AUTUMN
LBS GUIDE TO INTERVIEWS IN INVESTMENT BANKING A practical guide to approaching I‐Bank recruiting in LBS
London Business School – Regent’s Park – NW1 4SA ‐ London
12
LBS guide to IB interviews TABLE OF CONTENTS 1. INTRODUCTION 1.1. Target reader, what should be expected from this guide 1.2. Mindset - Process - Preparation 2. THE RIGHT MINDSET 2.1. So you were not a banker… 2.2. Know the economy, know the markets, know the deals, know the culture 2.3. The winners 3. WHAT IS INVESTMENT BANKING? 3.1. Overview of investment banking 3.2. Main players 3.3. Why a summer internship? 3.4. The life of an associate 3.5. Overview of the Roles in Banking 4. RECRUITING COMPONENTS 4.1. Process timetable (clarity on what to do, when) 4.2. Why networking is a necessary component of recruiting 4.3. How to be effective in the networking 4.4. On-campus presentations 4.5. Trading floor visits 4.6. Events by invitation only 4.7. Informational/mock interviews 4.8. Corporate Partners’ Week 4.9. Cover letter preparation (Career service material) 4.10. PLP sessions 4.11. CV preparation (Career service material) 4.12. Simple words of advice which may save your life (dress code, timing, professionalism, common sense) 5. INTERVIEW PREPARATION 5.1. What are the interviewers looking for? 5.2. Interview types (behavioural, fit, competency) 5.3. Know your story/pitch (before networking, CS materials and sessions) 5.4. Financial knowledge: use of core courses, training on campus and other resources 5.5. Company research 5.6. Practice interviewing – find your study group 5.7. Final considerations
LBS guide to IB interviews 6. INTERVIEW QUESTIONS 6.1. IBD – Fit questions 6.2. IBD – Technical questions 6.3. Global Markets – Technical questions 6.4. Brainteasers and logic questions 7. ASIA RECRUITMENT 7.1. Networking and Presentations 7.2. CV and Cover Letter (October – Mid-November) 7.3. Application (Late November – Early December) 7.4. During the Hong Kong trek (Mid-December) 7.5. First round Interview (Late December/Early January) 7.6. Second round interview (Late January/Early February) 8. SOME ADVICE FROM PREVIOUS YEAR STUDENTS This document is for LBS student use only. Any reference texts used for are credited in the paper. Should you receive a copy of this document as a nonmember of the School Community please contact
[email protected] immediately
Preface The LBS guide to IB interviews has been put together by two MBA 2012’s, who worked on it for 3 months in their free time (evening and weekends) to prepare this guide for future MBA classes. They were both successful in their search for a Finance internship for Summer 2011, and wanted to share what we have learnt during the process to give you a better chance of succeeding. The guide has been updated by MBA 2013 who secured IB internship offers in IBD and Markets for Summer 2012 in EMEA and Asia Pac. A serious amount of time and effort has gone into writing this book, and yet we know it can always be improved. Therefore, we hope that future generations of students will take up the challenge to update and improve this guide, in conjunction with Career Services. Meantime, if you are reading this book it means you are undertaking banking recruiting, and we sincerely wish you GOOD LUCK!!! Matteo & Tomasz (MBA 2012)
LBS guide to IB interviews Serena , Zoe and Edward (MBA 2013)
“There is no favourable wind for he who knows not where he is heading” Seneca
1 INTRODUCTION 1.1 Target Reader. What should be expected from this guide? London Business School has an incredible reputation as a finance school. Not only are the courses offered in Finance some of the best out there, but the placement opportunities in the Investment Banking world are enormous. In addition, since you managed to get your place on the LBS programme, you probably have a good GMAT score and incredible work experience. As a consequence, an offer to join Goldman Sachs as an Associate is just waiting for you. Right? Maybe, but probably not… Unfortunately, the reality is different. But you are lucky enough to have this guide. Read it and you will understand how to gain your internship at one of the top investment banks. LBS is a world full of opportunities for students looking to break into investment banking. All of the Bulge Bracket banks come on campus to recruit associates in IBD (i.e. M&A) and many recruit for Markets (Sales & Trading, Research). You do not necessarily need to have an IB background. Indeed, every year a number of students successfully manage to make extreme career changes. After all, this is what most of us are, career changers. Notwithstanding the recent ups (very few) and downs of financial firms, IB is still a popular career choice for LBS students. The easy answer is that money is what draws student attention. However, this is no longer necessarily true after the crisis, but, at the end of the day, a career in IB gives you skills that are highly valued in throughout finance world. An experience in IB may open doors in Private Equity shops, Hedge Funds, Asset Managers and even in the corporate world as a CFO or in the Business Development division. However, Banking is an intense career and you won’t succeed in the job or in recruiting if you aren’t committed to a longterm career in banking. It should not be viewed as simply a stepping stone to somewhere else. Now let’s go to the bad news. Getting a place in IB is extremely hard. This is because competition is extremely tough with banks becoming increasingly
LBS guide to IB interviews selective. You have to realize that all your fellow students have amazing stories and awesome personal experience. Moreover, you will suffer competition from US schools. While LBS is a core recruiting school for all the major firms, they also recruit heavily from Wharton, Chicago and the likes and thus you are competing with those students as well. Finally, in market downturns, banks decrease their summer associate class and thus are even more selective. This guide is intended to be a reference guide to be used throughout the entire recruiting process. However, you will need to do more than just reading this guide. Career Services has some exceptional material that you must read. Use all the interview preparation books that the library has. In addition, there are also some very useful guides which can be used to get an edge over others (a small list is available on page 160). Meet people, both students (as early on as possible to get tips and guidance) and alumni and do some serious networking (can’t be emphasised enough). These activities are key, and through this guide we hope to give you some insider tips about this long and intense process.
1.2 Mindset – Process - Preparation Before starting with the bulk of material, we want to give you a helicopter view of the key things you need to do and what the recruiting process looks like. Believe us, at some point during the Fall Term you will be overwhelmed. You will asking yourself questions like “What am I doing?” or, our favourite, “Am I really convinced that networking has any impact on the recruiting process?”. When this happens, this single page may be your best friend. It will help you to see the big picture, put things into perspective and ultimately land your IB job. Preparation is the key. Do not think for a second that reading lots of finance related material means preparation. Here we are talking about serious and detailed preparation. You really do not want to take any chances. Our experience suggests that if you are not prepared in one particular area, this is what at one point the interviewer will ask. But what is it that you need to prepare? Three things: 1) Market knowledge. You not only need to be fully familiar with the overall market conditions, but you also have to know the peculiarities of each the major financial institutions, especially the one whose representative you are meeting, as he/she is bound to ask you, “Why us?”, and you need to have a relevant answer.
