Tag Archives: Investment Banking

What Questions to Ask in an Investment Banking Interview?

I found the following information in the Wetfeet Insider Guide to Careers in Investment Banking. This post follows on from my previous post on Investment Banking Interview Questions and Tips.

The following are good generic questions that will fit most investment banking interviews. However, you’ll want to think of additional ones that apply specifically to the company with which you’re interviewing. One important reminder: If you’ve already covered any of this material in your interview, don’t revisit it. You’ll appear inattentive and unfocused.

A word to the wise: We’ve grouped our questions according to our sense of relative risk. Those in the “Safe” section are meant to be boring and innocuous, while those in the “Well Done” section will help you put the fire to your interviewer’s feet.

Safe Questions

  • What kind of person are you looking for? (This question will provide useful information on personal characteristics you should emphasize.)
  • What makes a person successful in this business?
  • What made you choose this firm over other firms?
  • What is a typical career path in the (corporate finance, sales, trading, research) department?
  • How much of an analyst/associate’s time is spent pitching new business?
  • Is there a formal mentoring program for new analysts/associates?
  • If I’m a CEO, why would I choose your firm to take my company public?

Medium

  • Beyond the league tables, what differentiates your firm from other firms?
  • How is an analyst/associate assigned from the generalist pool to a project?
  • How long does it take most people here to become managing directors?
  • Can one request specific teams, industries, or product groups?
  • How well do the firm’s different divisions work together?
  • What’s the path? Are there specific benchmarks you have to hit?
  • What are the firm’s biggest challenges and opportunities in the next 2 years?
  • What aspect of your job do you find most frustrating?



Well Done

  • How has increased consolidation in the industry affected your firm, both positively and negatively?
  • If the company has merged: What new business has resulted from the merger? How well have the two cultures mixed?
  • How would your firm fare relative to the competition if interest rates suddenly skyrocketed? If oil prices plummeted? (Or whatever else you can think of along these lines, to help you gauge how prepared the firm is for future possibilities.)
  • If the company has not merged: Do you think the company needs to acquire or merge with a competitor in the near future?
  • How committed is the firm to building its XYZ business? (Investment banks are known to eliminate entire departments when they underperform against expectations, and if you happen to work for one of those departments, that is not usually good news..)
  • What percentage of the managing directors are female or minority?

Business and Company Valuation; Discounted Cash Flow and Multiples

Business and Company Valuation

“What is a business worth?” Although it seems simple, determining the value of any business requires experience, sound judgment from market and industry experience and at least some understanding of financial analysis.

Underpining everything that is outlined below however (much of which I sourced from wstselfstudy.com), I am certainly a part of the Warren Buffet school of thought that outlines that it is important to be able to understand a business before you decide it is the business for you.

What a company is worth is commonly different between buyers and depends on several factors including:

  • Assumptions regarding the growth and profitability prospects of the business,
  • An Assessment of future market conditions and demand,
  • Assumptions based on the competition in the market,
  • Varying appetites for assuming risk (the discount rate on expected future cash flows)
  • What unique synergies may be brought to the business after the purchase.

The purpose of this article is to provide an overview of the basic valuation techniques used by financial analysts to answer the question in the context of a merger or acquisition.

Basic Valuation Methodologies

There are several basic analytical tools that are commonly used by financial analysts to determine the value of a company or business. These methods are based on financial theory and market reality but it must be remembered that these tools are only indicators and should not be viewed as a final definitive statement of value, but rather, as a starting point to estimate value.

The Wall Street Self Study course notes that different people will have different ideas on value of an entity depending on factors such as:

  • Public status of the seller and buyer
  • Nature of potential buyers (strategic vs. financial)
  • Nature of the deal (“beauty contest” or privately negotiated)
  • Market conditions (bull or bear market, industry specific issues)
  • Tax position of buyer and seller

Each methodology is fairly simple in theory but can become extremely complex. They include:

“DCF” – Discounted Cash Flow Analysis

The free cash flows to a company are discounted over projection period. This method is especially relevant where there aren’t any comparable companies allowing the use of the multiples methods below or for smaller companies.

In a DCF analysis, free cash flows are modeled over a projection horizon and then discounted to reflect thier present value in today’s dollars (i.e less). In addition to these cash flows, a value must be determined for the cash flows generated beyond the projection horizon, commonly called the “terminal value”. Thus, DCF accounts for time value of money and relative risk of investment, but is highly sensitive to the discount rate.

The DCF approach is among the most scientific and theoretically precise valuation methodologies because it relates specifically to the profitability and growth of the business being valued. Due to its dependency on the discount rate and a number of long term future assumptions, it must be remembered that it needs to be used in association with other methods.

Analysis of Selected Publicly Trading Companies or Selected Acquisitions using Multiples

A part of most valuation methodologies is the idea of a ‘multiple’. A multiple is simply a ratio of value to a financial statement statistic such as Revenue, EBITDA, EBIT and the Price / Earnings (PE) ratio (Check here for Company Valuation Definitions of these ratios). Each of these multiples are common in different industries for different reasons. In general, the higher the multiple, the higher the value given to the future earnings or cash flow of a company; in other words, the higher the multiple, the more a buyer will pay for the company.

