societies you are a member of, clubs and organizations in which you do not have a leadership role, and charity involvement Also include any research projects or ancillary work with professors and academic/nonacademic competitions, if applicable Try to focus on things that make you look accomplished and interesting

6. Skills & Interests:

This section should be extremely brief, 1-2 lines total. Start with skills, including: • • •

Languages you know and your aptitude Proficiency with computer programs (MS Office, Capital IQ, Bloomberg, Factset, etc.) Additional technical skills (basic financial modeling, programming languages, etc.) Insider Insight



Considerations When Listing Skills On Your Resume

Remember that everything on your resume is fair game. If you put modeling or investing under “Skills”, you may get grilled on it during interviews (i.e. name a stock you own and tell me your investment rationale).

Next, discuss interests: • •

Put legitimate things that interest you and that may be interesting to the reader When possible, provide a statement with one more level of detail rather than a single word. For example, instead of “travel”, write “travel to remote countries and cities”. Instead of citing “movies”, cite “films by Martin Scorsese”. Insider Insight



Considerations When Listing Interests On Your Resume

Think carefully about what you highlight in the “Interests” section of your resume. Anything that sounds strange, immature, or dorky can ruin your chances of landing an interview.

Essential Resume Do’s And Don’ts DO     

DO NOT 

“Finance up” your resume Have multiple people review your resume, even if just for formatting Emphasize responsibilities Choose only the most relevant experience Embellish


Lie  Have any spelling, grammar, or formatting mistakes  Exceed one page in length

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(11.5) Review Process (What An Insider Looks For) Knowing how your resume is going to be reviewed will provide valuable insight when creating it. In this section, we provide an overview of the resume review process and concentrate on specific aspects that insiders look for. Consider the review process as you create and perfect your own resume.

The Resume Packet Investment bankers will receive a resume packet consisting of all of the resumes from your school (yours will be among them). The number of resumes received varies depending on size of bank, type of group, office location, and school. As would be expected, bulge bracket banks and corporate headquarter locations receive the highest volume. The group of resumes is narrowed down to around 15-20 per 100 received; those chosen will move on to first round interviews. Non-Target School

Resumes from non-target students are treated differently than target school resumes. Firstly, nontarget school resumes are usually put into the hands of investment bankers and HR concurrently, exclusive of any resume packet. This is due to the fact that there is no resume drop on campus. HR tries to compile non-target school resumes, but note that there is no guarantee that your resume makes it into the right person’s hands. Be proactive in the process and cover all bases by submitting your resume to both bankers and HR. Once non-target school resumes are lumped together by HR, they are not necessarily distributed to bankers at the same time as target school resume packets. For these reasons, your best chance to get included in the resume review process is to have an established relationship with an investment banker that will not only forward along your r esume to HR, but will also give them a positive recommendation.

Quote “ We usually field non-target candidate resumes from students and bankers alike and keep them in a folder until the recruiting season begins. Unless a candidate really stands out or is highly recommended by a banker, we will not look at this folder until we have a better idea of how our target school recruiting efforts are going. ”

- HR Executive, Middle Market Investment Bank

Who Reviews It Your resume will normally be reviewed, first and foremost, by alumni from your school that work within the bank. These alumni bankers will be most familiar with specific majors, groups, and awards at your university and are therefore able to provide the bank with the most qualified opinion on the f acts you present. These individuals know which student groups are meaningful and which are filler, appropriate GPA expectancy by major, and other school-specific insight. Other bankers will also weigh in with their opinions. HR typically plays a limited role in the resume review process, usually only conducting preliminary screens to determine which candidates make it into the larger resume packets. The actual review process is conducted by the bankers themselves (with HR coordinating the rest of the process). Analysts and Associates are the primary resume reviewers, with Vice Presidents providing their opinion depending on their capacity.


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Insider Insight 

Resume Review at Smaller Banks

Senior bankers will be much more involved in the resume review process at smaller, boutique investment banks. These banks are also less likely to have formal resume packets.



How An Insider Reviews Your Resume The entire review of your resume is usually done in less than 30 seconds; with hundreds of resumes, investment bankers often cannot afford to devote more time to each one. Here is the 30 second breakdown of what we look at, in order: • • • •

• • • •

Name/hometown School, major, and GPA Work experience: company and position of each (before looking at the descriptions) Description of one or two jobs that seem interesting; specifically look for key words and phrases (without even reading the whole bullet) Leadership opportunities: group and title before reading descriptions Description of leadership opportunities that stand out Glance at extracurricular activities Read interests/skills Insider Insight





Resume Review Considerations

Analysts pay attention to interests because it is the one “fun” thing in an otherwise dull and monotonous process. However, your interests will never outweigh other strong factors on a resume (GPA, work experience, etc.). Do not forget that the task of reviewing resumes is in addition to the banker’s other work. The process can become a chore, especially when a banker is busy, and judgment calls are made as quickly as possible.

Selection Process Upon receiving all of the resumes, the recruiting coordinator instructs the investment bankers on how many first round interview spots there are for a particular school. Bankers then review the resumes independently and select the top candidates to fill the appropriate number of spots. The group of reviewers gets together and cross references their selections to find consensus picks. The remaining openings are then debated among the investment bankers. The entire process is completed in a matter of hours. Non-Target School

Before non-target school candidates are officially selected for a first round interview, they are usually pre-screened over the phone to validate their competency. HR often handles these calls. ***For tailored resume review, please consider iBanking Insider’s resume review services at www.ibankinginsider.com/resume . Our team of professional insiders will help you hand craft the perfect investment banking resume.***


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(11.6) The Cover Letter Some banks require that you submit a cover letter with your resume; hardly anyone reads it. Accordingly, we keep the below overview brief and highlight main cover letter structure. The cover letter is an easy area to make a fool out of yourself; there is very little upside but heavy downside. Keep your cover letter simple, and make it as concise as possible: it should be about half of a page.

Joseph T. Schmoe 5555 Walnut Street | Philadelphia, PA 19104 (555) 555-5555 | [email protected]

[Month Day, 20XX]

To Whom It May Concern: I am applying for the [Summer Analyst] position that is currently posted on the [University of Pennsylvania Career Center web site]. I am a [junior] at [The Wharton School], pursuing a degree in [Economics] with concentrations in [Accounting and Finance]. My interest in this internship position at [Morgan Stanley] is based on my career goal of working in the investment banking industry upon graduation. [Morgan Stanley’s] prestigious identity as a major bank and its long history of investment banking draws me to the company. I am confident that my [professional work experience, leadership roles, work with student organizations, and success in team environments make me an excellent candidate for this position]. I am continuing to expand my knowledge of financial markets and have gained relevant experience from my internship at [Booteek Capital Investment Bank] this previous summer. My experience working on [pitches, models, and industry analyses] taught me essential skills that I believe are directly transferrable to a position with your firm. Thank you for your time and consideration. I welcome the opportunity to meet with you further to discuss the [Summer Analyst] position with your organization. If you have any questions, please do not hesitate to contact me at [(555) 555-5555] or [[email protected]].

Sincerely, Joseph T. Schmoe

Cover letters should be in a three paragraph format: • • •

1st paragraph: what firm and position you are applying to and why 2nd paragraph: describe yourself, your relevant background, and why they should choose you 3rd paragraph: thank the readers for the opportunity and provide your contact information

Have a cover letter template that only requires changing a few names in the document (minimal moving parts); addressing the wrong bank or bankers is the easiest way to mess up. www.ibankinginsider.com

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Chapter 12: Step 5 – Network Networking is one of the most important skills you can learn; the earlier you start, the better. Meeting the right people and maintaining the right relationships will greatly increase your chances of landing a job in investment banking. Keep in mind, the end goal of networking is to obtain a job offer. We provide insider advice on investment banking-specific networking below; we discuss with whom to network, where to network, and how to network (outlining an exact plan of attack). Note: this section is geared towards investment banking-specific networking (we reference reaching out to “bankers”, going to “investment banking” recruiting events, etc.). Employ these same tactics to obtain other finance-related jobs or non-investment banking internships. Non-Target School

Section (12.4) below contains a comprehensive overview of the networking process as it relates to non-target students. It will also be helpful to familiarize yourself with the general networking section beforehand as non-target strategies incorporate many of the same processes and insights.

(12.1) Whom To Network With In this section, we outline specific people to network with and why.

Current Upper-Classmen Seek out upper-classmen who have completed investment banking internships. These “semi-insiders” can provide insight into the job itself and the recruiting process: they recently went through investment banking recruiting and proved successful. Senior students with full-time investment banking offers often act as liaisons between the investment bank and their school. Forming relationships with these students can prove to be useful as recent graduates of summer internship programs are often consulted by banks when hiring new candidates. A “positive” review from these individuals will give you an a dvantage during the recruiting process.

Alumni Alumni (especially younger ones) are often eager to stay involved with their schools and help students at their alma mater. Utilize these connections to get your foot in the door. With alumni, you have the immediate benefit of an established common ground (providing you with an excuse to reach out to them). Alumni connections are often underutilized by students: you might be surprised by the list of alumni from your university that work in finance-related jobs. Alumni from specific campus organizations are also great resources (i.e. fraternities/sororities, business organizations, secret societies). Members of these groups share a connection one level deeper than just the school itself. Industry-specific groups (undergraduate finance or business groups for example) will likely have the most alumni in the field, increasing your chances of networking with a worthwhile contact.


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Family And Friends If you have any family or friends connected to investment banking, utilize them. No one would like to see you succeed more than this group of individuals. Spend some time exploring possible family and friend connections even if you believe none exist; try to uncover relationships a few degrees of separation away.

Other Industry Insiders Ideally, insider connections will fall into at least one of the above categories. When all else fails, reach out to investment bankers with whom you have no connection. We dig into this “cold networking” strategy later, but (as a general rule) reach out to more junior employees or HR departments first . These individuals will be more involved with the recruiting process and, perhaps, more willing to help you. Insider Insight 

Whom To Contact In HR

There is often a team of HR recruiters headed by one coordinator that runs the recruiting process. Get in touch with each firm’s HR department and build a relationship ahead of the recruiting process. This can prove to be useful.

(12.2) Where To Network Serious candidates should network everywhere. Below we discuss relevant organizations and resources that exist to help you find and cultivate relationships that will lead to job offers.

Student Groups The most relevant student groups for networking are undergraduate business and finance-related organizations. These student groups often host workshops and investment banking-specific events (described in Section (12.3)); some are designed exclusively to network with industry professionals. Investment banks interact with these student groups with the intent of meeting (and screening) candidates ahead of recruiting. Year after year, business fraternities send candidates to Wall Street as these organizations are designed to build a professional network between alumni and current students. Alumni from these groups attempt to hand pick members for employment in order to perpetuate the cycle. Although business is not their stated purpose, social fraternity and sorority networks are heavily represented on the Street. Members of these organizations share very strong ties and alumni look to help out the younger generation.

Alumni Center Almost every university will have a center dedicated to connecting alumni and current students. These centers carry a database of alumni (contact information, where they work, etc.) and host alumni-specific events that provide a useful platform for you to meet recent graduates. Attend alumni events and use the database to seek out investment bankers that attended your university.


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Career Center Every school has a career center designed to connect students with jobs. These centers hold industry panels and information sessions where investment banks come to network and speak to prospective students. Attend as many of these events as possible; they are often intimate and extremely useful networking tools. Some colleges offer “investment banking tours” in which a group of students takes a university-organized trip to visit different firms on Wall Street (or regionally) and network with alumni. Attend these tours if your school offers them or try to initiate one if not offered by your university. Insider Insight 

Attending Information Sessions

Investment bankers usually track attendance at information sessions and other networking events. Firms compile attendance data from various events leading up to the resume drop and utilize this information to gauge a student’s interest in their firm. They also begin recognizing the names of candidates who attend multiple events.

Firm Events Some investment banks hold receptions to which students must apply ahead of time. These receptions are usually intended for juniors that will be recruiting shortly thereafter and a re used as a way to introduce the office to potential candidates from nearby schools (attending as a sophomore is a good way to get ahead). Keep an eye out for application deadlines through your career center. If you are not sure whether local investment banks hold these receptions, consider emailing someone from within your existing network at the bank.

Online Social media is becoming more and more important in the networking landscape. Utilize it wisely. Use LinkedIn to stay connected with industry insiders. Create a profile and connect with industry professionals as you meet them. Also, use the site as a platform to introduce yourself to investment bankers you would not otherwise meet. Utilize Facebook to find and stay connected with relevant student groups. This social network is a great way to stay informed of upcoming events and meetings. Insider Insight

Utilizing Facebook & LinkedIn



LinkedIn is one of the tools most underutilized by current students. Professionals are much more receptive to networking with strangers on this site, so take advantage of this opportunity.  DO NOT request to be friends with investment bankers on Facebook: this is not the right medium for networking.  Be smart about what you share on your Facebook profile: do not have offensive pictures or information on your page. Investment bankers and HR sometimes check Facebook profiles when screening candidates.


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(12.3) How To Network As a college student, there are two major avenues through which you can expand your network: 1. Reaching out to individuals to form new relationships or further existing ones 2. Attending events designed to introduce you to dozens of new industry contacts The networking process is non-time specific: it should be done actively throughout your undergraduate career. Those seeking last minute jobs should reference “cold calling” in Section (12.4) below. Approach the networking process with the understanding that you need to build personal relationships with your contacts. Come resume submission time, you want to be viewed as more of a “friend” than a generic college student. This takes time. Our networking plan of attack will consist of four major steps: 1. 2. 3. 4.

Prepare Execute Follow-up Maintain and Exploit

1. Prepare You need to understand how to make initial contact with industry insiders and how to prepare for networking meetings. Action Items 1-2 (below) are relevant specifically when reaching out to individuals independently. Follow Action Items 3-6 (below) to prepare for both networking events and personal meetings. Action Item 1 – Make a list of the people in your network and their contact information. Include individuals connected to investment banking or any other related business/finance field (focus on individuals in the groups described earlier). If you do not have someone’s contact information, use our email address formula list in Appendix B. Action Item 2 – Send personalized emails to everyone on your list. Introductory phone calls should be avoided unless the contact is a close friend or a family member. The email should be short, only a few sentences, and should convey the following: who you are, what school you attend , how you know the individual or obtained their contact information, and the purpose of your email/next steps. E-Mail Template

Robert, My name is [John Doe] and I am currently a [sophomore] at [University of Pennsylvania] pursuing a degree in [Finance]. I obtained your email address from [our alumni network on campus]. I am reaching out to you because I am very interested in a career in investment banking and was hoping that you could provide me with some of your insight. Is it possible to have a quick phone call or grab coffee sometime next week to discuss your background and address a few questions I have related to the field and your firm? Thank you in advance. Best, John (555) 555-5555


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No reply? Send a follow-up email after a week or so with your original email attached. Keep this second email even more brief – a sentence or two should suffice. E-Mail Template

Robert, I just wanted to follow-up regarding the email I sent you last week. Are you free over the next week for a quick introduction? Best, John If they do not respond to this email, try a different means of contact. Other options include reaching out via LinkedIn or calling (we address the risks of cold calling in Section (12.4) below). If you still fail to get a response using the above methods, try again in a month with another email. Action Item 3 – Research the firms, groups and/or persons before speaking with your contact: look up recent finance news, notable deals, company happenings, etc. Your goal is to speak intelligently and sound prepared; do not go overboard (spend 30 minutes maximum on this Action Item). Insider Insight 

Researching Individual Bankers

If possible, get the inside scoop on your networking contact before speaking with them. Learn about their academic history, career path, interests, etc. to gain an edge. If they like the New York Knicks, this is something you should weave into the conversation.

Action Item 4 – Be up to date on industry news. Spend a few minutes reading the headlines from the week. Good sources include: • • • • • •

Yahoo! Finance Google Finance WSJ Dealbreaker Dealbook Bloomberg News

Action Item 5 – Prepare well-thought out questions. Examples of questions include: • • • •

•

What drew you to the group that you are currently in/firm you are currently with? What is your favorite aspect of working at your firm? What path did you take to get into investment banking/finance? Is there anything you would recommend to someone in my shoes to better position myself to get into investment banking? Could you walk me through your typical day?

DO NOT ask questions that will be very difficult for the person to answer. Ask open-ended questions as they allow your contact to speak openly and cause them to feel better about the conversation. Action Item 6 – Update your resume and have it on hand . Casually reference the fact that you brought your resume with you if they care to look at it. If the person with whom you are speaking does not ask for a copy, do not force it upon them.


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2. Execute Now that you have set up personal meetings, you are ready to begin networking; it is time to execute. In this section we detail how to successfully form personal relationships through one-on-one meetings, as well as how to stand out during networking events. One-on-One:

Action Item 1 – Place the phone call or head to the meeting (arrive early). Action Item 2 – Upon meeting, break the ice with small talk regarding how you know each other. Open the conversation by discussing your background and why you are interested in the field. Be ready to answer questions such as “Why investment banking?” and “How did you hear about the industry?”. Action Item 3 – Ask the banker intelligent questions and focus the conversation on their experience. Be ready to provide a few follow-up questions after they answer. Action Item 4 – Once the conversation is wrapping up, propose a way to maintain the relationship. This can be done by asking if it is okay to reach out with future questions or seeking advice. Networking Events:

The point of networking events is to meet investment bankers and follow-up with them. Think of this as an ice breaker and a way to begin a one-on-one dialogue with these individuals after the event. Fringe benefits include meeting bankers from different banks and groups, getting a feel for the culture, and learning a little bit about the job itself. Action Item 1 – Approach a banker not already talking to a lot of students. Action Item 2 – Be slightly aggressive and introduce yourself as soon as you can. Action Item 3 – Ask the banker intelligent questions and focus the conversation on their experience. Be ready to provide a few follow-up questions after they answer. Action Item 4 – Stand out from other students by having an interesting story, asking a random but relevant question, or trying to momentarily divert the conversation away from the job (perhaps about sports or undergraduate experience). Good examples include “How did you end up in the city you work in?” and “What do you think of that city?” . These tactics create memorable encounters and produce reference points to include in a follow-up email, increasing the likelihood that the banker remembers you. Insider Insight  

Networking Event Conversation Tips

Analysts particularly enjoy talking about college days, so bring these up. You are not alone in feeling that these events are awkward; many times bankers feel the same way. Getting bankers to talk about themselves is usually an easy way out for both parties.

Action Item 5 – Get the banker’s business card and make a clean exit .


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Example

“Joyce, I’m going to continue networking with the rest of the people here, do you mind if I get your business card? Thanks, and again, my name is John Doe. It was a pleasure meeting you.”

Insider Insight

Networking Event Strategies



During networking events, reiterate your name upon leaving the conversation. This will greatly increase the chances that the banker you spoke with remembers whom you are.  After walking away, write down a few of the highlights from your conversation on the back of that person’s business card while they are fresh in your head. These notes will come in handy when following-up. Action Item 6 – Repeat items 1-5 until you have either A) met all relevant people at the event or B) the event ends. Essential Do’s And Don’ts DO 

DO NOT

Be likeable: Bankers want to work with candidates they like Do not come off as 1-dimensional; there should be more to your story than your love of finance Always thank the banker for their time



Dress for the occasion: Wear full suits at formal networking events. Three-piece suits and cuff links should be avoided at all costs If meeting someone for coffee or lunch, as a general rule, wear what they will be wearing



−

Hog time or linger: For personal meetings and networking events, do not linger or waste the individual’s time. Recognize when the conversation is becoming stale, and make a clean exit −

−

−



−

Talk about money or hours: Unless talking with a close friend −

−



Be confident (but not arrogant): You do not know more about the job than they do −

3. Follow-Up Following-up with contacts after meeting them is an extremely important step in the networking process. Send a follow-up email several hours later (or the next day) thanking the person for their time and mention how you hope to stay in contact. If you met the person at a networking event, remind them of whom you are by mentioning something unique about yourself or that you talked about (reference the notes you took on the back of their business card). Also, it is good practice to include your resume in the follow-up email, even if the person did not request it. Below is an example of a follow-up email:


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E-Mail Template

Joyce, It was a pleasure meeting you yesterday afternoon at the [UPenn] networking event. Just to remind you, I was the sophomore that discussed [how the Eagles would have been better off trading Michael Vick]. I really appreciate the insight you provided on [Goldman Sachs], and I look forward to keeping in touch throughout the upcoming recruiting process. As a reference, I have attached a copy of my resume. Thanks again for your time. Best, John (555) 555-5555 Stick to follow-up emails only; unexpected follow-up phone calls are a “no-no”. Insider Insight

Sending Follow-Up Emails

 

Use a generic email template when sending follow-up emails to different banks. When emailing members of the same bank, especially those that are fellow Analysts, personalize the emails and stagger sending them. Analysts often sit in close proximity and sometimes discuss follow-up emails from students.  It is not uncommon for careless emails to circulate around Wall Street: be careful! Less is more.

4. Maintain And Exploit The Relationship Do not forget that the primary purpose for networking is to get an interview and ultimately a job. Therefore, it is very important to keep in touch with key contacts periodically. As a general rule, reach out to your contacts every 1-2 months to stay relevant (any more often and you become a nuisance, any less often and you fall off of their radar). Ask additional intelligent questions or seek advice. When seeking internships as a freshmen or sophomore (and after establishing worthwhile contacts), it is important to know how to ask for an interview or internship. For companies without a formal recruiting process, candidates must make their desire for an internship known. For a detailed explanation of how to utilize your network to obtain pre-internship internships (including examples), refer to Section (13.3). When pursuing a junior year investment banking Summer Analyst internship, your network plays a vital role during the application, interview, and follow-up process. Maintain a running dialogue with your network of contacts up to the point of submitting your resume. After securing an interview, reach out to your contacts at that bank ahead of the meeting (to build goodwill). Whether or not you land an internship, stay in touch with your contacts as they could prove useful in the future. For a detailed explanation of how to utilize your network to obtain a junior year investment banking Summer Analyst internship (including examples), refer to Section (14.3).


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(12.4) Non-Target Strategy: Going Above And Beyond Non-Target School

Note: This section is dedicated to non-target student networking strategies. For non-target students, networking is the most important step towards landing an investment banking job. As a non-target student, banks will not actively seek you out; it is up to you to get your foot in the door and convince someone on the inside that you are capable of succeeding on the job. Students at nontarget schools will need to take extra steps to break into the industry. For this group, alumni connections in the industry, friends and family, and social media will be particularly useful. As a non-target student, you need to hustle: below are some additional steps you can take to make your way into the interview process.

Start Early Coming from a non-target school, you need every advantage possible. Get on investment bankers’ radars early to emphasize your interest in getting a job. Networking is not done overnight: forming worthwhile relationships requires significant time and investment on the part of the student. You want to come across as a friend and not someone looking for a handout.

Attend (Or “Crash”) Nearby School Events For students enrolled at non-target schools, do everything possible to attend nearby target-school events put on by that school’s career center or student groups. When at these events, emphasize to the investment bankers and recruiters that you go to [your non-target school’s name], a non-target, but you have been coming to events at nearby target schools. The firms may be surprised to meet someone from a different school, but they will be impressed by the dedication you are showing by going out of your way to meet them. Quote “ During my junior year, I drove 45 minutes once a week to attend an investment banking workshop at a nearby college. One time, I even drove three hours to attend an investment bank’s information session. My commitment paid off, and investment bankers would frequently comment on my dedication. ”

- Analyst, Middle Market Investment Bank How Do I Find These Events?

1. Go to campus websites, find the relevant student groups (and their respective websites) and check them periodically – they will typically post upcoming events online. If events are not posted, email group officers (find their contact information online) and ask if they have an events schedule. 2. Join business organization mailing lists at local target schools. 3. Call or visit local target-school career centers and pose as a student. Ask about upcoming events they will be hosting for finance-related companies. 4. Reach out to friends who attend these schools and ask about their recruiting events.


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5. Hear from an industry insider who is attending: sometimes events will come up in your networking email conversations. Bankers may mention that they are attending an event on a certain date (or you can ask them). Insider Insight 

Strategies For Contacting Other Schools

When reaching out to other schools (or organizations at these schools), use a non-school related email account (i.e. Gmail, Yahoo!, etc.). Individuals will most likely assume that you are student at their school and will be much more informative and candid when speaking with you. If they do not ask, do not tell them that you go to another school.

How Do I Get Into The Events?

Many of these events are closed to students from other schools, but there are ways around this. First and foremost, request attendance with the organizer. If this does not work, below are several other strategies: 1. 2. 3. 4. 5. 6.

Act as if you belong (just walk in) Tag along with a friend from the school “Forget” your student ID (if asked) Sneak in Borrow a student ID card from a friend Linger outside to meet the firm representatives as they leave (note: some bankers may find this slightly awkward)

This is where hustle comes into play. Students have even been known to drive several hours every week during the recruiting season just to attend a 30-minute event.

Reaching Out “Cold Turkey” If you are not establishing sufficient industry connections, you need to resort to more aggressive measures. Reach out “cold” to industry insiders to initiate some sort of conversation. Although your “hit rate” with these people might be low, do not get discouraged: there are A LOT of them. Below we detail strategies for “cold turkey” networking. Some students may find these approaches uncomfortable, but it may be a necessary step to obtain a job in investment banking. Ask To Be Introduced

Gain instant credibility with a new contact by having someone introduce you to them. Although you might not know the contacts in your investment banking network very well, you may need to ask for a favor in this regard. Leverage your contacts to introduce you to A) other people within their firm and B) friends at other firms. Build credibility before asking your contacts to put you in touch with other companies; it may be best to build a relationship and meet in-person at least once before making this request. Bankers are hesitant to spam their friends with undergraduate candidate introductions and will not risk their reputations on individuals they do not know very well.


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LinkedIn

A great way to initiate contact with investment bankers is via LinkedIn. On this network, most individuals are not very discriminating when it comes to accepting requests to connect. Utilize the website in the following ways: 1. Connect with (add) industry insiders: you can search by co mpany, industry, city, etc. and find relevant contacts at banks. 2. Look at the individual’s background to find talking points when making initial contact. 3. Use LinkedIn’s messaging system to reach out to these new connections OR utilize their name and bank to figure out their work email address (see Appendix B for bank email address formulas). 4. Once connected to industry insiders, browse their list of c onnections to find more individuals to network with. Repeat steps 1-3 with these connections. Insider Insight 

Contacting Insiders: Email vs. LinkedIn

Industry insiders will be more likely to respond to work emails than LinkedIn messages: whenever possible, initiate contact via work email. If this fails or you are unable to track down their email address, send a LinkedIn message. Try to move the conversation to work email as quickly as possible.

Search Online

Utilize search engines to find new banker names and their contact information. Although difficult to find, search online for names of investment bankers at bulge bracket firms. Put together a list of middle market and boutique investment banks that you are interested in and search these companies’ websites: many firms list out each employee and often provide contact information on their website. If you come across the names of investment bankers but are unable to find their contact information, browse the bank’s website or utilize search engines to find the company’s standard email suffix (@xxxxxxxx.com). Finding the email prefix will be more difficult. In Appendix B we list the email address formula for all bulge bracket banks and pr ovide you with a general rule for email prefixes that you can follow to c orrectly guess a banker’s email address.

Cold Email

After employing one of the above strategies to find a “cold contact”, you need to have a well-thought out plan to make initial contact. It is much more difficult to be taken seriously and establish a relationship than it is to find a banker’s contact information. Keep the email short so the insider does not feel burdened reading it. Convey why you are worth their time by bringing up relevant experience and strong interest in the industry. Be direct and honest; many investment bankers will appreciate your drive. Mention that you are trying to expand your network and learn more about the job and specific firms.


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E-Mail Template

Wayne, My name is [Kelly] and I am currently a [junior] at [ UC San Diego] studying [Economics] with a minor in [Accounting]. Through my networking efforts, I came across your contact information and wanted to reach out to introduce myself. I am very interested in pursuing a career in investment banking and have been trying to position myself to break into an internship role. [This past summer I completed a valuation internship with Duff & Phelps which only f urthered my interest in corporate finance]. I would love to learn more about your firm and your experience there; are you free sometime next week for a quick phone call? Attached is my resume for your reference. Thank you in advance for your time. Best, Kelly (555) 555-5555

Insider Insight 

Cold Emailing Considerations

Cold emailing is a crap shoot. Reach out to a lot of people to increase your chances of finding someone willing to help you. Some investment bankers will appreciate your proactive approach and enjoy helping ambitious students. Others will delete your email immediately.

Cold Call

Investment bankers have mixed feelings regarding cold calls from prospective Analysts. Utilize this strategy as a last resort. It will be extremely difficult to find bankers’ phone numbers, but you can come across them online (especially at smaller banks), be tipped off by a friend, or call the bank’s general office number and make your way past the receptionist. When calling an investment banker, be prepared to have a 10 minute conversation on the spot (even though this is unlikely). Introduce yourself and give them a brief background. Mention that you are extremely interested in investment banking and that you are simply trying to expand your network and learn more about breaking into the industry. As always, tell the banker that you want to hear more about their background and their firm. Try to keep the conversation extremely brief and propose an in-person meeting for coffee (this helps prevent seeming like a nuisance and gives you time to regroup and ask more thoughtful questions). Ask for their email address to make further communication efficient.

Let Your Personality Shine When reaching out to bankers, be personable. Many students that reach out are “robotic” and come across as generic. As a non-target student, it is especially important that bankers like you as an individual; be someone that they want to hang out with outside of work. Take the conversation beyond banking; you need to build a PERSONAL relationship. Discuss outside interests and avoid being too formal or scripted. In the end, someone will need to put their name on the line for you. Bankers will be more willing to do this for students with whom they have a more personal connection. www.ibankinginsider.com

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Chapter 13: Step 6 – Obtain Pre-Internship Internships The best way to break into investment banking as a full-time Analyst is to obtain a junior year investment banking Summer Analyst internship (going forward we call this the “junior year Summer Analyst internship”) and get a full-time offer. It is nearly impossible to obtain this crucial junior year internship without relevant experience on your resume; you need to complete internships during your freshman and sophomore years. We call these internships that lead up to your junior year Summer Analyst internship “pre-internship internships”. There is no single must-have internship required to break into banking. However, not all internships are viewed the same. Below we provide insight on what type of internships exist and which internships insiders prefer and look for.

(13.1) Types Of Internships Summer Internships Broadly speaking, these are full-time internships, approximately 8-12 weeks long, and they offer the closest thing to full-time job experience. Investment banks place a high value on summer internships because there is a higher probability that you complete meaningful work. Summer internships can be paid or unpaid, but (in general) they are more likely to be paid than internships during the school year. Investment banking candidates need at least one meaningful summer internship before applying for their junior-year Summer Analyst internship (ideal candidates have two). Insider Insight 

Sophomore Summer Programs

Several investment banks offer freshman and sophomore internship and mentorship programs. These are extremely hard to get but look amazing on a resume. Some firms that offer these internships include: JPMorgan, Goldman Sachs, Morgan Stanley, Citi, UBS, and BAML.

Part-Time, School Year Internships As a lower-classman, it is easier to obtain part-time, unpaid internships during the school year than during the summer. Companies often look to local universities to provide a cheap and qualified workforce to take care of random tasks. These positions usually will not provide you with much meaningful experience as it relates to investment banking, but they will act as resume builders. Part-time, school year internships are NOT substitutes for getting summer internships: they act as a complement. Non-Target School

Part time internships during the school year are usually very accessible for non-target students and will make you more competitive when trying to get summer pre-internship internships.


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(13.2) How Different Internships Stack Up Below, we describe various forms of internship opportunities, from best to worst in the eyes of an insider.

High Finance Internship These internships include positions at an investment bank (IBD or Trading), hedge fund, private equity firm, or asset manager. Nothing looks better when applying for a junior year Summer Analyst internship than having already worked in these areas of finance: especially investment banking internships, as they are directly relevant. High finance summer positions are not easy to obtain as underclassmen: we recognize that most of you do not have family connections to help get you the job. Your best chance of securing one of these jobs is by applying for positions at boutique firms. However, as mentioned above, some bulge bracket banks offer freshman and sophomore rotational programs. Insider Insight 

Unpaid Internship Considerations

If necessary (and financially feasible), an unpaid internship in investment banking or the buy-side is always preferable to those below.

General Corporate Finance/Consulting/Accounting These internships include corporate development, accounting, valuation, and general finance positions. Positions within this category provide an experience with elements that are directly relatable to investment banking. •

Examples: PWC Valuation, Duff & Phelps Valuation, Disney Corporate Development, Coca Cola Financial Planning & Analysis, Deloitte Consulting, E&Y Audit, etc. (here we mention “big name” firms to give you some ideas, but smaller companies and boutique accounting/consulting firms are your best bet)

General Financial Services This category includes internships in wealth management, insurance services, private banking, etc. Investment bankers know that these jobs are heavily sales-related, especially at the intern level, but they look good on paper if positioned well. Bankers understand that it is very hard to obtain meaningful work experience during your freshman and sophomore years. These internships convey passion for finance and an intern’s role can be embellished. •

Examples: Merrill Lynch Private Client, Northwestern Mutual Financial Network, AXA Advisors, Smith Barney

Financial Education Programs These are paid programs that teach participants a variety of financial concepts, with some concentrating on investment banking in particular. Programs are diverse and include modeling workshops, investment banking boot camps, and summer extension finance classes , among others. These are not technically “internships” but are looked upon favorably as they teach candidates highly relevant skills for the job. •

Examples: Swiss Finance Academy, Training the Street, Wall Street Prep, college extension courses


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Other If you are unable to complete internships or training programs in any of the above-mentioned categories, try to obtain any general office job (this can include any field: marketing, sales, etc.). Otherwise, consider doing a study abroad program or some other form of unique experience (such as volunteering somewhere exotic) that builds a worthwhile story you can present when interviewing. Traveling or studying during the summer is better than admitting that you could not secure an internship. These types of experiences are more acceptable during the summer after your freshman year. Nevertheless, doing NOTHING is the worst thing you can do.

(13.3) How To Get These Internships Attempt to land positions with bigger firms, but recognize that the highest probability method of securing a worthwhile internship as a freshman or sophomore is to aim for boutiques and smaller c ompanies. Non-Target School

Obtaining pre-internship internships is an extremely vital step for non-target students. You are on more of an even playing field here than when applying for junior year summer internships. Also, preinternship internships are a way to distinguish yourself from the competition: if you have several worthwhile internships before junior year Summer Analyst internship recruiting begins, you have a much better shot of getting your foot in the door.

Start Small The first internship that you attempt to get will be the hardest. Start small and work your way up the hierarchy by seeking out wealth management and financial services positions as your first internship. After obtaining at least one of these internships, you will be better positioned to obtain internships that provide a more worthwhile experience for investment banking. Use this as a stepping stone to pursue general finance and high finance jobs. If you can skip these steps and secure a banking internship without them, do so (however, this is very unlikely). Start small in the high finance space by seeking out jobs with small boutique investment banks . These firms are much more likely to provide internships to lower classmen (although these may be unpaid). These positions can serve as fall-back options and also open new doors as bankers at these firms frequently have relationships at larger banks. Non-Target School

Students from non-target schools in particular should concentrate on internships with smaller firms that hire underclassmen. These firms tend to not have set hiring policies and do not always solicit interns through campus career centers. Below, we outline some good starting points to find pre-internship internship opportunities:


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Friends & Family Connections Having a connection is the best way to get an initial internship. Many companies, especially the major players, do not actively seek freshman and sophomores for internships because they have several years before graduation, and there are plenty of upper-classmen with more experience looking for these roles.

Career Center Seek out internship postings specifically for freshmen and sophomores. You can apply to postings for juniors, but the likelihood of getting these is low. At a minimum, check for new job postings weekly. Insider Insight 

Gaining Actual Interview Experience

Even if you do not think you want the job, it does not hurt to apply for various internship opportunities: you may get some “free” interview practice and experience along the way. Real interview practice is especially valuable to younger students.

Networking The highest probably method of obtaining an internship as an underclassman is to utilize your network of finance contacts. Reach out to industry insiders and see if they have positions available for someone in your current situation. As many pre-internship internships tend to be offered by smaller firms, candidates must frequently ask employers for a position (versus applying through a school’s career center or going through a formal recruiting process). A typical “ask” should: 1. 2. 3. 4. 5.

Build credibility by referencing past interactions and strong interest in the firm Gently propose your desire for an internship (the “ask” itself) Leave the door open for alternatives (create an internship, unpaid jobs, mentorships, part-time) Include your resume Propose next steps and alleviate your contact’s responsibility as your gatekeeper with their firm (offer to speak with someone else at the firm, ask to have your resume forwarded to HR, etc. )

For the best results, build well-established and personal relationships with industry contacts before asking for favors. An example email is detailed below: E-Mail Template

Brian, I appreciate all of the insight you have provided me over the last few months regarding the [wealth management] industry and [Smith Barney] in particular. As my [sophomore year] summer approaches, I am beginning to look into various summer internship opportunities in the financial services field. Knowing you and your firm, I feel that I would be a great fit and would love to experience first-hand everything that we have discussed. Is your firm offering any internship opportunities this summer? If so, I would greatly appreciate being considered for an interview. If not, is there any way I could be considered for some form of internship or job with your company? I have attached my resume for your reference and am more than happy to speak with anyone else at your firm regarding any potential opportunities. Thank you again for everything. Best, Scott www.ibankinginsider.com

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If their firm does not offer an internship program, offer to work part-time or for free in exchange for some form of mentorship. If this fails, ask them for references or recommendations on where else to look for an internship. For a full discussion of networking see Chapter 12.

Online Job Boards Although not exclusive or specifically designed to hire interns, online job boards can provide positions not offered through your school. They can uncover internships and companies that you did not know existed. Some of these websites (i.e. Craigslist.org) will offer very small, one-off (but sometimes highly relevant and useful) internship opportunities. Some of these are finance specific, and others are general job boards with robust finance categories. Examples include:  

Careerbuilder.com Craigslist.org

 

 

Doostang.com eFinancialCareer.com

FinancialJobBank.com Fins.com

 

Monster.com SimplyHired.com

(13.4) What To Take Away From Your Internships Pre-internship internships are more than just names on a resume; they are an opportunity to learn relevant skills, and they increase your human capital and value to future employers. Focus on the below items during your summer experience to walk away in the best position: •

• • • • • • •

If the internship entails it, learn relevant finance and accounting concepts as applied on the job. These will serve as major talking points during future interviews. Use Excel and PowerPoint as much as possible. Start building organizational and file-management skills . Get comfortable in a professional setting. Learn how to interact over the phone and via email. Understand office dynamics and politics . Learn about the finance industry as a whole. Seek a return offer to leverage next summer (although many of these firms will not provide an opportunity to return). Insider Insight

Pre-Internship Internship Takeaways



One of the most important takeaways from pre-internship internships is e stablishing worthwhile relationships with employers so that you can use them as valuable references in the future.  Keep a list of deals, projects, and tasks that you work on, with brief overviews; this will come in handy not only during interviews, but also when building your resume. Remember, these internships serve as stepping stones for skills learned, and also improve how you look on paper (resume building).


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Chapter 14: Step 7 – Prepare For Junior Year Summer Analyst Interviews Junior year investment banking Summer Analyst internship interviews are no “walk in the park”; they entail pressured environments and test technical aptitude. Effective interview preparation is essential; treat this preparation process as (or more) seriously than you would treat a class . Anyone can become a master of the investment banking interview process with sufficient amounts of studying and repetition. These interviews are designed to test several major areas, including general intelligence, knowledge of the job, technical aptitude, attitude (candidates often overlook this), and interest in the position. Technical and non-technical items are equally important and both c an be prepared for.

(14.1) Action Item 1 – Talk To Experienced Peers Find upper-classmen who went through the most recent recruiting cycle and gain as much insight as possible by talking with them about their experience. In particular, discuss things such as materials studied , differences between interviews, bank cultures and reputations, and interview logistics specific to your university. Maintain good relationships with these individuals as you will undoubtedly reach out to them several times throughout the interview process. Non-Target School

Peers that have been through the investment banking interview process are very important at nontarget schools: they provide insight on how they broke in from your school. They can tell you whom to reach out to, let you know which banks are the most receptive, and provide you with a behind-the scenes look at the recruiting process. If your school has no direct affiliations with Wall Street, consider reaching out to friends at other schools to see if they can put you in touch with their peers.

(14.2) Action Item 2 – Understand The Industry And The Job Candidates can no longer memorize interview questions and answers; the recruiting process has become too competitive. Bankers know how to spot memorized and coined responses (industry insiders have seen all of the same how-to guides that you have). Interviewers want to see that you have a solid understanding of what the job entails and that your decision to start your career as an Analyst is well thought-out. Use Part I of this guide as a primer for understanding the industry and job. At a minimum you should: • • •

Know what an investment banker does and understand the role of the Analyst Know a bank’s role in the marketplace Maintain a working knowledge of the different financial markets

Convey this knowledge whenever possible. Doing so will impress industry insiders and is a great way to stand out and get a leg-up on the competition. Your knowledge can be reflected in questions you ask investment bankers, discussions you have with them, and questions you answer.


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Quote “ My favorite question to ask aspiring undergrads is: ‘Why investment banking?’. Next, I often hear a coined, memorized response. My favorite follow-up to that is: ‘Okay, can you describe to me what it is that you think you will be doing day-to-day?’. You would be amazed by the number of people that cannot answer the second part of that question. ”

- Managing Director, Middle Market Investment Bank

(14.3) Action Item 3 – Continue Networking Having a good network of contacts becomes ESPECIALLY useful during this time. A few months ahead of junior year Summer Analyst internship recruiting (late fall/early winter), concentrate your networking energy specifically with the aim of landing interviews. As interviews approach, banks put on events designed to screen applicants and promote their banking team. These information sessions are generally held during fall and early winter on campuses of target schools. Attend as many events as possible. Non-Target School

Try to attend information sessions at nearby schools, particularly during fall and winter of your junior year. When attending, ask how you can be considered for a job with the rest of the applicant pool. For a detailed discussion regarding these strategies, refer to Section (12.4). Some banks offer winter receptions which require candidates to apply during the fall. Keep an eye out for these application deadlines through your school’s career center or reach out to the banks in which you are interested. Ask if they offer any such programs (use this question as an excuse to reach back out to a contact and try to set up a one-on-one meeting shortly before internship interviews begin). Winter receptions are a rare way to visit a bank’s office and meet senior bankers that usually do not attend oncampus events. Insider Insight 

Networking Event Repetition

You can often meet the same individual two or three times before applying for an internship just by attending different networking events. The more interaction you have with the same bankers, the more committed you appear. After seeing you enough times, they will remember you.

At this point, it is vital to re-engage prior contacts at firms to which you plan to apply . Two weeks to a month before applying for a job, email your contacts asking how to best position yourself to land the interview. This interaction reinforces your desire to work for the company and intent to apply in the near future. Not only do you gain valuable insight regarding the firm’s application process, but you also stay on the front of your contact’s mind. For a detailed description of how to network, see Section (12.3).


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E-Mail Template

Sam, Hope things are treating you well. I am reaching out to let you know that I plan on applying for the [Summer Analyst position] next month. You have been a great resource thus far, and I was just curious if you had any insight on how to best position myself to get an interview. After hearing about your experience at [Goldman Sachs], it sounds like a great fit for me. Thanks again for all your time and insight, and I look forward to hearing from you. Sincerely, John

(14.4) Action Item 4 – Master Your Story (Introduction) At the beginning of every interview you will be asked a derivation of the following question: “Tell me about yourself” (or “please walk me through your resume”). The answer to this is your “story”. The story is arguably the most important part of the interview: it is your first impression, it encompasses everything that has led you to this point , and it offers you a way to grab the reins and steer the conversation to your advantage. This is the most “trainable” of all qualitative questions you will come across; expect to be asked for your story nearly 100% of the time. Your story should be no more than 2-3 minutes and should come across naturally (not scripted). It will consist of four parts, detailed below: 1. 2. 3. 4.