LBS guide to IB interviews 2) Your story. Career Service will make it clear that having a solid story is crucial. Your CV, cover letter and networking activities will all help you in developing a robust story on why you want to be a banker. And interviewers will challenge you hard on this one (er, the correct answer is not money). This is highly critical, beginning with what you were doing before coming to LBS and then your decision of why you decided to do banking (especially in the current scenario), and whether you are aware of the skill sets required to come in, and how are you investing in developing those skill sets? 3) Technical skills. This includes both financial and interviewing skills. By the time of the interviews, you should be pretty strong in your financial knowledge. More important, you must be trained in pitching your story in front of an interview, which is a stressful experience. Practice, practice, and practice, in front of a mirror, with friends and during mock interviews with fellow LBSers (via PLP) and with members of Career Services. Developing the right mindset is also crucial. If you want to be a banker, act like a banker. To find out how a banker thinks, networking is probably a good place to start. While every person working in investment banking has their own personality, there are some common traits. You’ll need to understand these traits because these are what recruiters will look for in their future associates. Through these conversations, you will learn to “talk the talk”. Pay attention to the words and phrases the bankers use and emulate these in your recruiting conversations. Finally, the process leading to interviews and offers extension is long, intense and pretty stressful. It involves several moments of self-reflection and at times you will be wondering why on earth you want to do all of this. But it is important that you don’t give up. Every step in this process counts and the smallest mistake makes the difference between having an offer or having someone wishing “good luck with your future career” (this is the standard sentence for a “ding”).
LBS guide to IB interviews
2 THE RIGHT MINDSET 2.1 So you were not a banker… Advice for career changers Key Takeaways: As a career changer, you are not at a disadvantage. However, you need to put extra effort in developing your story, meeting people and learning about finance. We do start the chapter on the right mind-set talking about career changers for a reason. The majority of LBS students looking for a career in Finance are indeed career changers. While being a career changer is not a problem per se, it remains true that you may be at a disadvantage with respect to students with relevant work experience. This is why it is crucial that, as a career changer, you develop the right mind-set right from the beginning. First of all, extra effort should be spent working on your story. You need to be convincing when you explain to recruiters why you want to be a banker, why you are leaving your previous career and what skills learnt in your previous job which can be useful in a banking environment. Even though you were doing something different, you still need to show that there is some relationship to finance. It is imperative that you fully understand your drivers to have chosen banking; and also the institution that you are interviewing with. Second, technical knowledge should not be underestimated. Being a career changer, you may hope that recruiters should not be too demanding. Unfortunately, this is not entirely true. During interviews, especially in the final rounds, technical knowledge will be tested. Therefore, a good strategy is to start studying and reviewing finance from the beginning of the Autumn term, from this guide as well as some of the sources given on page 160. Finally, networking is crucial for career changers, this can’t be emphasised enough. Whilst networking is important for everyone, it is especially important if you don’t have a finance background. Meeting people is your opportunity to learn banker lingo, practice your story and get some advice from someone with similar backgrounds. In addition, meeting people before the recruiting season is your chance to let them see how motivated you are in your next career move. To conclude, there is some good news. Many career changers successfully manage to land a job in investment banking. It is a tough journey, but developing the right mind-set right from the start will flip the odds in your favour.
LBS guide to IB interviews 2.2 Know the Economy, know the markets, know the deals, and know the culture Key Takeaways: Read, at a minimum, the FT every day from September and form a view – do not fall in the trap of reading the FT the week before the interview, it won’t help you. Do not fall in the common “donkey” mistake, reading the FT but not understanding what it is really saying. Understanding the culture is probably the hardest part to build (it takes time), and it is almost as important as having a good story. Investment bankers are looking for candidates that they believe will be able to perform the job. Therefore, they want to understand if you share common ground with them, whether you could potentially be a good banker. The financial community in London has a common culture; they all read the same newspapers and use the same databases, have a similar definition of “professionalism” and are exposed to the same events/deals in the world. Do not commit the mistake to be technically perfect but not having understood the mindset of your interviewer. Therefore it is mandatory to read the Financial Times, (and the Financial News and the Economist) every day from as soon as you arrive on campus. • Financial Times: You can subscribe to the school service delivery for a student price and get an online account which offers smartphone access. • Financial News: You can find a weekly copy in the Taunton library, in Career Services Reception and you can register for the online service through the library. • Economist: You can find a copy in the Taunton. If you are interested in Sales & Trading, include an online subscription to Roubini Global Economics, available from the library database provided by LBS. Financial reading will improve your familiarity with the language of the financial community and give you a good impression of what bankers are exposed to. Remember that a critical part of Investment Banking is about clients’ interaction, which is often heavily focused on what’s going on in the market (they want to know your judgment, be prepared to have an opinion, otherwise why they should pay you??? For example, why HP acquired 3Par? Was it overvalued?).
LBS guide to IB interviews CAUTION: At the beginning you may feel a little bit overwhelmed by the amount of information, especially if your background was in gardening or birdwatching, but do not despair, you cannot imagine how much information will stick on your brain just by reading the FT every day. You will slowly build your financial/economic knowledge, and this is going to make a difference during your networking and interviews. Also do not forget to test your views with your classmates on every important event, you can also form a small group and exchange views and opinions, you will be surprised of how useful can be.
2.3 The Winners Key Takeaways: It’s a competitive process but don’t panic, it is just hard work and interpersonal skills. Focus on polishing your story and establish relationships with bankers/alumni, and also do everything else! I guess there is no need to tell you this is a competitive process, in 2011 around 40 people got an IBD job, from an application pool of up to 120 (and remember, these are all your fellow LBSers who are already high acheivers). So, unfortunately we have to talk about who made it and who didn’t. I know, now you are worried, however you are an LBS student, and this means you are intelligent, hardworking and very well prepared. You probably hold yourself to higher standards that other people do – and that’s the reason why you are a success. Therefore be confident in yourself and be prepared to work hard in the next months. LBS is going soon to submerge you with a combination of heavy academic lifting, social events and a busy recruiting calendar. Going through this journey you should keep in mind 7 very important things: • Plan your time wisely: you soon will wish your day had an extra 12 hours; prioritise and schedule strategically. • Every day drink an espresso and read the FT – enter in the financial world mind-set (industry knowledge). • Join the Finance Club and attend all the networking events; use the club as a way to get advice from 2nd years.
LBS guide to IB interviews • Start networking with Alumni in October – many students wake up in late November and start emailing the entire alumni directory, with poor results. • All your classes are important, but in banking a lot of questions will involve Corporate Finance and Accounting (be sure you get an A, at least). • Find 2-3 classmates you like, who have similar goals and who are willing to share information. You can divide up tasks such as bank research, preparing technical questions as well as giving each other mock interviews. This can be done closer to November, once you are also better prepared. As you go through this period, remember to put particular emphasis on perfecting your story and networking: • Perfecting your story: why you want to move from deep-water drilling to IB? This is the most important question, and the answer must be rationale and convincing. You will keep telling your “what” and “why” with every banker you meet, and they will judge you on the credibility and the rationale of your story. Moreover, be a reactive learner and keep polishing your presentation/story after meeting with any banker. • Develop relationships: at the end of the day banking is a deeply personal business. Getting a job in IB is more like asking someone for a date than taking a final exam. The human side trumps all else and all your technical knowledge will not help if you can’t clear the hurdle on the interpersonal side. Moreover, your final interviewers may be with the same bankers you met for a coffee in December, and if they liked you the interview may verge on the last match of rugby you played (which actually happened to one of our colleagues in a final round in US bulge bracket).