An an examples, If a company’s LTM EBITDA was $50 million and similar companies were trading at a 7X EBITDA multiple, the company would have an implied value of $50 million X 7 or $350 million based on an LTM or trailing basis.

The following is a brief overviewe of the two common methods that are used in selecting appropriately similar company multiples:

Trading Comparables (“Trading Comps”) Analysis

Trading Comps is the term for multiples analysis of publicly traded companies and then making comparisons with other similar or comparable companies.

This method is most relevant for valuing public companies with publicly traded competitiors. A major disadvantage of this valuation method is that often, it is difficult to determine the appropraite competitor and number of variables can get in the way.

Deal Comparables (Deal Comps”) Analysis

Deal Comps or analysis of selected acquisitions are very similar to trading comps except that deal comps compare actual completed transactions instead of publicly traded companies as the domain of comparable companies.

This approach is very relevant in the absence of public traded competitors but information can be very scarce and unreliable depending on company and the particular industry.

Other Methods

The following are other methods that I will not go deeper into in this article:

Asset Valuation – Involves analysis of tangible asset

Break up Analysis – Involves sum of parts analysis based on different business lines

LBO Valuation – Involves financial engineering based on leverage or use of debt

Investment Banking Interview Questions and Tips

Practising investment banking / finance interview questions will be crucial in order to distinguish yourself from the next commerce / law graduate with first class honours who probably has a very similar resume to yourself.

How to get into investment banking

Whilst I do not speak from experience, I hope the following investment banking interview questions and tips which I have pulled together from research across the internet will help graduates considering a role in investment banking. I query whether now (mid 2008) is the most ideal time to be jumping into investment banking but I’ll get to that another day.

Expected Investment Banking Interview Questions

Ultimately, investment banking interviewers want to know two things regardless of the role you are applying for:

1. Why do you want to go into the investment banking?

2. Why do you want a job with the particular firm you are applying for?

From my analysis of a couple of insider surveys done by Wetfeet, the key is to be prepared by having thought well about these questions before the interview. Research into the firm and where the banking division (trading / M & A /advisory / etc) is placed comparatively to its competition (League tables) is a good place to get started when thinking about these questions.

However, to stand out, originality and some degree of understanding of the culture of the firm would probably be required to differentiate you from the talented competition.

Investment banking interviewers will be looking for different skill sets depending on the type of investment banking job you’re pursuing. Types of Investment Banking jobs can be seen in my post what is involved in a career in investment banking.

“One insider who worked in corporate finance after college and pursued a sales position after business school observes that in her corporate finance interviews, the recruiters focused on her analytical skills and experiences, while her sales interviews were more weighted toward evaluating her people skills, particularly those related to negotiation, relationship building, and persuasion.” Wetfeet Insider Guide to Investment banking


Common Investment Banking Interview Questions

Being prepared for the following questions will give you the best chance at performing in the interview:

  1. What most excites you about a (corporate finance, research, sales, trading) job?
  2. What can you tell me about a couple of stocks that you follow?
  3. Why do you want to work for this bank versus our competitors?
  4. Who is our competition (in the major categories)?
  5. Tell me about your leadership experience…
  6. Tell me about a high-stress situation you’ve been in. How did you handle it?
  7. What could you do better the next time?
  8. What did the stock market do last week?
  9. The Fed recently lowered interest rates. Do you think the move will be sufficient to stimulate the stock market? Why, or why not?
  10. In which areas is our firm the strongest? The weakest?
  11. What other banks are you interviewing with?
  12. What career opportunities are you exploring other than investment banking?
  13. Sales/trading: Pretend that I’m a portfolio manager for Investment bank A. Explain to me why I should buy the latest IPO the firm has underwritten…
  14. Research: You’ve just been hired as our firm’s new finance industry analyst. In 2 weeks, you’re scheduled to address a growth-stock conference on industry trends. How would you prepare?
  15. Corporate finance: In a merger discussion, ABC Systems says Magnatech is worth $23 per share; Magantech says $34 is more in the ballpark. Who’s right, and how would you arrive at a valuation?

Investment Banking Interview Tips

Finally, following the following tips likely prove useful depending on the role you are applying for:

  1. Be prepared to be able to explain how to value a company
  2. Be prepared to work with a few numbers in the interview
  3. Be prepared to promote your individual advantages as opposed to the next interviewee (speak other languages, finance experience, successful investing history, people you know within the firm and hence cultural fit)
  4. Be honest
  5. Focus your skills and experience towards the particular role you are applying for (eg, a career in Mergers and Acquisitions required different skills to a career in sales and trading)

I hope the above information helps you in your path to becoming an investment banker! If its not for you, try my post on Law firm summer clerkship tips, resume advice and law firm career site links.