Background Why Finance? The Road to Investment Banking Why this Interview?

Write down an outline of your story and practice it over and over: it must sound natural!

1. Background Briefly discuss where you are from, give a sentence about your high school highlights, and say which university you chose to attend and why. Example

“I was born and raised in San Jose, CA. I attended Mission San Jose High School where I was the Senior Class President and played varsity basketball. Going into college applications, I had a strong interest in business and therefore applied exclusively to schools with undergraduate business programs. I ended up getting into UPenn, and couldn’t pass up the opportunity to attend Wharton.”

Insider Insight 

Your Story For Regional Offices

If you are applying to a regional office, your background is a great way to convey strong roots and interest in staying in a particular location. Regional offices seek candidates with a long-term commitment to the city in which they are located. As an example: “I’ve always wanted to be back in San Francisco given that my family is located here.”


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2. Why Finance Explain what sparked your interest in finance and include specifics; the earlier you found the spark, the better. Examples include: a class you took , a professor you reached out to, a student group you got involved in, family and friends, people you have met , exposure to the stock market , and countless others. Example

“I first became interested in finance (in particular) during my first accounting class freshmen year: we had a project that required each student to pitch a stock to the class. This was my first real introduction to the stock market, and I was instantly hooked. Studying financials and different metrics used when analyzing stocks was intriguing. This process was arguably the most fun I had in any course up to that point. I found myself wanting to learn more, and I ended up opening my own brokerage account shortly thereafter.”

3. The Road To Investment Banking The point of this step is to bridge the gap between your initial interest in finance and decision to apply for a job in investment banking. What milestones influenced your decision? •

• • •

Use this step to walk the interviewer through key highlights in your resume: weave in your involvement in relevant student groups, leadership activities, and internships. Give a chronological answer and clearly describe the progression step-by-step. Choose 3-4 major events and show how they connect . When describing internships, explain what you learned , what you liked about it, and what led you to the next experience. Example

“After that experience, I joined a few finance clubs on campus and continued to take basic accounting and finance classes. I wanted to gain a more hands-on approach, so I obtained an internship at Merrill Lynch in their Private Client division. I learned a lot about the markets and handling clients, but the job was a bit too ‘salesy’ for me. I returned to school, took more advanced finance courses, and became the Vice President of the Undergraduate Business Group. This allowed me to expand my network, which I utilized to get an internship at Disney in their Financial Planning and Analysis department. I learned basic financial modeling and budgeting concepts, but I wanted to dive deeper than just elementary forecasting. I described my dilemma to some upper classmen, and they recommended investment banking as a perfect fit for me. I learned more about investment banking and, after taking a week-long workshop, discovered that I was extremely interested.”

4. Why This Interview This part of your story should convey why you applied to this bank or group specifically. • •

Limit this to a sentence or two. Emphasize different people you have met throughout the process, group culture, and specific products or industries that they cover.


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Example

“I spent the fall semester doing research and networking with different investment banks. I became particularly interested in mergers and acquisitions and the implications of company combinations. I know that your M&A group has a strong reputation on Wall Street, so I am very interested in working with your team. Meeting some of your colleagues only solidified my desire to work with your group. That is how I ended up here today.”

Non-Target School

Your “story” will play a particularly important role in interviews. Non-target students need to focus on conveying a strong passion for finance and that their experiences have prepared them well for the job. Emphasize (subtly) the lengths you have gone to in order to break into investment banking.

(14.5) Action Item 5 – Prepare For Qualitative Questions Approximately one-third to one-half of each interview is qualitative. With these questions, investment bankers aim to learn more about you: your background , personality, character , ethics, etc. Understand what types of fit questions there are. Some of the general categories include: • • • • • • • • •

Academic background Commitment to the job Cultural fit Ethics Strengths and weaknesses Teamwork Understanding of the job Why banking Work background

Stand out during qualitative questions by conveying a strong understanding of what the job entails. Understanding Part I of this guide will be extremely helpful. Non-Target School

There is a high likelihood that you are asked more questions related to “what is banking” to gauge that you have a thorough understanding of the job. Preparing for non-technical questions is not as easy as memorizing coined answers. You must think of your own way to tailor responses and formulate “your story” well. Arm yourself with specific examples and past experiences that you want to highlight in your re sponses. Practice your answers by saying them aloud or by conducting mock interviews with fellow classmates (we dive into these in Section (14.7)). ***SEE CHAPTER 22 FOR A LIST OF THE MOST COMMON AND RELEVANT QUALITATIVE QUESTIONS AND ANSWERS.***


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(14.6) Action Item 6 – Study Technical Questions Generally, one-half (or more) of each interview is focused on technical questions, especially in earlier rounds of interviews. These are designed to screen candidates for the technical aspects of the job and will cover accounting , valuation, and finance concepts. At the latest, begin studying for these questions over winter break during your junior year. Allocate AT LEAST one month to study. Insider Insight 

Making Time To Study For Interviews

Some candidates will intentionally take a lighter course load during winter quarter/semester to give themselves more time to study and prepare for interviews.

Non-Target School

Non-target students will likely be tested more heavily on technical questions compared to students from target schools; know these cold. If applicable, study old class materials (such as accounting). Focus on understanding how the statements interact, different methods of valuation, etc. (helpful, but not very necessary). For those with more time to prepare, the following books and guides provide in-depth overviews of onthe-job technical skills. These cover more than you would ever need to know for an interview, but act as a great primer for technical training related to the job: • • •

Investment Banking: Valuation, Buyouts, and Mergers and Acquisitions (Rosenbaum and Pearl) Vault Career Guide to Investment Banking (Lott) The Practitioner’s Guide to Investment Banking, Mergers & Acquisitions, Corporate Finance (Castillo and McAniff) Insider Insight



Understand Concepts, Not Answers

Bankers enjoy taking commonly-known interview questions and framing them in a different way to see if you understand the concept, not just the answer.

***SEE CHAPTER 23 FOR A LIST OF THE MOST COMMON AND RELEVANT TECHNICAL QUESTIONS AND ANSWERS.***

(14.7) Action Item 7 – Conduct Mock Interviews “Mock interviews” are practice interviews (often between peers or with the career center) designed to imitate the real thing; they provide a taste of what real interviews are like and give candidates the opportunity to gain feedback and correct any interview shortfalls.

It is essential that you practice interviewing: your first interview experience should not be with an actual job on the line. •

•

Conduct as many mock interviews as possible (mastering the interview becomes easier with repetition). Start practicing at least a few weeks before internship interviews begin.


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•

•

Ideally, conduct mock interviews with students that have already been through the recruiting process (these people will know what to ask and what to look for when interviewing you). Alternate among friends also going through recruiting, and take advantage of mock interviews through your school’s career center. Insider Insight



Mock Interview Strategy

Often times you can check out the actual interview rooms in the career center to conduct mock interviews in: this helps get you “into the zone”.

What To Focus On •

• • • •

Content : your story, why you want the job, fit questions, technical questions, and questions for the interviewer Body language: eye contact, firm handshake, sit upright, no fidgeting Confidence: voice does not trail off, assertive attitude Tone of voice: smooth, proper volume, enthusiasm No “likes” or “ums”

Conduct good mock interviews by recreating a professional setting (attire, location, tone): • • • • • •

Ask the person to tell their story Ask them a few qualitative questions Ask them a few technical questions Leave a minute at the end for the interviewee to ask the interviewer some questions Keep the exercise under 30 minutes Spend 5-10 minutes after the interview giving the other person feedback

(14.8) Action Item 8 – Research The Banks It is important to walk into each interview with an arsenal of bank-specific information. Investment bankers will want to see that you are interested in their specific bank and that you have been on top of recent bank developments. A day or two before your interview, research and memorize the following: • • • • • •

Major news associated with the bank Large deals the bank recently closed Stock price, if public Key executives (mainly CEO) Groups and industry offerings (especially if regional) Bank reputation

(14.9) Interview Essentials There are a few things that every interviewee needs to be prepared for. Below we dive into must-knows and some essential do’s and don’ts related to the interview process.

Back Pocket Items Going into any interview, be prepared with the following: www.ibankinginsider.com

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•

Current market prices: Dow Jones, S&P 500, Nasdaq. Insider Insight



Quoting Stock Prices

When quoting stock or index prices during interviews, do not give exact prices. Instead, give a small range so that it does not seem memorized from that morning. Bankers ask this question to gauge whether or not you follow the markets. •

•

• •

Be able to explain the financial crisis and other current events. A detailed explanation can be found in Appendix C . Stock to pitch: a very common question from interviewers that is used to truly see if you follow the markets or not. You need to know things like the current stock price, trading multiples (i.e. P/E), and the company’s relative positioning to competitors, growth prospects, and major risks. This is discussed more in-depth in Chapter 22. A joke: some interviewers try to catch people off-guard with this. Make sure yours is appropriate. A recent book that you have read (non-finance related).

Words of Wisdom • •

•

•

•

•

You only get one internship recruiting season, so do not procrastinate. Avoid getting too personal during the interview. It is important to have memorable anecdotes, but do not bring up any sad, traumatic, or uncomfortable experiences. The interview is a professional environment and you should act accordingly. Understand everything on your resume. Anything on your resume is fair game for the interviewer: if you put down a specific deal, job, club, etc., be ready to discuss it in detail. Focus on the job you are currently interviewing for. When discussing why you want the position, do not go into too much detail regarding exit opportunities (make it seem like your desire to do banking is well-thought out and that banking is not merely a means to an end). Prepare 3-4 good questions to end the interview on a strong note. Asking boring or dumb questions leaves a bad taste in an interviewer’s mouth. These questions are an opportunity to not only show deep insight and understanding of the industry, but also gain valuable knowledge. Convey that you have done your homework and that this is a serious decision you are making. For a detailed list of questions to ask after an interview, see Appendix A. When interacting with bankers and recruiters, always have a firm handshake and smile.


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Chapter 15: Step 8 – Obtain Your Junior Year Summer Analyst Internship Steps 1-7 have culminated to this point. You have excelled at school, gotten involved on campus, met the right people, obtained relevant work experience, perfected your resume, and prepared for interviews. Now it is time to execute and land a Summer Analyst position. In this chapter we break down each step of the internship recruiting process and provide insight on what you can expect during each round of interviews.

(15.1) Action Item 1 – Understand The Internship’s Importance It is important that you understand the significance of the junior year Summer Analyst internship before you begin recruiting.

Internships Lead To Full-Time Jobs Investment banks hire the majority of their full-time Analysts out of the summer internship program. If it can be avoided, banks do not want to go back to colleges in the fall for full-time recruiting; they aim to fill 100% of their full-time Analyst class with successful interns. For this reason, banks put the majority of their yearly recruiting resources into summer intern recruiting. It is much harder to get a full-time job without a summer internship. Non-Target School

Investment banks (especially larger ones) rarely give full-time Analyst offers to non-target students that lack junior year Summer Analyst internships. Getting a summer internship (even at a small boutique investment bank) is a must.

Find The Right Fit The summer internship is a way for the bank to test you as an Analyst and for you to test out the bank. Think of this as a 10-week trial on the part of both sides: does the bank think you fit in and can you succeed as a full-time Analyst? Do you like the bank culture and Analyst experience? Many summer internships (especially at middle market and bulge bracket investment banks) are “generalist programs”. This means that interns are not assigned to a specific product or coverage group, but instead work with bankers from various teams. Summer Analysts can expect to work within various industries and transaction types. After receiving a full-time offer, a group selection process occurs whereby interns are matched with a specific group that they will join as a full-time Analyst. Analysts that do not have a summer internship do not have the luxury of experiencing different groups and finding a good fit.

Can You Handle Investment Banking? Beyond testing out a specific bank and group, the internship is also a way to test if you can handle the industry. A large number of interns quickly realize that the stress of the job and the long hours are not for them. It is better to learn this heading into your last year of college rather than after graduation.


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(15.2) Action Item 2 – Stay On Top Of The Recruiting Cycle Understanding and monitoring the recruiting cycle is essential to knowing when to study, when to network, and which firms are recruiting (and when). The main investment banking Summer Analyst interview cycle runs from January to April of your junior year; for the purposes of this guide we call this the “recruiting cycle”. Bulge bracket banks are usually the first to start interviewing ; some start as early as the first week of January, depending on which school you attend. Smaller banks have a wider recruiting window and may hire right up until (or even during) the summer, with the smallest firms hiring on an as-needed basis.

Pay attention to which banks and offices will be recruiting at your school, as well as resume drop deadlines. Expect the process to conflict with classes and exams, and plan accordingly. DO NOT miss resume deadlines: if you fail to apply on time, you are out of luck. Discovering which banks are recruiting at your school also allows you to determine which banks are NOT c oming to campus (you need to contact these independently); reach out to your contacts at these firms to find out how you can be included in their recruiting process.

(15.3) Action Item 3 – Apply Target Schools Check your school’s career center website daily for new or existing resume drop deadlines a nd submit your resume as early as possible. Get it out of the way because if you miss the deadline, you are not going to be considered for the job. Often times, regional and international offices will not recruit on your campus, even at target schools. Contact HR at the different banks, and find out how to apply to these positions. Recognize that the recruiting cycle and/or timing may be different for these internships. If you have met contacts from different regions, email them to find out how to best pursue an opportunity with their office.

Non-Target Schools Non-Target School

Note: This section is dedicated to non-target student internship application strategies. Non-target students do not have a set application process to follow (i.e. career center resume drop) and instead must rely on their network of industry insiders to apply for interviews. Your ideal means of applying is by sending your resume to an investment banker that you have been in contact with. The banker then hopefully forwards it along and even “goes to bat for you” by telling colleagues that you are worth an interview. Recognize that these bankers need to go OUT OF THEIR WAY to give you a chance to interview and that their reputation is on the line. An example email is provided below:


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E-Mail Template

Michael, Hope things are treating you well at [Barclays] and that you had a great holiday. I am reaching out to inquire about your Summer Analyst recruiting process. As we have discussed, I am very interested starting my career in investment banking (especially with your firm). I recognize that my process will be different coming from a non-core school, but I would like to apply. What steps can I take to be considered for this year’s recruiting process? Is there someone else at the bank or in HR that I should reach out to? Attached is my resume for consideration. Thank you so much for all of the help, and I look forward to hearing back regarding next steps. Best, Sarah Ideally, after sending an email like the one above, your contact will simply forward your resume along with their recommendation. If you are told to reach out to someone else, do so, and copy your contact on the email. Recommendations from senior bankers are regarded highly and will instantly put a candidate on the bank’s radar. Quote “ If a Senior Vice President or Managing Director contacts us with a strong candidate recommendation, we usually give that individual a phone screen (and in some cases a first round interview). If they blow us away, we lump these candidates into the rest of the recruiting process. ”

- Vice President of Human Resources, Bulge Bracket Investment Bank Without a recommendation, your resume will usually be grouped with other non-target students into a “side folder”. Under normal circumstances, this folder is not tapped unless an investment bank does not secure all of the candidates it desires from target school recruiting.

HR is a useful resource for the application process, but DO NOT RELY ON HR ALONE. As a formality, apply on the bank’s website so HR knows you are interested in an internship (even though this process is often futile). Timing is extremely important . Reach out too early, and you will be forgotten by the time the bank starts recruiting; reach out too late, and the bank will have already filled its intern class. Therefore, reach out to your network no later than the first week of January, and make your intentions to apply clear: do not be afraid to come across as very forward. Ask what the process is for someone in your situation; is there a deadline date or can you send your resume across now for consideration in this year’s recruiting cycle? Always stay one step ahead of target-school recruiting: there is a chance that the banks fill all of their spots before giving you the opportunity to interview.

(15.4) Action Item 4 – Network At this point, you will have attended recruiting-specific networking events (information sessions, winter receptions, etc.) and re-engaged your insider contacts (letting them know that you plan to apply for the job). www.ibankinginsider.com

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After applying for internships, there are a few areas where networking can come into play. Reach out to your network of contacts:

1. After Securing An Interview Upon obtaining a first round interview, reach out to your contact at that bank to update them on your situation. Reiterate your enthusiasm for their firm and convey how excited you are to have this opportunity. Let them know that you look forward to meeting their team in person. Employ this form of networking to reinforce your commitment and stay on the banker’s radar. E-Mail Template

Jared, I am reaching out to let you know that I was selected for a first round interview with your firm. As we have discussed before, [JP Morgan] is my top choice and I am extremely excited for this opportunity. I look forward to meeting with your colleagues next week. Thanks again for all of the insights you have provided me over the last few months. Best, Alex

2. When Trying To Leverage Other Interviews If you have received one or more first round interviews with other firms, leverage them to help you land an interview with other desirable banks. Use this strategy for the following situations: A) The bank you are reaching out to has not communicated interview acceptances yet (sometimes resume deadlines are staggered). B) You failed to receive a first round interview with the bank you are reaching out to but would still like to be considered for an interview (i.e. if five bulge bracket banks accept you for first round interviews, you can ask a sixth bank to reconsider your application). When reaching out, emphasize that other firms have showed interest in you. The more desirable you seem, the more likely it is that these banks will interview you. Bankers will appreciate the transparency and may appreciate your perseverance.

3. To Stay On A Firm’s Radar After Failing To Secure An Interview Keep in touch with investment bankers whether or not you are able to land an interview with their firm. These contacts may come in handy in the future (full-time Analyst recruiting). Emphasize that you appreciate their help and that you would love to stay in touch regarding future opportunities with their firm. Non-Target School

After the application process, networking for non-target students is very similar to that of target students, with a few major differences. Non-target students need to be more proactive when talking with their contacts at different investment banks. It is much easier for non-target resumes to “slip through the cracks” as they are not submitted through a school website. Mitigate this risk by being in constant contact with investment bankers and www.ibankinginsider.com

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HR, especially after submitting a resume. Follow-up every 3-5 days to ensure that your resume is not forgotten. Leveraging other interviews (#2 above) is extremely important for non-target students. Banks face larger risks when hiring non-target students as their academic backgrounds and experiences are less tested than students from target schools. Also, individual bankers that “go to bat” for these students face reputational risk. Non-target students with interviews at other banks have proven themselves worthy of consideration for an internship. After having passed one (or more) bank’s “test”, nontarget students are more likely to be given an opportunity to interview with the bank they are reaching out to. In some cases, larger investment banks may not have the capacity to interview non-target students (competition is too high, fewer internship openings, etc.). Stay on good terms with members within your network, even after being denied an interview; these contacts can sometimes refer you to their network at other (smaller) banks.

(15.5) Action Item 5 – Continue Preparing For Your Interview For a detailed description of how to prepare for interviews, see Chapter 14. Remember, you should continue studying up until the day of your interviews.

(15.6) Action Item 6 – Dominate Your Interviews If all goes as planned, you have now made it to the next level: the interview. Below we provide an inside look at the interview process itself. We cover general tips and strategies and dive into each of the different types of interviews you will come across as you advance through the process. This section provides a rare view of what investment bankers see and look for from the other side of the table.

General Interview Tips & Strategies •

•

•

• •

When to Show Up: Do not be too early or late. Wait outside or in a parking lot if you get to an interview more than 15 minutes early. What to bring: Bring at least five copies of your resume, a portfolio, a notepad, a pencil, and a calculator. What to wear: Wear a full suit and tie, keep it conservative. Dark blue, dark grey, and black are all fine suit colors. Wear a blue or red tie with a blue or white shirt. Last minute check: Check where the markets are on your cell phone. Get in the zone: Get into a “chatty” mindset by talking with people before the interview. Make sure that you are wide awake and your mind is clear. Quote

“ I would talk to people on the phone or would talk to people in the waiting room to get myself in a talkative mood before any interview. This really helped calm my nerves and improved my interview performance. ”



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Phone Screen Some banks will call candidates before filling their first round interview slots: this is a “phone screen”. The bankers may email you to warn you of the call, while others will call out of the blue (often catching students off guard). Insider Insight 

Screening Calls During Recruiting

There are different theories about answering calls from unknown numbers during recruiting season. To gain the upper hand and be better prepared, let calls from unknown numbers go to voicemail. When employing these tactics, listen to the message immediately and put yourself in a position to call back as soon as possible. Note, by not answering the call you run the risk of the bank passing you up, especially if you barely made their cut. Some bankers get frustrated when students knowingly screen their calls.

Non-Target School

Non-target candidates and those applying out of their own region can expect a phone screen before any in-person interviews. The banks want to screen and pre-qualify students before spending money to fly them out to the office. More formal phone screens can resemble first round interviews (described below) in terms of questions asked and interview structure. During phone screens, you have the rare advantage of having materials in front of you; have these handy but do not rely on them. Make sure the interviewer cannot hear you flipping pages! What To Expect •

•

•

A typical phone screen lasts for 15-30 minutes, with 1-2 bankers on the other line asking you some brief, simple questions to test your competency. The screen will be mostly qualitative, with the bankers trying to gauge how you sound over the phone before narrowing down the applicant pool for in-person interviews. As long as you can explain everything on your resume , tell your story well, and understand some of the basic valuation questions , you will be fine.

First Round Interview (On-Campus) For target schools, candidates will be notified online regarding first round interview selections. You will be accepted, denied, or chosen as an alternate (usually 1-2 slots are reserved in case accepted students drop out). After being selected for a first round interview, you must pick your time slot. Depending on your school, investment banks will have between 14 and 60 slots for first round interviews on each campus in 30 minute increments (most schools have ~15-20 first round interview slots per bank). The selection date and time will be communicated in the original job posting; pick a time slot at the instant they become available. When picking a time slot, we recommend second or third in the morning or first or second after lunch. Interviewer attention is the strongest during these times. Approximately 2-3 out of every 20 first round interview candidates will make it to second round interviews.


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Insider Insight 

Choosing Interview Time Slots

Choosing an interview time slot is often very competitive. If your career center has a set time to choose slots, consider waiting at your computer until that exact moment. Many candidates employ this same tactic; therefore, even this does not guarantee that you will get your desired interview time.

What To Expect • •

•

The interview will last a total of 30 minutes. Arrive 15 minutes early to the career center lobby. Other candidates will be sitting there waiting to be called to a back room for the same interview or other interviews (often times, different banks recruit on the same day). A banker will walk out, call your name, and introduce themselves. The next 30 seconds will most likely be awkward for both parties as you try to make small talk while walking back to the interview room. Insider Insight

Making Interview Small Talk

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Ask interviewers how their day is going so far; then talk about interviews, the fact that they are not in the office, how you missed class for this, etc.  If your interview is right before lunch, try asking, “Do you need any recommendations about where to eat?” If your interview is immediately after lunch, a good icebreaker is, “Where did you guys go for lunch? Hopefully someone directed you somewhere good.” •

•

When you enter the interview room, there will usually be two bankers on the other side of the table. They will briefly introduce themselves and their backgrounds; then they turn it over to you. The first round interview generally consists of four parts: 1. 2. 3. 4.

•

Your story with some minor follow-up questions about your resume Qualitative questions Technical questions Questions for the interviewer

Steps 2 & 3 vary by bank, both in breadth and order. Some banks like to spend the entire first round interview grilling candidates on technical questions, but most take a more balanced approach. Insider Insight 

Sell-Mode After First Round Interviews

Sometimes, you may notice at the end of an interview (especially when you are asking questions) that bankers go into “sell mode” and promote their bank. This is a good sign that your interview went well and that you will likely get past the first round.

Insider’s Perspective

Below, we briefly discuss the first round interview process as experienced by a banker on the other side of the table (what the day is like for them, what is going through their mind, etc.): •

Bankers that are interviewing you are excited to be out of the office but at the same time have the lingering stress of work piling up.


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For Analysts, this is finally their first time to sit on the other side of the table. Do not be startled if they are a bit harsher than others; this might be their first time as an interviewer. This is often a reminiscent time for interviewers as they remember going through the process and college days, in general. The mood is typically very serious during the interview. However, between interviews the bankers often joke around (remember that these are normal people). The interview process becomes very monotonous for the bankers because they ask the same questions and hear similar responses all day. Breaking this monotony is a way to stand out. You can do so by having an energetic attitude (instead of nervousness) as well as telling interesting stories regarding your experience. Different levels of bankers will be impressed by different things. For example, Analysts are more likely impressed if you answer a particularly difficult technical question correctly; Vice Presidents may be impressed if you demonstrate the capability to be a hard worker. A LOT less time is spent assessing you than you likely realize. Quote “ I interviewed four candidates with one other guy and we decided on a top two and bottom two after a 20 minute discussion. ”

- Analyst, Bulge Bracket Investment Bank •

A quick way to get dinged is by lacking confidence (shaky answers), being overly animated, or speaking softly. Interviewers only see you for 30 minutes and have already pre-judged you somewhat due to your resume: confident and crisp attitudes are always noticed. Insider Insight 

Strategies Employed By Interviewers

Interviewers have different strategies for trying to catch candidates off guard. Some will take a “bad cop” approach by cutting you off and grilling you, while others will try to continue asking more and more detailed follow-up questions until you do not know how to answer. Do not be alarmed if you fail to answer some of their questions; these bankers are most concerned with testing your logic under pressure. Other bankers will take the opposite approach and act friendly and casual with candidates. No matter how they come across, maintain professionalism.

After The Interview • •

• •

Review how you did. Immediately write down all the questions you can remember ; there is a good chance you will hear similar ones in other interviews. Note any major slip ups so that you can address them before your next interview. Send a follow-up email that night or the next morning (see Section (15.7) below). Non-Target

You generally will not have formal first round interviews as a non-target student. First round interviews will typically be held over the phone and will be just as thorough as those held in-person. Prepare similarly and expect the same format for these first round phone interviews as the in-person interviews detailed above.


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Second Round Interview Making it past the first round interview is an excellent accomplishment. At this point, you have made it past a pool of hundreds of resumes and are among the ~10-15% who were asked to come back after first round interviews. Acceptance to the second round interview is typically communicated over the phone. Expect to hear back within 24-72 hours of your first round interview, but note that some firms call that same night. Smaller banks often take longer to get back to you and usually communicate this fact at the end of the first round interview. If you do not get a second round interview, expect an email a few days to a week later. Insider Insight 

Scheduling Second Round Interviews at Smaller Banks

Boutique investment banks and smaller middle market firms often have slower hiring processes; do not get discouraged if you do not hear back from them quickly. Sometimes 1-2 weeks can pass before you schedule a final round interview.

After the first round interview, the process moves away from campus. Your career center will not be involved and interviews will be conducted at the bank’s offices. • •

•

Second round interviews are often final round interviews (often referred to as “super days”). Super days at larger New York-based banks most often fall on a Saturday and each consist of approximately 20 candidates. This group of students is made up of individuals from a handful of schools. Super days can last from 2-5 hours, and banks often have some form of mixer, dinner, or social event the night before (or of) the super day with all of the interview candidates. Insider Insight

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Interview Meals & Social Events

Although the atmosphere will be more relaxed during a final round lunch or dinner, THIS IS STILL PART OF YOUR INTERVIEW! Do not get too comfortable. Let your personality show but maintain a level of professionalism. •

•

Investment banks (especially New York-based bulge bracket offices) hold multiple super days spanning several weeks (or more). Because second round interviews are off campus and are time consuming, there is a high likelihood that you will need to miss class. School conflicts often arise, so talk to professors about missing classes or tests; final round interviews should ABSOLUTELY take priority over classes. Sometimes the firms will work around your schedule, especially if you have a test or final exam, but do not push this. Regardless, class needs to take a back seat to your interviews; one of the main purposes of attending school is to land a job.

What To Expect

Second round interviews vary greatly by region and bank. Here we will walk you through a “typical” set of second round interviews: •

• •

Arrive at the office building 15 minutes early. You will likely clear security and be escorted to the firm lobby. A representative from HR or a banker will greet you and take you to a conference room. The number of interviews varies; you should expect to have a minimum of three interviews of 30-45 minutes each. Sometimes super days can last up to five hours.


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•

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•

•

•

Whereas first round interviews are usually conducted by junior bankers (Analysts and Associates), during the second round interview you will meet with bankers of all levels. It is not uncommon for a VP or MD to sit down with you, especially in smaller or regional offices. Technical questions vary from basic (similar to first round) to more advanced. Bankers want to push your knowledge limit as this is the final test before they give you an internship offer. The technical questions tend to be more case-study based in second round interviews (i.e. questions that require pencil and paper), and sometimes an entire interview can be based on one example. Each ~30 minute interview may vary in its mix of technical and qualitative questions: a single interview may be half technical half qualitative, mostly technical, or mostly qualitative. At the end of each interview, be prepared to ask at least two detailed and insightful questions of your interviewer(s). Since these are final round interviews, it is okay to ask questions that make the bankers sell the bank to you. For a list of questions to ask your interviewer, refer to Appendix A. At some banks, once the interviews are complete, candidates are walked around the office to meet bankers at their desks. This can be rather awkward because you will have only ~30 seconds to talk with each individual. Be confident and discuss your background/where you are from; it will be difficult to remember names but do your best. Insider Insight 

Interviewing With Senior Bankers

Interviews with senior bankers are usually qualitative and involve very few technical questions. They are more concerned with your attitude, your fit with the office, and your motives. These bankers are more disconnected from the technical aspects of the job and leave technical questions to Vice Presidents and junior bankers. When being interviewed by senior bankers, emphasize your personality and exhibit strong, confident communication skills.

Insider’s Perspective •

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Even though recruiting is an important process, deals take precedence for bankers. It is not uncommon for some internal interview schedule shuffling to occur last minute with one banker filling in for another. Some bankers like to play “good cop, bad cop”. One interviewer is very cordial with the candidate while the next interviewer grills the interviewee (keeping them on their heels). A major focus of final round interviews is testing your level of knowledge. Bankers will push your limits with questions that you probably do not know how to answer. It is okay to say “I don’t know” at a certain point; bankers want to see that you can take what you have learned previously and apply it to questions you do not know how to answer. Insider Insight 

•

Thinking Aloud During Interviews

If you do not know an answer to an interview question (and you have said so), do not be afraid to try and “think aloud”. This shows the interviewer that, although you might not know the actual answer, you are still able to use common sense to get you close. If you show that you are willing to attempt an answer, interviewers will often help you along the way.

After conducting interviews, bankers discuss whether or not to secure a candidate immediately (giving them an offer that day) or risk losing them to another bank.


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Recognize that most of the 2 nd year Analysts that interview you will never e ven work with you. By the time you start your internship, those Analysts will have completed their two-year program. Keep this in mind when evaluating your potential future coworkers. Similarly to first round interviews, surprisingly little time is spent deliberating on candidates. You are sized-up in a holistic manner, and therefore, how your carry yourself is important. Non-Target

Second round interviews will be the same for target and non-target students. Non-target candidates will either be lumped into super days with other non-target students or will be weaved into the target-student final round process. After completing a set of final round interviews, expect to speak with a few senior bankers. Since you come from a nontraditional background, the team will require a final “okay” from more senior individuals before extending you an offer.

Juggling Interviews It is not frowned upon to discuss having other interviews: it makes you look more desirable. Do not be afraid to tell banks that you need to work around other interviews if you have conflicting schedules. If anything, it may make them want to give you an offer sooner (if they like you). When scheduling conflicts arise, final round interviews should take precedence over first round interviews.

(15.7) Action Item 7 – Follow-up After each round of interviews, send a follow-up email to every individual that interviewed you. Keep these simple, and personalize the emails when possible. The email should be a simple thank you for being considered for the job and for the interviewer to have taken time out of their busy schedule to meet with you. Send follow-up emails within 24 hours, but no earlier than the evening of the interview. An example follow-up email is below: E-Mail Template

Steven, It was a pleasure meeting you this morning. Thank you very much for considering me for a position with your firm. Meeting you and hearing more about the firm only reinforces my belief that [Goldman Sachs] would be a great fit. I look forward to staying in touch regarding next steps. Best, Mark After second round interviews, mention firm culture in f ollow-up emails, and emphasize the fact that you have now met enough people to be certain that you are a good fit at the bank. Insider Insight

Sending Thank You Emails

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When sending follow-up emails, do not sound desperate, and keep the email very short. This act is more of a formality than anything.  Bankers do not want to receive thank you emails while interviewing other candidates later in the day. Do not be over-eager to send a thank you email.


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(15.8) Action Item 8 – Choose An Offer At this point, ideally all of your hard work has paid off and you will receive a summer internship offer (or even better, multiple offers). Offers are normally communicated by HR or one of the bankers the night of your final round or within a few days (but sometimes this can take up to a week). Some firms tell you on the spot (at the end of your super day).

Exploding Offers When communicating offers (due to high competition for the job), banks often give some form of an “exploding offer” to candidates that they like. An exploding offer is an informal offer that “explodes” (terminates) if not accepted immediately or within a very short time frame. Banks justify exploding offers due to the highly competitive landscape: they do not want to risk losing other qualified students to the competition while someone sits around on an offer . If you are not willing to commit, they will find someone else who is, and they aim to do this before that person gets acquired by another firm. Insider Insight 

Recruiting Competition Between Investment Banks

Investment bankers are competitive and this is reflected in the recruiting process. Each bank is recruiting from the same pool of students, so banks will usually try to pre-empt competitors and secure the best candidates first. Some firms will be more aggressive than others and cultures are often reflected in different recruiting tactics.

Exploding offers are somewhat faux pas. They are commonly “not allowed” (or at the least are frowned upon) by universities and even bank HR departments. To get around this, firms use carefully worded phrases and scenarios as to not give an offer that “officially” explodes. Let us examine a few exploding offer scenarios: Example

“Everyone you met today really liked you, and we feel you would be a great fit for the firm. Unfortunately, things are very competitive this year and we only have a limited number of intern spots. If we gave you on offer right now, what would you say?” The answer is ALWAYS YES. Although you did not technically receive an offer in the above situation, once you say yes you will likely hear “then consider this your offer”. If you say “no” or show uncertainty, the bank might never give you the offer. GET THE OFFER FIRST, DEAL WITH SUBTLE CONSEQUENCES LATER. Example

“Congratulations, we have decided to extend you an offer for this summer. As you know, it is a very competitive process this year. If you want to tell us your answer right now, that is great. Also feel free to think it over this weekend if you need to speak with your family or anyone else. But, we really need your final verbal answer by Monday morning (three days later). Now, if you don’t let us know on Monday, it doesn’t mean that you are not still a candidate for this summer. However, in this scenario we can no longer guarantee your spot in our group. We are interviewing [Wharton] kids on Monday afternoon and need to fill our summer class. If you do not let us know Monday, we can touch base after interviewing other schools, but we highly recommend you make up your mind before then.”


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This scenario is a nice way of saying “let us know by Monday or we will give your spot away”. Even if this is an empty threat and the bank is just trying to incite a quick answer, DO NOT RISK IT. If you have more than one offer, decide by Monday. If you do not have another offer yet and are still interviewing, ACCEPT. Worst case scenario (after accepting an offer), you can change your mind and accept an offer at another bank. This may require you to burn bridges. Although you should try to avoid this, it is not uncommon. Choosing an offer is a big decision, so it is okay to be a bit selfish. Insider Insight 

Reneging On An Offer

Note, some campuses career centers have policies that penalize students engaged in wrongful recruiting practices (such as reneging on an offer). These repercussions are usually minor, but know that they do exist.

Shopping Your Offer After receiving an offer (or offers), some candidates will attempt to use them to their advantage and seek out an internship offer at another bank. This process of reaching out to other firms is called “shopping” the offer. Other investment banks will likely want (or at least want an opportunity) to meet and interview you. Having one offer can open many doors: it acts as a stamp of approval and will now follow you through the rest of your process. If you passed the test at one bank, others may find you more likely to pass theirs as well. Non-Target School

Receiving an offer as a non-target student is especially validating. Whether it is from a boutique, middle market, or bulge bracket investment bank, leverage your offer to “shop up the ladder”. You may now get looks at investment banks that would not have previously considered you. Upon receiving an offer, IMMEDIATELY contact banks that you are more interested in and update them with your current situation. Explain your desire to interview with and work at their firm, and ask how you can be considered for a job. Even if they have not started recruiting or did not give you a second round interview, you are now more desirable and may warrant special circumstances. If the bank likes you enough, you may jump the recruiting process and get to interview with them before anyone else.

Choosing Your Offer If you have multiple offers, weigh the following: • • • • • •

What city you want to work in Bank and/or group reputation How well you get along with the bankers (you should have met dozens of people by this point) Work-life balance Summer-to-full-time conversion Compensation


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Insider Insight

Considerations When Choosing An Internship Offer

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When weighing offers, consider the probability of getting a full-time offer at the end of your internship. Although rare, some banks are known for giving out more internships than planned full-time offers. Candidates are forced into a “survival of the fittest” environment where fellow interns are direct competitors.  A few banks pay interns by the hour, allowing Summer Analysts to earn tens of thousands of dollars in just one summer. Joining for this reason, though alluring, is very short-sighted. Once you receive an offer and have signed the dotted line, go out with some friends. Congrats! You have passed one of the most difficult hurdles in the process of becoming an investment banker!

(15.9) So You Didn’t Get An Investment Banking Internship If you did not get an investment banking summer internship offer, there is no time to feel sorry for yourself . Remember, the end goal is to land a full-time job in investment banking. Although a junior internship increases your odds of breaking into the industry, there are other ways in. In this section, we concentrate on what to do next if you did not get an internship: we detail what your options are and help you formulate an action plan.

Assess Why First and foremost (while the interview process is fresh on your mind) assess why you did not get an investment banking summer internship. Pinpoint which shortcomings apply to your situation. Common shortcomings include: 1. Poor resume – was not finance focused, poorly formatted, did not sell yourself or experience well enough. 2. GPA and educational background – low GPA, non-relevant major (need to take recommended classes in finance and accounting). 3. Lack of work experience – not enough finance or finance-related internships. 4. Poor networking – did not make the right connections, did not keep in touch or follow-up, did not network well enough to get your foot in the door. 5. Interview performance – did not sell your story well, underprepared for technical and qualitative questions, did not carry yourself well (nervous, unprofessional, etc.). To help assess why, you should ask yourself the following two questions: 1. Did you get any first round interviews? If your answer is “no” or “limited”, then your problem is likely one (or a mix) of shortcomings 1-4. 2. How often did you make it to second round interviews? If your answer is “never” or “rarely”, then your problem likely lies in shortcoming 5.

Fix It To better position yourself for future investment banking interviews, address the issues that prevented you from securing an internship. After discovering what went wrong, fix the problem by employing the following advice:


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1. Poor Resume

Read Chapter 11 for a detailed description regarding how to create the perfect finance resume. Concentrate on formatting, “financing it up”, and embellishing where applicable. ***For tailored resume review, please consider iBanking Insider’s resume review services at www.ibankinginsider.com/resume . Our team of professional insiders will help you hand craft the perfect investment banking resume.*** 2. GPA And Educational Background

It is unlikely that you will be able to make any significant changes to your GPA or major by this point, but consider adding a minor or taking outside finance courses to beef up your educational background. If you are on the quarter system, you can sign up to take finance and accounting classes during your spring quarter (before any summer internship would begin). Leverage this fact in upcoming interviews for other summer internships. 3. Lack Of Work Experience

This will be tough to remedy, so your best bet is to adjust your story. Tailor it in a way that reflects a change of heart that you had and how you somewhat recently decided to try to get into finance. Once again, leverage the fact that you plan to take finance and accounting classes as evidence. Get an unpaid or paid finance-related internship during the spring; you can point to this as additional evidence of your dedication to the field. 4. Not Enough Networking

Refer to Chapter 12 and assess where you deviated from the networking plan we outline for you. Go to every networking event and information session possible during the spring and try to reach back out to people you may have lost contact with. Cold calling and emailing may be a more viable option for you at this point as you will need to reach out to smaller banks and other finance firms to find an internship. 5. Interview Performance

Review which parts of the interviews you struggled with. Did you mess up on technical questions? Was your story fluid, relevant, and believable? Did you give specific answers to qualitative questions? Discover where your faults lie and refer to the beginning of this Chapter and Chapter 14 to fix the problem and find additional helpful resources.

Your Options If you are 100% set on breaking into bulge bracket investment banking, you should consider extending graduation by another year. This gives you the option to apply again for junior internships during the next recruiting cycle. However, you still need to gain worthwhile experience this summer. Consider the following: •

Pursue internships at smaller local boutique investment banks . These firms often recruit long after larger investment banks have finished recruiting. The best way to pursue these positions and get your foot into the door is by hustling and utilizing any contacts you have made. Consider cold emailing or calling individuals working at these firms, offer to work for free, or just tr y to shadow senior bankers.


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Pursue an internship in another avenue of finance: corporate finance, sales and trading, equity research, etc. Insider Insight 

•

• •

Breaking Into IBD Through Different Departments

If you are extremely dedicated to breaking into IBD, a roundabout way to get into the job is to work in a different division of the bank (i.e. Sales & Trading or Equity Research). From there, you have the chance to network your way across the firm and request transfers within the bank. This is a particularly good strategy for non-target candidates. Note: this is possible but it is not easy.

If you fail to obtain an internship in a directly related field of finance, try getting one in a lessrelevant finance field such as accounting, valuation, or others. These firms usually start recruiting a few months after investment banks have finished . Many of the big four accounting firms look good on a resume: not only do these firms have accounting departments, but many have corporate finance or valuation-related groups. Pick something that you can embellish upon so that it sounds relevant to investment banking. The process for applying for these internships on-campus is very similar to that for IBD.

Formulate A Plan Now that you have assessed why you did not get the internship and what your other options are, it is time to take action. Action Item 1 – Apply to small boutique investment banks that have less-formal recruiting processes. Some of these firms might recruit through your school’s career center, otherwise hustle and reach out to smaller banks to see if they plan to hire interns. Action Item 2 – Determine how much time you have until recruiting begins for non-investment banking internships. Action Item 3 – Broaden your search to general finance opportunities and apply. Start with major corporations that recruit on campus. Action Item 4 – Further broaden your search by seeking out non-finance (but relevant) opportunities such as accounting. Start with bigger-name firms and slowly move to middle-market and smaller firms. Action Item 5 – If all else fails, obtain any corporate internship where your experience can be spun to show relevance to investment banking. To reiterate, if you do not obtain at least a boutique investment banking internship, the likelihood of getting an offer during full-time recruiting in the fall is much slimmer (however, candidates still break into full-time positions after a summer in corporate development or valuation, so do not give up).


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Chapter 16: Step 9 – Excel During Your Summer And Secure The Full-Time Job Landing a summer internship is great, but the end goal is a full-time investment banking job. Once you have accepted a summer offer at a bank, focus your energy on succeeding during the internship and obtaining a full-time job offer . At the end of your junior year Summer Analyst internship, you need to get a full-time offer. It does not matter if you change your mind and want to work at a different bank or if you are having second thoughts about banking as a whole. If you do not receive an offer, other employers will question why and will instantly doubt your capabilities. In this chapter we focus on ways to get ahead before your summer internship and how to excel as a summer intern.