LBS guide to IB interviews
3 WHAT IS INVESTMENT BANKING? 3.1 Overview of Investment Banking Investment banks act as an intermediary facilitating the transfer of capital from providers of capital (lenders or investors) to users of capital (borrowers or issuers). An investment bank is a financial institution that assists individuals, corporations and governments in: • Traditional Investment Banking: - Strategic Advisory: (eg M&A) Restructuring, takeover defence, fairness opinions. In the typical project bankers assist in negotiating and structuring mergers between companies. If, for example, a company wants to acquire another firm, an investment bank will help finalize the purchase price, structure the deal, and generally ensure a smooth transaction. - Capital Raising: (eg Via Debt/Equity Capital Markets) Raising capital by underwriting and/or acting as the client's agent in the issuance of securities (equity, debt/fixed income, or hybrid). In particular, the underwriting function involves the bank assuming the initial risk. For example, in the case of a bond offering, the investment bank purchases the entire bond offering and then starts looking for buyers in the markets. This means that the investment bank assumes the risk of the transaction not being able to re-sell the bond in the market. • Sales & Trading: - Sales: Institutional sales are responsible for nurturing and developing business relationships with large institutional investors such as pension funds, mutual funds, hedge funds, or large corporations. Their compensations is a commission on trades made through their firms or a percentage fee on their clients’ assets held by the firm. - Trading: traders have two main functions: 1) Provide clients with the ability to buy or sell a security on demand and also provide liquidity to
LBS guide to IB interviews the equity/debt of an institution’s traded securities by acting as a market maker 2) Proprietary trading: use the firm’s capital to make directional bet on the public markets. Typically, the marketing-making function and the proprietary trading function are performed by the same trader for any given security. • Research: - Analysis and recommendation of stocks and bonds, including company coverage and sector coverage. Research analysts follow stocks and bonds and produce recommendations to investors on whether to buy, sell, or hold those securities. They also forecast companies’ future earnings. • Structuring: - Create tailored solutions, usually with the help of derivative products to help clients to express a trade of hedge their liabilities in a way that they would be unable to do trading “off the shelf”products alone.
LBS guide to IB interviews Many banks also have a merchant banking (private equity arm) and a private wealth management (HNWI private client service business) division.
Sell-side Typical Investment Bank Structure
Investment Bank
Investment Banking Division (IBD) “Private” market = Corporate clients
Finance
Sales & Trading / Markets / Securities
ECM / DCM or Financing
Operations
“Public” market = Investors IT
Legal & Compliance
Human Resources
Risk & Corp Advisory
IBD and the Markets divisions are heavily interrelated. A good example is a company wishing to go public. The IBD team provides the valuation of the company and facilitates the registration and execution of the process; the ECM team helps the company during the roadshow and prices the deal; Markets then takeover the process, with Sales placing the securities with end investors and Trading providing secondary market liquidity by acting as market maker. Research provides continuous coverage of the security and helps investor processing information relating the company and its business. Large investment banks usually organize their investment banking functions along products lines (M&A, Leveraged finance, ECM, DCM), industry groups (Telecom, Oil&Gas, Retail) and geographic coverage (UK, France, Italy). As these groups focus on industries and relationships, they are able to become very close to the clients and their needs. Therefore, it is not uncommon for M&A advisory work to be undertaken across these groups.
LBS guide to IB interviews Sell-side Investment Banking Division (IBD)
Typical Investment Banking Division Product Focus
Geographic Coverage
Advisory, e.g. – Mergers and Acquisitions (M&A)
Industry Focus
Cover all products and industries across a specific region, e.g. – UK – Benelux – Iberia – Germany
Financing, e.g. – Equity, IPOs – Debt – Lev Fin
Areas of expertise include: – Consumer Products – Financial Institutions (FIG) – TMT – Natural Resources – Real Estate
Sales & Trading functions usually include Sales (selling financial products of the bank to clients), Trading, Specialised structuring of financial products and Research. Sell-side Sales and Trading / Markets
Typical Markets Division
Trading
Sales
Sell financial products to investors
Specialize by: product geography industry
Provide liquidity for investors (flow trading/market making) and/or trade the bank’s money (proprietary or “prop”)
Structuring
Develop bespoke financial products/ derivatives to meet a client’s specific risk management or investment needs
Research
Provide trade ideas for salespeople and traders and provide independent research to investors
ie Rates, equity RV or Macro (“strategy”)
LBS guide to IB interviews However, every bank is different. For example, some banks include ECM and DCM in investment banking while others have these functions in Markets. You should learn about the structure of each bank you are talking to as well as the acronyms they use. A note on the way to do business: the primary output of investment bankers are usually “discussion materials” or “pitchbooks”. These highlight the issue at hand, the suggested solutions and the bank’s credentials and the preparation of these materials will take up most of your time as a IBD banker, especially at a junior level. Usually these services are free and are a way of putting a foot in the client’s door and developing a relationship, in the hope that it will eventually lead to feegenerating business. Once a client has engaged a bank, the project moves from pitch to deal as the bank works to execute the deal (whether is a merger, acquisition, equity offering, restructuring, or debt).
LBS guide to IB interviews 3.2 Major Players Major players in investment banking can be classified into two main types: • Universal Banks • Specialised players/boutiques Universal banks recruiting on campus include Morgan Stanley, Bank of America Merrill Lynch, Citigroup, Credit Suisse, Goldman Sachs, Barclays, J.P. Morgan, HSBC, Deutsche Bank and Nomura. These players offer a variety of services and even have corporate lending and retail operations. This raises a very important distinction in the world of investment banking. A number of firms have remained “pure” investment banks (Goldman Sachs, Morgan Stanley), while others have commercial banking arms (JPMorgan, Citigroup, Bank of America). Historically, the two models were completely separate entities; while the investment bank would provide M&A and other strategic financial advice to companies, the commercial bank would mainly lend capital (often for the same transaction). However, as firms evolved, many banks decided to provide both services (“one stop shop” for the clients), providing capital and advice.
Sell-side
“Bulge” Bracket Bank of America Merrill Lynch Barclays Capital Citi Credit Suisse
Middle Market Lazard Rothschild Jefferies Moelis
Deutsche Bank Goldman Sachs HSBC JP Morgan Groupo Santander RBC Societe Generale RBS
Nomura Morgan Stanley UBS
“Regional” Commerzbank Lloyds BNP Paribas BBVA
Standard Bank RBS Standard Chartered VTB
Boutiques Product Hamilton Ventures (M+A Real Estate) Stormharbour (Trading)
Industry Fox Pitt Kelton (financial services) Delta Partners (TMT)
Geography Frontier secs (Mongolia) Cavendish (UK) EFG Hermes (Middle East)
LBS guide to IB interviews
There are many ways to measure the quality of investment banks. You might examine a bank’s expertise/track record in a certain segment of investment banking or the growth of its revenues and net income. Many also pay attention to “league tables,” which are rankings of investment banks in several categories (e.g., equity underwriting or M&A advisory). However, it’s quite easy to manipulate league tables and this is not going to be a perfect predictor of your internship experience. The truth is that your experience (and your career) is going to depend from the quality of the people you are working with. Therefore, spend time to meet alumni and network with bankers in order to understand in which bank you may fit the most.