Mergers and Acquisitions Career; What is involved and is it for you?

Mergers and Acquisitions

To many in the finance industry and the general population, mergers and acquisitions work can seem very glamorous and high profile. The mergers and acquisitions group (known as M&A) provides advice to companies that are buying another company or are themselves being acquired.

At the same time, the work leading up to the headline-grabbing multibillion-dollar acquisition can involve a great effort to crunch all the numbers, perform the necessary due diligence, and work out the complicated structure of the deal. The guide noted that one insider said, “You have to really like spending time in front of your computer with Excel.”

Often, the mergers and acquisitions team will also work with a Corporate Finance industry group to arrange the appropriate financing for the transaction (usually done through a debt or equity offering).

In many cases, all this may happen on a very tight timeline and under extreme secrecy and pressure. Mergers and acquisitions is often a subgroup within corporate finance; but in some firms, it is a stand-alone department. Mergers and acquisitions can be one of the most demanding groups to work for.

What do Mergers and Acquisitions Groups do?

  • Advise firms on merger and acquisition strategies
  • Determine target company valuations using a number of different valuation techniques
  • Help the target of a hostile acquisition arrange a defensive strategy where appropriate
  • Conduct due diligence on a target or acquiring company (this includes examining the financial results and other business factors that will affect the value of an acquisition)
  • Negotiate price, terms, and conditions of an acquisition or merger
  • Work with the other company’s advisory team and the lawyers to structure the deal

A Career in Mergers and Acquisitions; Who Does Well?

Like corporate finance, mergers and acquisitions requires detail-oriented thinking, a knack for using numbers to understand business patterns, problem-solving skills, an ability to think critically about the numbers you’re working with. Add to this, excellent communication and people skills and you have a potential mergers and acquisitions candidate.

Also like corporate finance, lawyers, MBAs, and experience candidates with specific industry knowledge make good mergers and acquisitions candidates. Many entry-level candidates try to get an internship to increase their chances of eventually getting full-time offers and the guide discusses methods of attaining these internships. Selection is competitive to say the least.

Investment Banking Interview Questions and Tips can be found in my article on Investment Banking Interview Questions and Tips.


Mergers and Acquisitions Job Tips

The M&A department usually recruits under the Corporate Finance or investment banking umbrella, although within the group you may find further specialization along industry lines. The work here tends to be intense and very deal-focused, and the hours are unpredictable.

“You might be staffed on five transactions and not much is happening. Then one turns live, and you have to cancel your weekend plans,” says an insider. “Or you could be very busy, and the next day something happens and work gets pushed back a week and suddenly your weekend is free.”

The job provides an excellent introduction to the high-stakes, power centric movement of the corporate world. It is common for insiders to report that personal ambition is a big success factor in mergers and acquisitions.

“You can learn the technical skills like accounting and modeling,” says one first-year associate. “It’s not so easy to learn how to be driven and to take responsibility, to own the deal.”

If you are the type of person to be depressed by the thought of spending 3 or more weeks of your life crunching numbers for a deal that may never happen, the guide suggested that there may be better alternatives in Corporate Finance.

Example of a Mergers and Acquisitons Deal

IBM Corporation decides it has an opportunity to strengthen its hardware business by acquiring an innovative developer of communications software. It approaches an investment bank to get advice on the potential deal. The bankers help IBM secretly value the target company’s assets and the potential value of its products to IBM (which may be higher than their current value because of the opportunities to link with IBM hardware and because of Big Blue’s marketing muscle).

The mergers and acquisitions group then develops IBM’s acquisition strategy and makes contact with the target company. Once the offer is made, the target company will consult its own investment bankers. They help the target evaluate IBM’s proposal, determine various strategies for defending against or negotiating with IBM, and work out a deal that will be in the best interest of the company’s shareholders. After some back and forth, the sides agree on a price (usually a combination of equity and debt), sign the documents, and merge.

I have sourced the majority of the information above from the Wetfeet Insider Guide to Careers in Investment Banking; click here to read about what is involved in a career in investment banking.

What is involved in a career in investment banking ?

investment banking

After reading The Accidental Investment Banker by Jonathan Cree, I decided my first blog on investment banking and corporate finance was due.

From my understanding of investment banking, many people simply don’t understand it. Is it banking? Is it investing? Is it Gordon Gecko in the movie Wall Street or is he a trader? What is the difference between an investment banker and an equity trader? What do investments bankers actually do?

One finance degree short of an answer, it took me a fair while to truly come to grips with the concept of investment banking. However, now that I have, I feel the short summary below will give a very good indication to those considering a career in investment banking or those wishing to understand investment banking better.

What is investment banking and what do investment bankers do?

As companies grow, they need capital. In many cases, in order to raise capital and for other related advisory services, companies go to investment banks. Investment banks provide a range of services relating to the raising of capital and act as advisors to the world’s corporate leaders… Continue reading What is involved in a career in investment banking ?