(16.1) Getting Ahead Now that you have secured an internship, there are several ways to get ahead. Investment banking summer programs will usually include some form of training (approximately one week for bulge bracket banks). This training, especially when coupled with your undergraduate education, is designed to be sufficient. More serious candidates will often take measures to gain a leg-up on the competition before the summer begins. Ways to get ahead include:

Take Workshops & Online Courses There are a countless number of online and in-person investment banking-specific workshops that prepare you for the job. The technical questions that you studied during interviews are relevant but do not fully prepare you for what the job will actually entail. Workshops and online courses provide a hands-on introduction to the actual technical tasks you will complete on the job (basic Excel, financial modeling, public comps, etc.). Many workshops are available year-round; ideally you should complete these in the spring, a few months before your internship begins. Notable workshops include: • • • •

Training the Street Wall Street Prep Investment Banking Institute AMT

Notable online courses include: • • •

Training the Street Wall Street Prep AMT

These courses are expensive: online training can cost hundreds of dollars, and in-person workshops can sometimes cost thousands of dollars. To reiterate, these are not necessary for you to succeed on the job, but they certainly give you an edge over students that have no hands-on investment banking technical training .


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Read These Books The books listed below provide insight ranging from details on what investment banks do to more advanced technical methods and their applications. • •

•

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Vault Career Guide to Investment Banking (Lott) Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions (Rosenbaum and Pearl) The Practitioner’s Guide to Investment Banking, Mergers & Acquisitions, Corporate Finance (Castillo and McAniff) Applied Mergers & Acquisitions (Bruner)

Utilize These Forums And Websites There are various websites that contain a plethora of knowledge as it relates to finance and investment banking in particular. They are useful for learning finance jargon and understanding the culture of the industry. Some of these sites are good sources for staying up to date on industry news: • • • •

iBanking Insider: utilize the “Ask” section of our website Wall Street Oasis Investopedia.com iBankingFAQ

Practice With MS Office As an Analyst, you will spend approximately 90% of your time using Excel , PowerPoint , Outlook , and Word . Practice using these programs so that you understand how to use them more efficiently. There are thousands of tutorials online: become savvy with these programs ahead of your internship as you will spend less time playing catch-up and more time learning financial concepts and necessary job skills.

(16.2) Excelling On The Job Below, we have compiled a list of the essentials for you to become a successful Summer Analyst . The junior year Summer Analyst internship is one of the most grueling 8-10 weeks of your professional career, but there is a lot to be gained from the experience. Treat this internship as your do or die moment and give it your all. Ideally, you will sign a full time offer upon completion of the internship and have a relaxing senior year.

Leave A Good Impression In investment banking, first impressions are everything . Set precedents early: prove that you are reliable in your first few weeks . If coworkers do not feel they can trust you early on, it will likely carry with you for the rest of your internship. Follow the tips below to ensure you leave a good impression: •

•

Pay attention to detail . The easiest way to blow a first impression is by making stupid mistakes. This means that you should not have any formatting errors, spelling mistakes, missed comments, or overall lazy errors. LITERALLY, double, triple, quadruple check your work, particularly in the first few weeks of the internship. The extra few minutes will pay off. Never be late to work or to meetings.


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Insider Insight 

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•

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Being Late To Work As An Intern

Full-time Analysts get frustrated when interns constantly show up to the office after them. It is an unspoken rule that interns should be the first ones in the office.

Have a great attitude. Be positive when receiving new assignments. Attitude is particularly important when judging interns and is a way to stand out early-on during your summer. Know your place in the office and be humble, nothing is beneath you (get coffee if you are asked to, though this will hardly ever happen). Avoid complaining to full time bankers. Quote “ It is always unnerving to hear Summer Analysts complaining. Everyone is working hard and you’re the only one who will be getting a nice long break when your program ends. ”

- Vice President, Bulge Bracket Investment Bank •

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Manage expectations by under promising and over delivering: give yourself a cushion when accepting new projects. When asked how long a project will take for you to complete, build a buffer by giving yourself more time than you anticipate the task needing. Avoid constant use of your personal cell phone . If coworkers walk by and always see you texting, it will reflect poorly on their view of your work ethic. If you see a senior banker doing something menial, offer to help. Their time is much more valuable than yours; if you see them doing an administrative task, offer to provide assistance.

Stay Organized Investment bankers love Analysts that stay organized; it is a necessary component of the job, and it makes everyone’s life easier. •

•

•

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Keep a running to-do list at all times. Tasks will begin to pile up, and it is vital that everything necessary is completed. Cross off items as you finish them, and review your to-do list for completion every night before leaving the office. Version control: when working in any document, periodically and systematically save new versions (i.e. v1, v2, v3…). After any big change or addition, save-up. If you mess up a live version of a model and accidentally save over it, you will be in BIG trouble. Keep email and deal folders well organized. Learn the best way to categorize and subcategorize from fellow Analysts. Always ask for a deadline or timeline on assigned projects. This aids in managing expectations and prioritization.

Practice Proper Email Etiquette As an investment banking Summer Analyst, you send a countless number of emails throughout the day (sometimes hundreds). Understanding the “ins and outs” of email etiquette is essential. Below, we detail some important points: •

•

Understand the email hierarchy: put the highest ranking individual on the email chain first, and then go in descending order (although this may sound ridiculous, some bankers care a lot). Be careful when replying to one individual versus replying all.


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•

•

•

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Keep every email professional: no slang, nicknames or abbreviations. Save casual or personal conversations for offline mediums. Double check email addresses before sending ANY emails to ensure you are sending it to the intended recipient. Triple check the email and recipients when sending confidential information or when a client is on the thread. Fill in the “To” addresses last: this prevents sending unfinished emails on accident or before adding attachments. Double check to make sure that attachments are included and that they are the correct files before sending. It does not look good to have to send a follow-up email after forgetting to attach a document. Quote

“ Whenever there is a name in the ‘To:’ field and I need to tweak an attachment or the body of an email, I consider myself in the ‘danger zone’! Avoid this as much as possible. ”


Practice Proper Phone Etiquette Summer Analysts do not receive a high volume of inbound business calls, but practice a simple greeting (i.e., “Hello, this is [John]”), which sounds infinitely more professional than “Hello”. Be concise and courteous. Try to end conversations by thanking the other party for their time and/or offering further assistance, if applicable.

Always Be Learning Along with getting a full-time offer, an end goal of your internship is to learn as much as possible (this is a major perk of the job). Recognize that, at first, you will be more of a burden than a help to full-time Analysts. Follow the below best practices as you learn on the job. Before asking any questions, try to find answers online. Bankers hate being asked questions that can be easily answered on your own: • •

•

For basic questions that cannot be found online, ask fellow interns. For more meaningful or job-specific questions, always ask full-time Analysts first . They will direct you to an Associate if they cannot answer it. Take notes so you do not have to ask the same question twice. Quote

“ It surprises me how often interns will come and ask me questions directly. I like interacting with them, but answering basic questions cuts into my time. ”

- Vice President, Middle Market Investment Bank “ I don’t mind when Summer Analysts ask me questions, in fact I encourage it. However, it bugs me when they ask the same question twice. I’m too busy to repeat myself. ”

- Associate, Elite Boutique Investment Bank


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•

•

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Ask for feedback : do this after a specific project, after a few weeks on the job, etc; it shows a desire to improve. Be a problem solver: “I don’t know” is an acceptable answer, but even better is “I don’t know, but I’ll try to find out”. Leverage all possible resources: knowing where to find the answer is often more important than knowing the answer itself.

Understand Office Politics Understanding office politics is essential in knowing how to interact with coworkers, managing what is expected of you, and finding out whose good side to be on. As an intern, face time is one of the most important aspects of office politics: be the first person in the office and the last to leave . Summer interns (in particular) are expected to always be around. The more someone sees you in the office, the more they associate you with commitment to the firm. Pay your dues during the summer to land a full-time offer. Quote “ As I always said as a Summer Analyst: face time to full-time, baby. ”


Insider Insight 

Summer Analyst Face Time

Most bankers will tell you that face time does not matter, but during your internship it does. Senior bankers love hard workers; convey this by being around the office all of the time.

Other things to consider when dealing with office politics are presented below: •

•

Form a good relationship with your staffer . If you have capacity, show initiative by asking to be added to different types of projects and deals. The staffer is often one of the more powerful and vocal members of your review process. Be likeable and social. Break the formal office setting when possible: get coffee or lunch with coworkers, go out at night with Analysts, etc. These are great ways to have personal conversations with peers and let your personality shine through. Forming good relationships with coworkers is very helpful in getting a full-time offer. Quote

“ Most bankers will refer to the ‘airport test’ when it comes to potential junior bankers. What this means is ‘if I got stuck sitting in an airport with the intern during a flight delay and had to make small talk, would I get annoyed with them?’ End up on the wrong end of this test and you could be out of luck come offer time. ”

- Vice President, Middle Market Investment Bank


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Insider Insight 

Importance Of Relationships In Intern Reviews

Strong personal relationships with other Analysts, Associates, and VP’s can make up for a lack of technical skills when being considered for a full-time offer. There are many instances where well-liked Summer Analysts are given full-time offers even though they lack proficiency in some of the technical skills required for the job. •

•

Interact with people senior to you (in the hallways, kitchen, elevator, etc.). Many interns act shy around senior bankers, so stand out by approaching them. However, avoid barging into offices or interrupting conversations; have something relevant to say or you will stand out for the wrong reason. Utilize a mentor: form a good relationship with specific full-time bankers and put yourself in a position where these individuals will go to bat for you during the review process.

Do The Little Things Employ the below to make your life a little easier during the rigorous summer internship: • •

•

Keep toiletries and snacks in your desk : you will most likely use them. Dress the part. You might not be able to afford Hermes ties or Ferragamo shoes, but have clean, presentable clothes. If your office does not require ties, avoid wearing a crew neck undershirt. For offices with casual Fridays, be smart about how you dress and err on the conservative side. In both situations, take cues from the full-time Analysts. Take detailed and comprehensive notes. You are the deal-team’s note taker, so be prepared in meetings and conference calls. Insider Insight

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Note Taking Strategy

A good way to go the extra mile and stand out is to email typed notes to your team after important events or meetings. •

When in doubt, print it out. Every time you have a meeting or call in a senior banker’s office, there are probably some materials you can print out and bring with you. It looks good when someone asks a question and you can provide them with the backup data.

(16.3) Understanding The Summer Review Process Summer interns should consider the entire program (8-10 weeks) as one big review process. Even if they do not make it clear, the bankers are judging your every move. Knowing this, along with how the review process works, is useful when trying to impress your reviewers. Aside from casual and informal feedback that bankers may provide, there are specific reviews that occur during the summer.

Mid-Summer Review • •

•

This review will occur halfway through your summer (~5 weeks). Usually, this will take the form of an informal 15 minute conversation with you, your staffer, and HR. Most banks have a specific review form and rating system that the staffer and other bankers fill out. This form rates candidates on a range of expectations including fit , technical aptitude, attitude, attention to detail , and organization.


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The staffer communicates feedback from these forms. The overall take-away from the meeting is your current status: are you below expectations, meeting expectations, or exceeding expectations? The conversation may end with the banker communicating whether or not you are “on track to receive an offer”. Insider Insight

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Mid-Summer Analyst Reviews

There is some element of criticism in every summer review. Digest what is said and avoid the urge to blurt out counter arguments – it is not a debate. If you are asked to respond, avoid blaming others and be positive about your ability to fix whatever has been discussed.

After the review, immediately act upon any negative feedback . If there is concern over your organization, clean it up right away. If there is unease regarding your technical skills or lack of modeling exposure, be proactive and emphasize to your staffer that you would like to work on this. You have another five weeks to prove yourself worthy of a full-time offer. Bankers want to know that you are trainable: prove that you are by correcting or improving on midsummer review feedback. Part of your final review will be focused on your ability to correct problems that were brought up during your mid-summer review.

Last Chance Review (Semi-Final Review) •

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A few weeks before the end of your summer, there will sometimes be a semi-final review: this is a group discussion to assess the intern class as a whole (interns will not be present). In rare cases a “final test” will be given over the last week or two without the intern’s knowledge. It is often something technical, such as a model. This is usually administered to interns that are “on the cusp” of receiving an offer or those that have not sufficiently demonstrated their technical skills. As a general rule, do not slack off towards the end of your internship. Regardless of whether or not you are working on a test, finish your internship strong.

Final (“Round Table”) Review At the end of your summer, your colleagues get together and provide verbal feedback in a live discussion with each other. The end goal is to determine which interns get full-time offers. •

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The review group consists of investment bankers from every level , from Analysts to Managing Directors. A few days to a week prior to the meeting, bankers may once again fill out one of the previously mentioned review forms, rating each Analyst a final time on various attributes. The group of investment bankers gathers in a conference room to discuss the Summer Analyst class. The focus for each candidate is twofold: 1. Can this intern complete the technical aspects of the job? 2. Does this intern fit in with the office culture; does everyone like him/her?

• •

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Specific deals you worked on are brought up and you are judged on your role and performance. Each individual who worked with you is asked to share their overall view of you and your work performance. Specific shortcomings are brought to light for each candidate. A discussion ensues over whether any of the shortcomings are deal breakers. If no deal breakers are found, the bankers discuss how fixable the problems are. Number of full-time spaces is discussed and each summer intern is ranked.


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For candidates just on the border of being acceptable, discussions may occur around extending them an offer versus going back to campus to hire someone full-time (a risky move since there is no internship trial run for these candidates). Insider Insight

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Round-Table Summer Analyst Reviews

You need bankers to go to bat for you during summer round-table reviews. A few strong opinions can make or break your chances of getting a full-time offer. These discussions can often get heated, with investment bankers having opposing views of particular Summer Analysts.

(16.4) Receiving Your Offer On the last day of your internship, your staffer and HR sit down with you for a final meeting , communicate any final feedback from the team, and let you know whether or not you got an offer . Unlike internship offers, full-time offer communication does NOT usually come as an exploding offer . You have several weeks to provide a verbal response, but the bank prefers confirmation as soon as possible. If you take a bit of time to decide, various levels of bankers will often call you to sell you and ask if you have any questions about the firm, job, offer, etc. After confirming your acceptance of the job, a few weeks to a month later you receive legal documents that you must sign. This makes it official! Insider Insight 

Analyst Signing Bonuses

Most bulge bracket investment bank offers come with a $10,000 signing bonus. This is paid well ahead of starting full time and can make senior year very exciting.

Choosing A Group Summer Analysts that interned as generalists often need to choose a group after receiving and accepting a full-time offer. Analysts are asked to rank their group preference (usually top 3-5 groups) and this is cross-referenced with a similar selection process by the different groups within the bank (ranking which interns they liked best). Analysts are then matched with a group based mutual preferences and the group’s needs. This process is often not fully completed until months after the internship has ended.


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Chapter 17: Step 10 – Full-Time Recruiting Investment banks engage in full-time recruiting to fill vacant Analyst positions. The openings are filled after summer interns accept offers. Full-time recruiting is an important step for students that either A) did not get an investment banking internship or B) had an internship but want or need (i.e. no offer) to look at other banks. In this chapter we provide an overview of the full-time recruiting process and outline strategies tailored for students in different situations.

(17.1) Number Of Openings In a given year, the amount of full time recruiting that a bank engages in depends on: • • •

How many interns did not accept full-time job offers after their summer How many interns did not receive offers at the end of their summer How well the market is doing (or is projected to do); a better market requires a larger Analyst class

Because of this structure, full-time recruiting is highly variable year-to-year . Overall, it is not nearly as robust as internship recruiting. As a very general approximation, bulge bracket firms will typically fill 15-40 full-time spots.

(17.2) Recruiting Cycle And Structure Full-time investment banking recruiting does not have a set schedule. It can start as early as August and can last for months after that. The structure is more informal than internship recruiting and initial fulltime recruiting depends mostly on word-of-mouth recommendations. As stated earlier, banks aim to fill their full-time Analyst class with summer interns. Once the summer process is over and the bank determines whether any spots are available, they may aggressively seek to fill the spots. Banks first reach out to candidates with whom they have been in touch or obtain candidate recommendations from interns that received full-time offers. If a bank does not find desirable candidates during this initial rush, they will go back to campus in September or October . This full-time on-campus recruiting process is very similar to that for summer internships, usually with an on-campus first round interview and in-office super days. Non-Target School

Starting in August, non-target candidates need to continuously reach out to bankers and HR to make sure that they are not passed up in the full-time recruiting process. Most non-target candidates that break into bulge bracket banks through full-time recruiting do so during the initial full-time recruiting rush (keep in mind that these candidates almost always had some sort of investment banking internship the summer leading into full-time recruiting).


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(17.3) Assess Your Situation And Execute A Plan At the end of your junior year summer, assess your situation to determine what course of action makes the most sense for you. Here we detail three main situations you may find yourself in at the end of your junior year summer: A. Received a full-time offer from an investment banking summer internship B. Had a junior year investment banking Summer Analyst internship but did not get an offer at the end of your summer C. Did not have an investment banking summer internship

Situation A – Received A Full-Time Offer From Banking Summer Internship If you like your firm and want to stay, great: you are DONE! Accept the offer and enjoy your senior year! If you were unhappy with your summer experience or are unsure if you want to work at another bank, you often have up to a month before getting official documents to sign. This gives you some time to shop your offer. Shopping Your Full-Time Offer

Students with full-time offers have the option of “shopping” around for another full-time offer at a different bank. This is fairly common practice among students going through full-time recruiting. Just like shopping your summer internship offer, shopping a full-time offer has many pros and cons: Pros & Cons   

You may get a job at a “better” bank. This may be a good way to change geographic location. You are in a powerful position. Other banks will find you desirable and will want to meet you. You can always fall-back on your offer if you do not find one you like better.  You can make a more educated decision on long-term desired work environment after having worked in investment banking.  There is a good chance that your bank will find out you are recruiting. This is most likely not a deal breaker, but it may change the way people think of you.  There is a chance that you will have to rescind on an offer, which can burn bridges and hurt your reputation with your school’s career center (and possibly other bankers).  Full-time recruiting is stressful and time pressured; you need to study and go through the grueling interview process once again. How To Reach Out To Another Bank

After deciding whether or not you want to shop an offer, you need to learn how to reach out to other banks appropriately: •

•

Reach out to contacts you made during (and prior to) summer internship recruiting. Utilize your network of industry insiders, especially those that you previously interviewed with. This is why it is important to stay on good terms with these bankers, even if you do not end up interning at their bank. Send them an email with a general update of your situation. Keep the email brief and offer to discuss your current status over the phone. If you are pressured for time to accept your current offer, let them know.


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E-Mail Template

Dan, We spoke a few months ago about summer internship recruiting. Just to remind you, I am an incoming senior at [UPenn]. I wanted to reach out and let you know that I received a full-time offer after my summer with [Morgan Stanley]. I would love to catch up regarding your full-time recruiting prospects and get on the phone as soon as possible. Please find my updated resume attached which reflects this summer’s experience. I look forward to hearing from you. Best, Ron

Insider Insight 

Shopping Your Offer To Previous Contacts

Many times, banks that you turned down (or banks with which you interviewed but did not get an internship offer) will tell you to contact them after your summer. This is a particularly good sign that they were interested in you previously.

Reach out to friends that interned at other banks: •

•

They will know what the full-time recruiting prospects are at their bank (ask them if their firm has any open spots). Friends can tell you exactly who the right person is to contact (even better, you can send them your resume and have the friend copy you on an email to that person).

The Full-Time Interview

The differences between full-time interviews and summer internship interviews are very minimal. The structure is generally the same, with two separate days of interviews. The first round interview can be conducted on-campus, over the phone, or in the office. The second round interview is conducted in-office and consists of 2-4 interviews. Content of these full-time interviews generally falls along the same lines as that of summer internship interviews, but will be mildly more difficult . Full-time interviews focus on two main concepts: 1. Your recent summer internship experience 2. Why are you looking elsewhere, specifically this firm? 1. Your Recent Summer Internship Experience: The majority of the interview focuses on experience from your summer internship, but you will be asked technical and qualitative questions, as well. For this reason, keep a list of notes on major deals or projects that you worked on during your summer. Make the notes as detailed as possible so that you can study them and reference specifics in your interview: •

•

Focus on what specific technical experience you gained ( LBO modeling, DCF, public comparables analysis), and know some of the numbers and strategy behind what went into your work. Technical questions tend to be more difficult because they are more specific and are often asked in relation to deals you worked on. Be able to give background on the deals, companies, or industries that you worked with. You should be able to describe the competitive landscape, risks associated with certain types of


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companies you worked with, and unique aspects of different deals you worked on. A walkthrough of how to describe deals/projects is located in Chapter 22. Make sure to highlight that you received an offer after your summer internship, and tell interviewers about any positive feedback.

2. “Why Are You Looking Elsewhere, Specifically This Firm?” This is the most important qualitative question that someone in Situation A is asked during full-time interviews: it tests your dedication and interest in the bank. You need to think of a story and stick to it. Emphasize one or a combination of the below facts: A. You wanted to work with this bank since internship recruiting, but timing did not work out and you had to accept your internship offer before this bank finished recruiting. B. You did not like the culture at your bank or morale was low. C. You are interested in a specific group that is stronger at this bank. D. You want to change cities. E. You heard from the bank’s interns that their summer was extremely rewarding and that they loved the firm. The actual answer to this question is most likely that this bank has a stronger reputation. Communicate that you want to be at the best firm and work for the best people; compliment your interviewers. Avoid “trash talking” your summer experience, it can make you look undesirable.

Situation B – Banking Summer Analyst Internship With No Full-Time Offer The bad news: you did not get an offer. The good news: you had a junior year investment banking Summer Analyst internship and gained relevant experience. It is not uncommon for students that failed to get an offer at one bulge bracket bank to end up at a different bulge bracket bank full-time. As long as you do not have a major flaw, you are more valuable than a student that did not have a banking internship (and in many cases, students that interned at boutique or middle market firms).

The Full-Time Interview

Full-time recruiting is the same in this situation as it is for Situation A (described above). The major difference for students in Situation B is overcoming the hurdle of explaining why they did not get an offer. Why Did You Not Receive An Offer?

This is the most important question every bank will ask you. They want to know if your lack of an offer is performance-related and will try to determine whether or not you can succeed if placed in their work environment. When talking to other banks, DO NOT LIE ABOUT GETTING AN OFFER; THEY WILL FIND OUT. Before approaching other banks, find out exactly why you did not receive an offer. You need to spin the reason into a good story that does not make you look bad. Emphasize the fact that you were a good employee during your summer, you had a good experience with the firm, but you think that the firm you are interviewing with is a better fit . The key is to keep a positive spin on things.


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Stick to one or a combination of the below facts: 1. Not enough spots “The bank did not have enough full-time offers to give to interns, but my review was positive." This emphasizes that you were liked by the office and places the blame on something out of your control (i.e. the market, the firm, etc.). Be careful : this means that there were other candidates that were better than you (i.e. you were not the best).

2. Wanted to work in a different group “I realized partway through my summer that I was not interested in my group. I was a bit too vocal about it, and I think the bank began to question my loyalty halfway through the summer.” This emphasizes that the reason you did not get an offer was not performance-related. It is especially helpful if you can justify your explanation with specific examples or interactions. Be careful : this argument hints at an attitude problem. Investment bankers like to hire humble individuals, eager to learn in any situation. Also, bankers know that other banks will go out of their way to retain top talent, even if the intern wants to change groups after their summer.

3. Did not vibe with the culture “I simply did not fit in with the firm’s overall culture.” Again, this emphasizes that the issue was not performance related, and instead was driven by differences in personality. Tailor your story to convey that you had a different personality and set of interests compared to everyone else. Avoid discussing an inability to get along with other bankers. Be careful : likability is an important factor to investment bankers. They will most likely assume that the problem is your personality, and not that of other bankers. Note, use this excuse with caution; the only time a firm would choose not to give you an offer based on “fit” is when you were on the border to begin with.

Situation C – No Investment Banking Internship It is difficult to obtain a full-time investment banking offer without a junior year Summer Analyst internship. If you did not have a valuation or finance-related internship, the chance that you get an investment banking offer during full-time recruiting is low . If you fall into Situation C, your best chance of securing an investment banking job is to aim for middlemarket and boutique investment banks; be realistic about your expectations. You can always try to lateral after a year if your heart is set on the bulge bracket. Utilize your network of contacts at different banks and try cold emailing and calling as many contacts as possible. You need to truly hustle your way into a job at this point. Keep in mind that these smaller banks often do not have set recruiting cycles, so you can spend most of your senior year reaching out to as many banks as possible. Refer to the Chapter 12 for a detailed description of how to utilize your network to obtain a job. To be more seriously considered for any full-time investment banking position, we recommend taking a rigorous modeling and/or investment banking workshop. A list is provided in Section (16.1). Otherwise, postponing graduation by one year is a viable option. This allows you to go through internship recruiting again next year . The Full-Time Interview


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For candidates without any banking internship experience, the full-time interview is much more technical : banks will look for proof that you: A. Have a thorough understanding of technical concepts required for the job B. Are passionate about investment banking, have done your homework, and f ully understand the role of an Analyst There is no internship trial run, so bankers will vet candidates much more thoroughly during full-time recruiting. Interviews may be lengthier as the firm dives deeper into making sure you are a good fit and worth the large investment they are about to make. As a general rule, position and tailor your non-finance experience in the best way possible. Make your experience sound relevant (even if it is a stretch). The more you can convince the interviewer of your passion for finance, the better.


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Chapter 18: Step 11 – I Did Not Get A Full-Time Job, Now What? Not everyone will land a full-time investment banking job; however, there is still hope. If you are serious about investment banking, there are roundabout ways of getting into the industry. Otherwise, going into a related field is also an option.

(18.1) You Still Want To Get Into Banking If your heart is set on getting into investment banking, there are options for increasing your chances of breaking into the industry in the future.

Delay Graduation As stated before, delaying graduation by one year gives you a chance to go through the recruiting process again. Along with this second chance, you also have more time to acquire other internships during the school year and can better position yourself when internship recruiting starts again. Insider Insight

Deferring Graduation To Recruit

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In most cases, when deferring graduation for recruiting purposes, banks will not notice (so do not bring it up). If they do notice, banks generally do not care that you are extending graduation.  To camouflage your extension, consider only putting your expected graduation date in the education section of your resume.

Masters Program Enroll in a 1-year masters program in something finance-related. Try to attend a program at a target school, allowing you access to on-campus recruiting. This extra year also gives you more time to expand your network. Non-Target School

This is a good strategy for non-target students: you earn a Masters degree and have the opportunity to become a target student in the bank’s eyes.

Enter As An Associate A long-term approach to getting into banking is to attend business school and enter as an Associate. Plan to work 2-4 years before business school as investment banks want Associates with corporate experience. Preferably, gain experience that is finance-related. Insider Insight 

Entering Banking As An Associate

Do not try to get an MBA immediately after undergraduate schooling with the hopes of skipping the Analyst career – banks will not hire you.


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Get Lucky Settle for a related non-banking finance job and stay in contact with your network of investment bankers. Investment banking is a high turnover industry, and it is not uncommon for 1 st year Analysts to leave early (sometimes after only a few weeks or months on the job). There is a small chance you could be called in as a substitute. Your chances for success become higher if you work in a related field that requires skills similar to that of investment banking (i.e. bec ome a credit or equity Analyst).

Back Office: A Common Misconception Some candidates wrongfully believe that settling for a “back-office” role in an investment bank is a viable way to break into a firm (by trying to lateral at a later time). Back office roles include non-revenue generating positions within the firm (accounting, IT, HR) and do not provide any relevant experience for investment banking. Transferring from these departments to a position in IBD is extremely rare: the options above provide a much better chance to land a job in IBD.

(18.2) You Want To Do Something Else Finance Related Despite not landing an offer, your time spent going through the investment banking interview process was still well spent. This preparation and interview experience is directly transferrable to recruiting for other finance-related jobs. Consider pursuing positions in the following finance-related fields: • • • •

Accounting Valuation Internal corporate finance Wealth management

Aside from rare cases, interviews for the above fields are not as te chnical or as intense as investment banking interviews. The rigorous preparation you have undergone is uncommon for these interviews; you will likely be well ahead of other candidates applying to these positions. Leverage everything you have developed so far, it has not gone to waste: • • • • •

Your finance resume How to tell your story Qualitative questions and answers (strengths and weaknesses, biggest accomplishment, etc.) Interview skills Networking strategy


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Part IV How To Succeed On The Job And Next Steps


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Chapter 19: How To Be A Successful Full-Time Analyst In this chapter, we provide insight on how to succeed on the job: ways to best position yourself beforehand, strategies for your first six months, and things that seasoned Analysts wish they had known before starting their Analyst programs.

(19.1) Preparing For The Job Although not required, students may find it beneficial to do the following things before their full-time job begins:

Keep Up With Financial News Read online and physical news publications on a regular basis to stay up to date on the happenings of the financial world. This is useful for conversations you have in the workplace, understanding the state of the market, and maintaining your interest in the field. The more well-versed you are on the market, the smarter you appear to your colleagues. Popular online news sources include: • • • • • • • •

Bloomberg News Dealbook Dealbreaker Google Finance Morningstar Reuters WSJ Yahoo! Finance

Brush Up On Summer Training Materials Just before the full-time job begins, consider giving yourself a refresher course by going through old training materials from your internship (if applicable). You do not need to spend much time going through difficult technical concepts as full-time training is designed to be comprehensive.

Continue Your Finance And Accounting Education Take relevant classes during your senior year that help prepare you for the job. Continue taking any accounting, finance, or economics-related courses (when possible). Pay close attention in these classes and learn relevant financial concepts.

Get “Fitted” You will be wearing business casual (or business professional) most of the time after you begin working: put your signing bonus to use and buy business clothes. Stick with conservative colors for shirts, pants, and suits, and remember no cufflinks and no suspenders. Invest in something comfortable; you are going to spend a lot of time in your new shirts and pants.

(19.2) Full-Time Training Bulge bracket and larger middle-market banks provide robust full-time training programs for incoming Analysts and Associates. These are primarily located in New York (with some in London) and usually www.ibankinginsider.com

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include incoming employees from around the world. The training programs are 4-8 weeks long (bulge bracket programs are closer to eight weeks) and include the following: •

• •

•

•

Overview of the bank and its culture: the bank will sell you on their firm to build loyalty and teach you about its structure and offerings. Talks from bank executives. On-the-job resource training: you will be instructed on how to use corporate resources such as the Presentations department, Information Services, and the Copy Room, as well as third-party subscriptions such as Bloomberg, Capital IQ, Factset, Thomson Research, a nd others. Technical training: this will be conducted by a third-party training company such as Training the Street or AMT and covers Excel , accounting , valuation, and modeling . This part of training lasts for several weeks and is the most valuable part of the program. Series certification training: usually towards the end, you will undergo an intensive week-long training course to help prepare you for your mandatory licensing examination(s). Individuals working in IBD must pass the Series 79 exam. Insider Insight

Full-Time Analyst Training Considerations

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The professional technical training that full-time Analysts receive is a significant perk of the job. These multi-week courses normally cost individuals thousands of dollars.  An important aspect of full-time training is networking with people from other groups and offices. Building a strong base of contacts will make your life easier on the job when it comes to needing favors or searching for previously completed work.  During training, you work fewer hours; take advantage of this more relaxed schedule before your real job begins.

Quote “ As a Leveraged Finance Analyst, I constantly have to do debt comps. After my Associate gives me relevant companies to compare, the first thing I do is contact friends from training who now work in the relevant industry group. I ask if they have seen debt comps for these names in pitches or previous deals they have worked on to make my life a little bit easier. The few minutes it takes to call or email them sometimes save me hours. ”

- Analyst, Middle Market Investment Bank Smaller middle market and boutique banks also provide training programs. However, these programs are usually conducted in regional or local offices and are often shorter and less structured. Larger middle market and elite boutique banks both tend to offer bulge bracket-esque training programs.

(19.3) First Impressions (Again) Your first few months on the job are the most important of your Analyst career. Although you may have interned at your bank the previous summer, this is a fresh slate to make new impressions. You have much more responsibility as a full-time Analyst (compared to your summer internship); you are given more meaningful work and coworkers have higher expectations of you. The trust you build and impressions you make during these first few months carry with you for the full two year program. If you violate this trust early on, you may never fully regain it. Work harder during this time and make sure that you leave lasting impressions. Concentrate on the following:


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•

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Attention to detail: Since you are no longer an intern, you are given less leeway for simple mistakes. Gain coworkers’ trust by checking over your work several times before giving it to them. If you establish an early reputation for not double checking your work, it will likely haunt you for the next few years. Be proactive: Ask for additional projects or how you can be more helpful to senior employees. Seek out staffings instead of avoiding them. Go above and beyond expectations: When completing a project, do more than the bare minimum required of you. Provide additional analysis, dig up helpful details, or make a more senior employee’s life easier in some way (i.e. thoroughly sourcing backup to make reviewing your work easier). Get on good terms with your staffer: They are influential in not only how much you work, but also in what you work on. Being on good terms with your staffer can win you better deals and projects and help you avoid unpleasant situations (such as “Friday night specials”). Prove yourself to them early on, and be likable. Make both of your lives easier by being transparent when communicating what you are working on. Insider Insight

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Conveying Your Staffing Preferences

Take an active role in your staffing process; communicate preferences to your staffer (what type of deals you want to work on, industry exposure you hope to gain, etc.). Many Analysts never take advantage of this opportunity and instead take a passive role.

Quote “ During my first few months, I was put on a deal with my staffer. It was a difficult few months, but working late nights together really sparked a friendship. After completing the deal, he was very impressed with my work ethic, and we have become good friends. Now, I tend to find myself working on better projects and am able to avoid a lot of bad staffings. ”

- Analyst, Elite Boutique Investment Bank

(19.4) Settling In After Analysts get settled into their roles, one witnesses a broad spectrum of approaches to the rest of the two year program. Some Analysts aim to be superstars; these individuals overachieve and push to be the best Analyst in their class (top bucket). Others try to skirt by; these people slack off and complete the minimum amount of work possible while still fulfilling their role (the quality of their work is still high and meets expectations, but they do not go above and beyond). Most Analysts will fall in-between these two extremes.

How To Be A Superstar If you dream of being the top ranked Analyst in your class, these are some things you can do to stand out: • •

• •

•

Actively seek out more work and staffings. Make an Associate’s life easier by assuming some of their responsibilities. Examples include running conference calls, creating presentation pages without a markup, etc. Always source the backup to your work; know where each number came from and why. Contribute insight (rather than just executing orders). Go above and beyond the Analyst role by taking a higher-level view of a deal and providing worthwhile opinions throughout the process. Recheck your work when you have time, but always be responsive on deliverables.


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• • • •

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Be a master of resource utilization: know what resources exist, and when and how to use them. Be one step ahead at all times: begin next tasks before being asked. Make efficient use of spare time by sharpening your Analyst skills when you have down time. Minimize the number of questions you ask, but when you do, ask the right questions and at the right time. Make your bosses look good. Create user-friendly models. Any coworker should be able to open your model for the first time, quickly see how it works, and be able to take it over seamlessly. Help fellow Analysts. Be impeccably reliable: coworkers should never need to worry about whether or not something will get done. Always be available. Over-communicate with coworkers. The more transparent you are about what you are doing, the more comfortable your colleagues will be. Insider Insight

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Analyst Rank vs. Exit Opportunities

Being the top ranked Analyst does not mean that you get the best exit opportunities. Sometimes it is better to focus more on recruiting and take a hit on your bonus to get a superior offer.

How To Be A Sufficient Slacker This section describes ways to cut corners and avoid additional work. Although these are ways to slack off, recognize that when someone is relying on you to complete something, it needs to be done well and in a timely manner. No matter your method and effort, deliverables need to be up to par. Insider Insight 

Getting Away With Slacking Off

Proving yourself during your first few months will make it exponentially easier to get away with being a sufficient slacker. Work as hard as possible for a few months to establish a great reputation before applying any of the strategies below.

In general, this conduct is more common once Analysts have obtained buy-side or other exit offers (do not forget, your bosses will often be called as references). Below, we list some common strategies: Concentrate On Material Work

When checking work, concentrate on material aspects of your work and areas more prone to errors. You will get better at this with experience. Look Busy At All Times

Analysts go to great lengths to avoid being assigned additional work. Try to look busier by: • • •

Setting a delay on emails so they send later at night, long after you have gone home Utilizing Alt + Tab (see Section (3.4)) Putting up a small computer mirror at your desk so you can see who is coming


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Quote “ I carry a notepad, even to lunch or the bathroom. Then I get back to my desk, drop the notepad, and give a big sigh as if I was just given a lot of work to do. ”

- Analyst, Bulge Bracket Investment Bank Push Back On Projects

Push back on new staffings by appearing to have limited capacity for new work. Exaggerate deadlines and estimates of how long current projects will take. Use this strategy wisely, though: Analysts that push back on new work too often are quickly viewed negatively by superiors. Outsource Work

Outsource as much work as possible to firm resources. Have Presentations put together the bulk of graphic-heavy materials you need. If you are asked to conduct research, have the Information Services team do the work for you. Over-utilize these services, but do not abuse them. Feign Face Time

Make it appear as though you are always in the office. Some strategies include: •

• •

Ensure that you are at your desk at opportune times (i.e. when senior employees are leaving for lunch or going home for the evening) Run windows media player so your screen does not go blank Forward incoming calls from your desk to your cell phone

Push Responsibility

When possible, try to push responsibility of completing projects to other groups on the deal team. For example, attempt to get the product group Analyst that you are working with to take on more of the work when creating a pitchbook. Utilize More Junior Employees

After being on the job for one year, ask to have more interns (during the summer) or junior bankers put onto your deals. Lobby by emphasizing that it will be a good experience for them. Leave the Office When Possible

If you have nothing to do, leave the office right after the last member of your deal teams lea ves. There is no reason to stick around if you have nothing to do. Establish a daily “gym” regimen at a certain time. People will assume this is where you are when not in the office. Politic

Become friends with employees at every level. These “slacker” strategies will work better for Analysts that are well-liked, especially by senior bankers.


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(19.5) “Things I Wish I Would Have Known” In this section, we break down the top items that Analysts wish they had known before heading into the job. Similar points are located in Section (16.2). Most of the same traits that help you succeed as a Summer Analyst help you succeed as a full-time Analyst, as well. Some of the below insights may sound familiar; most are so important that they warrant being mentioned more than once.

The Analyst/Associate Dynamic Some Associates attempt to be more of a friend than a superior, while others want to maintain a strictly professional relationship. Befriend Associates whenever possible because the good ones can make your life exponentially better. Not only can they help you avoid unnecessary work (pushing back on Vice Presidents), but they can also help influence your staffing . You interact with Associates more than any other level of employee. They have the most direct impact on your investment banking experience. 2nd year Analysts often know more than newly hired Associates, even though these Associates are technically above them. This can sometimes frustrate Analysts and lead to conflicts (do your best to swallow your pride and help them integrate). Being on bad terms with an Associate can only hurt you in the long run.

Importance Of Finding A Mentor Form a good relationship with a Vice President as early as possible. Sit down with this person and explain that you want to develop a big picture view for each deal and project you work on. They can provide great overviews and insight regarding the deals on which you are staffed. This not only helps you understand the job more, but also helps when going through exit opportunity interviews (you will be able to talk about your deals more effectively and have good employer references).

Bonus Payment And Reviews People underestimate how large of a role qualitative factors (such as likability) play in reviews. The reviews themselves are conducted behind closed doors, and coworkers’ general perceptions of you matter significantly. Factors that go into the ranking include: how well colleagues like you, how smart people think you are, and how efficient you are at completing tasks. Insider Insight 

Banker Influence In Bonus Decisions

Understand who has influence in bonus decisions, and ensure that you are on their good side. Usually, your staffer and more well-respected individuals in your group provide the most powerful and respected opinions during Analyst reviews. If everyone else in your group loves you, but one of these powerful individuals has a negative opinion of you, your review and bonus will likely be lower.

It is very difficult to obtain a top ranking at any bank. The amount of additional effort required may not be worth the minimal increase in bonus pay. Usually the difference between top, middle, and bottom bucket is no more than $5,000-$10,000. It may require an extra 20-30 hours per week to jump from middle to top bucket; you do the math.


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DISCLAIMER: On average, top bucket Analysts put in the most hours, but this is not always the case. On the flip side, you could work more than any other Analyst and still only receive a middle bucket ranking. As stated earlier, bonuses are determined more by market, bank, and group than anything else (including performance). Long Hours & Weekends

You constantly hear stories about the long and exhaustive hours that investment banking Analysts must work. Although you are most likely aware of this drawback, most individuals grossly underestimate the difficulty of working such long hours. Before pursuing a career in this industry, fully consider the implications of working upwards of 16 hours daily and most weekend days. To get an idea of what an Analyst’s life is like during a live transaction (as well as an Associate’s), look to your most difficult finals week. You can expect a similar (if not worse) work and sleep schedule. Unlike a week of finals, this lasts for several weeks (or months) at a time. At one point or another in their careers, most Analysts question their sanity. Quote “ My roughest stretch was during my first year as an Analyst. I was staffed on two live deals on accelerated time frames. For around six weeks, I stayed in the office until 3:00am each night, with only one day off. I remember having over a dozen cups of coffee on certain days, as I struggled to stay awake. My record was 14. ”

- Vice President, Middle Market Investment Bank

Organization Staying organized is extremely important in investment banking because you have so much going on at any given time. It becomes easy to lose things or forget that you need to complete certain projects. Make your life easier by organizing email efficiently: create deal folders, auto-file, delete old or irrelevant emails, etc. Make everyone’s life easier (including yours) by keeping file folders organized: archive old documents, categorize folders appropriately, save relevant backup in a central location, etc. Practice wise saving and version control: save up frequently, create new versions after making major changes, etc. Keep physical deal folders well organized at your desk: be able to reference old files when in meetings. Keep running notes of deals that you work on: you will want them down the road.

Managing Expectations As stated earlier: “under-promise and over-deliver”. Immediately ask for timing and deadlines on new staffings so that you can plan accordingly. Give yourself a timing cushion when possible; projects ALWAYS take longer than expected. Do not be afraid to tell someone that you are staffed on too many deals if you are getting crushed.

Forming Relationships Across The Bank You interact with lots of different groups within the bank on a daily basis. Having a person you can rely on in each group makes your life easier when you need to reach out for a fa vor or something deal-related;


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investment bankers tend to give preference to people they know. Full-time training is a great place to meet these individuals. Remember that finance is a small world: you will likely run into colleagues down the road. Forming worthwhile relationships with your coworkers may come in handy sometime in the future.

Leveraging Existing Work Time is a commodity for Analysts and you want to avoid wasting it whenever possible. Know what work has been completed and leverage it. If you do not know whether a particular project has been previously completed, spend the extra few minutes to find out if it has been done by someone else in the bank (this is where forming relationships proves helpful). Investment bankers tend to do the same type of work for different clients, which is why it is so common to leverage existing presentations, models, and comparables. This is what bankers are referring to when they say “do not recreate the wheel”.

Importance Of Attitude Having a good attitude around colleagues is an important aspect of being an Analyst. All investment bankers feel the urge to complain at many points during their career. The wise do not act on it (or if they do, it is only among bankers of their same level). Even when the job gets tough, maintain a good attitude around senior bankers. They want people that can keep their composure during tough situations. Your VP’s and Associates will do enough complaining for the both of you (trust us on this one).