LBS guide to IB interviews 3.3 Why a summer internship? Key Takeaways: The summer internship is a 10-week interview; it’s a chance for recruiters to understand if they would like to work with you permanently. And don’t forget, it is also your chance to understand if this is what you want to do for the long term. That’s simple; bankers want to test the field of the best candidates they could find in the market. The summer internship is a 10 week interview in which you are thrown right in the middle of the game. The entire point of the recruiting process for banks is to find people who will excel in the role of the summer associate and demonstrate the potential eventually to grow into a more senior position and take the lead in creating external relationships and ultimately, generating business. However, different banks will have different internships structures. They may staff you directly in one industry or product team or in a generalist pool in which summer associates sit together and are staffed on a project basis or work a rotational programme. Which is the best option? It depends on your background and your expectations. A pool may be effective if you do not want to specialise too early, but may not be the best option if you have a very specialised/industry focused background. For example if you have been working in healthcare for the last 5 years it may be a good idea to leverage your knowledge within the healthcare group, to demonstrate how valuable you would be to that team, thus winning a full time offer.
3.4 The life of a Summer Associate: IBD Key Takeaways: The associate is the pillar of the execution; he drives the analysts and the daily workflow of the team according to seniors’ directions and his own business judgment. However, 10 weeks is a short time, and no one is expecting you to be up and running from day 1. Before going into the details of what to expect during the summer internship, it is essential that you fully understand this section as you will be asked during your interviews, what your understanding is of what will be expected from an Associate and you are required to have a fair idea, which you articulate well. The Associate is the second most junior member of the team, but not in the summer. Yes, you may have your MBA and your perfect DCF skills, but the
LBS guide to IB interviews analyst will still call the shots and drive the work during the summer. Do not be patronizing. You need to win over the analysts in the team every bit as much as you are trying to charm the senior bankers. The Associate is the quarterback of the team, acting as the project manager and the analytical overseer for the daily work of the team. Senior colleagues give directions and Associates are in charge for the execution. The best associates: • Get the number rights and are technically very prepared • Successfully mentor, lead and coordinate with Analysts • Have business judgment (it’s that sparkle that will make you shine) • Have commercial skills when facing a client Here is a simple schedule of the main responsibilities of an Associate: :
Associate Responsibilities
Valuation and Analysis Roles Choose appropriate valuation techniques Error check of analysts’ models More sophisticated modelling Being “independent” Tasks Broad view, ranging from knowing how to read financial statements to assessing competitive positioning and macroeconomic conditions Accretion/dilution analysis All valuation methods
Communication and Materials Roles Communicate with senior bankers for constant feedback Take charge of analysis and presentations Coordinate with other teams of the bank Lead analysts work Find and read all important sources of company’s information Tasks Pitch Books Information Memorandum and Management presentations Clients’ presentations
Meetings Roles Coordinate meetings logistics and agenda Take notes during the meeting Prepare the meeting with all the relevant analyses Be ready to answer to questions Tasks Making it happen Attend meetings (internal and external)
LBS guide to IB interviews 3.5 Overview of Roles in IBD Key takeaways: The associates and the analysts are the core of the “execution team” responsible for the execution of the team workflow. A good Associate that can work semi-independently is considered a “blessing” from MDs and VPs (improves dramatically the quality of their life). • Analysts (3years) - Everything falls on them - Barely time to sleep, will work most week-ends - Very analytical, financial modelling, public comps, deal comps, DCF - Document preparation - Sometimes do not fully understand the big picture (no time for thinking) • Associates (3-5years) - May work slightly less than analysts, but will need to think more, so even if you aren’t in the office, you are thinking about your work - Manage and assist in the execution of transactions - Responsible in front of the MD and the VP of the analyst’s output (investment books and modelling). If an analyst makes a mistake, it’s you who looks bad, not the analyst. - Discuss details and numbers involved in deals with VPs and MDs - Expected to contribute to team discussion and clients’ meetings - Interact with different areas of the Firm in order to bring the breadth of Firm’s resources to bear for the benefit of the client - Provide rapid and accurate market judgements - Prepare and deliver clients’ presentations in a compelling manner - Act as a mentor and role model to Analysts - Can work “semi-independently” • Vice-Presidents and Directors - Responsible for deal execution, manage associates and analysts - Expected to be able to carry on a deal almost independently from the MD - Start having important client interaction and generating business - Lifestyle becomes somewhat more manageable - Travelling increases significantly, as do responsibilities
LBS guide to IB interviews
• Managing Directors - The origination of business depends completely on them. MDs spend most of their time visiting clients and proposing new business ideas - Have the final accountability of the strategic deal decisions and execution - Support and guide the client in the deal’s negotiations - Remunerated on the amount of fees generated
LBS guide to IB interviews 4 RECRUITING
COMPONENTS
4.1 Recruiting process timetable Recruiting in banking is a marathon. Many times you may feel overwhelmed by all the events and the networking, but do not despair, it’s simply part of the process and if you are diligent and effective, you will tilt the balance in your favour. Your goals: • All your preliminary work has one goal in mind, to win a 1st round interview slot. Many banks will receive hundreds of applications and will be able to interview only a small fraction. • Therefore your first task is to establish meaningful connections at the firms you are interested in. Bankers who were impressed by you will pass your name to HR and improve your chances to getting on the interview list. Also, in certain banks, there is a book of CVs and is sent around to associates and VPs, and the CVs that get the maximum ticks get interview calls. Be very careful to make a good impression. Establishing a connection in a bad way will ensure you are not placed on that interview list. • Most firms have teams focused on recruiting at LBS, usually made up of Alumni. Use both the portal directory and the banks’ presentations to enter in contact with them but be careful about bothering them too much. Illustrative Bulge Bracket Investment Bank Recruiter 2010 Applications (Approx) 100 65
1st Round Interviews
2nd Round Interviews
23 (23%) 20 (31%)
Hires
13 (13%) 11 (17%)
4 (4%) 3 (5%)
65 65
100 2200
23
11 13
3 11
4
4
What, Who, How Finance?: Presentation to MBA 2012, 7 September, 2010
Blue = Markets
Red = IBD
Page 7
LBS guide to IB interviews
Time Table
September - October
Work on your CV Meet 2nd years Attend employer presentations with the Finance Club Begin networking
November - December
Employer presentations Closed list events Cover letter and resume refining Interview preparation Networking Form interview prep teams
January - December
Interview prep Corporate week
September: • Think about your story: potential employers want to know why you want to be a banker and why you would be a good one. Your story should highlight all the steps that brought you here and be consistent with your resume. Why September? You will soon notice that, in every coffee chat you have with bankers, you will need to focus firstly on who you are and why you are interested in banking. Use each conversation to refine your story further. • Finalise your CV, take inspiration from the 2nd years who were successful (us the Summer Internship Directory to find out who interned where, use Career Services resources, they have lots of “best practice” examples to work with, and think of it as your primary piece of marketing material. • Ask 2nd-year MBAs for referrals to other contacts in investment banking. • Read this book (you are on a good path, keep going) and familiarize with all Career Service resources. • Read the financial press and know what deals are happening, the rationale behind the deals and the associated multiples, how they are in line with the industry multiples and your opinion on the deal. You must do this throughout the entire process.
LBS guide to IB interviews October: • Participate in all Finance Club activities and attend every presentation. It’s critical to make contacts in the banks and follow up initial meetings with short emails and phone calls. Note that it can be hard to have a good conversation with the recruiting team when surrounded by dozens of your classmates. Try to get two or three bankers’ business card and follow-up with a concise email and meaningful questions. You should assume that bankers are going to keep your emails. • Additionally, try to get the contact of the school captain and try to get a good impression on him/her. This person will be heavily involved in choosing CVs for first round. • Networking: reach out to alumni working for the firms you are interested in working for. Invite them to lunch or for a quick coffee near their offices. Some of the MBA 2012’s and 2013’s worked in small groups which saved the alumni some time. Dress like a banker and sell yourself. • Form an “IBD Study Group” for interview prep, M&A deal review. • Meet with 2nd-year MBAs who worked in IBD • Start to draft cover letters. • Continue to refine your CV as you learn more. • Run a league table of M&A deals in the Library and research these with Capital IQ. November: • Attend banks presentations and all events organized by Career Services. • Keep in touch with your contacts and establish new ones, focus your work on the alumni network. You may also ask to HR at presentations to put you in contact with alumni in the departments you are interested in. By the end of November you should have met a minimum of 2-3 people from each of your target banks, focusing on making connections in your preferred sector when possible. • Research firms you are interested in (news, deals, financials, etc). • Begin to review possible interview questions. • Take part in the mock interviews provided by Career Services, prepare for them as if the real deal, the more you put in, the more you will get out of the session.
LBS guide to IB interviews • Sign up for PLP sessions for extra practice • Weekly prep sessions with IBD Study Group. • Refine CV and cover letters even more. Career Services hold finance drop ins, you can turn up as often as you like to have your new version checked and critiqued. December: • Finalize cover letters and your CV, send Holiday wishes, submit your applications. Remember that if you are a career changer you should apply to as many banks as possible because you will probably not get shortlisted for all of them. • Review possible interview questions and follow up with practice. • Take part in mock interviews with friends, 2nd years and Career Service. Practice will significantly improve your interviewing skills. • Use holidays to rest properly; you’ll need your energy. Also, if you haven’t already, start thinking about what your Plan B and C might be in case you are not successful in banking interviews. Hope for the best, but prepare for the worst. January - February: • Corporate Partner week is the first week of January and all the Corp Partner Banks will come to campus to present and hold a networking event. You will have met the company reps before, many of your fellow students will not have and it is a bit of a scrum. This is a time to confirm your commitment, you won’t have much time to build relationships by this stage. • Spend the first two weeks of January preparing for interviews, keep rehearsing and polishing your story. • Interviews period! Be confident and enthusiastic. Banks will come to the Taunton and make first rounds (approx. 2 weeks). You’ll sign up through Career Service (Career Central). • Establish what part of the day you are at your best and try to schedule your interviews accordingly. • Manage schedules with location in mind. • Follow-up good interviews with thank you emails.
LBS guide to IB interviews • Second Rounds come hot on the heels of the first. They tend to take place at the Bank’s office and some can take up several hours of your day. If you have been lucky enough to win through to multiple banks, you might have to contend with interview clashes. The quickest way to resolve these is to manage it yourself, by speaking to both Banks. If this option fails then let Career Services know and they will work to resolve on your behalf. • One important input here is that if you have been lucky to bag multiple second round interviews, you will definitely get the chance to mention it to the second round interviewers as they will ask you who else you are interviewing with, don’t hold back. If other banks want you, then this bank will also want you, but don’t lie as HRs at various banks are networked.
4.2 Why networking is a necessary component of recruiting Key Takeaways: Networking will be your key to interviews; successful relationships may help you unexpectedly during the recruitment. No other topic creates so much confusion – so let’s dive right into it and see how you use networking to break into the industry. Each year banks receive hundreds of equally outstanding applications from LBS, but they can call only 30-40 of them at the first round. Networking is how recruiting teams (often alumni) select those candidates. Moreover, having favourably impressed a recruiter during the networking period may help you shine during the interviews.
4.3 How to be framework)
effective
with
networking
(Connect.Me
Key Takeaways: Career Service offers a very interesting presentation every year on how to network effectively. Be sure not to miss it. We will provide a brief summary in this chapter. Plan it wisely and execute it smoothly. People typically approach relationship building in a fairly unstructured, haphazard and opportunistic way. While this may work if you are lucky, the great likelihood is that you will fail. The Connect Me framework is based on research that Career Service commissioned to a third party company. The goal of the research was to identify
LBS guide to IB interviews the main characteristics of successful networkers. LBS students and alumni who were regarded as successful networkers and had successful careers were interviewed and asked how they approached networking. The results showed that they all used a methodical approach. Essentially there are three primary sets of activities: Planning, Execution and Management.
Planning: • Objectives: Determine the banks you are interested in and research the alumni you want to contact. Make a file excel will all the details. Usually, you will have to contact 10 alumni for every positive response. • Timeline: Set a clear timeline for meeting your goals (September November).
LBS guide to IB interviews • Collateral: Develop marketing material to support your message (email), prepare your story, especially why banking and why you are a good fit. Execution: • Research: Ensure you understand your target audience (bank’s culture, deals, banker background). • Tactics: - Email each of your contacts and ask for a 15-minute informational chat. Keep your email to 5 sentences at the most, and introduce yourself by giving school name, explaining how you found them, and summarizing your work experience. Then propose 2-3 specific dates. - Prepare some questions: start by asking about the person’s background and interests (always keep the conversation focused on them). They may “test” you but never pre-empt this by bragging about your accomplishments or showing off on how smart you are. Remember that the burden will fall on you to lead the conversation. Don’t assume the banker will provide the content. Follow up with a thank you note and leave your business card. • Soft skills: Banking is a deeply personal business. You can’t win just by studying the practice exam. The human element trumps all else. All the industry knowledge and technical mastery in the world will be inadequate if you can’t clear the hurdle on the interpersonal side. Management: • Data management: Manage your contacts; keep track of the development. • Managing priorities: Identify/manage your most important contacts. If you’ve made a good first impression, they will advocate your cause. Otherwise, don’t dwell on it – focus on the bankers who are most helpful. Follow-up when you actually have something to say. If someone wasn’t helpful or if you have better contacts, don’t feel pressured to stay in touch with everyone all the time.