Importance Of Judgment Many areas of an Analyst’s job require sound judgment; this includes formulating model assumptions, interpreting comments, interacting with clients , managing workloads , etc. Judgment cannot be learned by merely reading a guide, but it gets better with experience and knowledge of the industry. Good judgment is often a distinguishing factor between good and great Analysts.

Taking Vacation/Missing Work There is a stigma on Wall Street that junior bankers should always be at their desks, not take lunches, order-in dinner, and take limited vacations despite the amount of time off you are allocated. A lot of this pressure is self-inflicted by Analysts: senior employees are usually too busy to worry about your whereabouts (unless you are working on a live deal together). Once settled in, planning short weekend vacations in advance is completely acceptable. You always risk having to cancel a vacation or having to work while traveling, but that is the nature of the business.

Ways To Stay In Shape In general, staying in shape is a very difficult task. We have listed out a few tips below: • •

•

Eat healthy; when you get stressed out, avoid snacking as a reward. Once you get settled in, establish a “gym culture” where you go to the gym at a set time every evening with other Analysts and Associates and come back afterwards to complete work. Utilize the weekends to work out.


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What To Keep At Your Desk You will be spending a lot of time at your desk, so it is necessary to keep it properly stocked with some of the essentials:   

Extra dress clothes Eye drops Face wash

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Gum Snacks: energy bars, cereal Sweatshirt/jacket

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Toothbrush and toothpaste Umbrella Vitamins

Work-Life Balance Many individuals go into investment banking thinking that it will be extremely difficult to maintain personal relationships while on the job: it IS. Living close to the office can help by freeing up time normally spent commuting. Avoid complaining about this aspect of the job to more senior colleagues – many of them are juggling the same issues and have wives/husbands and kids at home. They are not going to be sympathetic if your boyfriend or girlfriend is mad that you cancelled dinner plans.

Importance Of Having Good Relationships With Back-Office Services Befriend auxiliary staff at the firm; sometimes they become your lifeline. This includes Copy Services, Presentations Services, Research Services, couriers, and IT . In investment banking, time is money: any hour that you can save is an extra hour that you can spend at home. Auxiliary staff can save you lots of time if utilized correctly. Analysts that play their cards right can often use their relationships with these people to get favors. Examples of favors include: • • •

Printing presentations at the last minute or skipping to the front of the print queue. Getting graphics created for a presentation ASAP. Conducting in-depth market research on obscure subjects (Information Services might be willing to spend more time digging for information if you have a good relationship with them). Insider Insight

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Getting On Good Terms With Auxiliary Staff

Do not underestimate the power of a simple “thank you”. When emailing or interacting with back-office support teams, show them how grateful you are and be overly thankful for their help. This is a quick and easy way to get on their good side.

How Early Exit Opportunity Recruiting Begins Private equity recruiting keeps getting pushed up every year. You can expect to start hearing from headhunters regarding private equity and other exit opportunities as early as three months into your first year as an Analyst . Be proactive and ask for legitimate staffings, especially at the beginning of your first year. Completing your first deal quickly can put you well ahead of the competition. Insider Insight 

Firm Help In Exit Opportunity Recruiting

Try to gauge your bank and/or group’s stance on exit opportunity recruiting. If they are known for being open to recruiting and helpful, make your intentions to recruit clear. As soon as headhunters begin reaching out to you, let your superiors know that you are looking into different exit opportunities. You will find that colleagues often go out of their way to help you.


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Chapter 20: Banking And Beyond One of the major benefits of being an investment banking Analyst is the lucrative exit opportunities. These include jobs in the buy-side, corporate finance, or continuing a career in investment banking (and working up to a client-facing role).

(20.1) Making It A Career Particularly in the U.S., the investment banking Analyst program has traditionally been “two-and-out”: most Analysts only stay at their firm for two years before pursuing other opportunities. That being said, staying in banking is still an option, and it is becoming more common as banks move away from set two year programs. Lifestyle improves after the junior levels along with pay. There are three major paths to take to work your way up the investment banking ladder: 1. Work as Analyst for two years and get directly promoted to Associate. This is somewhat uncommon, but banks will provide this option to retain their more promising Analysts. 2. Extend your Analyst term for a third year and then get promoted to Associate. The third year as an Analyst is often a trial Analyst/Associate hybrid year used to screen candidates trying to move up within the firm. 3. Obtain an MBA, recruit for a job in banking, and enter as an Associate. Unlike Analysts, Associate hires are assumed to be long-term, career-aspiring employees. Associate programs normally last three years, followed by a promotion to Vice President. Once a banker reaches the Vice President level, they begin forming client relationships and start to pursue deals independently. Promotion after the VP level is based largely on performance (client relationships and bringing in deals), making this level much less structured in terms of tenure. There is no guarantee of eventual promotion to Managing Director: Vice Presidents must prove that they can generate new business or they are let go. Insider Insight

Working Your Way Up In An Investment Bank

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Many Analysts and Associates presume that being good as a junior banker translates into success at the senior level. This is not necessarily true as the Vice President level and above requires a much different skill set. Technical aptitude and analytical skills can carry a banker through the Associate level; beyond this, relationship and sales skills become essential.  In rare cases, high level executives in other industries (i.e. consulting, law) can become bankers at the Senior VP or MD level. They are utilized for their relationships and industry expertise.

(20.2) Exit Opportunities Many undergraduates enter investment banking with the intent of exiting after two years. Due to the specific skills acquired on the job, there are six highly popular exits: 1. 2. 3. 4. 5. 6.

Private equity Hedge funds Venture capital Internal corporate finance Business school Entrepreneurship


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Insider Insight

Setting Yourself Up For Exit Opportunities

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Keep a file with notes from major deals and projects that you work on. This will be vital when updating your resume and studying for exit opportunity interviews.  As an intern and full-time Analyst, the majority of the junior bankers your work with will move on to other relevant opportunities. Form relationships with your junior coworkers and keep in touch: they can serve as useful entry points into buy-side and other exit opportunities. Even contacts that you make as an intern can be helpful three years later.  The “Analyst” title equivalent on the buy-side is an “Associate” (not to be confused with the Associate position in investment banking). Below we break down the different exit opportunities in more detail.

Private Equity & Hedge Funds This is the most coveted exit strategy for investment banking Analysts, especially at well-known and respected banks. Private equity and hedge fund jobs pay extremely well, are difficult to get, and usually have a better work-life balance. Many Analysts pursue buy-side opportunities because they think that the work will be more interesting: they are lured by the experience of looking at things from an investor’s perspective and having “skin in the game” (money on the line). Insider Insight 

Work In Private Equity vs. Investment Banking

Note that the work for junior employees in private equity is very similar to that in investment banking. If you do not like modeling, this is likely not the right exit strategy for you.

Compensation

Private equity and hedge fund positions are known for being some of the highest paying jobs in finance. Analysts that pursue these roles can expect a significant increase in pay depending on the size of the fund they join. Similar to investment banking, pay for these jobs is usually characterized by a high base salary and annual bonus. Base salaries at larger funds are in the $125-$140k area with bonuses expected to be at least 100% of base salary, depending largely on fund performance. Another component of compensation is “carry”: investment returns that employees can earn in-line with fund performance. Note, not all funds offer carry, especially to junior employees. Lifestyle

Unlike investment banks, buy-side firms are not at the whim of demanding clients and instead serve the needs of their investors. This allows buy-side Associates to have more stable schedules that are less subject to last-minute surprises (though surprises can occur when potential investments have short windows). Insider Insight 

Hours In Private Equity vs. Investment Banking

Lifestyle for junior employees at mega funds is generally similar to that of bulge bracket investment banking (and sometimes worse). These firms have demanding investment requirements and large amounts of capital to invest, both translating into extensive analysis for buy-side Associates.


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Recruiting

Within a few months on the job, bulge bracket investment banking Analysts begin receiving emails from major headhunting firms. Shortly thereafter, Analysts have informational interviews with these recruiters to discuss what sorts of exit opportunities interest them the most. Conversations focus on types of funds, sizes of funds, locations, investment strategies, etc. If you do not hear from headhunters before December of your first year, start reaching out by finding contacts on LinkedIn or asking friends. Each headhunting firm has its own set of clients. Private equity funds and hedge funds almost always work exclusively with one headhunting firm; do not blow off any recruiters . In most cases, headhunters are the sole point of entry to the buy-side; funds often outsource their entire recruiting process to these companies. Insider Insight 

Buy-side Recruiter Considerations

Headhunters are the gatekeepers: get on good terms with them. Sometimes they ask you specific technical questions or specific deal-related questions; they often pre-screen candidates in this manner before introducing them to their best clients.

Recruiting can begin as early as March of your first year and can last for several years (depending on how quickly you get a job). Insider Insight 

Timing For Buy-side Recruiting

Over the last few years, buy-side recruiting has started earlier and earlier as firms aim to stay competitive and snag the best talent first. Traditionally, the largest funds in the world go on a multi-week recruiting blitz to begin every recruiting season. After these hectic first few weeks, the process dies down significantly and firms recruit sporadically throughout the year.

Non-Target School

Unfortunately, your undergraduate non-target school status comes into play again during buy-side recruiting and can make it difficult to break into more well-known firms. Working at a prestigious investment bank can help, but it does not guarantee equal footing.

Venture Capital Venture capital is arguably the least common buy-side exit opportunity for investment banking Analysts. There are fewer junior openings at these firms, and individuals with engineering and startup-related backgrounds are often preferred. Positions with venture capital firms are favored by individuals with a passion for helping young corporations. Junior employees gain valuable insight into investing in earlystage companies. Compensation

Venture capital firms are not known for paying employees as well as other buy-side jobs. Typical entry-level Associates should expect all-in pay of $150k-$200k . Compensation consists of a base salary, year-end bonus, and (more rarely) carry.


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Lifestyle

Venture capital firms are known for having the best junior lifestyle of all buy-side opportunities. Firm culture is often less formal and firms are known for having better hours (especially early-stage venture capital funds). Associates spend a lot of time meeting with entrepreneurs and networking with industry professionals. The job is less modeling-intensive and more focused on sourcing deals. Recruiting

When considering investment banking candidates, venture capital firms often prefer individuals in a bank’s technology coverage group. It is not uncommon for some firms to require an MBA. Recruiting is somewhat independent with no set cycle, so Analysts must be proactive to come across employment opportunities. Most headhunters that reach out to Analysts do not recruit for these types of firms.

Internal Corporate Finance Internal corporate finance is the broadest exit category with the most available positions. Every major company has a corporate finance department, and they often prefer to hire former investment bankers. The technical skills you gain as an Analyst are very valuable and are directly transferrable to positions in these departments. Individuals interested in breaking into a specific industry (i.e. retail, entertainment, media, technology, etc.) should consider these positions. Compensation

Corporate finance compensation is usually significantly lower than other exit opportunities (even investment banking). These companies do not realize buy-side investor profits and cannot pay employees as well, especially at the junior level. Compensation at these firms varies widely, but exinvestment banking Analysts can expect to make around $80k-$120k at more well-known companies. Insider Insight 

Corporate Finance Compensation

Internal corporate finance roles offer very little room for increases in compensation. This is a major difference between these positions and buy-side opportunities; year-over-year increases in pay are minimal in comparison.

Lifestyle

Internal corporate finance positions offer the best work-life balance among the exit opportunities listed here. The average employee at these companies works nine-to-five, so employees in the corporate finance department will not be working 100-hour weeks. Corporate finance employees can expect to work 50-70 hours per week , on average. However, during big deals, corporate finance employees are known to work hours that are similar to those in banking (but this occurs infrequently). Company culture varies by industry, but employees are generally treated very well and exhibit stronger loyalty towards their employer. Recruiting

Some of the same headhunters that recruit candidates for buy-side positions also recruit for these jobs. However, since so many positions exist, a significant amount of the search needs to be conducted independently. To find open positions, browse company websites and well-known online job boards (Monster, CareerBuilder, etc.).


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Business School After 2-3 years in investment banking, business school is a viable option. This route is worth consideration for candidates interested in switching industries or those uncertain of what they want to do next. For those that plan to stay in banking, business school is a way to take a “vacation” (although expensive) and better position oneself to lateral to another firm. The process of entering a top MBA program is more competitive when coming from a finance background. Candidates will need a high GMAT score and undergraduate GPA to stand out. In general, it is more difficult to get into a top business school with only investment banking Analyst experience.

Entrepreneurship For those with an entrepreneurial spirit, working as an investment banking Analyst provides many advantages. Individuals learn relevant skills related to company valuation and accounting, as well as how to find investors, how to create marketing materials, and overall deal processes. On top of this, the job provides a rare inside look at very successful companies (and unsuccessful ones, too). Working in investment banking also provides a worthwhile capital base, making dreams of entrepreneurship realizable more quickly.


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Part V Technical Concepts & Interview Questions


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Chapter 21: Technical Guide – Accounting, Valuation & More Any junior level employee at an investment bank, private equity firm, venture capital firm, hedge fund, or even corporate finance department of a company needs to understand the fundamentals of how to conduct technical analysis. Rather than provide you with a textbook-sized instruction manual, we have condensed the most important technical concepts that you need to know into the following pages. Review these concepts and understand their usage, as this knowledge will be tested extensively during almost every interview.

(21.1) Accounting Overview Accounting is an essential component of any job that requires an individual to conduct financial analysis. It is known as the “language of business” for a reason: without a basic knowledge of the financial statements, how they are structured, and how they interact with one another, it is impossible to perform even the most basic financial analysis. In this section, we provide a basic introduction to the most relevant and important accounting concepts as they pertain to finance interviews and the job. In conjunction with these basics, we recommend serious candidates take one or more university-level courses in managerial and/or financial accounting. Accounting is a driving force behind the financial statements reported by every company. Below we outline the three major financial statements: Income Statement, Statement of Cash Flows, and Balance Sheet. As an investment banker or other finance professional, you can expect to work with these statements every day.

Income Statement The Income Statement presents the results of a company’s operations for a given period of time. It lists the major sources of income (revenues), costs of doing business (expenses), taxes, and ultimately ends with profits or losses (Net Income). Net Income can be defined as a company’s earnings to which owners of the company have a claim. The Income Statement provides the necessary line items to conduct analyses regarding expenses, revenue growth, and margins. The major items listed within the Income Statement include: • •

•

•

•

Revenue: money received from normal business activities. Gross Profit: revenue less direct cost of selling the goods or providing the service that resulted in the revenue. Operating Income (“EBIT”): profit earned from the normal course of business after deducting operating expenses (or Earnings before Interest and Taxes). Pre-Tax Income (“EBT”): profit earned after taking into account all income and expenses (from the normal course of business and from ancillary activities), before factoring in income taxes. Net Income: profits or losses that owners of a company have a right to.

In the world of finance you will hear investment bankers and other professionals refer to Earnings before Interest, Taxes, Depreciation & Amortization, or “EBITDA”. This is a very popular metric to use when analyzing a company’s operating performance over time as it not only serves as a rough proxy for a company’s cash flows, but it also eliminates ancillary business activities and is relatively immune to accounting manipulation. Everything “below the line” (Interest, Taxes, D&A) has little to do with the company’s performance, so eliminating those line items from the metric allow for a purer analysis of how efficiently a company is being operated.


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Insider Insight

Above & Below “The Line”

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People often refer to an item on the Income Income Statement being “above or below the the line”. The “line” is usually drawn at EBIT (operating income), which means that expenses incurred “above” EBIT are “above the line”, and expenses that occur “below” EBIT are “below the line”.  “Above the line” expenses are operating expenses and include items such as D&A, SG&A, marketing expense, payroll expense, expense, and COGS. “Below the line” expenses are non-operating non-operating expenses and include items such as interest expense, e xpense, other gains or losses, lawsuits, etc. To get to EBITDA, you simply simply add back any Depreciation & Amortization Amortization expense to EBIT. EBIT. The figure below is a sample Income Statement:

Income Statement For the 12 Months Ended December 31, 2013 Fiscal Year End 1 2/ 2/3 1/ 1/1 3 $120 (35) $85

1 2/ 2/3 1/ 1/1 2 $110 (30) $80

(25) (10) (8) (10) ($ 5 3 )

(22) (8) (8) (14) ($ 5 2 )

Ope rating Pro fit (EB IT)

$32

$28

Othe r Inc ome / (Expense s) Inte re st Expense Pre -Tax Inc o me (EB T)

(1) (8) $23

(2) (8) $18

Ta x Expe nse Ne t Inco me

(9) $14

(7) $11

EB ITDA

$40

$36

Sa le s COGS Gro s s Pro fit Operating Expenses: Ge ne ra l & Administra tive P a yroll Expe nse De pre ciation & Amortiza tion Marke ting Expe nse To tal Ope rating Ex pe ns e s

Statement Of Cash Flows The Statement of Cash Flows (or “Cash Flow Statement”) presents a company’s inflow and outflow of cash over a period of time. More specifically, the statement statement shows how changes in the Balance Balance Sheet and Income Statement affect the company’s cash balance. Finance professionals often note the Statement of Cash Flows as their “favorite statement” due to its high degree of transparency; it cannot be easily manipulated by accounting tricks and therefore paints the Income clearest picture of a business’s overall health. For example, a company might boast high Net Income on the Income Statement but at the same time be hemorrhaging cash from various investments or financing activities. The Statement of Cash Flows accurately portrays portrays the amount of cash going in and out of the business and helps address a ddress questions related to maintaining current growth, capital structure decisions, and solvency.


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The major items listed within the Statement of Cash Flows include: Operating Activities 

Calculates cash inflows inflows and outflows from operations  Begins with Net Income  Add back non-cash expenses (D&A, stock-based comp)  Add or subtract changes in Working Capital

Investing Activities 

Calculates cash inflows and outflows from acquisition or divestiture of long-term assets  Purchase or sale of land, buildings, or factory equipment equipment  Acquisition or sale of small companies or properties Purchase or sale of available for-sale securities

Financing Activities 

Calculates cash inflows and outflows from finance-related activities  Issuance or buyback of new or existing debt  Stock issuances or buybacks  Cash dividends to shareholders

NOTE: Above, we mention Working Working Capital. For a detailed description description of how to calculate calculate Working Capital, see the Balance Sheet section on the following page.

After each section of the Statement of Cash Flows is calculated, they are added together to get the overall Flows is provided below: below: Net Change in Cash for the period. An example Statement of Cash Flows

Statement of Cash Flows For the 12 Months Ended December 31, 2013 FYE FYE 12/31/13

Cash Flows from Operating Activities: Net Income Income Depreciation & Amortization Change in Working Capital Cas h from Ope rating Activitie s

$14 $14 8 (7) $1 5

Cash Flows from Investing Activities: P urchase of Equipment Sale of Building Cas h from Inve s ting Activitie s

(20) 17 ($3)

Cash Flows from Financing Activities: Dividend to Shareholders P aydown of Debt

(7) (9) ($16)

Change in Cas h

($4)

Beginning Cash Balance Ending Cas h B alance

22 $1 8

Although not directly listed on the financial statements, an important metric in corporate finance is Free calculation can differ, but generally this this term refers to cash available Cash Flow. Its exact meaning and calculation to the company before any a ny sort of financing activities are taken into consideration. Below we outline a short-form method of calculating Free Cash Flow:


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FCF = Cash from Operating Activities – Cash from Investing Activities

In the formula above, Cash from Investing Activities can be replaced by capital expenditures, but the two should generally be interchangeable. interchangeable. A more detailed calculation for for Free Cash Flow (particularly, unlevered Free Cash Flow) is located in Section (A.6). Insider Insight 

Free Cash Flow

Free Cash Flow is an important metric for determining the sustainability of a company’s operations: several quarters or years of consistently negative negative FCF implies a need for external financing sources (such as a loan loan or issuing new equity). equity). A company can only survive survive for a finite period of time if it cannot produce positive FCF.

Balance Sheet In simple terms, the Balance Sheet presents a company’s current financial state in the form of assets, liabilities, and ownership. ownership. The Balance Sheet reflects a company’s assets measured measured against the claims of its creditors and shareholders shareholders at a set point in time. A key aspect of the Balance Sheet is that it ALWAYS properly balances based on the below formula: Assets = Liabilities + Owners’ Equity

Examples of each account include: Assets       

Cash & Equivalents Accounts Receivable Inventory Prepaid Expenses Property, Plant & Equipment Goodwill Intangible Assets

Liabilities     

Accounts Payable Salaries Payable Income Taxes Payable Accrued Expenses Long-Term Debt

Owners’ Equity  Retained Earnings Interests  Non-Controlling Interests  Additional Paid-in Capital  Accumulated Other

Comprehensive Income

Below is an example of a Balance Sheet with relevant line items bolded:

Balance Sheet As of December 31, 2013 As s e ts Cash & Equivalents Ac counts Receivable P repaid Expenses Income Tax Receivable Curre nt As s e ts

P roperty, P lant & Equipment (Less: Depr. & Amort.) Ne t PP&E Other Long Term Assets To tal As s e ts


$18 12 8 4 $4 2 $100 (25) $7 5 17 $ 13 4

Liabilitie s & Equity Accounts P ayable Salarie s P aya ble Accrued Expenses Current P ortion of De bt Curre nt Liabilitie s

$14 9 10 7 $ 40

Long Term Debt Other Long Term Liabilities To tal Liabilitie s

55 4 $ 99

Sto ck ho lde r's Equity

$ 35

To tal Liabilitie s & Equity

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$ 1 34

Assets and Liabilities Liabilities can be divided between current current and long-term accounts. Current Assets and Current Liabilities are needed to calculate Working Capital, an important accounting concept that measures the short-term financial health health of a company. A specific form of Working Capital called “Operating Working Capital” is frequently used when creating a financial model. Working Capital = Current Assets – Current Liabilities Operating Working Capital = (Current Assets – Cash) – (Current Liabilities – Current Portion of Long-Term Debt)

Current Assets     

Cash Accounts Receivable Inventory Prepaid Expenses Other Current Assets

Current Liabilities    

Accounts Payable Accrued Expenses Income Taxes Payable Current Portion of Long-Term Debt

Beyond Working Capital, the Balance Sheet provides other useful metrics such as the Book Value of of Equity is often very different different from the Equity and the Book Value of Debt. Though the Book Value of Market Value of Equity, it becomes bec omes a useful metric when valuing insolvent companies. The Balance Sheet provides the link link between the three financial statements. statements. It is vital to understand understand how the statements flow together, so refer to Section (23.1), Question 1 which covers in more detail how the financial statements are interconnected.

(21.2) Financial Ratios Financial ratios are important metrics metrics used to evaluate a company’s company’s performance over time. They are useful in determining company trends and improvements/digressions by analyzing how they change over time. Financial ratios are also useful useful in comparing the operating operating and financial performance of one company to another (to see how they they stack up against one another). another). The major types of ratios include include Solvency/Liquidity Ratios and Profitability/Efficiency Ratios .

Solvency & Liquidity Ratios Solvency and Liquidity Ratios are used to determine a company’s ability to remain financially stable and pay back its short-term (“liquidity”) and long-term ( “solvency”) debt obligations. obligations. Investors pay close attention to these ratios that show a company’s financial risk and and seek companies that display a high probability of being able to pay them back over time. Below we outline some of the most common and important Solvency & Liquidity Ratios:


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Solvency & Liquidity Ratios Name

Ratio

Description

Debt

Lower

Solvency

Equity

Equity available to "pay back" debt obligations

Cash Total Current Liabilities

Cash available to cover shortterm liabilities

Higher

Liquidity

Cash + A/R

Assets that could be quickly liquidated to cover short-term liabilities

Higher

Liquidity

Current assets that could be used to cover current liabilities

Higher

Liquidity

Debt to Equity

Liquidity Ratio

Quick Ratio

Total Current Liabilities

Total Current Assets Current Ratio

Total Current Liabilities

Prefer Higher / Lower Type of Ratio

Profitability & Efficiency Ratios Profitability and Efficiency Ratios are used to examine how well a company manages its assets and liabilities and its ability to earn a high return on those assets. On a single-company basis, these ratios are important because changes in efficiency will often eventually hit t he bottom line and directly affect profitability. When comparing multiple companies, these ratios can be used to help compare the effectiveness of management teams and determine which companies are being run well versus those that have room for improvement. Below we outline some of the most common and important Profitability & Efficiency Ratios:

Profitability & Efficiency Ratios Name Inventory Turnover

A/P Turnover

Ratio

Description

Sales

Higher

Efficiency

Inventory

How quickly inventory is sold to customers

COGS Average A/P

How quickly Accounts Payable is paid

Higher

Efficiency

Accounts Receivable

Lower

Efficiency

Sales x 365

How long on average does it take to collect A/R

Gross Profit Sales

How much profit is earned from sales

Higher

Profitability

Net Income

Profits relative to the amount of company equity

Higher

Profitability

Days Sales Outstanding

Gros s Profit Margin

Return on Equity

Shareholder's Equity


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Prefer Higher / Lower Type of Ratio

(21.3) Introduction To Valuation Valuation is the bread and butter of the buy-side and sell-side world. Understanding how how to properly value a company or investment is an important talent that distinguishes the skill sets of finance professionals. In this section we we highlight the three most commonly commonly used methods of valuation valuation and dive into each: • • •

Public Comparables (or “Comparable Companies” or “Equity Comparables”) Transaction Comparables (or “M&A Comparables”) Discounted Cash Flow Analysis

Before digging into each valuation method, it is important to have a clear understanding of Equity Value and Enterprise Value.

Enterprise Value vs. Equity Value “Enterprise Value” (or “Firm Value”) measures the value of the company as a whole (the value attributable to all parties). It includes the value attributable to equity holders holders PLUS any debt holders, preferred equity holders, and other other parties not captured in the the common equity account. Equity Value, on the other hand, measures only the value available to equity holders in the company. Enterprise Value = Market Value of Equity + Market Value of Debt – Cash & Equivalents + Preferred Stock + Non-Controlling Interests – Investments in Associated Companies

In the above formula, there is sometimes confusion as to what is meant by non-controlling interests and investments in associated associated companies. Below are some simple ways to think think about each concept: •

•

Non-Controlling Interests: reflect the claims on another company’s assets that have been consolidated into the operations of the firm being valued. This amount represents the un-owned un-owned portion of majority-owned majority-owned subsidiary companies (i.e. the firm in question owns more than than 50%, but less than 100% of a subsidiary; subsidiary; the difference is known known as “non-controlling interest”). Investments in Associated Companies: reflect the claims on assets that have been consolidated into other firms. This amount represents the portion portion of other companies that that a firm owns a significant percentage of (i.e. 20-50%), but whose earnings have not been consolidated into the firm in question’s. Therefore, these large investments in in other companies are excluded from the Enterprise Value formula of the firm being valued.

Equity Value can be derived by reaching Enterprise Value and then back-solving for Equity Value, or it can be calculated for public companies using a more traditional method: Equity Value = Diluted Shares Outstanding x Share Price

Note: The following valuation valuation methods are are most often used to derive derive a company’s Enterprise Enterprise Value (the value of the entire company).

(21.4) Public Comparables Analysis Public Comparables Analysis (or “Comparable Companies Analysis” ) is a form of valuation which infers that similar companies will exhibit similar valuation multiples. To perform this type of valuation, an Analyst first finds a peer group of companies similar to the company they wish to value. When determining a peer group, it is common to choose “comparables” based on the following criteria:


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•

•

• •

•

•

industry/sub-industry ustry group? In most cases, the peer Industry: are the companies in the same industry/sub-ind group will start with companies in the same industry and then hone in on more of the criteria below. Size: do the companies have a similar number of employees? Are they similar in their overall market share? Are revenue figures in the same ballpark? ballpark? Geography: are the companies located in the same region? Are they serving the same customers? Product/service mix: do the companies offer similar products and/or services to their potential customers? Do they face similar risks and growth growth opportunities? opportunities? stage of their corporate life cycle? Is a startup company Maturity: are the companies in the same stage being compared to Coca Cola? Financial Metrics: do the companies have similar debt levels, financial ratios, etc.?

After finding a good set of similar companies, one then analyzes the financial metrics and valuation multiples of this peer group to determine what types of multiples should be applied to the target company. Common valuation multiples include: • • • • •

EV/Sales EV/EBITDA EV/ FCF Price/Earnings Per Share Price/Earnings/Growth Price/Earnings/Growth ( “PEG Ratio”)

Taking the average or median of the comparable company valuation multiples can be useful, but a more thorough analysis of the target company’s financial performance and capital structure compared to each company yields more accurate results. For example, are certain EV/EBITDA multiples higher or lower for certain companies in in the comparable set? If so, why? why? Do certain companies have higher EBITDA EBITDA margins or more sales growth, and is that driving higher or lower valuation multiples? multiples? Let us look at the following example:

P ublic ublic Compar Co mparables ables Analysis Analysis ($ in millions, millions, except per share data) Firm Value $2,200 $1,025 $3,450

Company Name Company A Company B Company C

Equity To tal Value De bt $1,600 $700 $375 $700 $2,600 $1,000

Av e rage Firm Value / Company Name Company A Company B Compa ny C Ave rage

Re ve nue EB ITDA 1.1x 7.3x 0.9x 5.2x 1.4x 8.1x 1 .1x

6.9 x

Re ve nue EB ITDA $8 53 $1, 03 1

FCF $180 $105 $270

$1 ,8 67

$ 18 5

$3 08

$ 16 0

4 .5%

17%

2. 7x

Price / FCF 12.2x 9.8x 12.8x

EPS 8.0x 6.8x 11.6x

1 1. 6x

8 .8 x

Implied Firm Value Value Us ing

Private Company D

Re v. EB ITDA $2,000 $300 $1,100 $198 $2,500 $425

Ne t Re ve nue E EB B ITDA De bt / Inc ome Growth M arg in EB ITDA $200 3.2% 15% 2. 3x $55 1.5% 18% 3. 5x $225 8.9% 17% 2. 4x

P/E $8 39

To tal

Ne t Re ve nue EB ITDA

De bt Re ve nue EB ITDA $200 $750 $150

FCF $90

Inc ome $75

Gro wth 3.0%

De bt /

M arg in EB ITDA 20% 1.3x

Let us assume that Companies A-C are comparable companies, and we are trying to extract a valuation for Private Company D (also similar similar to Companies A-C). We can determine an Enterprise Value for Private Company D based on any or all of of the three multiples calculated. calculated. Applying each, we get:


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Enterprise Value/Revenue 1.1x EV/Revenue * $750 = ~$853 million Enterprise Value/EBITDA 6.9x EV/EBITDA * $150 EBITDA = ~$1,031 million Price/Earnings 8.8x P/E * $75 Net Income = $659 equity + $200 debt – $20 cash = ~$839 million

Notice in the P/E ratio we must must add debt and subtract cash to reach Firm Value (Enterprise Value) as the P/E ratio only gives you Private Company D’s Equity Value. Applying simple averages of the valuation multiples from Companies A-C might not be the most accurate method of valuing Private Company Company D, though. One must take into consideration consideration Private Company D’s D’s overall size, revenue growth, EBITDA margin, Debt/EBITDA ratio, and other factors and compare these items to the set of peer companies to determine which valuation multiples are most applicable to Private Company D.

(21.5) Transaction Comparables Analysis Transaction Comparables Analysis (or “M&A Comparables”) uses past transactions of comparable companies to infer a valuation valuation for a target company. It is very similar to Public Comparables Comparables Analysis, however rather than comparing companies themselves, an Analyst compares transactions (such as acquisitions, mergers, IPOs, etc.) and the valuation levels achieved. When looking for a peer group of transactions, Analysts look for those involving companies with similar businesses, as well as other selected criteria (discussed below). At the most basic level, if an investment investment banker was working with a client client that is a potential acquisition acquisition target, he would start start by finding similar similar acquisitions from the past few years with companies in the same industry as their client, of the same size, etc. Below we outline common common company traits used to build build a transaction comp group: group: •

•

•

•

•

•

Industry: are the companies involved in the transaction from the same industry/sub-industry group as the company being valued? Geography: is the transaction executed by companies in the same region as the company being valued? International transactions transactions (and/or cross-border cross-border transactions) may differ in their comparability to domestic transactions. occurred recently? Was the economic environment environment similar to the Date: has the transaction occurred current economic environment? Transaction multiples multiples can vary widely from year-to-year; year-to-year; it is important to compare transactions transactions during similar economic economic cycles. Comparing acquisitions acquisitions from Fall 2006 (economic boom) to those in Spring 2009 (deep recession) will yield very diff erent valuation multiples. Transaction Size: is the size of the transaction similar to the one being contemplated? Comparing a $1 billion acquisition with a $50 million acquisition is not ideal. Each one has different implications, including the importance/change in market share that could come about from a much larger lar ger transaction. Consideration: how was the acquisition paid for? Was it an all-stock deal? Was it 50/50 cash/stock? This is a less important comparison, comparison, but sometimes companies companies will inflate their valuation (and are willing to pay more for a company) in an all-stock deal. acquisition a hostile or friendly takeover? takeover? Hostile Hostile vs. Friendly: was the comparable acquisition takeovers almost always result in higher valuation multiples (given the fact that the target company does not want to be acquired).


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After coming up with a list of relevant transaction comps, financial Analysts then look to see if any trends exist in the valuation multiples of these transactions. The goal is to determine which financial metrics were used to value the transactions. Are companies being valued according to Earnings, Revenue, EBITDA, or something else? Sometimes industries carry specific metrics that are used in valuation (such as EBITDAR or Price per Key) . Next, Analysts break down the transactions by the details details of each company to find averages, averages, medians, highs, and lows among the the data. Metrics typically included included are: •

• • • • •

Enterprise Value or Transaction Value or Equity Value: depending on the transactions being compared, this metric will differ. For example, if IPO transactions are being being compared for a company that plans to go public, then an Analyst would care most about Equity Value (as this is the value attributable to an IPO). However, if comparing acquisitions acquisitions for a company that seeks to get bought out, then one would want to compare Enterprise/Transaction Value (as this is the relevant metric for an acquisition). Revenue: dollar amount, % growth, etc. EBITDA: dollar amount, % growth, % margin, etc. EBIT: dollar amount, % margin Earnings (Net Income): dollar amount, % growth, EPS, % margin, etc. Free Cash Flow: dollar amount, % margin, % growth

Once the key valuation and operating metrics have been discovered, Analysts will compile relevant transaction multiples such as EV/EBITDA, EV/Revenue, Equity Value/Net Income (or P/E), etc. Multiples are then averaged across the peer group and a range will be determined. determined. Finally, valuation is inferred by applying the target company’s financial metrics ( EBITDA, Net Income, Revenue, etc.) to this range of average multiples. Below is an example of a set of comparable transactions transactions that have been spread:

Transac Tr ansaction tion Comparabl Co mparables es Analysis ($ in millions) millions) D ate

Purc has e

A nno unce d

Acquire r

Targ e t

Co ns ide ratio n

8/1/13

Toy Story Co.

Finding Nemo Inc.

7/12/13

Muppets Co.

4/3/13

Ente rpris e

Enterprise Value / LTM

Value

Re v e nue

EB ITDA

Ca sh

$530

1.2x

7.4x

Wall E Inc .

Ca sh

$780

0.9x

6.9x

Ca rs Co.

P lane s Inc.

Cash / Stock

$950

1.4x

7.5x

9/20/12

Lion King Co.

Air Bud Inc.

Ca s h

$1,700

0.7x

6.5x

2/8/12

Dalma tians Co.

Fanta sia Inc.

Ca s h

$650

1.4x

7.6x

10/20/11

Hercules Co.

Jungle Book Inc .

Ca s h

$800

1.5x

7.7x

M e an M e dian

1 .2 x 1 .3 x

7 .3 x 7 .5 x

H ig h Lo w

1 .5 x 0 .7 x

7 .7 x 6 .5 x

In this example, the appropriate mean or median Enterprise Value multiples would be applied to the Revenue and/or EBITDA figures of the company being valued to arrive at an implied Transaction Value.


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(21.6) Discounted Cash Flow Analysis Arguably one of the most common types of valuation, Discounted Cash Flow (or “DCF”) Analysis is a useful method to break down the value of a business’s operations. In simple terms, a DCF is a shortform model that projects out future FCF of a business and then discounts that cash flow back to the present using a set discount rate. A DCF can be broken down into three important components: 1. Discount rate (WACC) 2. Free Cash Flow 3. Terminal Value Before diving into each, it is important to understand the concepts of present value and discount rates.

Present Value & Discount Rates The fundamental premise behind present value calculations is simple: individuals prefer to have money today rather than money tomorrow because they can invest the money today and earn a return going forward. When calculating the present value of an amount to be received in the future, one must always assume a required rate of return that an investor would demand. This assumed rate of return is known as the discount rate, Weighted Average Cost of Capital (“WACC”) , or the hurdle rate (all interchangeable). A discount rate can also be thought of as the amount of interest someone assumes they could earn on an investment. It is important to recognize that the discount rate and present value are inversely related: the higher the discount rate, the lower the present value (and vice versa). To see how this works in practice, let us look at an example. Example

Assume an individual receives a gift of $100 today. If that person has an annual discount rate of 10% (in other words, he believes he can earn an interest rate of 10% per year on his money), then investing that $100 today at an interest rate of 10% would result in $110 in his bank account at the end of one year. Therefore, this individual should be indifferent between receiving $110 one year from now and receiving $100 today. Below is the formula for a present value calculation: PV =

payment

(1 + r) ^ t Where: payment = amount of money to be received (also known as future value) r = discount rate t = length of time until you receive the payment***

In this case, payment = $110, r = 10%, and t = 1, getting us to a present value of $100. ***Typically, this will be in years, though it is important to match the discount rate period with the time period of the payments. For example, if there is an annual discount rate of 10% but payments are monthly, then the discount rate must be converted to a monthly rate. To do this, utilize the following formula: Effective rate for period = (1 + annual rate)

(1 / # of periods)

– 1

Per the formula, an annual discount rate of 10% translates into a monthly discount rate of 0.797%.


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Discount Rate (Weighted Average Cost of Capital)

With a basic introduction to present value, it is now possible to move on to a vital component of the DCF process: the discount rate or Weighted Average Cost of Capital (“WACC”) . WACC is the formula used to calculate a discount rate, and it consists of several parts: cost of equity, cost of debt , and cost of preferred equity (if applicable):

Cost of Debt WACC = [rd * (1 - t)] *

Cost of Equity D

(D + E + P)

+ re *

E (D + E + P)

Cost of Pref. + rp *

P (D + E + P)

Where: r e = cost of equity r d = cost of debt r p = cost of preferred equity t = tax rate D = market value of debt E = market value of equity P = market value of preferred equity Notice above that each respective discount rate is multiplied by its proportion of the total capital structure of a company. We demonstrate this formula in the example below: Example

Company A has a market value of equity of $500 million and $200 million of debt. Assuming a cost of equity of 15%, a cost of debt of 10%, and a tax rate of 40%, calculate Company A’s WACC. WACC = (.1 * .6) * ($200 / $700) + .15 * ($500 / $700) WACC = 12.4% We multiply the cost of debt by (1 – t) because interest expense paid to creditors is tax deductible. If you were to pay equity investors a return (i.e. as a cash dividend), this would not be tax deductible and would not be listed on the Income Statement (whereas interest expense is).

Finding a figure for the cost of debt is relatively straight-forward: the cost of debt should be the weighted average yield on all outstanding debt within the company. If no market prices of debt are publicly available, then taking a weighted average of the company’s interest expense to its book value of debt is usually accurate enough. To find the cost of equity, we use a formula known as the Capital Asset Pricing Model (or CAPM) . CAPM = rf + β * (rm - rf )

Where: r f = risk free rate (equal to U.S. Treasury Bill with maturity equal to length of DCF, usually 10 years) β = levered beta of the company’s equity r m = expected return of the stock market In the CAPM formula (r m – r f) is known as the market risk premium: this is the excess return that the market demands given the risk of equity. Historically, the expected return of the market has www.ibankinginsider.com

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hovered around 7%, which results in a market risk premium in the 3-5% area. Levered Beta is a measure of the individual stock’s volatility compared to the stock market (i.e. the S&P 500). If a company has a Beta of 1.5, then for every 1% increase in the overall market, there should be 1.5% increase in that company’s stock price (and vice versa). The riskier a stock is, the higher its Beta. To find an applicable levered Beta for your stock you must: 1. 2. 3. 4.

Find the levered Betas for comparable companies (located online or via paid subscription) Unlever the Betas of those companies Find the average and/or median of the unlevered Betas Re-lever the Beta using your specific company’s capital structure (using its mix of debt, equity, and preferred equity)

The formulas for unlevering and levering Beta are below: βL

Unlev ered β =

1 + [(1 - t) * (D / E)]

Leve red β = βU * [1 + [(D / E) * (1 - t)]]

Where: β L = levered Beta β U = unlevered Beta E = market value of equity D = market value of debt t = corporate tax rate Once levered Beta is obtained for the company being analyzing, plug in the other parts of the CAPM formula to find the cost of equity. The risk free rate is the rate that investors demand with no real default risk on their investment; the typical proxy used is the interest rate on a U.S. Treasury Note or U.S. Treasury Bond.

Free Cash Flow After finding a proper discount rate to be applied to a DCF, the next step is calculating unlevered free cash flow and projecting it into the future. Unlevered FCF represents a company’s cash flows before the effects of interest payments on debt. For this reason, unlevered FCF represents the purely operational cash flows of the business, independent of its capital structure. This means that the exact same company with $100 million of debt vs. $800 million of debt would have the same unlevered FCF (since interest expense on the different debt levels is not deducted from cash flow figures). Note that this difference in capital structure (debt) WOULD affect the discount rate and equity value calculations, though. Unlevered FCF is calculated as follows: (EBITDA - D&A) * (1 - t) = Tax-effected EBIT Unlevered FCF = then Tax-effected EBIT + D&A - Capital Expenditures - Working Capital Increase

As described above, we use unlevered FCF because it represents the cash flows available to the business as a whole and provides the fundamental value of the business’s cash flows, regardless of capital structure and debt levels. The value obtained in a DFC using unlevered FCF is the company’s Enterprise Value. On the other hand, conducting a DCF using levered FCF will produce the company’s Equity Value; you would discount levered FCF by the cost of equity, excluding the cost of debt or preferred equity.


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To project unlevered FCF into the future, one does not simply add a growth rate to a company’s historical unlevered FCF. Instead, projections involve specific revenue growth, balance sheet, and margin assumptions. Typically, an Analyst will assume certain growth rates for revenues while increasing or decreasing margins (decreasing or increasing expenses as a % of revenue) to arrive at projected EBITDA. Future capital expenditures and working capital can be calculated as a % of revenue or other line items, or can be built out with detailed capital expenditures schedules and full three-statement models. In these full models, line items of the Balance Sheet are calculated year-to-year to arrive at the change in Working Capital. The tax rate should remain constant. When building a DCF, cash flows and other operating figures are typically projected out 5-10 years into the future to ensure that a company’s cash flows are stabilized by the time a terminal value is calculated. As we will discuss shortly, DCF valuation is highly dependent on the terminal value , a figure that represents a company’s cash flows to infinity (in other words, over an infinite period of time). It is very important to project out enough operating years so that this “infinite” terminal figure is stable and not inflated. Note that DCF projections can go out further (15-20 years) if dealing with a very early stage company, though this is not very common (nor are extended projections very accurate).