LBS guide to IB interviews 4.4 On Campus presentations Key Takeaways: Attend all of them, focus on the bankers with the fewest students surrounding them, chat for a few minutes, collect business cards, and then thank them and go to meet the other bankers. Banks make their first official contact with students through on campus presentations in January but in the Autumn there are plenty of educational/informational events, either arranged via the Finance club or by Career Services. Alumni and representatives from divisions seeking to hire summer associates will be at the presentations. Your goal is to establish business contacts in the firm and learn about its particular culture and strengths. It’s an opportunity to find out how to respond when asked “why do you want to work with us?”. Do not misinterpret what we are saying here, the events should not be a race to collect business cards, but rather an opportunity to win “memory share”. The best result you can achieve is that someone in the firm will remember you in a good way and refer your name to HR. Therefore, having meaningful interactions with 23 bankers per event is a sensible goal. Standing silently in a circle around a recruiter will not help you, nor will asking bland questions inappropriate to the context or individual you are meeting. If the group is too crowded, move along to the next group. Finally, remember that you really want to avoid making a bad impression: every year 1-2 students become infamous for “elbowing” their fellow students. This strategy doesn’t pay off. When actually in the conversation you will need to practice your 30 second pitch on who you are and why investment banking. At the same time, you shouldn’t do most of the talking. See it as an opportunity to ask insightful questions that you would like to have answered about banking and the markets. As a final point, many students tend to focus their time with most senior people. While they may be important decision makers, do not forget that usually Associates and VPs prepare the first draft of the interviews’ list. Moreover, is often harder to follow up and meet a senior banker than a VP and an Associate
LBS guide to IB interviews 4.5 Trading floor visits Key Takeaways: Trading floor visits are a must attend event for Markets. Great networking opportunities and a chance to check out the fabled trading floor environment. Trading floor visits are the key networking events for all wannabe Salespeople and Traders. Generally speaking, all the major banks looking for Associates in their Markets division will host one trading floor visit. An indicative list includes BAML, DB and Nomura. These visits are organized via the Finance Club between October and December i.e. before the start of the more formal recruiting process. These events are informal and are a great way to increase your knowledge about Sales & Trading and the culture in a specific bank. The format is the same at all the banks and will consist of a standard presentation, a Q&A session with alumni working at that bank and finally a short walk on the trading floor. The actual trading floor visit is very short, lasting about 10 minutes. Trading floor visits are extremely useful and a must attend event. First of all, it is a good opportunity to meet people working within different banks. Second, and most important, many of the people you meet during these visits are the actual interviewers! Finally, you should have a look at the trading floor before applying for Markets. The atmosphere is very special (noise, interesting characters, countless monitors), and you either you love it or hate it. It is better to find out whether you like this environment sooner rather than later. There are some strategies to make the most out of these events. • Read information about the bank you are visiting. Generally speaking, you should have an idea on the financials, the current strategic issues and whether the bank has a good recruiting history with LBS. • Follow up on the people you meet. The super simple strategy is to send a thank you email. Be sure you send this email only to people you actually spoke with. However, we would strongly suggest you to try to meet someone after the event for a more informative chat. Remember, some of these people will actually interview LBS students in January-February. • Do not tell people you are just checking out opportunities. Even if this is true, keep it to yourself. Bankers like motivated people and it is always best to behave as if being a Salesperson is your only focus in life.
LBS guide to IB interviews As a final note, these events are in great demand, they are made available on sign up basis via the Finance Club and sell out in less than a minute. So you must be fast in hitting the refresh button and be sure to “outclick” everyone else!
4.6 Events by invitation only Key Takeaways: they are another step of the process, simply in a smaller setting As with other recruiting events, these are evaluative. Banks will invite a smaller group of people to dinner, drinks or breakfast and give them a chance to talk with you with fewer people around. Usually the ratio students to bankers is approx. 5:1. Your goal is to attend all company presentations, follow up with emails and phone calls, to be invited to all closed list events and, ultimately, make it to the interviews’ list. These events are an opportunity to make meaningful conversations about the job and the industry away from the crowd of the company presentations. Use this opportunity wisely and remember the importance of winning “memory share” in the bankers’ mind. Closed list events will not guarantee you a place in the interview’s list; it’s simply another step in the process that banks use to know you better. Many firms have more than one closed list event and typically try to invite different students to each event.
4.7 Informational/mock interviews Key Takeaways: Informational interviews are part of the selection process. Good candidates are referred to HR for the interviews list. Informational (or mock) interviews are an opportunity for you to visit a firm’s office and meet bankers from different levels. These types of interviews are designed to be “informational”, in other words are a way to answer your questions about the bank. However, it’s not unusual for them to turn into real interviews with direct questions. Depending on the particular person you meet you may enter in an interesting conversation or be grilled on your story, your strengths and weaknesses
LBS guide to IB interviews (even accounting!). So, do not schedule a mock interview unless you feel prepared for a real interview. It is a good idea to attend these sessions if you feel ready, you may have a good shot at leaving a good impression on the firm and be referred for the interview list. Needless to say it can easily backfire, especially if your story is not convincing or well prepared. Finally, if you schedule an informational interview, be ready with an agenda and a list of questions. You may find yourself sitting with two guys looking at you and waiting for questions.
LBS guide to IB interviews 4.8 4.9 Cover Letter Key Takeaways: A cover letter must be flawless. It’s the first piece of written work you send to your future employees. Writing the cover letter should be a fairly easy exercise and not take too much time. The truth is that it won’t help you in getting the interview. However, if not well written, it will seriously harm your application. Let’s put it in this way, recruiters will examine your cover letter as an example of your ability to produce an important document without mistakes and in a fairly structured and elegant way. Screw it up, and you may not get a second chance. So, the best word of advice is: read, proof read, ask your friends to read it, ask Career Services for their advice on it and re-read again. Use the cover letter as a way to highlight your strengths and why you should be perfect for the job, and make it fairly standard so that you will be able to easily tailor it for each bank. Also, try to accommodate names of the individuals you have met at the bank, this will help HR get feedback about you from them. As a general rule, most students tend to structure their cover letter in three main paragraphs: Introductory paragraph, Body paragraph and Concluding paragraph. Find in the next page a sample of the structure. For
more
detailed
information
check
Career
Services
Portal
pages.
LBS guide to IB interviews Name Surname London Business School Regent’s Park | London NW1 4SA
[email protected] Mobile Number Name Surname Recruiter Bank Name | MBA Recruitment Canary Wharf | 20 Bank Street | London E14 4AD Month Day, Year Dear Name MBA Recruiter, RE: Application for Investment Banking Summer Associate Position INTRODUCTORY PARAGRAPH: Communicate to the recruiter what you are applying for and mention some of the bankers to whom you have spoken to during the networking BODY PARAGRAPH: Highlight the parts of your precedent work experience or education that you know are relevant skills in investment banking: Select Critical Competencies and Key Requirements Based on your analysis of their Key Requirements, select the most important (4-5) requirements of the job description (draw upon your Analysis of the Job Ad/Job Description) Demonstrate you Match the Criteria Convincingly articulate how your demonstrated skills, strengths, experiences and achievements can be an asset to the potential employer. Make sure you use your ACHIEVEMENTS to illustrate specific examples. Remember – keep it succinct!!
CONCLUDING PARAGRAPH: Adding Value Be sure to draw direct connections between your background and the job description! This is the time to outline your Unique Selling Points (USPs). Show your value add – how can you help the organisation? What unique skills can you bring? This is a summary of what you have said so far but summarise the key skills and your US. Yours sincerely, Name Surname
LBS guide to IB interviews 4.10 Peer Leadership Program (PLP) Key Takeaways: The PLP sessions are a unique opportunity to get advice from second year students who interned in some of the top banks. Attend sessions as soon as they become available, which is generally early October. Strictly speaking, the PLP is not a component of the recruiting process. Still, it is a platform that gives students continuous support from the Fall term till the end of the recruiting season. This support can be extremely valuable and help you to successfully land a job in investment banking. The PLP program is delivers by second year MBA students under the supervision and paid for by Career Services. After undertaking Career Services training sessions , PLP students release time slots on Career Central to meet with first year students. These slots are 30 minutes each and during this time students can seek advice on CV, Cover Letter, Interviews, networking and everything else. PLP students are trained on all these areas and have relevant experience in different fields. Now that we have an understanding of what the PLP is, how can we get the most value out of it? The first thing to do is to identify among the PLP students those who can match our needs. In doing so, you should consider where they interned, what their background was and what their key skills are. Hopefully, you will have identified more than one student that suits your needs. During the sessions, it is important to have a clear goal in mind. This can be a CV review, advice on networking email or just some soul searching. Many students find useful to spend most of their session practicing interviews. It is important to remember that the PLP students are more than willing to help and will often go the extra mile. In addition, chances are that they just finished their summer internship in one of the top banks. Thus, they have unique insights on all the peculiarities of the recruiting process.
LBS guide to IB interviews 4.11 CV Preparation Key Takeaways: the CV is a forward looking document telling the recruiters why you would be a great addition to their team. Preparing a perfect CV is your top priority in the first month of School. You will use it sooner than you think, and it’s definitely better to have it ready when you need it. The way you should look at your CV is not like a summary of your past experiences, but as a prospectus telling to future employers why you are going to be a good addition to their team. Therefore, you want to highlight all the leadership and team working experiences you have. Moreover, if you have finance/deal related experiences, you should definitely point them out. While everything on the CV must be true, the content you want to include is, to a certain extent, discretionary. The goal is simple, try to include every experience that is consistent with what recruiters are looking for in their candidates. It’s also important to “frame” your experiences in the right perspective using appropriate wording. You can find an excellent list of “resume action verbs” on the Career Service website. Be aware that each line of your CV can become an interview question, therefore you should be ready to back it up. You should approach the CV review process very seriously and make good use of all the Career Services resources (both online and in person). Start reading/watching the CV writing guide in September, make a draft and then ask to at least 4-5 other students (including native speakers!) and Career Services to read it. Usually the 2nd years are a great resource together with the PLP sessions. Many students also find it helpful to take inspiration from the format of the 2nd years CV in the CV book.
LBS guide to IB interviews 4.12 Simple words of advice...... Key Takeaways: An elegant and conservative style is imperative. Be professional in the banking “way”. If in doubt, observe the style of the bankers coming on campus or ask your classmates who have worked in the sector. Remember, it’s easy to make the wrong impression.
4.12.1
Male Dress code
Let’s start saying that we have seen students showing up at closed list events with very dirty shoes, and that’s doesn’t really work with bankers. Therefore, be careful to shine your shoes and iron your shirts before interviews and networking events. • Suit: black business or medium-dark grey; go for a classic and elegant style. Avoid extravagant colours such as maroon, green or light coloured suits. • Conservative silk tie: We suggest silk because it makes a nicer knot. I would not go for the cheap solution given the importance of the situation. Moreover, you want to dress as bankers do. • Shirt: a conservative long-sleeve solid white or light blue should work well. • Belt: a simple and elegant belt matching the colour of your suit and shoes. • Socks: match the colour of your shoes and belt. • Shoes: low-heeled and conservative (cap-toe or wingtip), black is safest. • Aftershave: be moderate, you are not going on a date. The interview room is often small and you do not want to fill it with your new scent. That would be awkward… • About the beard. It’s usually uncommon for bankers. Clean-shaven is the best way to go. • Haircut: needless to say that the bankers tend to have short and wellgroomed hair. Long hair is a rarity among bankers, most of whom are not particularly open minded. .
LBS guide to IB interviews 4.12.2
Female Dress code (tricky since we are men but...)
• Skirtsuit or pantsuit is a very good choice. The Skirtsuit is probably considered the most prudent choice. Also a navy-blue, black-medium grey business suit with white or light blue blouse with high neckline. • Perfume: be moderate. The interview room is often small and you do not want to fill it with your perfume. • Belt: as usual must be coordinated with your outfit. It’s imperative to wear one if your dress has belt loops. • Shoes: low-heeled, conservative dress shoes colour coordinated with your dress. They should also be closed. • Hairstyle: I guess you don’t need advise on that. Elegant and tasteful. Don’t let it cover your face so, if long, wear it up or back so as to avoid constantly flipping it out of the way. Too much movement is not ideal for an interview. • Earrings: moderate, elegant and discrete. One per ear in the traditional earlobe position. • Handbags: usually perceived more professional to carry a briefcase or a portfolio.
LBS guide to IB interviews 4.12.3
Professionalism and timing
Professionalism means adhering to the principles of courtesy, honesty, and responsibility in one's dealings with clients and associates, indicating a level of excellence that goes over and above the commercial considerations. Honesty it’s a necessary characteristic of recruiting. The banking world in London is a relatively small one and if a student is caught lying, it will quickly get back to other recruiters. This doesn’t mean you can’t be commercially savvy in selling yourself (that’s what bankers do all the time). Being late is inexcusable. If you are afraid you might be late, then let them know in advance. Take note of the exact location and the travel time before scheduling networking events/interviews. Allow yourself some extra time. Professional manners: use courtesy and thank your interviewer for his time. If invited out for a dinner events/drinks be aware of your alcohol tolerance. It wouldn’t be the first time that someone oversteps the line and doesn’t get to the interview’s list (or worse, doesn’t get a full time offer in the summer).