Terminal Value The final piece in a DCF valuation is the terminal value calculation. Terminal value represents the present value of the company’s unlevered FCF’s beyond the DCF’s projection period (into infinity). At this point, the company’s cash flows are assumed to be stabilized. Insider Insight 

Present Value of the Terminal Value

The terminal value is not the present value TODAY; it represents the present value at the end of the DCF projection (5-10 years away). For this reason, one must discount the terminal value back to the present day (today), as well. This “double present value” calculation is often forgotten when walking through a DCF during interviews.

The terminal value usually represents a majority of the value calculated in a DCF , making it a very important part of the analysis. Small changes in discount rate, growth assumptions, exit multiples, or other factors can cause major swings in overall valuation from the DCF. There are two major methods of calculating the terminal value: the perpetuity growth (or Gordon Growth) and exit multiple methods.

Perpetuity Growth Method

The perpetuity growth method utilizes the present value formula for a series of cash flows that are received forever (i.e. “into perpetuity”). The present value formula for a payment or cash flow received into perpetuity is below: PV =

FCFn * (1 + g) r-g

Where: FCF n = terminal year unlevered FCF g = growth rate r = discount rate


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Notice in the formula above that one must multiply the final year’s free cash flow by (1 + g) to get the following year’s unlevered FCF under the assumed growth rate. How is a proper growth rate determined? A growth rate in the 2-5% range is the most common, as going any higher would infer that the company would drastically outgrow the U.S. economy (given historical GDP growth rates), and would eventually be larger than the economy as a whole. Thus, FCF projections are usually carried out until assumed growth rates reach this r ange in the DCF model. Exit Multiple Method

The exit multiple method assumes the company will be sold at the end of the projection period and uses Enterprise Value multiples to estimate the value at this time. Depending on whether or not the company will “exit” via a sale, M&A Comparables can be used to find the appropriate Enterprise Value multiples. The most common valuation multiple used is EV/EBITDA, with EV/EBIT, EV/FCF, and EV/Revenue also occasionally being used. To find the terminal value, simply multiply the proper valuation multiple by the final year’s EBITDA, Revenue, unlevered FCF, or other statistic. Do not forget, this terminal value must still be discounted back to the present. Insider Insight

Exit Multiple Method



The exit multiple method is more commonly used than the perpetuity growth method due to its more accurate and measurable nature.  The exit multiple method uses actual public and transaction comps to find exit multiples while the perpetuity growth method relies on a growth assumption over an infinite time period (the proper growth rate to assume is always open to debate).

Step-By-Step Below we recap the steps of completing a Discounted Cash Flow Analysis: 1. 2. 3. 4. 5. 6.

Obtain the discount rate using WACC (and finding the cost of equity using CAPM). Project unlevered FCF 5-10 years into the future. Calculate the terminal value using the Exit Multiples Method or Gordon Growth Method. Discount future unlevered FCF’s and the terminal value back to the present. Sum all of the present values to reach your company’s Enterprise Value. If looking for Equity Value, simply back-solve by subtracting the company’s current debt balance and add its cash balance (from the Enterprise Value formula); adjust for non-controlling interest, preferred equity, or investments in associate companies, if applicable.

To see all of these components in action, study the following example of a short-form DCF analysis:


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Discounted Cash Flow Analysis WACC

12% Terminal Ye ar 5 Value $122 $128 (55) $67

Year 1 $100 (48) $52

Ye ar 2 $105 (50) $55

Ye ar 3 $110 (52) $58

Ye ar 4 $116 (54) $62

Less: Depreciation & Amortization EBIT

(12) $40

(12) $43

(12) $46

(12) $50

(12) $55

Less: (1 - T) Tax-Effe cte d EBIT

(16) $24

(17) $26

(19) $28

(20) $30

(22) $33

Plus: Depr. & Amort. Less: Capital Expenditures Less: Increase in Working Capital Unleve re d Free Cash Flow

12 (15) (3) $18

12 (14) (2) $22

12 (13) (4) $23

12 (12) (2) $28

12 (11) (3) $31

Revenue Less: Operating Expenses EBITDA

Terminal Value (Avg. of Exit Mult. Method & Gordon Growth) Pre se nt Value of FCF

$16

$17

$467 $16

$18

$17

Ente rprise Value

$265 $350

Terminal Value: Exit Multiples Method Year 5 EBITDA $67 Comparable EV/EBITDA 8.0x Te rminal Value $534

Formula =

EBITDA * EV / EBITDA

Terminal Value: Gordon Growth Method Year 5 FCF $31 Assumed Perpetual Growth Rate 4.0% Te rminal Value $401

Formula =

EBITDA * (1 + g) (g - r)

(21.7) Capital Structure A company’s capital structure, the way in which it is financed (or “capitalized”), is an important financial concept and is relevant for any individual engaged in financial analysis. A company’s capital structure will typically include some combination of debt and equity, as well as some other form of financing such as preferred equity. A breakdown of the different components of a company’s capital structure is located below:


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Senior Secured Debt (Bank Debt and often High Yield Debt)

Most Secured

Senior Unsecured Debt (High Yield Debt and sometimes Bank Debt) Debt Senior Subordinated Debt (High Yield Debt and sometimes Mezzanine Debt) Subordinated Debt (Mezzanine Debt and PIK Debt)

Preferred Equity Equity Least Secured

Common Equity

Debt Debt is money borrowed by a company that it is required to pay back at a future date. The amount of debt a company takes on varies widely, with some companies having no debt in their capital structure (including many early-stage companies, technology companies, or other companies that have very f ew tangible assets to serve as collateral). There are various types of debt, with the major categories listed below: Type of Debt

Interest

Ranking

Bank Loans (Term Loans)

Floating Rate

Senior Secured or Senior Unsecured

Fixed Rate

Senior Secured, Senior Unsecured, Senior Sub, or Subordinated

Amortization Covenants

Maintenance

Company assets

None

Incurrence

Sometimes company assets

Varies

Senior Unsecured, Senior Sub, or Subordinated

None

Varies (usually incurrence)

Usually none

Convertible Debt

Fixed Rate

Senior Secured, Senior Unsecured, Senior Sub, or Subordinated

None

None

None

PIK Debt

Fixed Rate

Deeply Subordinated

None

Incurrence

None

Bonds (High Yield Debt)

Mezzanine Debt


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Interim payments

Collateral

Similar to valuation multiples, there are different debt-related ratios used to measure the overall “health” of a company’s capital structure: it is important to recognize signs that a company is taking on too much debt or may face financial troubles in the future. Below are some examples of common debt ratios used to analyze a company’s capital structure: Leverage Ratios    

Coverage Ratios 

Total Debt/EBITDA Net Debt/EBITDA Senior Debt/EBITDA Total Debt/Shareholder’s Equity



EBITDA or EBIT / Interest Expense (Interest Coverage Ratio) Fixed Charge Coverage Ratio

Generally, lower leverage ratios are better (especially from a creditor’s perspective). The lower a leverage ratio is, the less debt the company has relative to its ability to earn money (in this case, EBITDA). When a company’s leverage ratio gets too high, investors become concerned with the company’s ability to pay back existing debt as well as its ability to incur additional debt in the future. Generally, higher coverage ratios are better. Coverage ratios reflect a company’s ability to pay back interest and other fixed charges relative to its financing (such as leases or mandatory debt amortization) vs. its cash flow, EBITDA, or EBIT. Example

A company has an interest coverage ratio of 1.0x. This is a bad sign as it implies that they can barely pay back interest expense; it has no flexibility for other uses of cash (such as expansion of the business through capital expenditures). A company in this position would be in very poor overall financial health, likely on the brink of bankruptcy.

Equity Subordinated to debt, equity represents ownership interest in a company and makes up the other portion of the capital structure. Equity holders are the owners of the business; they control business decisions and have a right to the business’s profits. Unlike debt holders, equity holders usually have no secured interest in their investment; equity is not guaranteed by any of the business’s assets, has no obligation to be paid back at a future date, and is the most subordinated level of capital in the overall capital structure. This makes equity more risky than debt, but it can also yield higher returns over time. Most people think of equity in its classic form, common stock, but there are other forms of equity as well. Below we break down the different types of equity: •

•

Common Equity: Common equity is the fundamental equity within a company. Owners of common equity shares are the owners of the business and retain a right to the company’s future profits. When a company goes public via an IPO, this is the form of equity they are offering to the public. Oftentimes there can be multiple classes of common stock, but at least one class carries the voting rights of the business (and therefore controls decisions that steer the company’s future). Preferred Equity: Preferred equity usually acts like a hybrid debt and equity instrument. Senior to common equity, preferred stock usually carries no voting rights in the business and sometimes carries a dividend payment to be received quarterly or semiannually (usually senior to any common equity dividends to be paid). Unlike debt, preferred equity has no maturity date and it often has the ability to convert into common equity at a set strike price.


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•

Contingent Equity Interests: Contingent equity interests consist of rights to future equity stakes within a company. Common examples include convertible debt, restricted stock grants, equity warrants, and stock options. Holders of these contingent interests do not have any current control or claim over the business, but they could in the future. It is important to understand what sort of contingent equity interests exist within a company as it can greatly affect share dilution.

(21.8) Options An option is a financial contract that gives the buyer the right (not the obligation) to buy or sell a specified financial instrument or asset at a specified price ( “strike price”) before a specific date. The seller of the option (usually a financial institution) is paid a fee for the contract and must fulfill the transaction if it is exercised by the buyer: thus, they have the obligation (not the right) to fulfill the transaction if exercised by the buyer. Options play many roles in financial markets, but this section will focus on their application to financial analysis. Our goal is to focus on aspects most relevant to finance interviews and on-the-job as an investment banker. Therefore, we will not discuss option pricing, Black-Scholes, or other technical valuation information. Instead, the focus of this section will be on how options affect share dilution and why this is relevant when analyzing a company’s financial performance. Going forward, any mention of “options” will be referring to the type issued by corporations (to their employees). These are different than the options mentioned above in that they are not standard option contracts that are bought and sold in a secondary market over price speculation. Company-issued options are granted as incentive compensation to executives and other employees at no expense to the employees themselves. This method of compensation aims at aligning corporate goals with individual incentives, and serves as a form of non-cash compensation (desirable for a company that wants to retain more cash). Beyond options, “restricted stock awards” are another form of non-cash, stock based compensation in which company shares are granted directly to employees with no strike price, but cannot be transferred until a set period of time has passed. Both employee stock options and restricted stock become exercisable after a set period time (known as “vesting”).

When analyzing a company’s earnings, one must take into account any potential share dilution from the exercise of these employee options and restricted stock awards. The main method of calculating share dilution is via the Treasury Stock Method. The Treasury Stock Method is a way of incorporating unexercised “in-the-money” options (when the exercise price of the option is lower than the current price of the stock) into a company’s fully diluted share count. This method assumes that the proceeds a company receives from the exercising of options are used to repurchase common shares. Refer to the following example for an illustration of this concept:


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Example

Company stock price = $20 Common shares outstanding = 1,000 Employee options outstanding = 100 Average strike price per option = $10 Notice that in this scenario, the options are in-the-money (stock price of $20 > option exercise price of $10). Before incorporating the buyback of any shares, the company’s fully diluted share count is 1,100 (1,000 common shares + 100 options in the money). Assuming that all 100 options are exercised, the company receives $1,000 in proceeds ($10 strike price x 100 options). Using the option proceeds, the company is able to buy back 50 shares ($1,000 / $20 per share). Thus, the net increase in shares is 50 (100 new shares from options, less 50 shares bought back), resulting in a fully diluted share count of 1,050. Note: if the company’s stock price is below the strike price of the options, then they would not be exercised (and common shares outstanding = fully diluted share count).

Restricted stock awards are typically just added to the amount of diluted shares outstanding since they have no strike price and they are expected to vest.

(21.9) Mergers & Acquisitions Analyzing past and future M&A activity is commonplace in investment banking. This section provides an overview of the different types of acquisitions, and then dives into the different ways to analyze the success or failure of each. There are two major types of buyers in an acquisition: strategic buyers and financial buyers. Strategic Buyers

Financial Buyers

Acquire a company operating in the same (or similar) industry to integrate or expand business or eliminate competition.

Group(s) of investors that purchase companies with the purpose of earning a return on their investment. Unlike strategic buyers, financial buyers are not operating companies. These buyers are behind most LBO (Leveraged Buyout) transactions.

Examples  Facebook acquisition of Instagram  Google acquisition of Waze

Examples Berkshire Hathaway acquisition of Heinz  Dell management buyout with Michael  Dell and Silver Lake

As a generalization, strategic buyers will usually value a company higher than financial buyers due to the potential realization of synergies (these will be discussed shortly). At the same time, financial buyers are constantly focusing on maximizing return on investment and therefore try to bid as low as possible to gain ownership of a company. The less a buyer pays for a company, the lower the investment, and (potentially) the higher the returns will be in the future.


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Why would a company want to merge with another company? The reasons are abundant, but in general it can be broken down into two major categories: horizontal integration and vertical integration. •

•

Horizontal integration: Acquisition of competitors and companies engaged in similar lines of business to eliminate competition and increase economies of scale. For example, a restaurant company acquiring a different group of restaurants. Vertical integration: Acquisition of companies in different stages of the supply chain in an effort to control all aspects of production. This type of acquisition aids in reducing costs of production, eliminates uncertainty in production, synchronizes the overall supply chain, and allows for internal streamlining of the entire process. For example, a baking company acquiring farmland to grow wheat or acquiring a distribution company to deliver its products.

In each of these types of acquisitions, an acquirer expects to realize certain benefits from the transaction, known as “synergies”. There are two types of synergies: revenue synergies and cost synergies. •

•

Revenue Synergies: Synergies that increase the “top line” items of an Income Statement (i.e. Revenues) via increased sales, prices, etc. Examples include cross-selling products, increased product reach, and co-branding. Cost Synergies: Synergies that reduce expenses and increase profit margins via cost cutting, economies of scale, etc. Examples include consolidation or elimination of facilities, reduced head count, consolidation of supply chain and distribution channels, and increased purchasing power.

It is important to note that although synergies are almost always baked into M&A valuations, they are by no means guaranteed. The realization of synergies can take several years, or they may never be realized, which is a major risk in any M&A transaction. Insider Insight 

Synergies

Typically, cost synergies are given more merit by Analysts than revenue synergies. This is due to the fact that cost cutting is more “provable” than a merged company’s ability to drive increased sales.

Consideration “Consideration” refers to the form of payment made in an acquisition or merger. The different types of consideration include: • •

•

•

Cash: though less common, corporations sometimes use balance sheet cash for an acquisition. Debt: raising new debt (either bonds or loans) to finance the transaction and pay the target company owners with cash. Equity: issuing new common stock of the acquiring company’s shares to distribute to owners of the target company. Oftentimes this is expressed as a ratio of the acquiring company’s shares to target company’s shares (i.e. 1.75 acquirer shares for every 1 target company share). Assumption of liabilities: more common in distressed acquisitions, sometimes a company will agree to acquire another by assuming their debt obligations (and assuming the liability of paying back creditors). Insider Insight 

“All-Cash Deals”

A common phrase in M&A terminology is an “all-cash deal”, but this statement almost always refers to acquisitions financed completely with debt (most companies do not have enough cash on their balance sheet to acquire another company and therefore must borrow). In this section, we refer to using debt as consideration for a transaction as paying “cash”.


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Most acquisitions will involve some combination of different forms of consideration: 50% cash/50% equity, 30% cash/70% equity, 100% cash, 100% equity, etc. There are pros and cons of each type of consideration: Pros & Cons Equity/Stock

Debt

 

 

Avoid taking on more debt (less interest) Can serve as strong currency in good market environments (stock is valued higher at time)  Delay tax payments until stock is sold in the secondary market  Dilutes existing equity holders

No dilution of existing share holders Often associated with lower cost of capital (thus higher return on investment over time)  Incur additional interest expense  May increase difficulty of raising more debt in the future for other purposes

Determining the right combination of cash and stock varies by transaction, industry, company, and market environment.

Accretion & Dilution Mergers can be generally classified as either accretive or dilutive: Accretion: refers to an increase in the acquiring company’s earnings per share (EPS) after the merger is complete (compared to EPS if they were to continue operating as an independent company). Dilution: refers to a decrease in the acquiring company’s EPS after the merger.

•

•

Determining the accretion or dilution caused by an M&A transaction is dependent on the projected financial performance of the combined company, realization of any synergies, and the type of consideration paid. In terms of consideration paid, raising debt will lower EPS due to increased interest expense from new debt issued to finance the transaction (thus lowering “earnings”); issuing stock will lower EPS due to share dilution (thus increasing shares and lowering per-share earnings). As well, the higher the purchase price, the less likely a deal will be accretive as the acquiring company will need to raise more debt or issue more stock (thus causing higher interest expense or more per-share dilution). Writing-up assets after the acquisition increases future depreciation and amortization expense, also lowering future earnings per share. It is difficult to determine the true accretive or dilutive effects of a transaction without completing a full merger model. However, a quick “back-of-the-envelope” rule to determine if an all-stock acquisition will be accretive or dilutive can be determined by looking at each company’s Price-to-Earnings ratio. Insider Insight 

Accretion & Dilution

In an all-stock acquisition, if the acquiring company’s P/E ratio is higher than the target company’s P/E ratio, the deal will be accretive. If the acquiring company’s P/E ratio is lower than the target company’s P/E ratio, the deal will be dilutive.

An explanation of the reasoning follows: with a higher P/E ratio, the acquiring company’s stock is “more expensive” or “more valuable” per share than the target company’s stock. In other words, the target company’s earnings are cheaper to buy than the acquirer’s own earnings, so the acquiring company’s EPS will increase because it does not need to issue as much stock to obtain the target company’s earnings.


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(21.10) Leveraged Buyouts A leveraged buyout (or “LBO”) is an acquisition of a target company by a group of investors, usually led by a financial sponsor (i.e. a private equity fund). LBO’s are characterized by the heavy use of leverage, meaning the acquisition is primarily financed with debt and a minimal amount of equity. Investors will usually guarantee the debt with the target c ompany’s own assets and use the target company’s free cash flows to pay off the debt placed on the company. Financial sponsors use LBO analysis to find a maximum purchase price they are willing to pay based on achievable debt levels and return requirements. Although the amount of equity invested varies, it is common to see equity comprise ~20%-40% of the transaction purchase price (with the remaining balance financed with debt). Many factors determine the amount of equity a buyer is willing to contribute to the purchase price, including: • • • •

Target company’s capacity to borrow money Equity requirements imposed by the bank (lender) Transaction size Return requirement of the financial sponsor

As can be expected, the less equity that investors put in, the higher the potential returns of the transaction; a lower initial equity investment means that future equity earned will be a higher mu ltiple of the initial investment. Though the use of financial leverage boosts returns to equity holders, it comes at the cost of increased risk. Companies that are purchased via an LBO transaction go from being in a (usually) stable financial situation to being in a highly leveraged one; the risk of bankruptcy significantly increases post-transaction.

Key Participants Below we outline the key parties involved in an LBO transaction: •

•

• •

Financial Sponsors: act as the buyer/investor in an LBO and can include private equity funds, hedge funds, venture capital funds, merchant banks, etc. Investment Banks: act as an M&A advisor to target companies (sell-side advisor) and financial sponsors (buy-side advisor); also provide debt financing to execute the transaction. Commercial Banks: provide debt financing in the form of bank debt. Target Company Management: work with investment bankers to market the company to buyers and lenders, and interact with the financial sponsor to address questions and discuss the future of the business.

What Makes For An Attractive LBO Candidate? Not all companies are good LBO candidates. Investors look for companies that exhibit a combination of the below characteristics: •

•

•

• • • •

Healthy and predictable cash flows to meet future debt obligations and interest payments that come from high use of leverage in an LBO Many hard assets that can be used as collateral when taking on more secured debt (which offers the cheapest interest rates) Limited ongoing research & development and maintenance capital expenditures as to not use up too much of the company’s cash flows Minimal working capital requirements Strong management team to run the company after the LBO Solid market niche with dependable and steady sale cycle Future growth prospects to enhance returns


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Untapped resources or potential to develop the business in different ways Current undervaluation compared to the rest of the market (helps minimize entry investment) Clear and practical exit strategy

• • •

LBO Valuation When looking at potential LBO targets, financial sponsors analyze each potential investment’s ability achieve a required rate of return, known as the “hurdle rate”. To do this, investors analyze expected internal rates of return (or “IRR”): the discount rate that makes the net present value of all future cash flows equal to zero. Investors have traditionally demanded LBO returns around 20%-30% and are able to demand these high returns because LBOs are inherently risky investments: investors lever the company up with debt, hold the investment for multiple years (at a minimum), and have no guaranteed exit strategy. An LBO analysis consists of projecting out a company’s operating performance (using detailed drivers and different operating scenarios), modeling in different assumptions about the ability to raise debt (dollar amount, interest rate, maturities, etc.), and calculating returns based on given exit scenarios. Insider Insight 

LBO Valuation

Instead of purely valuing a company with an LBO analysis, investors instead look for the maximum price they could pay for the company in order to attain their required hurdle rate of return. This type of analysis is typically coupled with other forms of valuation to determine how high of a bid the financial sponsor is willing to make to acquire the target company.

Value in an LBO is dependent on a few key drivers: • • •

•

Purchase multiple: the lower the purchase price, the higher the potential rate of return. Leverage: more debt and less equity allows for amplified returns. Free Cash Flow: more free cash flow allows a company to take on more leverage and pay down debt quickly. Exit Multiple: the higher the sale price/exit valuation, the higher the potential rate of re turn.

Returns in an LBO are achieved by three potential means: •

•

•

De-leveraging: as debt is paid down using the target company’s free cash flow, the investor’s equity stake increases. Operational Improvements: growing revenue, increasing EBITDA and free cash flow, and expanding margins will increase total valuation (exit multiples will be multiplied by larger EBITDA numbers). Multiple Expansion: growth in the company or industry beyond expectations can lead to higher exit multiples upon sale than entry multiples when purchased.

To better understand the importance of leverage’s effect on returns, look at the following high-level example:


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Example

A private equity firm wants to buy a company with an Enterprise Value of $50 million. They are able to get a bank to loan them $30 million to finance the transaction, requiring the fund to put in $20 million of their own money; note that this debt is the obligation of the company being purchased, not of the private equity firm. Over the next 7 years the company creates steady cash flows and the private equity fund (now owners of the company) uses these cash flows to pay down the $30 million in debt. Assume that after 7 years of operating the company, all of the debt has been paid down and the Enterprise Value expands slightly to $60 million. When the sponsor sells the company at the end of year 7, it will receive $60 million, a 300% gain on the original $20 million they put in. Now, imagine that the private equity firm had put in the entire original $50 million on its own (and had taken on no debt). At the end of year 7, the sponsor would receive $60 million for their initial $50 million equity investment, a much smaller equity return of 20%.

LBO Analysis – The Process In this section we aim to shed some light on the actual process of conducting an LBO analysis (beyond just the theory), and what Analysts can expect to do on-the-job when modeling out an LBO. Though this is not a thorough step-by-step guide, the following points provide a high-level overview of how to create an LBO model: 1. Evaluate the target and LBO feasibility: analyze if the target company is a good LBO candidate by looking at factors such as debt levels, margins, growth prospects, projections, etc. Weigh the specific risks associated with an LBO of this target company in the current economic environment. 2. Create operating assumptions: these will be used to project the financials of the potentially acquired company into the future (often create multiple operating scenarios and compare the effects on future returns). This includes items like revenue growth and margin assumptions. 3. Adjust EBITDA: a highly influential metric in the LBO model, EBITDA must be adjusted carefully for non-recurring line items and common add-backs (such as non-cash compensation, impairments, etc.). 4. Determine appropriate capital structure: types of debt raised to finance the transaction (senior debt vs. subordinated debt), dollar amounts and leverage levels, interest rates, maturities, etc. Models will often incorporate and compare various debt scenarios. In the model itself, capital structure will play an important role in the “sources and uses” as well as the “debt tables”. 5. Figure out investment horizon and exit multiple: generally, the exit multiple and entry multiple should be the same; with a timeframe (how long the sponsor plans to hold the investment) and exit multiple in mind, it becomes possible to calculate an internal rate of return. 6. Calculate equity returns and “sensitize”: IRRs are calculated and sensitized to see difference in returns based on hypothetical changes in factors such as exit multiple, operational assumptions, exit year, key drivers, etc. 7. Back-solve to determine valuation (or maximum price): review the model and sensitivity tables, and tweak assumptions to arrive at a potential maximum price the financial sponsor would be willing to pay based on a desired hurdle rate. 8. Revisit LBO feasibility and valuation : take a look at the model and outputs to determine if debt levels make sense, coverage ratios stand, downside case is bearable, etc. Compare LBO value to other common valuation methodologies.


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Exit Strategies Buyers will usually hold hold an investment in a company company for 3-7 years before monetizing it. The main methods of realizing a return on investment in an LBO include: •

•

•

Dividend Recapitalization: the company refinances its debt (and often issues more debt than necessary to finance the dividend), and the financial sponsor pays themselves a significant onetime dividend. Initial Public Offering (IPO): the company lists its shares on a public exchange, allowing the financial sponsor to either (i) sell part or all of its equity ownership to public investors during the IPO, or (ii) sell its equity ownership to public investors at a later point in time. Sale (to strategic or financial buyer): the company owned by the financial sponsor is sold to a separate company, resulting in the financial sponsor’s equity ownership being purchased in full. This is one of the most common exit strategies for an LBO investor.


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Chapter 22: Qualitative Interview Questions & Answers (22.1) “Why…?” 1. Why do you want to do investment banking, private equity, etc. ?

Expect to hear this question first in almost every interview (after walking through through your resume). It tests your understanding of the job as well as intentions for entering the the industry. Do you fully comprehend what you will will be doing every day and are you you excited for these experiences? Are you here to learn or are you simply doing doing the job for the money and exit opportunities? opportunities? Candidates that truly understand the day-to-day work of an investment banker ( or private equity associate, or hedge fund analyst, etc.) and convey passion for the industry will shine. Show the interviewer that that your decision to work in the the field is well thought out. Good answers include: include: • • •

• • •

Passion for learning about new companies/industries and analyzing their operations Interest in the concept of valuation and the different methods to reach a value Strong analytical background and interest in math leads to a desire to work a job where one can utilize these skills Desire to gain hands-on experience in the capital markets and execute transactions Large level of responsibility, meaningful work done at the junior level Steep learning curve/fast paced environment (NOTE: this is one of the most overused answers to this question)

2. What is it about [firm name] that makes you want to work here?

This question is designed to see if you have done your homework and are familiar with the firm with which you are interviewing. Did you just apply to every investment bank hoping that that you will get a hit from one, or did you apply to this firm for a reason? Bankers understand that most of the major investment banks are very similar (especially in the eyes of an outsider), but this question gives you an opportunity to stand out if you can convey knowledge of the firm’s strengths or your passion for their environment and/or office. The most common answer to this t his question focuses on generalizations such as a company or office’s prestige, deals they have completed, completed, office culture, etc. Although these answers answers are acceptable, stand out by being as anecdotal with your answer as possible: •

•

•

Instead of just saying you like the culture or people at the firm, bring up specific conversations or meetings you had with individuals in the office. Instead of saying that you appreciate the firm’s completion of headline deals, show that you are familiar with their accomplishments ac complishments by discussing a recently completed deal. Demonstrate that you have done your homework by communicating your desire to work with a specific group in their office and be armed with reasons why.

3. Why are you interested in our group vs. a different product or industry group (or our division vs. another division in the bank)?

Answer with a combination of the following: • • •

Firm or group reputation Deal flow Enjoyed the individuals you have met at different recruiting re cruiting events or via networking


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•

•

The types of skills you will learn while working in banking and/or for that specific group (i.e. certain types of modeling, etc.) Desire to learn about the industry industry they work in (if interviewing interviewing for a coverage group). For example, say that you are passionate about clean technology if interviewing with the Technology group

4. Why are you interested in this office location, in particular?

If a regional office: • • •

•

If you have roots in that city or region (i.e. family or network lives there), emphasize this fact. You are interested in industries and/or products covered in that region. Emphasize that you want to live in this particular region long-term (i.e. you want to work in Los Angeles because of the weather and lifestyle). You prefer an intimate, small office feel and work best in this type of setting.

If the New York office: • • • •

If you have roots in that city or region, emphasize this fact. You want to work in the bank’s largest office. “There is no other city like New York, when it comes to finance.” You want to take advantage of the networking opportunities.

5. If you could work in any group at any bank, which would it be and why?

Your answer here will be highly highly dependent on where you are interviewing. interviewing. In the end, you want your answer to be “your group and bank”, but you need to be strategic in getting to this conclusion. Your dialogue should describe characteristics that steer the answer towards the bank you are interviewing with specifically. If you truly are interviewing for for your dream job, make make this clear. If not, still show show that you have done your homework and that this firm meets all of your criteria: • • • • •

You know about the bank’s group offerings and history. You have spoken with employees and get along with them. You fit in with the group and bank culture. You are excited for a specific type of transaction they are known to work on. The office location (city) is where you plan on settling down.

If you are interviewing with a large bank, bring up the benefits of their size (large training tr aining programs, larger network, bigger deals, exposure to a larger pool of transaction types, proven track records, rec ords, best and brightest co-workers, co-workers, etc.). Conversely, if interviewing interviewing at a smaller firm emphasize what led you you there (more intimate setting, more senior exposure, higher level of responsibility, more hands on experience, specialization in deal types, etc.). 6. Where else are you interviewing? interviewing? Are you looking at other industries?

In summary, say that you are interviewing at different firms and are only interested in investment banking; do not be shy. shy. Interviewing at different firms makes makes you more desirable, but do not lie. lie. If you only have a few other first round interviews, keep it vague. Do not make the interviewer interviewer question your commitment commitment to the industry. Banking should not be be an option or backup; it should be your plan.


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7. Suppose you did not get an investment banking internship/job. internship/job. What would you do instead?

Caveat your answer with the the fact that you hope to avoid this this situation. Interviewers are looking looking for a few different things when asking this question: they want to see that you have a well-thought-out plan and that your passion lies (ultimately) in finance/investment banking. If you respond to this question with something random or unrelated to finance, they might question your motivations for pursuing pursuing the job. However, if you answer thoughtfully thoughtfully and (even better) describe a backup plan where you still end up in investment banking, then your passion for the job will be noticed. A good answer would involve involve pursuing an internship/job in a directly-related directly-related industry with the hopes of landing a full-time Analyst position at a later date. 8. Do you plan on jumping to the buy-side after 2 years at our firm?

Though you may be pursuing an investment banking job solely for the exit opportunities, you do not want to communicate this plan. plan. A good way to frame your your answer is to say that you are not sure sure because for now you are only worrying worrying about the job at hand. You are currently very interested interested in investment banking and are very excited to gain firsthand experience experience in the industry. industry. Exit opportunities in similar areas of finance are not out of the question, but it is too early for someone in your situation to know whether or not investment banking is more of a career choice or if you would want to use it as a s a stepping stone to do something else. Note: interviewers know know that many candidates candidates pursue investment investment banking for exit opportunities, and this is only fueled by the fact that most Analyst positions are only guaranteed with a 2 year commitment. Recently, however, more and more firms are looking for career oriented oriented employees. 9. Where do you see yourself in five years?

The likelihood that you actually know know where you want to be in five years is low. The point of this question is to gauge gauge your commitment and interest in finance. It can also be used to catch you you off guard: an interviewer does not want to hear that you plan on doing something unrelated to finance. The simple answer is that you are not 100% positive, but you have done enough diligence to know that you want to do something in finance long-term. Throw in examples such as staying in banking, eventually moving to private equity, potentially going to business school, etc. 10. What is your #1 priority for this summer if you landed an internship with us?

Use this question to prove that you know what to expect on the job and have thought out what you plan to gain from the experience. This question opens the door for unique answers answers that may let your specific personality shine. Some good general answers include: include: • • • •

•

•

Succeeding and getting a full-time offer (always ( always a good answer) Sharpening your technical skills (i.e. modeling, valuation, financial statement analysis) Gaining a better (and firsthand) understanding of how the deal process works Learning more about a specific industry and/or type of deal (depending on what group or office with which you are interviewing) Becoming more effective at time management and learning how to prioritize important tasks while maintaining a high level of responsibility Solidifying your belief that you want to make this job a career (be careful with this one)


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11. What skills do you plan to take away from your internship?

This question is similar to the one above, a bove, but focuses on the specific skill sets that junior bankers can expect to cultivate. Show that you understand understand the day-to-day day-to-day experience of being an investment banker and what you will learn and develop. Good answers include: include: • • • • • • •

Technical skills (modeling, valuation, financial statement a nalysis) Qualitative skills (creating presentations, memos, and marketing materials) Time management and prioritization Effective organization Ability to work under pressure and meet tight deadlines Leadership, responsibility, and multi-tasking How to interact with senior employees

(22.2) Understanding The Job 1. On a scale of 1 to 10, how would you rate your knowledge of investment banking?

Be careful when answering this question: answer too low and your interviewer will be unimpressed by your lack of understanding understanding of the job, answer too high high and you might get difficult difficult follow-up questions. Preface your answer by assuming that a 10 is someone who knows EVERYTHING EVERYTHING possible about investment investment banking. In that case, you you are usually safe answering in the 4-6 range (when interviewing for internships; 6-8 is a better answer for full-time Analyst interviews). Give reasoning why you you came to your answer. Convey that you understand understand broader concepts related to investment banking and investment banking transactions, but mention that some of the details are still unknown to you. you. Show that you are excited to learn learn and point to it as one of the main reasons reasons you want the job. 2. Why do clients hire investment banks (in other words, “What is banking?”)?

This is another question that is designed to test your knowledge about investment banking as a whole. Broadly speaking, clients hire investment banks when they need to r aise capital or require advisory expertise. An investment bank acts as a middle man, connecting those looking looking for money and those with money to invest. A client hires an investment investment bank for a variety of reasons: reasons: • • • •

•

Looking to purchase another company or wants to be sold (M&A) Wants to spin-off a division of the company (divestiture) There is an impending bankruptcy (restructuring) Wants to raise money for various reasons or go public: IPO, private equity placement, bond transaction, loan transaction, etc. (debt or equity underwriting) Needs a fairness opinion

For a robust explanation of the services offered by investment banks, refer to Chapter 1. 3. What factors make an investment bank successful?

This question tests your understanding of how investment banking works and requires a relatively indepth understanding of the investment bank itself. itself. Since different departments of the bank bank make money in different ways, it is appropriate to differentiate and ask if you should concentrate on IBD specifically. Factors include:


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•

• •

• •

•

•

Completing a high volume of transactions/closing deals: largely dependent on how well the market is doing as a whole. Lower cost of capital: allows banks to win deals with lower fees. Strong senior banker and client relationships: increases the likelihood that a client chooses your bank to help execute a transaction. Bank reputation: overall as a firm, with certain types of transactions, in certain industries. Strong internal risk management team: protects the bank’s capital from being lost in higher-risk deals that earn more fees. Experienced and innovative team members: more experienced bankers have a better understanding of how to address a client’s needs. Breadth of offerings and capabilities: a full suite of products and services allows a bank to win clients that need help with a variety of strategic decisions.

4. What do you think is the biggest misconception about investment banking?

This question tests your understanding understanding of the investment banking industry and culture. culture. Again, interviewers may use this question to see which candidates have done their homework and really know what they are getting themselves into. Some common misconceptions include: • •

•

• • •

•

Investment bankers live lavish, flashy lifestyles. Investment banks act purely as middlemen and do not provide much “real” value (when, in fact, they provide countless analyses to aid in important company strategic and capital-related decisions). The significant influence of the macro economy’s performance on individual investment banks (it is arguably the biggest biggest factor determining how well an investment bank does). does). Investment banking is all about M&A and working on LBO’s. Bankers work 100 hours every week (this happens in waves, but is not always the case). Investment bankers themselves buy and sell companies, or that investment bankers are investors (it is called the “sell-side” for a reason). Good junior bankers make good senior bankers (the two demand entirely different skill sets).

5. In your opinion, what has prepared you more for this position, past internships or university classes?

Ideally, your answer should be past internships (though not all interview candidates are lucky enough to have applicable job experience). experience). Interviewers value on-the-job on-the-job experience more highly than financial classes, especially because most candidates will have completed very similar course loads. Make your answer even more ideal by describing that your classroom education has c omplemented what you learned on-the-job and has proven helpful throughout throughout your past internships. For candidates with less applicable internship experience, argue that classes have provided a strong financial and analytical background and that that case studies have prepared you you above and beyond theory. theory. If you were involved with highly relevant clubs or paid for third-party education, reference that experience when describing why you are qualified (from a non-job experience perspective). 6. Tell me what you think you will be doing on a day-to-day basis.

This question is designed to test your knowledge knowledge of what the job entails. Interviewers like asking this question when a candidate’s candidate’s answers sound scripted. scripted. If you say that you are passionate passionate about working in investment banking, you should be able to prove t hat you know what you are passionate about. This can sometimes sometimes be an instant “ding” for a candidate. In a nutshell, an Analyst’s day-to-day responsibilities include administrative work (setting up meetings, organizing files), research, qualitative work (creating pitchbooks and profiles), and www.ibankinginsider.com

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technical work (modeling, (modeling, valuation, etc.). For a more robust explanation to this question, refer to Chapter 3. 7. Would you go against your Associate or Vice President’s directions if the deal required it?

This behavioral scenario is designed to test your understanding of the Analyst/Associate/VP Analyst/Associate/VP role and workplace politics. You should generally assume that the answer to “defying authority” authority” is no (unless a team member senior to them gave you alternate alternate instructions). As a junior banker, convey that you understand your role is to aid in deal execution and not to make high-level decisions. If you are stuck in this situation, explain that you would bring up the concern with your Associate or VP directly and ask them to give their opinion opinion on the matter. The next course of action would would be to discuss the situation with someone someone senior to the Associate or Vice President if they ignore your your dilemma. The bottom line is that you would defer the decision to someone more senior. You do not have enough experience and it is not your place to determine what the deal requires. 8. Your Associate and VP are giving you conflicting instructions/requests, what do you do?

Like the question above, this scenario tests understanding of the Analyst role and office chain of command. The best answer would be to defer defer responsibility. responsibility. Explain to the the Associate that that he or she is giving you conflicting information information from what your Vice President instructed. Under normal circumstances, the Associate will reach out to the VP and discuss their conflicting ideas directly and will then advise you on the agreed-upon proper course c ourse of action. Note: this situation situation happens a lot more more than you would think think as Associates are often often “closer to the ground” and more involved involved in the technical aspects aspects of a deal than Vice Presidents. Presidents. 9. What would you do if you had two projects that th at were “fire drills” for two different MDs?

There is no real “correct” answer to this question. question. Not only does it test test your understanding of the role of an Analyst, but it questions your problem solving methods. Be transparent and aim to get both jobs done as soon as possible. possible. Preface your answer by saying that you would try to avoid the situation, if possible. You would prioritize if it was possible to complete both projects, but if it is impossible to get both jobs done on time, you would would be transparent and vocalize the issue with your staffer and deal teams. It is important to punt responsibility and not be the “decision maker” regarding which job is more important. That is not an Analyst’s job. job. Show that you you recognize that both both jobs need to to be completed, that both need to be quality work, and that you understand your personal limits.

(22.3) Character Attributes 1. What are your strengths and weaknesses?

Expect to see this question in both finance and non-finance interviews interviews alike. The trick is to highlight relevant strengths and to present weaknesses that are actually just strengths strengths in disguise. Arm yourself with at least 3 strengths and 3 weaknesses when heading into any interview. Strengths: • •

Motivated Hardworking


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• • • • • •

Proactive – you don’t need to be micromanaged Persistent – you never give up and accomplish anything you put your mind to Always own your work and take responsibility for it Ambitious Perfectionist – you pay close attention to detail Team player

Weaknesses: • • • • • •

Spread yourself too thin because you are ambitious Get caught up in the details (a cliché answer in investment banking interviews) Sometimes procrastinate because you are more motivated by pressure situations Sometimes over prepare rather than just jumping right into a task (delaying its completion) Tend to be overbearing/micromanaging with individuals you work with Tend to complete all the tasks on your own when working with a team

See the theme with the weaknesses? The key is to relate the weaknesses to strengths wherever possible, but do not be blatant about it: being too disingenuous when describing weaknesses can sometimes turn off an interviewer. 2. If your friends could describe you in three words, what would they say?

Plan ahead with at least three key words that effectively describe your positive characteristics. Be prepared to describe the reasoning behind each word (for example, if you say “funny”, you should have a joke prepared). Examples of good key words include:   

Passionate Hard-working Funny

  

  

Wise Prudent Attentive

Diligent Detail-oriented Hungry

  

Trustworthy Determined Smart

3. I see here that you worked at [previous job] last summer. What would your boss say about you if I asked him?

This question is simply a different version of the “what are your strengths and weaknesses” question. Explain the things you excelled at on the job while trying to make them relevant for an investment banking position. These include: paying close attention to detail, having a good work ethic, being on time, being eager to learn, maintaining professionalism, getting along well with colleagues, etc. If you are proud of a specific project/deal/accomplishment from your previous job, weave it into your answer and use it to exemplify your strengths. Avoid mentioning negatives unless specifically asked. If you are asked to present negative characteristics that your boss would describe, be realistic about your weaknesses. Saying “I get too caught up in the details” is not a good answer (and is arguably the most over-used answer to this question). List out actual weak attributes, but make sure they are not material for the job at hand. For example, do not say that you lack a strong work ethic, often make stupid mistakes, etc. (critical skills needed to be an Analyst). Instead, list off less relevant weaknesses such as asking too many questions, overextending yourself, lack of experience with MS Office, etc.


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4. If I had two minutes to defend you in front of a selection committee, what would I say?

This question is asking for your “strengths”, but it is directly applied to the role of the Analyst/Associate. Good answers include: • •

• • • • • • •

Can always be relied on to complete work on time and at a high caliber Proactive – goes above and beyond expectations without being asked, and seeks out work and learning experiences Willing to put in the demanding hours when required High quality work – few/minimal errors Strong technical and modeling skills Personable with fellow coworkers, makes the lives of superiors easier Meets and exceeds deadlines Punctual – first one in the office and last one out Genuinely passionate about the work/industry

5. What is a recent problem you encountered at school or work? How did you resolve it?

This question is used to discuss a real life pressure situation a candidate has dealt with and how they acted. Have one or two well thought out past experiences (from internships, leadership positions, etc.) in your back pocket. If necessary, it is okay to tweak small details or bend the truth a bit to make the story more applicable. Here is a good example: “When I was the president of the business club, a situation came up where, due to a clerical error, a scheduling conflict occurred with a room we had reserved for our yearly executive board elections. We had 100 members show up to a room at the same time as another student group. I called the relevant individual in the office of student affairs, but it turned out that every room was taken. I was forced to act quickly and find an alternative location without the help of the university. I called in a favor with my friend who was an RA in the dorms and was able to get him to clear the study lounge for an hour so our group could meet…” Note: though the example above serves as a good template, demonstrating your ability to overcome a work-related conflict will often be more appreciated by your interviewer. 6. Tell me about a time that you failed.

Think of an error that does not make you look very bad and use this as an opportunity to show how you recovered. The key here is flipping the question to showcase a positive attribute. Mention an experience with an organization or job listed on your resume and keep it simple. Walk through the failure (perhaps an event did not go as planned; you forgot to complete a work product; you missed a final; etc.), and then describe how you remedied the situation. It is important to acknowledge your mistake and prove that you were able to act upon it: investment bankers make mistakes too, and this question is designed to test your ability to recover. 7. Suppose you were fired after working at this company for 3 months. What happened?

In essence, this question is asking for your weaknesses, but it is more difficult as it requires that the interviewee have a good understanding of the job itself. It also does not allow for the interviewee to “sugar coat” a weakness; in this situation, the weakness gets you fired. It will be very difficult to put a positive spin on this situation, but attempt to do so. One approach is to be lighthearted and make a joke of the question (for example, answer with “the firm must be downsizing” or something similar), but success with this attitude depends on your particular interviewer.


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More serious answers should be prefaced with something that dulls the weakness you describe, such as: “I cannot foresee anything that could cause this to happen; external factors would likely be responsible. But if I had to guess… “ •

• •

•

You were overstaffed with work so not all work could be completed in time or to a level you thought was acceptable. You spend too much time on individual tasks because you are a perfectionist. For whatever reason you did not fit in with the office culture and did not share similar views as the employees working right above you. The job and its requirements were much different than what you had been expecting/prepared for despite speaking with countless insiders beforehand (NOTE: be careful when using an excuse like this as it might inspire the interviewer to question your dedication to the job).

8. Why should I hire you over everyone else?

Think of this as your 30 second “elevator pitch”. Concentrate on promoting yourself instead of degrading others. Convey the following: •

•

•

•

Unique and relevant background – Your past experience has given you the tools and technical skills needed to succeed as an Analyst. If possible, position your experience as unique and emphasize that you are grateful for it. Knowledge of what the job entails – You have an in-depth knowledge of the role of the Analyst and have realistic expectations of what you will actually be doing. You do not mind the long hours, administrative tasks, and sometimes difficult work: in fact, you are enthusiastic about it. Enthusiasm for finance – You want to make it sound like you have been interested in finance, specifically investment banking, for a long time. You did not discover banking last week and decide to apply. Interest in the firm – This is the firm you want to work for, hands down. You have hit it off with enough people and have done enough diligence to make this decision.

9. Are you a leader or a follower and why?

The answer to this is simple: “it depends”. Most students will immediately say that they are leaders, but the question is designed to trap you in that answer. Investment banking Analysts are the most junior members of deal teams; therefore, their role entails following the orders of more experienced bankers. Your interviewer wants to know that you will be able to listen to directions and “be a follower” when needed. At the same time, when working on specific tasks for deals, Analysts should be able to take initiative and act as leaders in the right situations. Your answer should fall along these lines: if you have the most experience (or no one else will step up to complete something), then you are more than ready to take control and be the leader. If not (and it makes more sense for someone else to be the leader), then you have no issues being a good follower. Get the point across that you know your role.

(22.4) Work & Personal History 1. Why did you choose to attend [your university]?

Your answer to this question will depend on many factors such as what type of school you attend (target vs. non-target), location, major, etc. This question opens the door for you to sell yourself as a


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candidate in many ways. In general, show that your decision was well thought out by bringing up key attributes in the decision making process, such as: • • • • • • •

Region/location Future employment opportunities Strong business/finance program Strong academics Well-rounded (good answer if you attend a semi-target school) Strong alumni network Intimate setting (good answer for smaller schools)

Overall, gear your answer based on your situation and make it fit in with attaining the job at hand. If you attend a target school, mention you have been interested in finance and knew that the school had a great department with a reputation for good recruiting prospects. If you attend a semi-target or nontarget school, mention that you were unsure of what to major in so you picked a more well-rounded institution before deciding on finance. This question also opens up the door to convey a strong association with the city in which the bank’s office is located. Bankers (especially those in regional offices) look for employees who have some grounding in that city and are not a flight risk. If applying for banks in your hometown or where you college is, incorporate something along these lines in your response: “I chose to go to University of Chicago because this is where I’m originally from and would prefer to establish my career”. 2. What is your most important extracurricular activity? Why?

With this question interviewers are trying to get to know you better as a candidate. In general, try to bring up a unique experience and something that truly takes up a good and meaningful amount of your time. Good answers include anything finance/business related (especially if you have a leadership role in the organization), and/or anything that you are genuinely passionate about and is a big part of who you are (community service, charity, athletics, etc.). You must balance a mix of relevance and personal importance when deciding what to share, as this will be reflected in your answer. Unique positions or experiences related to finance or activities where you have shown particularly impressive accomplishments will go over well. 3. Why did you choose the extracurricular activities you did (as listed on resume)?

This is an opportunity to provide more information on the experiences you list on your resume. Your answer here should connect to your “investment banking story” likely shared at the beginning of the interview. Start with a high level comment along the lines of “wanting to fully take advantage of the different learning experiences and opportunities presented in your college setting”. Next, go into each activity you outline and briefly explain why you chose to become involved (networking, interest in the field, learn more about the different avenues of business, give back, etc.). Take this opportunity to demonstrate your personality, as interviewers want to see you are a well-rounded person. 4. What is the last book you read for pleasure?

Interviewers will use this question to get to know you better as an individual and to see where your interests lie. Try to come across as multi-dimensional and avoid giving a coined response by saying you recently read a finance or investing book. However, if you truly are in the middle of a financerelated book, sharing this may spark up a conversation; have a recently read non-finance book in your back pocket in case that answer does not go over well. Use discretion and try to pick a book that is appropriate and will not evoke negative judgment by the interviewer (sorry, no 50 Shades of Grey).


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5. What should we know about you that is not on your resume?

Use this question to sell yourself, but at the same time provide a unique detail about your life that will stick out in an interviewer’s mind (so they do not have trouble remembering you later). There are two primary ways to answer this question: •

•

Give a 30-second elevator speech about yourself: emphasize your work ethic, passion for the job, etc. Tell them an interesting fact about yourself: competitions you have competed in, significant accomplishments (perhaps unrelated to finance), unique facts about your family or connections, odd interests not included on your resume (make sure they are not weird), nontangible traits (i.e. how important family/friends are to you), etc. If you take this route, convey your personality and well-roundedness in your answer.

6. Do you prefer to work with a team or alone? Give me an example of when you worked with a team.

The best answer here is “working with a team” – investment banking is highly team oriented so your ability to collaborate and work with others is imperative. Every deal you work on will have a diverse team, often spanning various offices and sometimes even countries. Not only should you prefer working in a team, team settings are where you flourish. In terms of giving an example, the best team experiences are usually anecdotes from participation in student groups, leadership roles, class projects, and past internships. Be prepared for this type of question and have a “teamwork” story planned ahead of time. Address the following: • • •

Background situation What the team accomplished How you contributed

7. What has been your hardest internship to-date and why?

This question is a good opportunity to showcase your strengths, prove you have handled a demanding job, and provide more clarity on an experience listed on your resume. If no single internship stands out as hardest, pick your most recent or most relevant experience. Try to convey the experience as demanding and as similar to a banking job as possible. Bring up some of the following factors as they apply to your previous internship: • • • • • • • • •

Demanding hours and schedule Unpredictability Large amounts responsibility Learning how to complete work you did not initially understand Working with senior management Tough technical projects Strict deadlines Steep learning curve High expectations

Instead of just listing these off, gear them specifically to the job you are describing (as part of your answer to why it was your hardest internship). End your answer on a high note with the caveat that although it was the hardest to date, it also holds as your most valuable experience and provided the highest level of learning.


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8. Can you walk me through a deal or project that you worked on last summer?

Walking someone through a deal and/or project is usually saved for individuals that have previous investment banking experience. When walking someone through a deal, follow the below structure: • •

•

•

Describe the background of the industry and company Walk through the specific type of project/deal for that company and why (i.e. if the company was looking to sell itself, say why they were pursuing that avenue) Dive into the details of the transaction – list off relevant financial metrics and ratios, issues you encountered, considerations made, etc. Tell them the status of the deal – did you complete the deal while you were at the firm? Is it still in progress?

If you are unsure as to whether or not the information is confidential, refrain from using specific names or giving too much detail related to the company of interest. However, confidentiality is NOT an excuse to avoid describing your past experience.

(22.5) Macroeconomics & Microeconomics 1. What are the three primary ways the Federal Reserve can influence the economy?

The Federal Reserve is responsible for using monetary policy to influence the level of money and credit in the United States. To do so, the Fed primarily uses the following three methods: •

•

•

Open Market Operations: the buying and selling of financial instruments on the open market. If the Fed wants to increase the money supply, they purchase securities thus pumping money into the system and stimulating the economy. If the Fed wants to decrease the money supply, they sell securities thus taking money out of the system and slowing the economy. Changes in Discount Rate: by manipulating the discount rate (the interest rate that the Fed charges banks on short-term loans), the Fed is able to influence credit and the money supply. For example, if the Fed lowers the discount rate, this in turn allows banks to lower the Federal Funds Rate (the rate the banks charge each other on short-term loans), which leads to a lower Prime Rate (the rate that banks charge customers). This action will stimulate lending by the banks and borrowing by customers, thus increasing the money supply. Reserve Requirements: this requirement is the minimum portion of received deposits that a bank must keep in its own vault or with the Fed. As an example, if the Fed lowers the reserve requirement, banks can keep less money in reserves and therefore have more money to lend. This action will be expansionary and increases the money supply.

2. If the Federal Reserve increased the federal funds target rate 50 basis points, how would this affect the economy?

Interviewers will ask this question to gauge your understanding of macroeconomics and the Federal Reserve’s influence on the economy. Though less important in investment banking (and more important for buy-side roles), it is important to know how to connect the dots with macroeconomic events. In “layman’s terms”, an increase in the federal funds rate causes short term interest rates to rise and subsequently leads to increased borrowing costs, thus constricting the money supply. A decrease in the money supply and rise in the cost of borrowing curbs economic growth; individuals are less likely to purchase goods and services, and businesses are less likely to invest and/or borrow money to expand operations. Therefore, overall consumer demand decreases, which causes a rippling effect


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throughout the economy. Less demand for goods and lower investment by businesses leads to lower overall wealth in society, and this leads to less demand for goods and less willingness to invest (a continuing downward spiral). From an inflationary perspective, a decrease in the money supply coupled with lower demand for goods and services slows down inflation as wages are less likely to rise and the cost of input/materials for operations drops (as demand for these goods drops). The Fed would implement this sort of monetary policy if it seeks to curb economic expansion or reduce inflation. 3. What is LIBOR? What does it signify?

LIBOR stands for the London Interbank Offered Rate, and it represents the interest rate that banks in London would be charged if borrowing from another bank. It serves as a benchmark for lending rates, and many banks use it as a base rate for floating rate debt. For example, a term loan may be priced at an interest rate of L+450, signifying that the interest rate is 4.5% plus the LIBOR rate (banks often set a minimum “LIBOR floor”, though). As LIBOR increases, this often sends bad signals to the economy by inferring that banks are less willing to lend to one another. In other words, they perceive that there is more risk lending to another bank in the current market environment; this causes them to demand a higher interest rate to account for the increased risk (though this can be caused by other market expectations, as well). A good demonstration of this effect is the brief spike in LIBOR during the middle stages of the 2008-2009 Financial Crisis. As LIBOR decreases, the opposite is true. 4. What is the TED spread and what does it signify?

The TED spread is the spread (difference) between LIBOR and rates on short-term U.S. Treasury Bills. Particularly, it is the difference between 3-month LIBOR and the interest rate on 3-month TBills. The spread between the two has usually hovered around 50bps or less during stable economic times, with T-Bills carrying slightly lower interest rates than LIBOR (given the fact that U.S. government debt is essentially “risk free” from a default perspective while short-term lending rates from bank-to-bank carry some, minimal amounts of default risk). As the TED spread increases (i.e. interest rates on T-Bills go down and/or LIBOR interest rates go up), this usually indicates an economic downturn or decrease in the stock market. As individuals turn to safer investments (such as government debt), the price of T-Bills is driven up and their respective yields/interest rates are driven down. As well, LIBOR rates increase as banks are less willing to lend to one another as they perceive higher credit risk, which is also an indicator of an economic downturn. In summary, an increase in the TED spread reflects a market belief in increased credit risk and a potential downturn in the economy. 5. What stocks would you buy right now and why (or pitch me a stock)?

Interviewers will often gauge a prospective candidate’s interest in financial markets (and finance in general) by asking this question. Individuals that simply memorize prices of market indices will struggle answering. Pick a stock or two ahead of your interview and study them. Choose a less wellknown publicly traded company: the less the interviewer knows about the company, the less likely it is that they can scrutinize your answers. Focus on the below when answering this question: • •

•

Describe the company and its operations Tell them why you think it is a good investment: describe the competitive positioning, specific multiples that make it attractive (P/E, EV/EBITDA, Debt/EBITDA, etc.), growth prospects, and risks of the business Be prepared to answer follow-up questions related to your stock – interviewers will try to find holes in your investment thesis.


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If you are unprepared for this question, do not attempt to pitch a stock that you know nothing about. You are better off describing that you follow the markets as a whole but have not focused on particular stocks. Try to steer the conversation to recent events or news stories regarding the industry. 6. What are the Dow, S&P 500, and NASDAQ currently trading at?

It is not uncommon for interviewers to ask for current market index prices (or even current Treasury Bill rates). With this question, they are looking to see how in-tune with the market a candidate really is. It is an expectation that every individual applying for a job in investment banking (or other high finance position) is aware of the happenings within general financial markets and current economic setting. Come prepared to each interview by knowing rough estimates of the current trading prices of the indexes. To avoid sounding scripted, present your answer as a general range or approximate figure. For example: “The S&P is trading around 1,500, the Dow around 14,700, and the NASDAQ around 3,500.”


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Chapter 23: Technical Interview Questions & Answers (23.1) Accounting – Basic 1. Walk me through the three financial statements and how they are interconnected.

First describe the three financial statements and what each represents: •

•

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Balance Sheet: a snapshot of a company’s assets, liabilities, and equity at a single point in time. Income Statement: shows a company’s income and expenses from operations for a specified period. Cash Flow Statement: shows a company’s cash inflows and outflows from operations, investing activities, and financing activities over a specified period.

Next, describe how they are related (i.e. how the statements flow into one another): •

•

•

•

•

On the Income Statement, the bottom line, “Net Income”, represents the after-tax profit earned by the company. This flows into the Balance Sheet under Shareholder’s Equity, increasing the balance of that account. Net Income also flows into the Cash Flow Statement and serves as the starting point for calculating Cash Flow from Operations. Changes to Current Assets and Current Liabilities on the Balance Sheet manifest themselves as changes in Working Capital on the Cash Flow Statement. Investing and Financing activities on the Cash Flow Statement will adjust non-current asset, liability, and equity accounts on the Balance Sheet (such as PP&E, long-term debt, shareholder’s equity, etc.). The final item on the Cash Flow Statement, change in cash, serves as a plug and should “balance out” the Balance Sheet (Assets = Liabilities + Equity).

2. If you could only have one financial statement to assess how well a company is doing, which would you choose and why?

If you only get one financial statement, always choose the Cash Flow Statement. In the world of banking, “cash is king”. It is the only statement that shows the true financial well-being of a company. Many items can be buried in an Income Statement and it can be difficult to see the actual financial performance of a company by just looking at it. The Balance Sheet is a static view of a company’s financial position and does not tell you how well the business is operating. 3. If you could have two financial statements, which would you choose and why?

If you could have two financial statements, always choose the Income Statement and Balance Sheet. With these two statements (over the proper periods), you can create a Cash Flow Statement, thus having all three financial statements. 4. What are the different parts of the Cash Flow Statement? Which part contains interest expense?

Understanding the Statement of Cash Flows is essential. The three main parts and their components include:


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•

•

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Operating Activities: Direct cash inflows and outflows related to the operations of a business. This section begins with Net Income and then makes adjustments for non-cash expenses as well as changes in Working Capital. Investing Activities: Changes in cash related to investment or divestitures in long-term assets. This section contains purchases (or sales) of Property, Plant & Equipment (PP&E), investments (or sales) in intangible assets (patents, licenses, etc.), purchases (or sales) of land, and purchases (or sales) of marketable securities, among others. Financing Activities: Changes in cash related to financing activities of the business (such as raising new capital). This section contains proceeds from debt or equity issuances, dividend payments, share repurchases, and debt pay down, among others.

Some interviewers like to trick candidates by asking them the second half of this question (or something equivalent). Interest expense is captured in the Income Statement and is therefore not part of the Cash Flow Statement: only non-cash interest expense adjustments are included in a Cash Flow Statement. 5. Can you give me some examples of non-cash expenses?

These are relevant for purposes of any cash flow calculations. The most common non-cash expenses include: • • • •

Depreciation Amortization Stock Based Compensation Bad Debt Expense

6. How do you define working capital? Can you describe to me a situation when a company would have an increase in working capital?

Working Capital is an important accounting concept that measures the short-term financial health of a company. Working Capital = Current Assets – Current Liabilities. Operating Working Capital = (Current Assets – Cash) – (Current Liabilities – Current Portion of Long-Term Debt) • •

Current Assets: Cash, Accounts Receivable, Inventory, Other Current Assets, etc. Current Liabilities: Accounts Payable, Construction Payable, Accrued Expenses, Current Portion of LT Debt, etc.

If a company has negative Working Capital, then it may have short-term liquidity issues: it will have difficulties paying off short-term liabilities with its short-term assets. An example of an increase in Working Capital would be an increase in a Current Asset account or a decrease in a Current Liability account. When Working Capital increases, cash goes down. 7. Is an increase in the Accounts Payable account a source or use of cash? Is Accounts Receivable (or Inventory) going up a source or use of cash?

Increases in short-term assets are decreases in cash (also known as a “use of cash”). Decreases in short-term assets are increases in cash (known as a “source of cash”). The opposite is true for shortterm liabilities accounts. As an example, if a company’s Accounts Payable account increases from one quarter to another, this means that the company did not use as much cash to pay short-term


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expenses during that time, resulting in more cash on hand at the end of the period. Thus, an increase in the A/P account is viewed as a source of cash. In other words, if a company was billed for $100, this is reflected on the Income Statement as a $100 expense. However, if they only paid $60 in cash up-front and agreed to pay the other $40 of the expense later, then this would be reflected in a $40 increase in the Accounts Payable account (also serving as a $40 source of cash to reflect the amount of the expense NOT paid in cash and thus still on the company’s Balance Sheet). The opposite is true for an increase in the Accounts Receivable account. If a company’s Accounts Receivables increase over a period, then the company did not collect as much cash from customers that bought on credit, so there should be less cash on hand at the end of the period. Thus, an increase in the A/R account is viewed as a use of cash. 8. If Depreciation increases by $20, what happens to the three financial statements?

This is a common question to evaluate a candidate’s understanding of the different financial statements and how they interact. Know how to answer variations of this question as it is likely that you will see it in one form or another. Most interviewers will not mind if you write down your answer on a piece of paper as you work through the question. Start with the Income Statement: expenses will increase by $20. Ask the interviewer if there is an implied tax rate (40% is probably a safe guess) and tax-effect the expenses. Pre-tax income decreases by $20 due to the increase in expenses, so post-tax Net Income will decrease by $12, net of 40% taxes. Next, move to the Cash Flow Statement: in Cash Flows from Operations, the top line (Net Income) will decrease by $12 as reflected in the Income Statement. Since Depreciation is a non-cash expense, you must add it back to Net Income as your cash balance did not actually decrease. The net effect of a $12 decrease in Net Income and a $20 increase in Depreciation is an $8 increase in your cash balance. Next, move to the Balance Sheet: starting on the Assets side, your contra-asset Depreciation account increases by $20, thus decreasing Assets by $20. Also on the Assets side, cash increases by $8, for a net decrease in Assets of $12. Moving to the Liabilities and Equity side of the Balance Sheet, Net Income decreases by $12: this results in a decrease in Retained Earnings (under Owner’s Equity) of $12. Notice that the Balance Sheet balances with a drop of $12 on both sides of the equation.

(23.2) Accounting – Advanced 1. Why is free cash flow an important metric?

Free cash flow (FCF) is defined as cash flow available to all security holders in a company (debt holders, equity holders, etc.). In a nutshell, FCF is excess (or deficit) money generated by a company after paying all cash operating expenses and investing activities. The formula for unlevered FCF is below: Unlevered FCF = EBIT * (1 – tax rate) + D&A – Change in WC – Capex

Free cash flow is very important because it is cash that a company can spend to perpetuate earnings generation and boost overall value. In a sense, it provides flexibility and more freedom in making


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strategic decisions. Companies with strong free cash flow can pay down debt, use internal financing instead of banks, pay dividends, buy back stock, develop new products, expand operations, etc. Since FCF does not include Cash Flows from Financing Activities, it can be used to measure the financial health of a company; in other words, it reflects the company’s cash flow irrespective of its capital structure. If a company continuously has negative FCF, it will run into financial trouble in the following ways: • • • •

•

Maintaining a healthy minimum operating cash balance Funding future capital expenditures/growth Paying current debt obligations (including interest, amortization, and maturities) Seeking out future financing from investors (both debt and equity investors will be hesitant to lend or invest in a company that struggles to earn positive FCF) Returning capital to investors (in the form of a dividend)

Ultimately, a company will need a lifeline in the form additional funding if it continues to have negative Free Cash Flow, which is a bad sign for investors. If a company continues to be unable to fund its operations/growth, then the business will likely hit a cash shortfall and is a major cause of bankruptcy. 2. What is the AOCI account? What goes in there, typically?

AOCI stands for Accumulated Other Comprehensive Income and it is an Equity account on the Balance Sheet. It is maintained separately from Retained Earnings and is an accumulation of the following examples of gains or losses that are not included on the Income Statement: • • •

Unrealized gains/(losses) on Available-for-Sale securities Gains/(losses) on derivatives Gains/(losses) on foreign currency translation

3. Say you buy PP&E with $50 million of debt and $50 million of equity, what happens in years 1 and 2?

This is another commonly-used accounting question. A summary of the major line item changes is below: Year 1 • • • • •

PP&E goes up $100 million Debt goes up $50 million Equity goes up $50 million Cash stays flat There are no adjustments to the Income Statement

Year 2 •

• • •

Incur depreciation expense on your PP&E. In this case, we assume 10 year straight-line deprecation, resulting in depreciation expense of $10 million. Assuming a 10% interest rate on your new debt, you incur interest expense of $5 million. Assuming a 40% tax rate, Net Income will decrease by $6 million ($15 million x 40%) Since depreciation is a non-cash expense, you must add back D&A of $10 million to the Cash Flow Statement (do not add back interest). With Net Income down $6 million and the D&A add-back of $10 million, there is a net increase in cash of $4 million.


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At the end of the year, the Balance Sheet balances because Assets drop by $6 million ($4 million increase in cash net of $10 million drop in PP&E) and Equity drops by $6 million from the drop in Net Income.

4. If a company issues 100 new shares at $10/share, what happens to all of the financial statements?

In this example, a company is issuing $1,000 of new equity. •

•

•

Income Statement: this transaction has nothing to do with income, so it does not affect the Income Statement. Cash Flow Statement: by issuing new shares the company is taking in cash, therefore this would be listed as a $1,000 source of cash under Financing Activities on the Cash Flow Statement. Balance Sheet: It would also be reflected on the Balance Sheet through the following accounting journal entry: DEBIT: $1,000 Cash & Equivalents, CREDIT: $1,000 Owners Equity. Both Assets o and Equity increase by $1,000, balancing the Balance Sheet.

5. Continuing from the previous question, what happens in Year 2 if the y applied all of those funds to pay down a debt instrument with 10% interest (ceteris paribus)?

If the company used the $1,000 at the beginning of Year 2 to pay down debt with a 10% interest rate, then the following would occur: •

•

•

Income Statement: $100 less of interest expense would be incurred ($1,000 x 10%), and assuming a 40% tax rate, Net Income increases by $60. Cash Flow Statement: Operating Cash Flow increases by $60 (from increased Net Income), but Cash Flow from Financing Activities has an outflow of $1,000 (having paid down $1,000 of debt) for a net decrease in Cash & Equivalents of ($940). Balance Sheet: Cash & Equivalents decreases by $940, Liabilities decrease by $1,000, and Equity increases by $60, resulting in a net decrease of $940 on each side of the A = L + E equation.

6. When discussing share dilution, what is the Treasury Stock Method? Can you walk me through the formula?

The Treasury Stock Method is a way of incorporating unexercised “in-the-money” options (when the exercise price of the option is lower than the current price of the stock) into a company’s fully diluted share count. This method assumes that the proceeds a company receives from the exercising of the options are used to repurchase common shares. To calculate fully diluted shares this way, follow these steps: 1. Options proceeds = (exercise price of options) x (# options outstanding) 2. Shares repurchased = (options proceeds) / (current stock price) 3. Diluted shares outstanding = (basic shares) + (in-the-money options) – (shares r epurchased) Note: if the company’s stock price is below the strike price of the options, then they would not be exercised (and common shares outstanding = fully diluted share count). 7. What is the difference between FIFO and LIFO accounting?

Both FIFO and LIFO are inventory valuation methods for companies that sell physical inventory: they are two separate ways to calculate a company’s Inventory and directly affect the Cost of Goods Sold (COGS). FIFO accounting refers to “First in First Out” and LIFO refers to “Last in First Out”. www.ibankinginsider.com

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Using FIFO, a company expenses inventory based on the oldest inventory on-hand (the “first” inventory that was purchased). Using LIFO, a company expenses inventory based on the most recent inventory on hand (the “last” inventory that was purchased). If Company A and Company B are identical in all aspects, in a normal business environment, and Company A uses FIFO while Company B uses LIFO, the COGS for Company A should be lower than Company B (due to inflation). Note: IFRS accounting standards ban the use of LIFO accounting, but GAAP standards do not. As an example of FIFO and LIFO accounting, let’s assume we own a bicycle manufacturing company and create 20 bikes on Saturday at a COGS of $100 per bike and 100 bikes on Sunday at a COGS of $120 per bike (due to an increase in tire costs). Thus, our inventory is as follows: Inventory Date Saturday Sunday Total Inventory

# of Bikes Cost per Bike 20 $100 100 $120 120

Total Value $2,000 $12,000 $14,000

FIFO: If we open for business on Monday and sell 30 bikes, under FIFO our reported COGS is $100 for the first 20 bikes and $120 for the other 10 bikes (for a total COGS of $3,200).

Sell 20 Saturday Bikes Sell 10 Sunday Bikes Total COGS

# of Bikes Cost per Bike 20 $100 10 $120

Total Value $2,000 $1,200 $3,200

LIFO: If we open for business on Monday and sell 30 bikes, under LIFO our reported COGS is $120 for all 30 bikes (for a total COGS of $3,600).

Sell 30 Sunday Bikes

# of Bikes Cost per Bike 30 $120

Total Value $3,600

Total COGS

$3,600

8. You are a CFO and your only goal is for the company to pay as little income tax as possible. You are given the choice of using FIFO or LIFO accounting. Which do you choose and why? Assume an inflationary environment.

To pay as little income tax as possible, the company should use LIFO accounting. As outlined above, LIFO will increase COGS, and therefore decrease taxable income. Thus, although your Net Income would be lower, your tax liability would be lower and your cash flow would be higher (compared to using FIFO). 9. Why would a company want to switch from LIFO to FIFO accounting?

Switching from LIFO to FIFO accounting has a few major outcomes: 1. Value of inventory will increase 2. Net Income will increase (going forward) 3. A tax liability will be incurred


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Companies that make the switch must retroactively apply these accounting changes to their financial statements. A re-valuation of inventory occurs due to the fact that the most recently purchased (and most expensive) inventory is now kept on the books, while the oldest (and cheapest) inventory is assumed to have been sold. Thus, the value of inventory increases. As well, for the same reasons listed above, COGS will have retroactively decreased, causing an increase in Net Income. An income tax liability will be incurred for having higher Net Income under the new FIFO accounting method; this will need to be paid off over the next several years. A switch from LIFO to FIFO will also produce a higher taxable income going forward, which results in lower cash flow (more cash taxes will be paid to the government while no cash changes have actually occurred). A company might do this to artificially inflate its EBITDA and Net Income figures, though this has negative consequences on a company’s free cash flow.

(23.3) General Valuation - Basic 1. What are the major methods of valuation? Rank them in terms of highest to lowest expected valuation.

The three most common methods are Transaction Comparables Analysis (or “Precedent Transactions”), Comparable Companies Analysis (or “Equity Comparables” or “Public Comparables”), and Discounted Cash Flow Analysis ( “DCF”). Generally speaking, Transaction Comps will place a higher value on a company than Equity Comps due to the incorporation of a “control premium” (excess price paid to take a controlling stake in a company) and anticipated synergies. A DCF is the most volatile valuation method and can be the highest or lowest form of valuation depending on assumptions. Transaction Comps: Compile a list of previous transactions based on specific criteria similar to the company you are valuing (same industry, same size, same geographic presence, similar financial metrics, etc.). Calculate various transaction multiples related to the deals (EV/EBITDA, EV/Revenue, etc.) to find averages. Value is then obtained by applying this range of average multiples to your company’s financial metrics (EBITDA, Revenue, etc.). Equity Comps: Compile a list of companies that are comparable to the company you are valuing based on factors such as industry, capitalization/size, geography, growth, liquidity, margins, product offering, etc. Calculate various trading multiples and metrics (Price/Earnings, EV/EBITDA, etc.) and find averages. Apply these averages to your company’s financial metrics to obtain a range of values. DCF: This is also known as an “intrinsic” valuation of a company. In a nutshell, a DCF takes the present value of expected future cash flows of a business as well as the terminal value and discounts them by an inferred discount rate. 2. What other valuation methods are there besides DCF, Public Comparables, and Acquisition Comparables?

While it is important to have an in-depth understanding of the three major valuation methods, recognize that several other more specialized, less common valuation methods exist. Interviewers may want to see that you have at least a high-level understanding of these (below are a few more common valuation methods outside of the core three): •

Liquidation Value: the value of tangible assets within a company if it were to go out of business. This is a conservative valuation method, often forming a low-end value when analyzing a company (commonly a company on the verge of bankruptcy). This is similar to


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•

•

an appraisal value and ignores the value of the “going concern” of the business (only valuing the company’s assets at their cumulative sale price in the market). LBO Value: the value a “financial buyer” would be willing to pay to acquire the company. This type of analysis assumes the absence of strategic buyers and thus the absence of synergies (thus providing a floor purchase valuation), but it can also establish a ceiling valuation by determining the highest purchase price possible to achieve a required IRR for the financial buyer (given maximum debt levels). Sum-of-the-Parts/Breakup Value: the value derived by dividing the business into different operating segments and valuing each independently. Each segment has its own valuation multiple applied to it and the valuations are summed to reach a combined value for the company.

3. What is the formula for Enterprise Value? How is it different than Equity Value? Enterprise Value = Market Value of Equity + Market Value of Debt – Cash & Equivalents + Preferred Stock + Non-Controlling Interests – Investments in Associated Companies

Enterprise Value measures the value of the company as a whole (debt and equity) while Equity Value only measures the value to equity holders in the company. 4. Why do you add Non-controlling Interest to Enterprise Value?

Companies that purchase controlling stakes (50%+) in other companies must report 100% of the subsidiary’s financial operations on their own financial statements (even though they own less than 100% of the subsidiary). Since the denominator figures (Revenue, EBITDA, etc.) include 100% of the subsidiary’s financials, the numerator (Enterprise Value) must also assume 100% ownership of the subsidiary. The difference in value between your actual ownership percentage and the full value of the subsidiary is referred to as Non-Controlling Interest. Adding this back to Enterprise Value ensures that you are comparing the full value of the business to the fully consolidated financial metrics. To think about this another way, adding back Non-Controlling Interest (thus increasing your valuation) is the same as adding the price that you would need to pay to buy out the <50% owner of any subsidiaries. You are reporting his portion of Revenue and EBITDA and therefore would need to compensate the minority investor to take control of his portion of the company. 5. What are some commonly used Enterprise Value and Equity Value multiples? Why do you use Equity Value/Net Income and Enterprise Value/EBITDA?

Common Enterprise Value multiples: • • •

EV/EBITDA EV/Sales EV/FCF

Common Equity Value multiples: • • •

Price/EPS PEG Price to Book Value of Equity

When calculating these ratios, consider which party (debt, equity, or both) the denominator applies to. Enterprise Value is the value of a company attributable to all investors and therefore requires a denominator reflective of this fact. Revenue, EBITDA, and EBIT represent financial metrics www.ibankinginsider.com

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available to both debt and equity holders as interest has not yet been paid out to debt holders. Net Income and EPS are only available to equity holders and are therefore used with Equity Value multiples. 6. What is the normal range for an EV/EBITDA multiple?

This is a trick question as there is no universal “normal range” for an EBITDA multiple. It is possible to get closer to a generalization when looking at specific industries, and even closer when looking at similar companies within the same industry. Similar to looking at P/E, the EV/EBITDA multiple is highly dependent upon assumptions and forecasts such as expected EBITDA growth, as well a s other tangible and intangible factors (such as credit risk, management aptitude, etc.). Generally, high growth industries will exhibit higher multiples and low growth industries lower multiples. For example, the technology sector tends to grow faster than the utilities sector, so companies in its industry often draw higher valuation multiples given the higher growth prospects. 7. If you issue $100 of new shares how does this effect enterprise value?

Recall the Enterprise Value Calculation described earlier: Enterprise Value = Market Value of Equity + Market Value of Debt – Cash & Equivalents + Preferred Stock + Non-Controlling Interests – Investments in Associated Companies

When a company issues $100 of new shares (AKA $100 of new equity), ceteris paribus, its market value of equity will increase $100 and its cash will also increase $100. Per the EV formula above, this results in a net change of $0. Thus, there is no change to Enterprise Value as a result of issuing $100 of new shares. 8. Continuing from the previous question, what happens if the company uses $50 of t hat new cash to pay out a dividend to shareholders?

Diving further into how capital structure decisions affect Enterprise Value, issuing a dividend to shareholders is straightforward in how it affects EV. If a company issues a $50 cash dividend, two things happen: 1. Cash decreases by $50 2. Equity decreases by $50 Following the EV formula, #1 increases Enterprise Value by $50 while #2 decreases Enterprise Value by $50. Thus, there is no change to Enterprise Value, ceteris paribus. Note: This assumes a theoretical world where investor reactions to capital structure decisions are irrelevant. In the real world, the issuance of new equity, new debt, a dividend, etc. could drive a stock higher or lower based on the signal it sends to investors (as well as tax implications with a debt issuance). This would affect the market value of equity and, therefore, a company’s Enterprise Value. 9. If you have a savings account with $100 deposited into it, what is the Enterprise Value of that account? What is the Equity Value? Assume no interest income.

This question is designed to test a more abstract understanding of Enterprise Value. In this example, an account with $100 of cash deposited into it results in an Enterprise Value of $0 ($100 of equity, less $100 of cash = $0). The account itself has equity value ($100), but it is not producing anything. In a sense, there is no “enterprise”/business of any value associated with it. If the account was earning interest income, then there is something being “produced” with that capital and the interest earned on the account would have an inherent Enterprise Value associated with it.


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From a theoretical perspective, this is what is meant by Enterprise Value: what is the value of the business that has been created? This is why we seek to eliminate or add the various elements of the EV formula to come to an Enterprise Value. For example, you might ask, “Why subtract cash in the EV formula?” Frankly, cash is cash and it is not part of the ongoing business. We are trying to find a value for the business that has been developed, and cash is just an accumulation of the earnings achieved so far (which will be captured in the equity value of the company). We strip out that cash from the equity value (which is part of the EV formula) to determine the amount of debt value, equity value, and other aspects of the EV formula that are attributable only to the ongoing operations of the business. 10. How do you calculate the present value of a future stream of cash flows?

In finance, “present value” refers to the value today of a future payment or future stream of payments (cash flows). The guiding principle is that individuals prefer to have money now versus receiving money in the future; money today can be invested and can earn a return moving forward. When calculating the present value, we must assume a required rate of return that an investor demands on their money (this is called the discount rate). Below is the formula to calculate present value for each future cash flow: PV =

payment (1 + r) ^ t

Where: payment = amount of money to be received (also known as future value) r = discount rate t = length of time until you receive the payment*** If an individual will receive more than one cash flow, then apply the present value formula to each future payment and discount them using the appropriate timeframe a nd discount rate. 11. How much would you pay for a tree that grows 10 dollars every year in perpetuity? What if growth is accelerating at 5% per year?

This is simply a present value of a perpetuity question. The formula for valuing cash flows into perpetuity is as follows: Perpetuity Value = C / r

Where: C = cash flow each year r = discount rate If you assume a 10% discount rate, then the value of $10 per year forever is $100 ($10 / 0.1). The formula for valuing a perpetuity that grows each year is as follows: Perpetuity Value = C / (r – g)

Where: C = cash flow each year


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r = discount rate g = perpetuity growth rate

If you assume the same 10% discount rate, then the value of $10 per year forever growing at 5% per year is $200 ($10 / (.1 – .05) ). 12. Would you rather have $100 now or $10 per year for t he rest of your life?

You cannot answer this question without knowing the discount rate. Demonstrate your understanding of this fact and ask for a rate (or assume one). In this example, let us use a 5% discount rate. The formula for the present value of a perpetuity payment is as follows: PV = PMT / (r – g)

Where: PMT = payment r = discount rate g = growth rate of PMT (if any) Plugging in our numbers, the present value of $10 per year for the rest of your life is $200 (which is higher than the other scenario of $100 today). At a 5% discount rate, you would prefer to have the $10 payment into perpetuity. If the discount rate is >10% in this example, the present value of the perpetuity payment falls below $100 and you would instead prefer to take the $100 today.

(23.4) General Valuation – Advanced 1. When analyzing a company going through bankruptcy or on the brink of bankruptcy, which valuation methods are the most useful? •

•

•

•

Liquidation Value: to establish a low-end “worst case scenario” valuation, Liquidation Value can serve as a useful valuation method for a company on the brink of bankruptcy. This method is particularly relevant for a company that files for Chapter 7 Bankruptcy. Sum-of-the-Parts Analysis: commonly, companies that are going through bankruptcy are broken apart and different divisions are sold off to separate firms while other divisions are liquidated or carried on as separate entities. Calculating the value of different divisions of the business proves useful as a company approaches bankruptcy and these breakups are negotiated by creditors. Public Comparables and Acquisition Comparables: though discounted slightly, these multiples-methods of valuation are still useful for companies that are near bankruptcy as they will need to be applied to revised management estimates for the business. As well, distressed acquisitions are commonplace among bankrupt companies, so finding comparable distressed acquisitions proves useful. DCF: similar to the explanation above on comparables, despite being in bankruptcy it is still possible to value a company’s cash flows by using revised estimates from management.

2. What metric would be appropriate in valuing a company with negative earnings

Companies with negative earnings (AKA negative Net Income) cannot be valued using multiples that rely on Net Income or EPS (because they will be negative numbers and the multiples will not be applicable). For this reason, you must go “above” Net Income on the Income Statement to find


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useable metrics for valuation. The most common metrics would be: • • •

Enterprise Value/EBITDA Enterprise Value/EBIT Enterprise Value/Revenue

Understand that if EBITDA is negative as well, you will have to continue to work your way up the Income Statement to find a material multiple. In this case EV/Revenue may be the best multiple. Using the above metrics, you can then derive multiples using Acquisition Comparables and Public Comparables analyses and apply them to the company being analyzed. In addition to using the above multiples, DCF analysis can be a useful form of valuation as companies with negative earnings can sometimes have positive cash flow (just because Net Income is negative does not mean that Free Cash Flow will be negative, too). Other valuation methodologies that may be more applicable here include: • • • •

Liquidation Value Historical Cost Replacement Cost Book Value

3. How would you value a company with negative cash flow?

Similar to the previous question, a company with negative cash flow does not mean that it has negative EBITDA, though it might. Companies with positive EBITDA can be valued off of multiples such as EV/EBITDA or EV/Revenue. Factors that could contribute to a company that has positive EBITDA but negative cash flow include: • • •

High capital expenditures (i.e. an early-stage company in a high growth stage) Fast-increasing working capital Significant tax liabilities

A Discounted Cash Flow analysis will not be of too much use here, so you must rely on other valuation techniques. Public comparables and acquisition comparables are still useful for the same reasons stated above. Sum-of-the-Parts analysis and Liquidation Value may be useful as well given the likelihood of eventual bankruptcy for a company with continuous negative cash flows is high. 4. What factors determine the value of an option?

There are various models used to price options (Black-Scholes being the most popular). These models take into account numerous factors and aim to define a fair market value. Some of the more important factors include: •

•

•

•

Current price of the underlying security vs. the strike price of the security (known as “intrinsic value”); the current price and strike price are used in conjunction to calculate what the option is worth if exercised today. Time to expiration: an option with a longer time until expiration will be valued at a premium since it has a higher chance/more opportunity over time to be in the money. Volatility: stocks with higher volatility are more likely to exhibit price swings and will be sold at a premium. Interest rates: though less directly related to the value of an option, fluctuating market interest rates affect the return demanded by an option investor, thus affecting option price.


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5. If two stocks have a P/E of 20x and 40x, respectively, which one should I prefer as an investor? What if they both have the same growth rate?

The answer to this question is “it depends”: you cannot determine which company is a more worthwhile investment by comparing P/E alone. To answer, you must understand what P/E represents and its limitations. In a nutshell, P/E ( Price / Earnings per Share) signifies how many dollars an investor is willing to pay for $1 of earnings. Investing in a 40x P/E stock may seem more expensive than 20x P/E, but the 40x P/E stock has growth expectations and risk already baked into this price. Put another way, the 40x P/E stock is expected to have higher future earnings and you must pay a premium now for this expected benefit. Another important thing to note is that P/E multiples tend to vary from one industry to another. For this reason, an investor must compare P/E multiples within the same industry to have a clearer valuation comparison. More established industries (with less expected growth) tend to have lower P/E ratios while hot and developing industries (with higher growth) tend to have higher P/E ratios. Even within a single industry, older companies may have lower growth prospects than newer players. Thus, P/E comparisons are more accurate the more similar a company is to the comp within its own industry. P/E alone does not paint a complete valuation story and therefore it is not possible to answer this question without more information. 6. Continuing from the question above, what if they both have the same growth rate?

If both stocks have the same growth rate, all else equal, you would prefer the stock trading at 20x P/E. You would prefer to pay $20 per $1 of earnings vs. $40 dollars per $1 of earnings if you knew the growth prospects down the road are the same. In reality it is not this easy since, as discussed above, many other factors affect P/E. One such example would be the how likely the company is to achieve its past earnings growth predictions (how risky the investment is). 7. Assuming the same industry, why would the P/E ratio for one company be higher than t he P/E ratio of another?

There are many reasons why two companies in the same industry would have different P/E ratios. Common examples of why a company’s P/E ratio would be higher than another’s include: •

• •

•

Better growth opportunities: better prospects for higher earnings in the future lead to a higher premium on earnings today. Lower operational risk: investors will pay more for more stable earnings. Better management team: respected and proven management teams drive lower costs and streamline operations, thus leading to higher valuations. Stronger financial health: companies with less debt and interest expense (relative to their EBITDA) are less likely to go bankrupt and have more flexibility to raise money in the future to fund growth.

8. As an investor, do you care more about trailing P/E or next twelve months P/E?

Trailing P/E refers to the current stock price divided by the last twelve months (“LTM”) EPS. Next twelve months (“NTM”) P/E refers to the current stock price divided by projected NTM EPS. Next twelve months P/E is more important to investors because it is much more relevant to them. Price/EPS means that you are, in a sense, paying a specific price for that company’s earnings. As an investor, you are inherently purchasing the rights to any future earnings of that company: you cannot buy a company’s historical earnings. Due to this, investors care more about projected EPS and,


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hence, NTM P/E. In general, investors are usually more concerned with the future performance of a company rather than historical performance. 9. Regarding forward P/E or EV/EBITDA multiples, should they increase or decrease as we look at future years’ numbers?

Let us look at an example to help answer this question: which row below is abnormal in a normal business environment? A B

2013 P/E 10x 20x

2014 P/E 15x 16x

Under normal circumstances, forward valuation multiples should typically trend downwards. In the example above, row A would be abnormal. Think of it this way: EBITDA (or Net Income/Revenue/etc.) should increase over time for a company in a normal business environment. Holding Enterprise Value or stock price constant, as you move forward in time, your denominator should keep increasing, causing the forward multiples to drop. EV/2013 EBITDA should be greater than EV/2014 EBITDA, and so on... 10. You are doing a valuation of a company that manufactures shoes. You are only able to choose 1 valuation methodology to use. Which do you choose and why?

This question tests your understanding of the major valuation types and what information is required to perform each. There is no truly “right” answer here; instead, justify your choice and use reason to come to a proper answer. Knowing that the shoe industry is large, developed, and has many players, it is safe to assume public company comparables and transaction comparables would be good valuation methodologies. There should be a large and diverse set of comps allowing for increased valuation accuracy with these methodologies.

(23.5) Comparables Analysis 1. What makes a good candidate for a public comp?

When finding companies to compare, there are several factors that Analysts look for in a peer group to match with their target company. Ideally, there are publicly traded companies that are relatively similar to the company being analyzed, allowing an Analyst access to their operational and financial data (but this is not always the case). Companies with similar criteria in the following areas make good candidates for a public comp: •

•

•

Industry/operations: This is the most important factor. First and foremost, your comparable companies need to be classified in the same industry as your target company. Ideally, they also have very similar operations in terms of types of products/services offered. Size/Maturity: You want to compare companies that are similar in size. This includes not only breadth and number of employees, but (more importantly) revenue, EBITDA, and other financial metrics. Comparing a small/early-stage company with a large/mature company is not as effective as comparing companies in the same maturity phase. Capitalization: Capital structure can play a large role in determining whether or not companies are comparable. For example, you do not want to compare a company with low debt levels with another that is on the verge of bankruptcy. Ideally, companies will have similar capital structures


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•

Geography: Companies that operate in the same geographies are the most comparable. You at least want companies operating in the same country, if not the same regions.

For more information on each of these characteristics, see Section (21.4). 2. What metrics do you look at when evaluating comparable companies?

When analyzing comparable companies, you tend to look at the following metrics (though these can vary slightly by industry): • • • • • •

Revenue Growth % (y-o-y) EBITDA Margin % EPS EPS Growth % Valuation multiples (EV/EBITDA, EV/EBIT, EV/Revenue, P/E, PEG) Leverage levels (Debt/EBITDA, Net Debt/EBITDA)

Note: you will typically be comparing future projections of these metrics (not historical trends).

For more information on these metrics, see Section (21.4). 3. Are there any factors I need to take into account when comparing a private company to a set of publicly comparable companies?

When comparing a private company to a set of public comps, there are numerous factors to consider: •

•

•

•

•

Liquidity: private company equity is less liquid and therefore should be discounted slightly (exiting the investment is more difficult, so the equity lacks a liquidity premium). Cost of borrowing: sometimes this is higher for public companies (less access to new debt/equity compared to a public firm), so valuation should be discounted slightly. Size: private companies tend to be smaller (which usually means more risk and/or less market share or economies of scale). Management control: often fewer shareholders as well as major equity holders involved in management; more risk when fewer individuals are in control due to the lack of a succession plan and management’s ability to fully control direction of company (without input from others). Earnings reporting: it is often difficult to obtain private company financials; private companies may report earnings and cash flows differently and are commonly not audited; often aim to minimize reported profit (for tax reasons).

As a general note, private companies are commonly discounted (often by 20-30%) after being valued in comparison to a public peer set due to the risks and considerations above. 4. What makes a good candidate for a transaction comp?

Characteristics used to build a set of transaction comparables are very similar to finding a good public comp, with a few other factors to consider: • • • • • •

Industry Geography Date completed Transaction size Consideration Buyer profile: hostile/friendly, institutional buyer/strategic buyer

For more information on each of these characteristics, see Section (21.5). www.ibankinginsider.com

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5. What metrics do you look at when evaluating comparable transactions?

When analyzing comparable transactions, you tend to look at the following metrics: • • • • • • • •

Enterprise Value or Transaction Value or Equity Value Revenue EBITDA EBIT Earnings (Net Income) Free Cash Flow Valuation multiples (EV/EBITDA, EV/EBIT, EV/Revenue, P/E, PEG) Leverage levels (Debt/EBITDA, Net Debt/EBITDA)

For more information on each of these metrics, see Section (21.5).

(23.6) Discounted Cash Flow Analysis 1. Walk me through a DCF valuation.

At a high level, a DCF is a short-form valuation model that projects out future FCF of a business and then discounts that cash flow back to the present using a set discount rate. Below we summarize the DCF Analysis process: 1. 2. 3. 4. 5.

Obtain the discount rate Project unlevered FCF into the future Calculate the terminal value Discount future unlevered FCF’s and the terminal value back to the present Sum all of the present values to reach your company’s Enterprise Value

For a full overview of DCF, see Section (A.6). 2. What is the difference between levered and unlevered FCF? Levered FCF: Cash flows that have accounted for payments made to debt holders (i.e. cash flows after interest payments and mandatory debt repayments). Unlevered FCF: Cash flows before debt service (represents the purely operational cash flows of the business, independent of its capital structure).

For more information, see Section (A.6). 3. How do you get from EBTIDA to unlevered FCF? Revenue to unlevered FCF? Net Income to unlevered FCF? Why must you multiply EBIT by (1-tax rate)?

Notice that the key to arriving at unlevered FCF is to always return back to EBIT first, then continue the formula from there. As long as you know how to get from EBIT to unlevered FCF, you should be able to calculate it under any circumstances. EBITDA to FCF EBITDA – D&A = EBIT * (1 – t) = EBI + D&A – Capex – Increase in Working Capital


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Revenue to FCF Revenue – COGS = Gross Profit – operating expenses = EBIT * (1 – t) + D&A – Capex – Increase in Working Capital Net Income to FCF Net Income / (1 – t) = EBT + Interest Exp. = EBIT * (1 – t) + D&A – Capex – Increase in Working Capital

Where: t = tax rate operating expenses = SG&A, payroll expense, marketing expense, etc. By multiplying EBIT by (1 – t) you are arriving at a “tax effected EBIT”. You are effectively applying taxes to the figure so that FCF does not include the tax benefits of interest expense (which are tax deductible). When looking at Free Cash Flow we want an after tax figure (cash will have to be used to pay taxes) and therefore must account for this tax while at the same time keeping a company’s capital structure independent of this calculation. 4. If I did a DCF on levered FCF, what value would that get me?

When conducting a DCF on unlevered FCF, the resulting value is the company’s Enterprise Value. Unlevered FCF does not include interest from debt and is therefore “capital structure independent” (cash flow available to both debt and equity holders). This results in Enterprise Value, a figure reflective of the value of the company to both debt and equity holders. When conducting a DCF on levered FCF, the resulting value is the company’s Equity Value. Levered FCF takes into account interest expense from debt, meaning debt holders have been paid. This results in a value of cash flows available only to equity holders in the company, also known as Equity Value. 5. How do you determine the terminal value in a DCF valuation?

The final portion of a DCF is the calculation of a terminal value. There are two major methods: the Gordon Growth method and the Exit Multiples method. •

Gordon Growth: Assume a growth rate of the company’s Free Cash Flow ( “FCF”) into perpetuity and apply the following formula to the final year’s FCF: (Terminal year FCF) * (1 + growth rate) / (WACC – growth rate)

•

Exit Multiples: Apply an exit multiple to your terminal year financials based on Transaction Comps or comparable financial metrics for similar companies.

6. When using the Gordon Growth method to calculate a terminal value, what is an appropriate growth rate to use? When using the exit multiples method, how do you determine an appropriate exit multiple?

When using the Gordon Growth method, it is common to choose a conservative growth rate such as long term expected GDP growth; more aggressive choices would imply that into perpetuity the target company would be larger than the U.S. Economy! Typically, a DCF is projected into the future until a low, stable growth rate is realized. When using the exit multiples method, transaction comparables are most commonly used to determine an average exit multiple (usually EV/EBITDA). Comparable company valuation multiples are sometimes used as well, but it must be noted that these often do not reflect a necessary control premium. www.ibankinginsider.com

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7. What are the three ways to manipulate a discounted cash flow model?

There are three major components to a DCF, and adjusting these will heavily affect the outcome of the model: 1. Discount rate: The discount rate directly affects the present value of future cash flows projected in the DCF. Adjusting the WACC even slightly can cause major shifts in the output of a DCF model. 2. Terminal value: Oftentimes, a majority of the valuation in a DCF is derived from the terminal value calculation. Making tweaks to the assumed growth rate for a Gordon Growth methodology or adjusting the exit multiple will shift a DCF valuation significantly. 3. Free cash flow: Obviously, a major part of a Discounted Cash Flow model is Free Cash Flow. Adjusting EBITDA margins/growth, capital expenditures, and working capital re quirements are all ways to impact FCF and thus change the value of your DCF. Note: as it may be apparent, a major disadvantage of the DCF valuation method is a heavy reliance on assumptions that are often difficult to precisely determine. 8. How would you build a DCF for a pre-revenue company?

The short answer is you likely wouldn’t. However, if you were to try and model out a DCF, you would need to project out the DCF for a significantly long period (maybe upwards of 20 years). During the earlier periods, the company would have significantly negative cash flow: no/little revenue with likely high capex and working capital increases. You would then need to continue projecting out the company’s operations until FCF became positive and reached a stable/mature point, so that you could calculate a reasonable terminal value. Though, again, this would be a far-fetched valuation with lots of questionable assumptions. 9. What is the formula for the Weighted Average Cost of Capital (WACC)? Where does this come into play in a DCF?

WACC is a formula used to calculate a discount rate and it consists of several parts: cost of equity, cost of debt, and cost of preferred equity (if applicable).

Cost of Debt WACC = [rd * (1 - t)] *

Cost of Equity D

(D + E + P)

+ re *

E (D + E + P)

Cost of Pref. + rp *

P (D + E + P)

Where: r e = cost of equity r d = cost of debt = r p cost of preferred equity t = tax rate D = market value of debt E = market value of equity P = market value of preferred equity Since the Weighted Average Cost of Capital is equivalent to a company’s discount rate, this comes into play in a DCF by acting as the percentage used to discount future cash flows to the present value (and thus arrive at a company valuation today).


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10. What is the cost of equity? How do you calculate the cost of equity?

The cost of equity is equivalent to the return on investment demanded by equity holders based on the risk associated with an investment. To find the cost of equity, we use a formula known as the Capital Asset Pricing Model (or CAPM). CAPM = rf + β * (rm - rf )

Where: r f = risk free rate (equal to U.S. Treasury Bill with maturity equal to length of DCF, usually 10 years) β = levered beta of the company’s equity r m = expected return of the stock market 11. What is the cost of debt? How do you calculate the cost of debt?

The cost of debt is equivalent to the return on investment demanded by debt holders based on the risk associated with an investment. The cost of debt can be calculated by taking the weighted average yield on all outstanding debt within the company. If no market prices of debt are publicly available, then taking a weighted average of the company’s interest expense to its book value of debt is usually accurate enough. 12. For a company with normal business operations, why is the cost of equity higher than the cost of debt?

Under normal circumstances, the cost of equity is higher than the cost of debt for the following reasons: •

•

•

Equity holders are behind debt holders in the capital structure: they take on more risk as investors in the event that the company becomes insolvent since debt holders get paid first. Debt tax shield: interest expense is removed from earnings before income taxes are applied or, put another way, interest on debt is tax deductible. Debt is often collateralized: equity investors have no guarantee on their investment, but debt holders often have specific assets backing their investment, which can be sold to help cover any losses.

13. Which has a higher WACC: an all-equity company, or the same company with some debt?

Usually, an all-equity company will have a higher WACC. Given that the cost of equity is higher than the cost of debt, and the fact that the all-equity company does not benefit from the debt tax shield, it is likely that the all-equity company has a higher WACC. Each company has an optimal capital structure that minimizes its WACC, and this almost always involves some combination of debt and equity; at some point, raising additional debt actually increases the firm’s overall WACC, but it is safe to assume that a company with NO debt does not have the optimal capital structure in place. 14. What components of WACC change for a company that isn't based in the U.S.?

The changes to WACC for non-U.S. companies are mostly related to the cost of equity. CAPM will differ in the following ways: •

Beta will differ: its correlation to the market will be based off of that respective region’s market index.


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•

•

The market risk premium will differ: again, the excess premium demanded by the market on equity investments will be based on a different equity index (not the S&P 500). The risk free rate might differ: sometimes people still use the U.S. Treasury rate as the Risk Free Rate in the CAPM equation.

Beyond the CAPM portion of the WACC equation, the cost of debt could be affected in certain areas where accounting rules differ: the debt tax shield may or may not be applicable in certain countries. 15. What is the difference between levered and unlevered Beta? How do you get from on to the other? Levered Beta refers to the Beta of a stock relative to the market af ter taking into account its capital structure (i.e. how much debt it has). In a sense, it tells you how risky the equity is in relation to the market. Unlevered Beta measures the risk of the business as a whole in relation to the market (not taking into account leverage/financial risk).

When determining the Beta for a company, you typically gather a set of comparable companies and use a financial program (i.e. Bloomberg) to gather their Betas. These will be levered Betas. You must unlever each of the Betas to then find a median that can be applied to the company you are analyzing. After finding this median unlevered Beta, you apply this number to your company’s capital structure to determine its levered Beta, which is the relevant metric for use in the CAPM formula. You cannot simply find a median levered Beta from a company’s competitors because you need to find the assumed average business risk of the company, then see how your company’s specific capital structure affects its own risk profile. Leve red β = β U * [1 + [(D / E) * (1 - t)]]

Where: β L = levered Beta β U = unlevered Beta E = Market value of equity D = Market value of debt t = corporate tax rate 16. Can you give me an example of a company or investment with a B eta that is negative, 0, between 0 and 1, greater than 1?

Beta is a measure of volatility that compares the return company or investment in question with the return of the overall market. This is relevant for the CAPM formula (as described earlier). The S&P 500 (or a comparable market index) is assumed to have a Beta=1. For example, if the “market” goes up 3%, then an investment with a Beta of 1 should also go up 3%. A description of different Betas and their significance is below: •

•

Beta>1: This investment is more volatile than the market. If the market goes up or down 1%, then this investment should go up or down by more than 1%. The higher the Beta, the larger the volatility. Examples of investments with Beta>1 include technology companies, early-stage companies, and companies in highly cyclical industries. Beta=1: This investment’s volatility matches that of the market. Examples include market indices: S&P 500, Nasdaq, Dow Jones Industrial Average, etc.


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•

•

•

1>Beta>0: This investment is less volatile than the market. If the market goes up or down 1%, then this investment should go up or down by less than 1%. Examples include blue chip stocks (Hershey, Coca Cola) and companies in non-cyclical industries. Beta=0: This investment is not correlated with the market (and is therefore “riskless”). Applying it to the CAPM formula gives us the Risk Free Rate. Examples of these types of investments include U.S. Treasuries. Beta<0: This investment is inversely related to the market. When the market goes up or down, this investment moves in the opposite direction. The most traditional example of this type of investment is gold, but other examples include put options and short ETFs.

17. How would you determine Beta, cost of debt, and cost of equity for a private company? Beta Betas measure a stock’s historical volatility compared to the entire market. Since private companies do not trade on a public exchange, Betas must be estimated based on the trading volatility of public comparable companies. Cost of Debt Private companies often rely on private bank loans as primary funding. These loans are not in line with the current public cost of debt and instead are usually offered at a premium. For this reason, similar to dealing with a private company’s Beta, cost of debt would need to be found by analyzing the cost of debt for publicly comparable companies. Another way to value debt for a private company would be to analyze the cost of acquiring new funding at the time of valuation. Cost of Equity The formula for cost of equity is the same for both public and private companies (using the CAPM formula). Since private companies are riskier than public companies (they carry more liquidity risk), when calculating cost of equity a private company will have a higher market risk premium (and higher Beta, as described above) which will increase the cost of equity. 18. What are the major problems with a DCF valuation?

This method of valuation is heavily dependent on assumptions and inputs. Minor changes in discount rate, growth rates, exit multiples, cash flow projections, etc. can cause extreme shifts in valuation. As well, the terminal value usually makes up a significant portion of the overall value of a company and is an extremely subjective part of the valuation.

(23.7) Leveraged Buyouts 1. What is an LBO?

A leveraged buyout is a transaction in which an investor group (usually including a private equity sponsor) acquires a target company. The investor group takes a controlling stake in the target company and funds the transaction mainly through debt (typical ratios are 20-40% equity with the remainder in debt). It is this high use of debt (known as leverage) that gives this form of acquisition its name. The debt is held at the target company level (secured by the target company’s assets) and will be paid off over time using the target company’s free cash flow. The goal of an LBO is to increase returns for the buyer by minimizing the equity invested in the target company and maximizing cash flow to pay down the high level of debt. The investor group will typically exit in 3-7 years through a sale, IPO, or recapitalization


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2. What are the advantages of an LBO (i.e. why would management want to do an LBO)?

LBOs can have significant positive effects on a company’s operations and its overall valuation. Some of the reasons why they are advantageous include: •

•

•

•

Increase management discipline: the amount of debt imposed on a company during an LBO forces management to scrutinize operations and more effectively manage the business as bankruptcy risk becomes much higher. Also, their jobs are now at stake as a financial sponsor can much more easily replace the C-level executives (compared to a widely-owned publicly traded company). Attract funding for growth capex: financial sponsors that execute LBO transactions have lots of money to work with. Oftentimes, these private equity firms invest hundreds of millions of dollars into companies that they take private to expand the business; this is capex that the company would otherwise not have. Opportunity to focus on long-term growth: one of the major flaws of publicly traded companies is that they often must focus on achieving or surpassing expected quarterly earnings thresholds. This limits their ability to invest in long-term growth prospects that do not yield any short-term benefits. Companies that are taken private have no such issues and can take short-term losses to fund what might become extremely profitable future opportunities. Optimize the capital structure: financial sponsors that purchase a company via an LBO change the entire capital structure of that company. Old debt and equity that existed are often wiped out and replaced by a completely new capital structure, which can be very favorable for companies that are struggling with poor financial situations.

3. What variables impact LBO returns the most? • •

•

•

Entry (or Purchase) Multiple: Minimizing your purchase price increases returns. Amount of Leverage: Maximizing the amount of debt raised will lower your initial equity investment and amplify returns (up to a point; debt carries more interest as leverage rises). Free Cash Flow Growth: Debt paydown from increased free cash flow will increase your equity stake in the company upon exit (in 3-7 years). More free cash flow will also result in a higher valuation upon exit based on a set exit multiple. Exit Multiple: Sell or value the company at the highest price possible when exiting the investment – the higher the sale price, the higher the returns.

4. What makes a good LBO candidate?

Not every company is a worthy candidate for an LBO; there are certain characteristics that make a company desirable for this type of buyout: •

•

•

• •

Stable Cash Flows: Companies with predictable and steady cash flows are ideal candidates. Leverage will be high post-LBO, and large amounts of debt will need to be paid down (i.e. risk of bankruptcy is higher now). Low Capital Expenditures: As an investor, you want to use cash flows to paydown debt, not capital expenditure requirements. High capex requirements might necessitate another equity investment by the financial sponsor somewhere down the road. Strong Management Team: An investor needs a strong, capable management team to run the company after the buyout. Stable Customer Base: Prefer companies with low customer concentration/steady growth. Opportunity for Margin Improvement/Growth: Companies with room for improvement make for good investments as cost cutting measures and new growth opportunities are ways to increase the value of the business.


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5. Who would be more willing to pay for the same target company: a private equity firm or a strategic buyer?

The answer to this question should begin with “it depends”, but generally speaking it should be the strategic buyer (another company in the same or related industry). Strategic buyers are more likely to realize synergies in a transaction, thus increasing the potential purchase price they are willing to pay. As well, private equity firms are more likely to demand a higher return on investment and look more closely for a “good deal” (and thus pay less). The exception to this would be if the private equity firm has one or more portfolio companies that are synergistic with the target. This means that they would also pay a premium to realize these synergies. 6. As an LBO investor, what factors do you weigh when determining how to f inance the transaction? Would you prefer to have more bank debt or more bond debt, and why?

The right combination and type of debt used to finance an LBO comes down to flexibility vs. interest rate. As an LBO investor, you can finance a purchase with secured bank debt (term loans) at lower interest rates, and you have the ability to prepay this debt with minimal or no penalties. However, this comes at the expense of tighter covenants and therefore less flexibility when adjusting the operations of the business. You could possibly run into financial trouble when spending lots of money on capital expenditures or when trying to pay yourself a dividend. If an LBO investor finances a transaction with more unsecured/high yield debt (bonds), then interest rates will likely be higher but there will be less restrictive covenants (allowing for more flexibility and less of a chance to breach those covenants). This flexibility is useful for investors that seek a financial cushion in the company being purchased (especially useful for companies that need to be “turned around”). Therefore, the answer to this question depends on the circumstances of the company being purchased in the LBO. It is common practice for most LBOs to be financed via some combination of secured bank debt and unsecured bonds to balance the effects of both. 7. How do you sell a company at the same price you bought it for, but still make a positive IRR?

This question is fundamentally asking, “What factors increase the IRR of a merger over time?” If you purchase a company with a combination of debt and equity, then it is possible to earn a profit by selling it at the same price. Look at the following example: • • •

•

You purchase a company for $100mm at the end of 2010 The transaction is financed using all-debt at a 5% interest rate The purchased company earns $10mm in excess cash flow each year; they use this cash to pay for the 5% interest expense and the rest is used to pay down the debt every year You sell company for $100mm at the end of 2014

Debt Balance

Excess Cash Flow 5% Interest Expense Cash Available to Pay Down Deb


2010 $100

2011 $95

2012 $90

2013 $84

2014 $78

$ --$ --

$10 (5) $5

$10 (5) $5

$10 (4) $6

$10 (4) $6

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At the end of 2010 you have a debt balance of $100mm, and each year you pay down a little bit of that debt, which also gradually lowers your interest expense over time. By 2014 you have paid off ~$22mm of debt, resulting in a 2014 debt balance of $78mm. When you sell the company at the end of 2014, though the sale price is only $100mm, $22mm of that value is attributable to equity ($100mm – $78mm debt balance remaining = $22mm). Therefore, your total return on capital is a $22mm profit from the sale of the company, which would give you a positive IRR (in this case, an infinite IRR since you made no initial equity investment). All of this happened even though the sale price did not change. Beyond the example above, the purchaser of the company could earn a positive IRR by paying himself a dividend. Even though the sale price is exactly the same, you would earn a positive equity return from the investment by earning equity through dividend payouts from the company’s cash flows.

(23.8) Mergers & Acquisitions 1. What are the reasons why a company would want to make an acquisition?

The two major strategies behind the majority of merger-related activity are horizontal and vertical integration: •

•

Horizontal Integration: involves acquiring competitors and companies engaged in similar lines of business to eliminate competition and increase economies of scale. Vertical Integration: involves acquiring companies in different stages of the supply chain i n an effort to control all aspects of production. This type of acquisition aids in reducing costs of production, eliminates uncertainty in production, synchronizes the overall supply chain, and allows for internal streamlining of the entire process.

2. What is a merger defense? Give me some examples of ways that a company could defend itself against a merger.

A merger defense is an action taken by a company to thwart a potential takeover by another party. This is mostly aimed at protecting oneself from a hostile takeover, a threat that only publicly traded companies face. Usually, merger defenses are put in place well-ahead of any anticipated merger activity. Below are some common examples of merger defense: •

•

• •

•

Poison pill (AKA a shareholder rights plan): allows shareholders to purchase additional shares of a company’s stock at a discounted rate when an intended acquisition of their company is announced. This discourages purchases by severely diluting the equity of a potential buyer. Staggered board: splits the board of directors of a company into different groups that are voted into their positions at different times (for multi-year terms). This prevents a purchaser from gaining control of the company immediately after obtaining a majority of the shares (it could take years to replace all of the board members and gain control of the company). Supermajority voting: requires a high % of shares to approve a merger (usually 80%). Making another acquisition: detracts potential buyers from acquiring the company as it is going through its own internal integration related to a separate merger. It would be very difficult to complete one merger after the other. Maintaining a high debt balance: forces buyers to be extremely financially stable (or risk bankruptcy).


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3. What is a control premium?

A control premium is a valuation premium placed on a company in order to own a controlling stake in the business. A buyer who will have control over the operations of a business must pay more for this power and influence as the group with control over the company has the final say in the strategic direction and future of the business. Otherwise, minority investors simply sit on the sidelines and provide input/opinions on the future of the company, but are at the whim of the controlling stakeholders. Let us look at two scenarios and compare the difference in ownership % and valuation multiple: 1. Company A intends to buy 30% of Company B 30% is not a controlling stake and therefore Company A will tend to pay a lower valuation premium, say 8x EV/EBITDA. 2. Company A intends to buy 51% of Company B  51% will give the buyer control of the company and its operations. Therefore, Company A must incorporate a control premium into their valuation of Company B and may pay 10x EV/EBITDA. Given that the buyer will have control, they are willing to pay a higher premium for the same earnings. 4. What are accretion and dilution? If a company with low P/E acquires a company with a high P/E in an all-stock deal, will the deal likely be accretive or dilutive?

Accretion and dilution refer to the net effect of an M&A transaction on shareholder value and whether EPS for the acquirer increases (accretive) or decreases (dilutive). In any M&A transaction, the factors that influence whether or not the combined entity’s EPS is higher than the standalone acquirer’s EPS include: • • •

Interest expense on debt raised for the acquisition Number of new shares issued by the acquirer to purchase the target company Increased amortization expense from write-up of assets

In an all-stock deal, follow this quick rule: when an acquirer with a higher P/E buys a target company with a lower P/E, the deal will be accretive (and vice versa). Think of it as a company buying “cheaper” earnings. 5. What are the major types of synergies? Give examples of each.

The two major types of synergies are cost and revenue synergies. Both are derived from M&A activity and can be summarized as follows: •

•

Revenue Synergies: Synergies that increase revenue items of an Income Statement via increased sales, prices, etc. Examples include cross selling products, increased product reach, and co-branding. Cost Synergies: Synergies that reduce expenses and increase profit margins via cost cutting, economies of scale, etc. Examples include consolidation or elimination of facilities, reduced head count, consolidation of supply chain and distribution channels, and increased purchasing power.

6. If Company A acquired Company B and achieved a positive $10mm in EBITDA synergies, how would this flow through the financial statements?

Typically, we assume that synergies are pre-tax, which means that they are generally just added to EBITDA. This is because the synergies could be either revenue or expense based ($10mm higher revenues or $10mm lower expenses). Therefore, the Income Statement would reflect a $10mm increase “above the line” and, adjusted for taxes, Net Income would increase $6mm (assuming a 40% tax rate). This flows through the Cash www.ibankinginsider.com

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Flow Statement as an increase in Cash Flow from Operations of $6mm, and a net increase in Cash of $6mm. On the Balance Sheet, Assets increase by $6mm from the increase in cash and Equity increases by $6mm from the increase in Net Income, thus balancing the A = L + E equation. 7. How do you calculate Goodwill in a merger?

Before calculating Goodwill, you must first deduct the existing book value of Net Identifiable Assets of the target company to determine the excess purchase price to be allocated to Asset write-ups. The amount of Net Identifiable Assets in a target company is roughly equivalent to its book value of common equity less existing Goodwill (both found on the target company’s Balance Sheet). Excess purchase price refers to the amount the target company is being purchased for, less its book value of assets. Next, allocate this excess purchase price to write-up the acquired target company’s tangible and intangible assets. Oftentimes the book value of assets is lower than the market value of these assets (as they are valued at the time of purchase, at a historical date), which is why they must be “writtenup”. The excess purchase price remaining ( after deducting the amount of assets that are written-up) is then added to new deferred tax liabilities created by the new write-ups of assets. Deferred tax liabilities can be calculated as follows: DTL = ($ value of asset write-ups) * (tax rate)

This will result in the total Goodwill created fr om the transaction.

(23.9) Capital Structure & Debt 1. Explain how a company’s capital structure works.

The capital structure of a company varies significantly by industry and by each individual corporation. The below chart outlines the order of different types of capital, starting with the most senior (AKA secured): Senior Secured Debt (Bank Debt and often High Yield Debt)

Most Secured

Senior Unsecured Debt (High Yield Debt and sometimes Bank Debt) Debt Senior Subordinated Debt (High Yield Debt and sometimes Mezzanine Debt) Subordinated Debt (Mezzanine Debt and PIK Debt)

Preferred Equity Equity Common Equity


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Least Secured

The upper-most items in the chart reflect individuals with a priority claim on assets of the company (as well as cash flows). Each type of capital is a source of financing that can be used by a company to fund its operations. The combination of different types of debt and equity used is called a “capital structure”. 2. Beyond common stock, what other types of equity could exist in a company?

Different forms of equity include: • • •

Non-voting common stock Preferred stock Contingent Equity Interests (convertible debt, restricted stock grants, equity warrants, and stock options )

For more information about different types of equity, refer to Section (21.7). 3. Why would a company issue one type of debt over another (i.e. Bank Debt vs. High Yield Debt)?

Each type of debt has its own pros and cons, below we outline some of them: Pros & Cons Bank Debt

High Yield Debt



      

Cheapest form of debt w/ lowest interest rates  Generally prepayable with no penalties  Can issue smaller amounts of debt  Requires collateral (cannot share collateral with other creditors in the future)  Generally have maintenance covenants, limiting operational flexibility  Mandatory amortization payments

Lock-in fixed interest rates Generally does not require collateral No amortization payments Generally fewer/no maintenance covenants Higher interest rates Requires large offerings ($100’s of millions) Generally requires mandatory “non-call” periods where debt prepayment is associated with penalty

4. Who is more senior, a bondholder or stockholder?

Bondholders are more senior than stockholders. In a typical capital structure, debtholders are more secured (AKA more senior) than equity holders; unlike bondholders, equity holders have no guarantee on their investment. In bankruptcy, creditors must be paid in full before equity holders can claim any proceeds from the bankrupt company. This makes equity more risky than debt and is a contributing factor to why investors typically demand a higher return on equity than debt. (See chart in Section (23.9), Question 1 for visual ranking of seniority). 5. What is a revolving credit facility and why do companies prefer it (while lenders tend not to)?

A revolving credit facility (AKA “revolver”) is akin to a large-scale corporate credit card. A revolver is a debt instrument made available to a company when it has (mostly) short-term financing needs. Companies often pay off this type of debt quickly to maintain a high available balance that can be potentially used in the future. Companies pay a set commitment fee (typically 25-100bps of the face value of the revolver) to maintain access to the debt, but they only pay the full interest rate on the drawn/used portion of the revolver.


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While companies love the flexibility of a revolver, lenders do not prefer to issue revolving credit facilities. Lenders earn minimal fees on unused revolver balances (usually less than 1% interest), but must still carve out enough cash from their Balance Sheet in case the full revolver needs to be funded quickly. 6. What is the difference between a term bond vs. a coupon bond?

A coupon bond is a debt obligation that requires the debtor to pay fixed coupon payments at designated periods of time (semiannual, annual, etc.) as well as the original principal at maturity. The name of these bonds (coupon) is derived from the original practice of tearing a coupon off of the physical bond certificate and redeeming it semiannually. Coupons are usually discussed as a percentage known as the “coupon rate” which is the sum of total coupon payments made per year divided by face value of the bond. Term bonds (or “zero-coupon bonds”) have no coupon payments between issuance and the time of maturity (the coupon rate is 0%). Instead of earning these coupon interest payments, the zero-coupon bond is sold at a deep discount to face value and the owner makes up the difference by getting the full face value at maturity. 7. How do interest rates affect the two bond types discussed above?

In general, bond value and interest rates (coupon rates) have an inverse relationship, meaning that when one goes up the other goes down. As bonds usually have a fixed coupon rate, investors will continually benchmark the return of a given bond with what else is available on the market. As market interest rates fluctuate, a bond’s fixed coupon rate will become more or less attractive to investors, which will affect their desire to pay more or less for the bond itself. As an example, say you own a $100 bond that pays a 5% coupon. If the market is paying coupon rates of 7%, investors can just buy a $100 bond at 7% and will not be willing to pay you face value ($100) for your bond that only yields 5%. Since interest rates have gone up, the value of your 5% bond will decline. If market interest rates fell below your 5% coupon, the opposite would be true and investors would pay you over face value ($100) for your bond that yields an interest rate above the current market rate. Zero-coupon bonds are unique when it comes to interest rates. As their name implies, zero coupon bonds do not make coupon payments, but this does not mean that they are unaffected by interest rates. Usually, zero-coupon bonds see the most volatile price movements as interest rates change. This is because without periodic coupon payments, there is no cushion to mitigate interest rate changes during the life of the bond. Owners of zero coupon bonds receive the entire cash flow at maturity instead of spreading out cash flows over the life of the bond. The present value of this cash flow at maturity is more sensitive to interest rate changes than a coupon bond that has cash flows spread over time. 8. What are the major types of debt covenants? Give examples of each.

When a company enters into a legal agreement with creditors to borrow money, there are specific terms listed in the agreement that force the borrower to adhere to certain guidelines/restrictions. These are known as “covenants”. Violation of a covenant often forces a company to provide a remedy to creditors in some way (i.e. paying a fee), but creditors can also force a company into default (usually the first step in a bankruptcy process). There are various forms of covenants, including:


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•

•

•

Affirmative covenants: require the debt issuer to adhere to and perform specific requirements. For example, a company must deliver quarterly audited financial statements. Restrictive covenants (AKA negative covenants): prevent the debt issuer from conducting certain activities. For example, the company cannot issue new debt, make certain investments, pay out dividends, etc. Financial covenants: force the debt issuer to meet certain minimum financial metrics such as Fixed Charge Coverage Ratio (FCCR), Debt/EBITDA, Net Debt/EBITDA, etc. Financial covenants can be further categorized as either incurrence or maintenance covenants: o Incurrence covenants: tested only if and when a debtor takes a particular action, such as wanting to issue new debt or make an acquisition. For example, to issue additional debt the company must maintain a Total Debt/EBITDA ratio of less than 4.0x. o Maintenance covenants: debtor must pass periodically scheduled financial tests (usually quarterly) to ensure that they are meeting minimum financial performance metrics. For example, the company must maintain a trailing twelve months FCCR of more than 1.0x (tested quarterly).

9. Which types of debt are likely to have more restrictive covenants and why?

In general, more senior debt (i.e. secured debt and/or bank debt) tends to have more restrictive covenants, especially if all tranches are issued at the same time. These senior tranches are the most secure and therefore will require the most covenants for protection. More restrictive covenants make the debt safer and more secure (from a lender’s perspective), and therefore contribute to lower interest rates on these more senior and secured debt instruments (bonds/loans). An exception to this rule can occur when tranches of debt are issued at different points in time. If secured debt is already in place, potential future holders of more junior debt may demand stricter and more restrictive covenants to increase their security and thus the attractiveness of the bond. 10. Why does a bond price decrease as the interest rate increases?

This question looks at the cause of the inverse relationship between bonds and their interest rates. Bonds carry fixed interest rates, meaning that the investor will obtain a pre-determined and designated coupon each period (for example, every 6 months). If the current market environment is characteristic of increasing interest rates, then the value ( desirability) of your fixed-rate bond decreases as investors can flock to similar (equivalent) bonds that pay higher interest rates. Ultimately, as a bond price decreases (due to an increase in market interest rates), the yield on the bond increases to match the equivalent interest rate that is currently being offered by the market. Let us demonstrate this with an example: Bond A: Par/Face Value = $1,000 Coupon = 8% Bond B: Par/Face Value = $1,000 Coupon = 10% Assume that Bond A and Bond B are equivalent in every way, except that Bond A was issued just yesterday and is set at an 8% coupon, while Bond B is being sold today at a 10% coupon. Since Bond B offers a higher coupon, Bond A’s price will drop to a level that makes its yield to maturity equivalent to Bond B’s coupon; if you buy Bond A at a discount then you earn a higher overall return than 8% as you not only earn the coupon but also the excess face value of the bond. For example, if you buy Bond A in the market at $900, you earn a $100 profit when it matures as the face value of the www.ibankinginsider.com

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bond is actually $1,000. In this example, you would earn the 8% coupon as well as an 11.1% return from the purchase of the bond ($100 / $900). In other words, Bond A would trade at a discount to par to earn a higher overall yield to maturity. 11. What is “Yield to Maturity” on a bond? Give me a rough estimate for Yield to Maturity (YTM) on a bond currently trading at 95, maturing in 5 years, and with a coupon of 10%.

Yield to Maturity ( “YTM”) is the internal rate of return earned by an investor assuming that they hold the bond until maturity (this ignores items such as the “callable date” for a bond). Put another way, YTM is the discount rate at which the sum of all the bond’s future cash flows (coupon and principle) equals the price of the bond. A back-of-the-envelope formula for calculating a bond’s YTM is as follows: YTM = Coupon % + (% discount / years to maturity)

We can illustrate this with the following example: 100 – 95 = 5% discount 5% / 5 years = 1% YTM = 10% + 1% = ~11% 12. What is the “Yield to Worst” on a bond?

Yield to Worst ( “YTW”) is defined as the lowest possible yield that can be expected on a callable bond investment. This figure acts as a “worst case scenario” for investors and takes into consideration factors such as when the bond is callable, call premiums, and current price of the bond, among other items. To calculate YTW, we usually assume it will be called on the first possible call date. To see why this brings up a “worst case scenario”, recognize that although we do get our money back, we will be missing out on future interest payments that would have been received had the bond not been called. By calculating the Yield to Call ( “YTC”) on this call date, we will get the YTW. By comparing this to the YTM that could have been achieved had the bond not been called, one can see the lost potential for return. For example, let us assume that there is a $100 bond with a 10% coupon trading at 110 (AKA 110% of face value) with a maturity in 5 years. The bond is callable at the end of Year 3 at 102% of face value. Its YTM = ~7.6% given where the bond is trading and assuming we hold the bond to maturity. Its YTW = ~6.9% based on the fact that you purchased the bond at an excess of its face value and will be earning two fewer interest payments over the life of the bond (which would help recoup the excess price paid for the bond). The 2% premium you are given when the bond is called does not provide a high enough premium to remedy your investment. 13. Does inflation help or hurt creditors? Equity owners?

Inflation hurts creditors but is either good or bad for equity owners (usually rather neutral). Creditors hate inflation because it devalues the money they receive from the debtors over time. Let us demonstrate this with an example: •

•

You borrow $1,000 today and plan to pay it back in 5 years (assume 0% interest expense here for simplicity). If there is 0% inflation per year, the creditor will break even on his loan (the $1,000 that you pay him back has the same purchasing power 5 years later).


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If there is 5% inflation per year, the creditor will lose money (the $1,000 that you pay him back is worth less in 5 years relative to everything else in the market: it has less purchasing power than $1,000 today).

Creditors normally plan for some amount of inflation by baking that into the interest rate they c harge debtors. Stocks tend to move in tandem with inflation (rising prices inflate company earnings and therefore valuations), but the benefits of inflation to equity holders are often debated. In general, just know that equity investments tend to rise in value with rises in inflation, and that (if given the choice) you would rather be an equity owner than a creditor in a high inflationary environment. 14. What are some creditor-specific concerns that equity investors would worry less about?

Creditors and equity holders both want a good return on their investment, but there are specific items and issues that are more relevant to those that lend money to a company. Here are some common creditor-specific concerns: •

•

•

•

Security: is the investment secured by specific assets of the company? Which ones? Equity holders do not have any form of security backing their investment. Seniority: similar to security, seniority refers to the preference that creditors have in their claims on a company’s assets. The more senior a creditor is, the more likely it is that they will get paid back by a company (in the event of a bankruptcy). Equity holders are always last in line in terms of seniority. Uses of free cash flow: though equity investors are concerned with a company’s cash flow and how it is used to advance the business, creditors can restrict a company’s ability to use free cash flow for specific items (such as paying dividends, paying down other debt, making excess capital expenditures, etc.). Investment protection in M&A: equity holders could theoretically worry about this in the form of a poison-pill, but creditors establish legal terms that specifically outline what happens in the event a company is sold or mergers with another company. Oftentimes, creditors have the ability to force a company to pay them back when a transaction occurs.

15. Why would two companies with the same EV/EBITDA multiple have different leverage multiples?

This is a bit of a trick question: appropriate leverage levels fluctuate by industry. Companies with more physical/tangible assets can generally take on more debt as they have more assets to secure the debt. An equivalent EV/EBITDA might be more of a coincidence as this is independent of the leverage multiples of the two companies. 16. What causes a company to go bankrupt?

Companies can only go bankrupt if they violate agreements with creditors. When legal terms of a debt agreement are violated, creditors can force a company into default; the two parties must then negotiate some sort of remedy (often a one-time fee). However, if no agreements can be reached or the company is in dire financial trouble, oftentimes the company will declare bankruptcy to protect itself from its creditors (to prevent them from simply seizing the company or its assets). Below are some ways that a company can violate its legal agreements with creditors: • • • •

Breaching covenants Failing to make interest payments Failing to make mandatory amortization payments Failing to pay creditors upon maturity of the debt


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Any one of these items allows the creditor to push a company into default, but default does not necessarily translate into bankruptcy. Oftentimes, it is in both parties’ best interests to renegotiate the terms of the credit agreement or bond indenture to avoid forcing the company and its creditors into a long, expensive bankruptcy process. 17. What are the major types of corporate bankruptcy in the United States? Which is more common and why? •

•

Chapter 7: bankruptcy liquidation – the company stops all operations and goes completely out of business. A trustee is appointed to liquidate (sell) the company's assets, and the money is used to pay off debt. Chapter 11: bankruptcy restructuring – reorganization of business and assets. A company restructures its operations and capital structure to return to a healthy state in the future. The goal is to become healthy enough again to turn a profit and pay back creditors. The company still has control in this process versus Chapter 7.

Corporations have historically favored Chapter 11 bankruptcy over Chapter 7 bankruptcy due to the fact that the liquidation often fails to yield the same returns that the ongoing business could attain; the inherent value of the business outweighs the liquidation value of the assets. Also, corporations and creditors get a say in the strategic future of the company when filing for Chapter 11 bankruptcy. It gives both parties time to deliberate and debate a future course of action for the company from an operational and financial perspective. 18. What is the fulcrum security?

The fulcrum security is the security in a company’s capital structure that will be converted from debt to equity when the company undergoes a restructuring (after filing for bankruptcy). Securities that are senior to the fulcrum security will be paid-out (i.e. not receive equity stakes in the future business), and securities that are subordinated to the fulcrum security will not receive any form of compensation. Distressed investors are highly interested in identifying this security as it gives them voting power in a company’s reorganization and equity ownership in the ongoing business postreorganization. To demonstrate, let us use an example: A company has the following three types of debt (in order of most secured to least secured): • • •

$250mm senior secured debt $400mm senior debt $150mm subordinated debt

After conducting extensive valuation work, the potential distressed investor determines that the company’s Enterprise Value is near $450mm. Based on this valuation, he believes the company’s fulcrum security is the senior debt (since the company is worth less than $650mm, the $150mm subordinated debt would be “out of the money” while the $250mm senior secured debt would be fully “in the money”, leaving the $400mm senior debt caught in the middle of only partly being “in the money”). The distressed investor would want to purchase some of the company’s $400mm senior debt if they are interested in participating in the company’s plan of reorganization. 19. As a company on the brink of bankruptcy, what are your options to avoid bankruptcy?

Companies that are about to go bankrupt often fall into desperate situations. Equity holders will try to do anything possible to avoid having their ownership taken away and maintain the business as a going concern. There are a few potential options that near-bankrupt companies can consider, including the following:


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•

•

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Internal Transformation: attempt to turn the company around internally without the help of creditors. The company will take measures to increase revenue and reduce expenses in order to boost profits and repay creditors. This strategy is likely unattainable for most companies that are about to declare bankruptcy. Refinancing/Distressed Financing: the company can look to raise additional debt financing or refinance existing debt to replace the existing creditors with new ones and push out maturity dates. Again, this strategy is usually not a possibility for companies about to go bankrupt; which creditors would want to lend new debt to a company that is about to become financially insolvent? Some companies, though, specialize in providing very expensive (i.e. high interest rate) debt to distressed businesses. Re-equitizing: this strategy looks to increase equity stakes in order to use the proceeds for working capital needs. Equity can come from new investors, management, current equity owners who want to increase their stake, etc. This form of capital may be hard to come across as investors are hesitant to take on equity in a company already in a risky state. Creditor Negotiation: under this strategy the debtor would attempt to negotiate with creditors to amend existing loan or bond agreements to avoid bankruptcy. Amendments can be used to adjust amortization payments, change financial covenants, lower interest rate payments, push out maturity, etc. Amendments/adjustments require a company to make certain concessions (often payment of a one-time fee to creditors). This strategy requires cooperation by creditors as they will likely be taking a hit in order to help the company get back on its feet. Distressed Sale: this involves selling the company as a whole and using the proceeds to pay back creditors. Sometimes distressed companies are purchased simply by finding a buyer that is willing to assume all of the debt of the distressed business.

20. How could a company that has been earning positive EBITDA for several years still go bankrupt?

The key to this question is understanding the limitations of EBITDA; it does not factor in certain material aspects of a business operations. Examples of how a company could go bankrupt with positive EBITDA include: •

•

•

•

Debt Service: EBITDA does not account for interest expense on debt or mandatory debt paydown. A highly leveraged company could have huge interest expense or debt amortization that causes it to have negative cash flow, even with positive EBITDA (remember, it is earnings BEFORE interest). High Capital Expenditures: A company can have positive EBITDA but negative cash flow by spending large amounts on capex (this is not reflected in EBITDA). Inability to Refinance: If a company has impending debt maturities and cannot refinance or pay back creditors, it will be forced to declare bankruptcy, even if EBITDA AND cash flow are positive. Violate Covenants: Even if a company is earning positive EBITDA, they must uphold agreements made with debt investors to maintain certain financial ratios (i.e. Net Debt/EBITDA). Breaching covenants can result in debtors taking control of the company (though unlikely).

(23.10) Miscellaneous & Brain Teasers 1. What is a league table?

This question tests a more obscure component in the investment banking world and would most likely be presented to gauge just how deep a candidate’s industry knowledge or experience is. League www.ibankinginsider.com

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tables are charts that rank investment banks on criteria such as number of deals completed, cumulative deal value, percent of market share, etc. Table parameters are designed to differentiate various factors such as region, deal size, product offering, industry, etc. These tables are put together by both investment banks (to present to potential clients) and third parties (to “objectively” compare how different banks stack up against one another). Note that these tables are taken as more of a rough guide than an absolute truth; oftentimes they are manipulated to most favorably reflect a bank’s position on the table and may contain certain exclusions. 2. What is a Confidentiality Agreement?

A Confidentiality Agreement is also commonly known as a Non-disclosure Agreement ( “NDA”). These are legal documents, or contracts, between multiple parties to ensure the privacy of c onfidential information. In the financial world, investment banks and buy-side firms regularly sign confidentiality agreements with companies to gain inside information regarding detailed financial performance as well as projected financial performance (particularly in the cases of LBOs and merger-related activity). By signing an NDA, all parties are held legally responsible for the nondisclosure of this private information and can face harsh penalties for any leaks or improper use of the data. 3. Why would a company want to go public?

Going public has both positive and negative consequences. On one hand, increased financial regulation and the development of an internal investor relations team can be time consuming, difficult, and costly. However, there are many benefits to going public, including: •

• •

•

• •

•

Access to financial markets/quick financing sources: the transparency and investor awareness built through an IPO gives public companies the opportunity to raise both debt and equity more quickly than private companies. Liquidity: equity is more readily purchased and sold in public markets. Exit by owners: a common way for early investors to monetize their investment in a company is via an IPO; they can sell their shares to the public after or during the IPO. Publicity: going public builds awareness about a company that might otherwise be unknown to the majority of retail investors (due to the hype surrounding the IPO). Currency to fund new acquisition: can issue public stock to buy a company. Compensation perk to acquire and retain talent: public companies can allow employees to participate in a wide array of stock-based compensation plans. Too many private investors: private companies can only have a limited number of investors; at a certain point they must legally go public to add investors (i.e. the controversy surrounding Facebook’s delay in trying to go public).

4. What is a stock split? Why would a company engage in this action?

A stock split is an action undertaken by corporations whereby existing shares are each divided into multiple shares. As a result of this action, the number of outstanding shares increases while the market cap remains constant (this is important to note). Many different exchange ratios are possible for a stock split, but the most common splits are 2-for-1, 3-for-1, or 3-for-2. In the case of a 2-for-1 split, a stockholder will receive twice as many shares post-split, but each share will be worth half as much as it was pre-split (thus in terms of value, the split is a wash). To see a split in action, let us look at an example: Assume stock A is trading at $10 per share and there are 50 shares issued. At this point in time it has a market capitalization of $500 ($10 x 50 shares). If a 2-for-1 stock split is implemented, each shareholder will be given twice as many shares, and each will be worth half as much. Following the


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example, stock A w ill now trade at $5 per share and there will be 100 total shares outstanding. Looking at the market capitalization post-split, we get $500 ($5 x 100 shares). Notice that the market cap is the same before and after the split. Although technically a stock split itself has no effect on value, the main reason they are implemented is to increase liquidity. A stock split increases the number of shares outstanding, thus increasing the liquidity of a stock. Investors commonly see stock splits occur when the price of a stock becomes extremely high. Psychologically, high share prices can “price out” some investors who are only able to buy a few shares and feel that each one is very “expensive”. Because stock splits are most commonly associated with rising share prices, they are often viewed as a positive signal to the market despite their lack of effect on stock value itself. 5. Say I bring you with me to Las Vegas to meet a client that provides linens to hotels and restaurants. You need to find out important non-public information about the company, so come prepared with 5-10 questions about their business. What are your questions?

This question tests your understanding of important operating considerations when looking at a client company’s business. It is not uncommon to face this scenario on-the-job in a buy-side or sell-side M&A position. Interviewers want to see how you think and if you understand what relevant and important non-public information an investor would want to know when analyzing a company. There is no correct answer, but in this situation some basic examples include: • • • • •

How are your contracts structured with hotels and restaurants? What prospective hotels and restaurants are you currently negotiating with? How do you source your linen? Are you planning an expansion into other industries beyond hotels and restaurants? What is the useful life of the different linens you provide to your customers? How do you calculate recurring sales for replacements?

You need to be able to think quickly to frame questions about a company or industry you have never spent time learning. Try to think of the basic functions of the business, where its risks lie, and what information would help you reach a conclusion of whether or not you would want to invest in the company. 6. Say I am a CFO of a public company with excess cash on hand, what are my options?

You can: • • • • •

Acquire another company Issue a dividend Buy back stock Pay down debt Invest in growth capital expenditures

Some interviewers may go one step deeper and ask you how to analyze what decision you would make. Explain that you would compare your options and determine which one will have the highest return on investment. 7. What is 1/32 in decimal form (or what is 1 ÷ 32)?

Although less common, some investment banking, private equity, and hedge fund interviews can include random math or computation problems. With these questions, interviewers aim to test a candidate’s mental math and problem solving capabilities under a pressured situation. Ultimately, they want to see how smart you are as well as your analytical capabilities. These types of questions will usually come from more “quant” focused groups or interviewers. In general, the trick is to break www.ibankinginsider.com

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down the problem into easier elements when possible. Although at first 1/32 (or 1 ÷ 32) seems a bit tricky, it can easily be broken down into much simpler math: 1/2 = 0.5 1/4 = 0.25 1/8 = 0.125 1/16 = 0.0625 1/32 = 0.03125 Notice each answer is just half of the previous (and much simpler) math problem. 8. You flip 3 separate coins at the same time. What's the probability of getting at least 1 heads?

Understanding probability is a useful skill in financial analysis; sometimes different operating scenarios are weighed by their respective probabilities to reach a more accurate valuation range for a company. This question (or similar versions) has been used to quickly test not only your statistical knowledge, but also your ability to do quick math in your head. Flipping three coins at the same time can yield the following outcomes:  

HHH HHT

 

 

HTT HTH

TTH THH

 

THT TTT

Out of the 8 possible outcomes, 7 of them have at least one heads, so the answer would be 7/8 or 87.5%. 9. You have two buckets of marbles, one with 50 white marbles and one with 50 black marbles. You can distribute the marbles however you please into either bucket ( does not need to be 50/50), but then you will reach into one of the buckets at random and will pull out a marble, also at random. How would you distribute the marbles between the two buckets to maximize your probability of choosing a black marble? What is that probability (roughly)?

To maximize the odds of choosing a black marble, you must place one black marble into one bucket (bucket A) and all remaining marbles (49 black and 50 white) into the second bucket (bucket B). With this in place, there are only 3 possible outcomes when choosing from the buckets: 1. You choose bucket A (50% chance), and will pick a black ball (100% chance of picking a black ball because it is the only ball in bucket A)  50% x 100% = 50% 2. You choose bucket B (50% chance), and pick a black ball (49/99 = ~50%)  50% x ~50% = 25% 3. You choose bucket B (50% chance), and pick a white ball (50/99 = ~50%) 50% x ~50% = 25% Notice that the total of situations 1, 2, and 3 (50% + 25% + 25%) equals 100%. To get the total probability of picking a black ball, you add situation 1 and situation 2 (50% + 25%) to get a 75% chance of picking black ball. 10. How many ping pong balls could you fit inside a 747?

Interviewers often like asking questions that gauge your ability to reach logical estimations; they use these questions as a way to understand your thought process. The trick with these questions is to start big and slowly get smaller and smaller in your details and analysis. You must gauge if the question requires you to ask questions of the interviewer or if they want you to come to a conclusion all on your own. You will notice that in answering you must make assumptions and go with them. You


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will not be docked if your guesstimates are not exact, but interviewers want to se e that you have common sense. Though there are many variations to these types of questions, we will use this classic example to demonstrate how to walk through a proper answer. Because they are asking about one physical object fitting into another, this question is best answered using size guesstimates and basic volume formulas: The body of a Boeing 747 is basically a cylinder about 200 feet long and 20 feet wide (therefore the radius is ~10 feet). Converting this to meters for ease of conversion, we get ~60 meters long by ~6 meters wide (radius is ~3 meters). The volume of a cylinder = π x r 2 x length The volume of our 747 body = 3 x (3) 2 x 60 = 3 x 9 x 60 = ~1,600 m3 Next, we go one level of detail deeper: let us assume that the wings, jets, tires, tail, etc. will hold another 10% of volume on top of the body: 1,600 cubic meters x 1.10% = 1,760 = ~1,800 m3 (or 1.8 x 109 m3) Now that we have estimated the volume (capacity) of the 747, we must determine the size of a ping pong ball. We know from experience that a ping pong ball is about 1.5 inches in diameter (so 0.75 inches in radius). Converting this to meters we get ~4 centimeters in diameter (so 2cm in radius). The volume of a sphere = 4/3 x π x r 3 The volume of our ping pong ball = 4/3 x 3 x (2) 3 = ~32 cm3 (or ~30 cm3) Putting these two volumes together, we get 1.8 x 10 9 / 30 = ~60 x 106 (or 60,000,000) ping pong balls. 11. How do you value a perpetuity that grows at $1,000/year? For example, $1,000 in Year 1 | $2,000 in Year 2 | $3,000 in Year 3 | etc.? Assume a 5% discount rate.

This question tests your understanding of the perpetuity growth formula, but also makes you think outside the box. You cannot simply apply the perpetuity growth formula to this question because the growth rate is changing every year: this is not a set growth rate %, but it is instead growing by a set dollar amount each year. Recall the perpetuity growth formula: Perpetuity Value = C / (r – g)

Where: C = cash flow each year r = discount rate g = perpetuity growth rate You must break down this question into separate sections and treat each year independently. Think of it like this: each year you are getting a new perpetuity payment. This is demonstrated in the chart below:


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1st Payment 2nd Payment 3rd Payment 4th Payment 5th Payment 6th Payment 7th Payment Total

Year 1 $1,000

$1,000

Year 2 $1,000 $1,000

$2,000

Year 3 $1,000 $1,000 $1,000

$3,000

Year 4 $1,000 $1,000 $1,000 $1,000

$4,000

Year 5 $1,000 $1,000 $1,000 $1,000 $1,000

$5,000

Year 6 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $6,000

Year 7 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $7,000

Again, each year you receive a NEW $1,000 payment per year that will go into infinity. Therefore, the present value of the each payment in each year is: PV 1st Payment = $1,000 / 0.05 = $20,000 PV 2nd Payment = $1,000 / 0.05 = $20,000 PV 3rd Payment = $1,000 / 0.05 = $20,000 PV 4th Payment = $1,000 / 0.05 = $20,000 And so on… Each year you are getting something that is worth $20,000, based on the present value of an annuity into infinity. Now, treat each of these $20,000 per year values as an annuity itself. Therefore, you are getting a $20,000 “payment” each year into infinity, and the present value can be calculated as follows: PV = $20,000 / .05 = $400,000


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Appendix A: Questions For The Interviewer 1. What attracted you to [your bank]? 2. How would you describe your group’s culture? 3. How are your deal teams typically structured? 4. Do Analysts commonly interact with senior bankers? 5. How are deal sourcing and execution handled in your office? Are the roles fairly separate or do Analysts in your office see a deal through from start to finish? 6. Have you noticed any effects at your firm from the recent changes on Wall Street/economic landscape? 7. What kinds of deals has your firm/office/group been working on recently? 8. What are the most common deal types that Summer Analysts can expect to work on? 9. What are your interactions like with other offices and internationally? Do you work on a significant number of deals with teams from other regions? 10. How often are Summer Analysts staffed on live deals versus pitches? 11. Do you have any sort of mentorship program for Summer Analysts? 12. What pieces of advice would you give an intern regarding how to be a successful Summer Analyst? 13. Within [your bank], what led you to work at a regional office instead of the New York office (or vice versa when interviewing in New York)? 14. Is it common and/or possible for Analysts to stay a third year with your group? What do most of your Analysts typically do after their two-year program? 15. Where do you see the economy (or industry) heading in the next several months/year? 16. I know that [well-known senior banker] runs your group, what is it like working with them?


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Appendix B: Email Address Formula List Each investment bank has a different “formula” for corporate email addresses; this formula is composed of two parts. 1. The email prefix: Consists of the portion of an email address before the @ sign. These are presented in several different ways: • • •

• •

First.last@ - this is the most common email prefix (john.doe@) First initial Last name@ - this is another extremely common email prefix (jdoe@) Last name@ - this is more common among buy-side firms but is used by some smaller banks (doe@) First.middle initial.last@ - this is common for individuals with popular names (john.w.doe@) First.last.#@ - this is a less common way to distinguish individuals with popular names (john.doe.2@)

Senior executives will often alter their email prefix as to avoid matching the firm’s email formula (this helps prevent cold emails). There is no harm in trying multiple variations of the above formulas when guessing a banker’s email address: at worst, the email fails to go through. In rare cases, individuals may have an obscure symbol or format; these will be nearly impossible to guess. 2. The email suffix: Refers to the portion of an email address following the @ sign (i.e. @bankname.com). This will be some derivation of the bank’s name (usually an abbreviation of some sort for banks with a long name). Below is an insider list of current email formulas. We have used an employee by the name of Joseph T. Smith to demonstrate the formulas: Bulge Bracket: • • • • • • • • • •

Bank of America Merrill Lynch: Barclays: Citi: Credit Suisse: Deutsche Bank: Goldman Sachs: JPMorgan: Morgan Stanley: UBS: Wells Fargo:

[email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Middle Market: • • • • • • • •

Jefferies & Company: RBC: Houlihan Lokey: HSBC: RBS: BNP Paribas: Rothschild: Macquarie:


[email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

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Elite Boutique: • • • • • •

Moelis & Company: Lazard: Blackstone: Evercore: Centerview: Greenhill:

[email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Some third-party websites offer email verification services for free. These can be helpful when verifying whether or not an email you guessed is correct. These include jigsaw.com, verifyemailaddress.org, verify-email.org, etc. Remember, if you are in contact with one person at an investment bank, you have the formula to reach out to other individuals at that bank: all you need is a name.


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Appendix C: Financial Crisis Overview 2008 Financial Crisis The financial crisis itself can be traced back to 2006, beginning with a decline in the subprime mortgage market. The repercussions of loose mortgage lending practices began to surface and manifest themselves through a rising number of mortgage defaults. This rise in mortgage defaults increased the supply of houses on the market and drove down housing prices. This problem in the mortgage market leaked to other sectors of the economy due to mortgage-backed securities (bundled groups of mortgages that were sold in tranches to institutional investors). These relatively “low risk” investments began losing most of their value as the subprime (highest risk) assets within them defaulted. The financial crisis was further fueled by the prevalence of Credit Default Swaps (“CDSs”), financial instruments that “insured” losses on mortgage backed securities. The increasing number of defaults hurt the companies that issued and sold CDSs by forcing payouts to the investors that bought them. Drops in value of mortgage-backed securities and CDSs caused a shrinking of bank balance sheets and froze credit markets as banks were not willing to lend to one another. The unwillingness to lend carried over to non-financial companies and caused a freeze in private lending as a whole. The economy witnessed a steep drop in consumption, leading to a reduction in GDP and the beginning of a deep recession. Consumer confidence was crushed and people began spending less money as unemployment rose significantly (companies were forced to reduce employee head counts). The U.S. government responded by passing the Troubled Asset Relief Program (TARP) designed to unfreeze credit markets and get the economy moving forward again. Source: 2008 Financial Crisis & Global Recession ; http://2008financialcrisis.umwblogs.org/executive-summary/


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In-Depth Table Of Contents Part I:


Chapter 1:

What An Investment Bank Is ...................................................................................................

5

(1.1)

Overview Of An Investment Bank .................................................................................. What Is An Investment Bank? ...................................................................................... How Investment Banks Are Structured ........................................................................ Investment Bank Divisional Breakdown ...................................................................... The “Chinese Wall” (Public vs. Private Information Barrier) ......................................

5 5 5 6 6

(1.2)

The Functions Of An Investment Bank ........................................................................... Corporate Finance ......................................................................................................... Capital Markets ............................................................................................................. Sales & Trading/Research ............................................................................................ Other Departments ........................................................................................................

7 7 7 8 9

(1.3)

Investment Banking Corporate Ladder ............................................................................ 9 Investment Banking Hierarchy ..................................................................................... 9 Deal Teams ................................................................................................................... 10

(1.4)

How Investment Banks Make Money ............................................................................. 10 1. Advisory Fees .......................................................................................................... 10 2. Underwriting Fees ................................................................................................... 10

(1.5)

Commercial Banking vs. Investment Banking ................................................................ 11

(1.6)

Other Finance Participants ............................................................................................... Venture Capital Fund .................................................................................................... Private Equity Fund ...................................................................................................... Hedge Funds And Mutual Funds ..................................................................................

12 12 12 12

(1.7)

Changing Nature Of The Industry ................................................................................... Increased Regulation .................................................................................................... Loss Of Major Firms And Consolidation ..................................................................... Wall Street Scrutiny ......................................................................................................

13 13 13 13

Chapter 2:

The Major Players .................................................................................................................... 14

(2.1)

By Size ............................................................................................................................ Bulge Bracket ............................................................................................................... Middle Market .............................................................................................................. Boutique ........................................................................................................................ Elite Boutique ...............................................................................................................

14 14 15 15 16

(2.2)

By Region ........................................................................................................................ New York City .............................................................................................................. Regional Offices ........................................................................................................... International Offices .....................................................................................................

16 16 17 17

(2.3)

League Tables .................................................................................................................. 18


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Chapter 3:

What The Job Entails ...............................................................................................................

19

(3.1)

By Types Of Staffings (Projects) ..................................................................................... Pitches ........................................................................................................................... Deals ............................................................................................................................. Internal/Infrastructure Projects ..................................................................................... Favors ...........................................................................................................................

19 19 20 24 25

(3.2)

By Types Of Work Performed ......................................................................................... Administrative Work .................................................................................................... Technical Work ............................................................................................................ Qualitative Work .......................................................................................................... Research ........................................................................................................................

25 25 26 27 28

(3.3)

By Groups ........................................................................................................................ Industry/Coverage Groups ............................................................................................ Product Groups – Corporate Finance ............................................................................ Product Groups – Capital Markets ...............................................................................

28 29 29 30

(3.4)

“Heard In The Bullpen” ................................................................................................... Bonus Season And Reviews ......................................................................................... Culture .......................................................................................................................... Auxiliary Staff Support ................................................................................................. Face Time ..................................................................................................................... Friday Night Specials ................................................................................................... All-Nighters .................................................................................................................. “The Red Light Of Doom” ........................................................................................... Red Pen Markups .......................................................................................................... Data Room And Lucite Companies Spoil You ............................................................. ALT + Tab .................................................................................................................... Attention To Detail ....................................................................................................... A Day In The Life .........................................................................................................

31 31 31 31 31 32 32 32 32 33 33 33 33

Part II:


Chapter 4:

Publicly Available Positives ...................................................................................................... 38

(4.1)

Compensation .................................................................................................................. Factors that Affect Compensation ................................................................................ Junior Bankers .............................................................................................................. Senior Bankers ..............................................................................................................

38 38 39 40

(4.2)

Exit Opportunities ........................................................................................................... The Buy-side ................................................................................................................. Business School ............................................................................................................ Other .............................................................................................................................

40 40 41 41

(4.3)

Unparalleled Learning Experience .................................................................................. Responsibility ............................................................................................................... Hours ............................................................................................................................ Teamwork ..................................................................................................................... Material Deals ............................................................................................................... Technical Skills ............................................................................................................ Senior Exposure ............................................................................................................

41 41 41 42 42 42 42


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Chapter 5:

(4.4)

Pedigreed Colleagues And Future Network .................................................................... 42

(4.5)

Prestige ............................................................................................................................ 43

Insider Positives ........................................................................................................................ 44

(5.1)

Learning To Deal With Stress ......................................................................................... 44

(5.2)

Badge Of Honor .............................................................................................................. 44

(5.3)

Transferrable Skill Set ..................................................................................................... 44

(5.4)

Future Jobs Will Be Less Difficult ................................................................................. 44

(5.5)

Full-Time Analyst Training ............................................................................................ 45

(5.6)

A Humbling Experience ................................................................................................. 45

(5.7)

Leadership And Management ......................................................................................... 45

(5.8)

Small, Exclusive Industry ............................................................................................... 45

(5.9)

Industry Expertise ........................................................................................................... 45

(5.10) Ideal Starting Point ......................................................................................................... 45 Chapter 6:

Chapter 7:

Publicly Available Negatives .................................................................................................... 46

(6.1)

Long Hours ..................................................................................................................... 46

(6.2)

Stress .............................................................................................................................. 46

(6.3)

Big Personality Bosses ................................................................................................... 47

(6.4)

Lack of Fitness And Overall Health ............................................................................... 47

(6.5)

Negative Public Image ................................................................................................... 47

Insider Negatives ....................................................................................................................... 48

(7.1)

Pay Is Lower Across The Board ..................................................................................... 48

(7.2)

Large Amounts Of Administrative Work ....................................................................... 48

(7.3)

Unnecessary, Unrecognized, Or Irrelevant Work Completed ........................................ 48

(7.4)

Limited Ability To Control Work Flow ......................................................................... 49

(7.5)

Investment Banking Is In A Volatile State ..................................................................... 49

(7.6)

Low Bank Loyalty .......................................................................................................... 49

(7.7)

Unrealistic Expectations For Exit Opportunities ............................................................ 49


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Part III:

How To Get The Job

Chapter 8:

Step 1 – Evaluate Your Current Situation .............................................................................. 51

(8.1)

Chapter 9:

Chapter 10:

Are You At A Target Or Non-Target School? ............................................................... 51 Target Schools .............................................................................................................. 51 Non-Target Schools ...................................................................................................... 51

Step 2 – Excel In The Classroom .............................................................................................

53

(9.1)

Major .............................................................................................................................. 53

(9.2)

Essential Classes ............................................................................................................. 53

(9.3)

GPA ................................................................................................................................ 54

Step 3 – Get Involved On Campus ........................................................................................... 55

(10.1) Join The Right Student Groups ...................................................................................... 55 (10.2) Form Your Own Student Organization ........................................................................... 55 (10.3) Honors Societies And Distinctions ................................................................................. 56 (10.4) Student Government ....................................................................................................... 56 Chapter 11:

Step 4 – Create And Perfect Your Resume ............................................................................. 57

(11.1) Format/Appearance ........................................................................................................

57

(11.2) Detailed And Quantitative .............................................................................................. 1. Detail Oriented .......................................................................................................... 2. Specific Numbers ...................................................................................................... 3. Finance Terminology ................................................................................................

59 59 59 59

(11.3) Results Driven ................................................................................................................ 60 Stress Exposure To Senior Employees ......................................................................... 60 (11.4) Finance Resume Structure .............................................................................................. 60 Major Sections .............................................................................................................. 61 Essential Resume Do’s And Don’ts .............................................................................. 63 (11.5) Review Process (What An Insider Looks For) ............................................................... The Resume Packet ....................................................................................................... Who Reviews It ............................................................................................................ How An Insider Reviews Your Resume ....................................................................... Selection Process ..........................................................................................................

64 64 64 65 65

(11.6) The Cover Letter ............................................................................................................ 66 Chapter 12:

Step 5 – Network ....................................................................................................................... 67

(12.1) Whom To Network With ................................................................................................ Current Upper-Classmen .............................................................................................. Alumni .......................................................................................................................... Family And Friends ...................................................................................................... Other Industry Insiders .................................................................................................


225

67 67 67 68 68

Chapter 13:

(12.2) Where To Network ......................................................................................................... Student Groups ............................................................................................................. Alumni Center .............................................................................................................. Career Center ................................................................................................................ Firm Events ................................................................................................................... Online ...........................................................................................................................

68 68 68 69 69 69

(12.3) How To Network ............................................................................................................ 1. Prepare ...................................................................................................................... 2. Execute ..................................................................................................................... 3. Follow-Up ................................................................................................................. 4. Maintain And Exploit The Relationship ...................................................................

70 70 72 73 74

(12.4) Non-Target Strategy: Going Above And Beyond .......................................................... Start Early ..................................................................................................................... Attend (Or “Crash”) Nearby School Events ................................................................. Reaching Out “Cold Turkey” ....................................................................................... Let Your Personality Shine ..........................................................................................

75 75 75 76 78

Step 6 – Obtain Pre-Internship Internships ............................................................................ 79

(13.1) Types Of Internships ...................................................................................................... 79 Summer Internships ...................................................................................................... 79 Part-Time, School Year Internships .............................................................................. 79 (13.2) How Different Internships Stack Up .............................................................................. High Finance Internship ................................................................................................ General Corporate Finance/Consulting/Accounting ..................................................... General Financial Services ........................................................................................... Financial Education Programs ...................................................................................... Other .............................................................................................................................

80 80 80 80 80 81

(13.3) How To Get These Internships ....................................................................................... Start Small .................................................................................................................... Friends & Family Connections ..................................................................................... Career Center ................................................................................................................ Networking ................................................................................................................... Online Job Boards .........................................................................................................

81 81 82 82 82 83

(13.4) What To Take Away From Your Internships ................................................................. 83 Chapter 14:

Step 7 – Prepare For Junior Year Summer Analyst Interviews ................. .......................... 84

(14.1) Action Item 1 – Talk To Experienced Peers ................................................................... 84 (14.2) Action Item 2 – Understand The Industry And The Job ................................................. 84 (14.3) Action Item 3 – Continue Networking ........................................................................... 85 (14.4) Action Item 4 – Master Your Story (Introduction) ......................................................... 1. Background ............................................................................................................... 2. Why Finance ............................................................................................................. 3. The Road To Investment Banking ............................................................................ 4. Why This Interview ..................................................................................................

86 86 87 87 87

(14.5) Action Item 5 – Prepare For Qualitative Questions ........................................................ 88


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(14.6) Action Item 6 – Study Technical Questions ................................................................... 89 (14.7) Action Item 7 – Conduct Mock Interviews .................................................................... 89 What To Focus On ........................................................................................................ 90 (14.8) Action Item 8 – Research The Banks ............................................................................. 90 (14.9) Interview Essentials ........................................................................................................ 90 Back Pocket Items ........................................................................................................ 90 Words of Wisdom ......................................................................................................... 91 Chapter 15:

Step 8 – Obtain Your Junior Year Summer Analyst Internship .............. ............................ 92

(15.1) Action Item 1 – Understand The Internship’s Importance ............................................. Internships Lead To Full-Time Jobs ............................................................................. Find The Right Fit ........................................................................................................ Can You Handle Investment Banking? .........................................................................

92 92 92 92

(15.2) Action Item 2 – Stay On Top Of The Recruiting Cycle ................................................. 93 (15.3) Action Item 3 – Apply .................................................................................................... 93 Target Schools .............................................................................................................. 93 Non-Target Schools ...................................................................................................... 93 (15.4) Action Item 4 – Network ................................................................................................ 1. After Securing An Interview ..................................................................................... 2. When Trying To Leverage Other Interviews ............................................................ 3. To Stay On A Firms Radar After Failing To Secure An Interview ..........................

94 95 95 95

(15.5) Action Item 5 – Continue Preparing For Your Interview ............................................... 96 (15.6) Action Item 6 – Dominate Your Interviews ................................................................... 96 General Interview Tips & Strategies ............................................................................. 96 Phone Screen ................................................................................................................ 97 First Round Interview (On-Campus) ............................................................................ 97 Second Round Interview ............................................................................................... 100 Juggling Interviews ....................................................................................................... 102 (15.7) Action Item 7 – Follow-Up ............................................................................................ 102 (15.8) Action Item 8 – Choose An Offer .................................................................................. 103 Exploding Offers .......................................................................................................... 103 Shopping Your Offer .................................................................................................... 104 Choosing Your Offer .................................................................................................... 104 (15.9) So You Didn’t Get An Investment Banking Internship .................................................. 15 Assess Why ................................................................................................................... 105 Fix It ............................................................................................................................. 105 Your Options ................................................................................................................ 106 Formulate A Plan .......................................................................................................... 107 Chapter 16:

Step 9 – Excel During Your Summer And Secure The Full-Time Job ................................. 108

(16.1) Getting Ahead ................................................................................................................. 108 Take Workshops & Online Courses ............................................................................. 108 Read These Books ........................................................................................................ 109 Utilize These Forums And Websites ............................................................................ 109 www.ibankinginsider.com

227

Practice With MS Office ............................................................................................... 109 (16.2) Excelling On The Job ..................................................................................................... 109 Leave A Good Impression ............................................................................................ 109 Stay Organized .............................................................................................................. 110 Practice Proper Email Etiquette .................................................................................... 110 Practice Proper Phone Etiquette .................................................................................... 111 Always Be Learning ..................................................................................................... 111 Understand Office Politics ............................................................................................ 112 Do The Little Things .................................................................................................... 113 (16.3) Understanding The Summer Review Process ................................................................. 113 Mid-Summer Review .................................................................................................... 113 Last Chance Review (Semi-Final Review) ................................................................... 114 Final (“Round Table”) Review ..................................................................................... 114 (16.4) Receiving Your Offer ..................................................................................................... 115 Choosing A Group ........................................................................................................ 115 Chapter 17:

Step 10 – Full-Time Recruiting ................................................................................................ 116

(17.1) Number Of Openings ..................................................................................................... 116 (17.2) Recruiting Cycle And Structure ..................................................................................... 116 (17.3) Assess Your Situation And Execute A Plan ................................................................... 117 Situation A – Received A Full-Time Offer From Banking Summer Internship ........... 117 Situation B – Banking Summer Analyst Internship With No Full-Time Offer ............ 119 Situation C – No Investment Banking Internship ......................................................... 120 Chapter 18:

Step 11 – I Did Not Get A Full-Time Job, Now What? .......................................................... 122

(18.1) You Still Want To Get Into Banking .............................................................................. 122 Delay Graduation .......................................................................................................... 122 Masters Program ........................................................................................................... 122 Enter As An Associate .................................................................................................. 122 Get Lucky ..................................................................................................................... 123 Back Office: A Common Misconception ...................................................................... 123 (18.2) You Want To Do Something Else Finance Related ........................................................ 123

Part IV:

How To Succeed On The Job And Next Steps

Chapter 19:

How To Be A Successful Full-Time Analyst ........................................................................... 125

(19.1) Preparing For The Job .................................................................................................... 125 Keep Up With Financial News ..................................................................................... 125 Brush Up On Summer Training Materials ................................................................... 125 Continue Your Finance And Accounting Education .................................................... 125 Get “Fitted” ................................................................................................................... 125 (19.2) Full-Time Training ......................................................................................................... 125 (19.3) First Impressions 2.0 ...................................................................................................... 126 (19.4) Settling In ....................................................................................................................... 127


228

How To Be A Superstar ................................................................................................ 127 How To Be A Sufficient Slacker .................................................................................. 128 (19.5) “Things I Wish I Would Have Known” ......................................................................... 130 The Analyst/Associate Dynamic ................................................................................... 130 Importance Of Finding A Mentor ................................................................................. 130 Bonus Payment And Reviews ....................................................................................... 130 Long Hours & Weekends ............................................................................................. 131 Organization ................................................................................................................. 131 Managing Expectations ................................................................................................. 131 Forming Relationships Across The Bank ..................................................................... 131 Leveraging Existing Work ............................................................................................ 132 Importance Of Attitude ................................................................................................. 132 Importance Of Judgment .............................................................................................. 132 Taking Vacation/Missing Work .................................................................................... 132 Ways To Stay In Shape ................................................................................................. 132 What To Keep At Your Desk ....................................................................................... 133 Work-Life Balance ....................................................................................................... 133 Importance Of Having Good Relationships With Back-Office Services ...................... 133 How Early Exit Opportunity Recruiting Begins ........................................................... 133 Chapter 20:

Banking And Beyond ................................................................................................................ 134

(20.1) Making It A Career ......................................................................................................... 134 (20.2) Exit Opportunities .......................................................................................................... 134 Private Equity & Hedge Funds ..................................................................................... 135 Venture Capital ............................................................................................................. 136 Internal Corporate Finance ........................................................................................... 137 Business School ............................................................................................................ 138 Entrepreneurship .......................................................................................................... 138

Part V:

Technical Concepts & Interview Questions

Chapter 21:

Technical Guide – Accounting, Valuation & More ................................................................ 140

(21.1) Accounting Overview ..................................................................................................... Income Statement ......................................................................................................... Statement Of Cash Flows ............................................................................................ Balance Sheet ................................................................................................................

140 140 141 143

(21.2) Financial Ratios .............................................................................................................. 144 Solvency & Liquidity Ratios ........................................................................................ 144 Profitability & Efficiency Ratios .................................................................................. 145 (21.3) Introduction To Valuation .............................................................................................. 146 Enterprise Value vs. Equity Value ................................................................................ 146 (21.4) Public Comparables Analysis ......................................................................................... 146 (21.5) Transaction Comparables Analysis ................................................................................ 148 (21.6) Discounted Cash Flow Analysis ..................................................................................... 150 Present Value & Discount Rates ................................................................................... 150 Free Cash Flow ............................................................................................................. 152 Terminal Value ............................................................................................................. 153


229

Step-By-Step ................................................................................................................. 154 (21.7) Capital Structure ............................................................................................................. 155 Debt .............................................................................................................................. 156 Equity ............................................................................................................................ 157 (21.8) Options ........................................................................................................................... 158 (21.9) Mergers & Acquisitions ................................................................................................. 159 Consideration ................................................................................................................ 160 Accretion & Dilution .................................................................................................... 161 (21.10) Leveraged Buyouts ......................................................................................................... 162 Key Participants ............................................................................................................ 162 What Makes For An Attractive LBO Candidate? ......................................................... 162 LBO Valuation .............................................................................................................. 163 LBO Analysis – The Process ........................................................................................ 164 Exit Strategies ............................................................................................................... 165 Chapter 22:

Qualitative Interview Questions & Answers ........................................................................... 166

(22.1) “Why…?” ....................................................................................................................... 166 (22.2) Understanding The Job ................................................................................................... 169 (22.3) Character Attributes ........................................................................................................ 171 (22.4) Work & Personal History ............................................................................................... 174 (22.5) Macroeconomics & Microeconomics ............................................................................. 177 Chapter 23:

Technical Interview Questions & Answers ............................................................................. 180

(23.1) Accounting – Basic ......................................................................................................... 180 (23.2) Accounting – Advanced ................................................................................................. 182 (23.3) General Valuation – Basic .............................................................................................. 186 (23.4) General Valuation – Advanced ....................................................................................... 190 (23.5) Comparables Analysis .................................................................................................... 193 (23.6) Discounted Cash Flow Analysis ..................................................................................... 195 (23.7) Leveraged Buyouts ......................................................................................................... 200 (23.8) Mergers & Acquisitions ................................................................................................. 203 (23.9) Capital Structure & Debt ................................................................................................ 205 (23.10) Miscellaneous & Brain Teasers ...................................................................................... 212


230

List Of Insider Insights Part I:


Chapter 1:

What An Investment Bank Is ...................................................................................................

5

Importance Of Understanding Investment Banks ......................................................... 5 Stock Trading Considerations ....................................................................................... 6 The Role of Capital Markets ........................................................................................ 8 Lead-Left Bookrunner .................................................................................................. 11 Chapter 2:

The Major Players ....................................................................................................................

14

Working In New York City .......................................................................................... 17 Working In International Offices .................................................................................. 18 Investment Banking League Tables .............................................................................. 18 Chapter 3:

What The Job Entails ............................................................................................................... 19

Pitches ........................................................................................................................... IPOs .............................................................................................................................. Buy-side & Sell-side Deal Workflow ........................................................................... Deal Toys ...................................................................................................................... Working On Internal Projects ....................................................................................... Performing Favors ........................................................................................................ Administrative Work .................................................................................................... Technical Work ............................................................................................................ Financial Modeling ....................................................................................................... Qualitative Work .......................................................................................................... Conducting Research .................................................................................................... Product vs. Industry Groups ......................................................................................... Bonus Timing ............................................................................................................... Pulling All-Nighters ...................................................................................................... Turning Comments .......................................................................................................

20 22 23 24 25 25 25 26 27 28 28 30 31 32 33

Part II:


Chapter 4:

Publicly Available Positives ...................................................................................................... 38

Workload & Pay In Down Markets .............................................................................. Overtime Meals ............................................................................................................ Analyst Rankings & Bonuses ....................................................................................... Senior Banker Compensation ....................................................................................... Learning From Colleagues ............................................................................................ Displaying Humility ..................................................................................................... Chapter 5:

38 39 39 40 42 43

Insider Positives ........................................................................................................................ 44

Boredom With Future Jobs ........................................................................................... 44 Chapter 6:

Publicly Available Negatives .................................................................................................... 46

Leaving The Office Early ............................................................................................. Working Weekends ...................................................................................................... “Red Light Of Doom” ................................................................................................... Establishing A Gym Regiment ..................................................................................... Chapter 7:

46 46 47 47

Insider Negatives ....................................................................................................................... 48

Working On Unused Materials ..................................................................................... 48


231

Part III:

How To Get The Job

Chapter 8:

Step 1 – Evaluate Your Current Situation .............................................................................. 51

What Makes A Target School A Target School ........................................................... 51 Chapter 9:

Step 2 – Excel In The Classroom .............................................................................................

53

Pursuing Non-Finance Minors ...................................................................................... 53 Academic Classes That Get You Ahead ....................................................................... 54 GPA Considerations ..................................................................................................... 54 Chapter 10:

Step 3 – Get Involved On Campus ...........................................................................................

55

Student Group Considerations ...................................................................................... 55 Chapter 11:

Step 4 – Create And Perfect Your Resume ............................................................................. 57

Importance Of Resume Formatting .............................................................................. Finance Terminology On Your Resume ....................................................................... Importance Of SAT Scores ........................................................................................... Considerations When Listing Skills On Your Resume ................................................. Considerations When Listing Interests On Your Resume ............................................ Resume Review at Smaller Banks ................................................................................ Resume Review Considerations ................................................................................... Chapter 12:

Step 5 – Network ....................................................................................................................... 67

Whom To Contact In HR .............................................................................................. Attending Information Sessions .................................................................................... Utilizing Facebook & LinkedIn .................................................................................... Researching Individual Bankers ................................................................................... Networking Event Conversation Tips .... ....................................................................... Networking Event Strategies ........................................................................................ Sending Follow-Up Emails ........................................................................................... Strategies For Contacting Other Schools ...................................................................... Contacting Insiders: Email vs. LinkedIn ...................................................................... Cold Emailing Considerations ...................................................................................... Chapter 13:

79 80 82 83

Step 7 – Prepare For Junior Year Summer Analyst Interviews ................. .......................... 84

Networking Event Repetition ....................................................................................... Your Story For Regional Offices .................................................................................. Making Time To Study For Interviews ........................................................................ Understand Concepts, Not Answers ............................................................................. Mock Interview Strategy .............................................................................................. Quoting Stock Prices .................................................................................................... Chapter 15:

68 69 69 71 72 73 74 76 77 78

Step 6 – Obtain Pre-Internship Internships ............................................................................ 79

Sophomore Summer Programs ..................................................................................... Unpaid Internship Considerations ................................................................................. Gaining Actual Interview Experience ........................................................................... Pre-Internship Internship Takeaways ........................................................................... Chapter 14:

57 60 61 63 63 65 65

Step 8 – Obtain Your Junior Year Summer Analyst Internship ............. .............................

85 86 89 89 90 91 92

Screening Calls During Recruiting ............................................................................... 97 Choosing Interview Time Slots .................................................................................... 98 Making Interview Small Talk ....................................................................................... 98 Sell-Mode After First Round Interviews ...................................................................... 98 Strategies Employed By Interviewers ........................................................................... 99 Scheduling Second Round Interviews at Smaller Banks .............................................. 100 Interview Meals & Social Events ................................................................................. 100


232

The Insider's Guide To Investment Banking.pdf

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