LBS guide to IB interviews 4.12.4
The interview schedule (23 Jan – 17 Feb)
Key Takeaways: So much preparation will unfold in three-four weeks. Be confident and be prepared. The recruiting process is long and intense but will unfold in three weeks only. Be confident and enthusiastic. First rounds commence two weeks after Corporate Partner presentations and last just two weeks. Banks will call you within 1-2 days with their decision if you are through to the next round. Second/Final rounds are usually at the recruiters’ offices. Here are some words of wisdom: • Sleep 8 hours per night. The interview period is intense and draining, and the mind works best after sufficient rest. • Be prepared for adverse weather conditions. If necessary, wear appropriate shoes and change prior to the interview. • Arrive early and ask HR the name of your interviewer(s). Take some time to memorise them, it is good to address your interviewer(s) by name. • Avoid bringing large bags into the interview room. Take a simple black folder/portfolio with notepaper, a pen, spare copies of your resume and business cards. Hand your business card to the interviewer at the beginning of the interview(s). • Do not exceed your usual caffeine intake and always bring breath mints and energy bars. • Do not take your cell phone in the interview room. Leave it in your coat outside the interview room. A ringing phone is a bad mistake. • Eat regularly and healthy, keep your energy at the right level throughout the interview period. Remember that, because you may experience high levels of adrenaline, you may not feel the need to eat. While this is understandable, don’t fall into that trap. At the end of the interview, thank your interviewer(s) for their time and the opportunity to interview with the company, make again the point of how important was for you to have this opportunity. If you feel the interview was a good one, it is advisable to send a thank you note on the same day.
LBS guide to IB interviews
5 INTERVIEW PREPARATION 5.1 What are interviewers looking for? Key Takeaways: Passion, humility, ability, commitment and leadership potential. In order to understand why banks use different interview types, it is good for candidates to know their ultimate goal. Candidates are usually assessed on three main interrelated levels: • Technical and competence (can you do the job?): you must have a mix of hard skills and soft skills, able to work effectively in a team and having the potential to lead the workflow. Typical questions include: - Technical questions: testing your ability to understand financial concepts. - Your experience and unique attributes: you are selling your own story, and bankers will ask for specific examples of when you showed the skills they are looking for, such as problem solving, team work and leadership. • Fit with the firm culture (do I see you working with me?): Firms have (or try to have) unique cultures. Talking with bankers during networking sessions is a great opportunity to find out, if you fit with their values. If yes, say it. It’s ok to repeat what you heard during the presentation or networking session; it shows you’ve researched, listened and understood the firm. However, as a general word of wisdom, you should maintain a positive attitude even under stress, show good presence and professionalism. • Passion and commitment (if I make you an offer, will you consider it seriously?): Banking is a very demanding job; therefore you must have passion and commitment. You also have to like the firm you are working for, and that’s why networking is so important. Bankers will ask why banking? Why us? And you should be ready with your bulletproof answer (answers must make sense). Ask yourself, do I sound convincing? Ask your friends to give constructive feedback on your story and reasons; this will help you are when under fire.
LBS guide to IB interviews • These are the three main areas of a candidate evaluation. However, the list of qualities to be assessed will usually be longer. Here’s a list we drew up with the assistance of other students who previously worked in banking prior to the MBA: • Leadership: ability to deliver results; pro-activeness and spirit of initiative to add value to the team. • Teamwork: communicate and work well with others, flexible, respectful with both senior and junior bankers. There could also be references to what your study group thinks of you and how well you get along with other members of the study group. • Dependability: pair of “safe hands”, ability to work hard, multitask, handle stressful situations and integrity. • Excellence: history of success and achievements; high intellectual horsepower; high standards, ambitions and drive to excel. • Attitude: pleasant to hang out with; sense of humour; motivated, hardworking and ability to learn and develop. • Presence and professionalism: commercial sense; good business judgement; articulate; inspiring trust and confidence.
LBS guide to IB interviews 5.2 Interview types Usually an interview lasts for 20/30 minutes. Therefore, if you have been scheduled for one hour it will probably be split in 2 x 30 minutes or 3 x 20 minutes. The usual recruitment process includes two rounds of interviews, with the first round on Campus at the school and the final round at the bank’s office. A couple of banks have more than 2 rounds and some have an Assessment day. There is no firm rule, but you are be more likely to be interviewed by VPs and Associates in the first round and by Directors and MDs in the final round. However, all rules are there to be broken, one year a boutique and a bulge bracket bank sent MDs to the first round. Interviewers will often be alumni of the School, so they will know the concepts of study groups and the MBA curriculum. You should be ready for questions about the life in LBS and what feedback your study group would give you. Usually it will be a one on one interview but it’s not uncommon to have two bankers conducting the interview. Be aware, if you are interviewing for a specific team given your particular background, it is very likely that a member of that team will interview you. No one can ever predict the format of an interview, so you should try to prepare well for many different situations. However, the major part of the interviews follows a common path (and a common goal). Below you can find a general scheme: • “Tell me about yourself” or “Walk me through your CV”: is usually the first question asked. It is an opportunity for you to control the message you want to give you interviewer(s) : - Frame every step of your career/story in a way that explains why you chose to do an MBA and why you are seeking a career in banking. It must be reasonable and rational. If it’s rational then everyone will be able to understand and believe you. - Talk about/frame your achievements that involve transferable skills and link them to banking (leadership, commercial, team work, deal related etc…)
LBS guide to IB interviews • Technical, behavioural and fit: hard skills vs soft skills, the endless battle. Do not fall in the false myth that banking is all about hard and technical skills. Banking is about good reasoning and great interpersonal skills. The banker is an analyst, a strategist, a salesman and a negotiator. Therefore, all interviews focus on the behavioural and fit of the interviewee. - The technical part is a minimum threshold you have to meet. It will also show your commitment and passion for finance. If questions become more difficult, that can be a good sign. The recruiter probably believes you have good knowledge and will want to push it a little bit further. - All other questions have the aim to understand if your experience and qualities will add value to the team, and why they would want to hire you versus another LBS student. Sometimes you may find yourself in a hostile environment, with your interviewer trying to systematically undermine and contradict every statement you make, even cutting you off before you finish your answer. In most cases it’s not because the interviewer does not like the answers, but because they are testing your confidence, your interpersonal skills and how you perform under stress.
LBS guide to IB interviews 5.3 Know your story/pitch Key Takeaways: Your story is how you will attract the interest of recruiters. It’s a great opportunity to drive the conversation and make yourself interesting to them. If you are not credible in selling your story and your skills, you will appear less credible and capable of selling an idea, a project or a company. Your story will make a huge difference in driving your interviews and networking, and it will usually be the first question they will ask. Bankers will only take you seriously, if you can capture their attention by communicating clearly your story/pitch. When considering your key marketing points, focus on how these points fit with the Associate role: • What are your transferable skills for investment banking? • What are your significant accomplishments from your work experience? • What in your background makes you stand from the others? Below there is a rational path that every good story should have: • The main passages of your life must make sense and show continuous improvement to excellence. Never talk negatively about your experience or past employers. Always say that you decided to change school/job/company because you were offered something better according with your drive to learn and improve your standards. The characteristics of your job should always show similarity to the Associate job (team working, leadership, problem solving and client standing, etc…) • Why an MBA at LBS and why banking? This should flow naturally within your story. You should show thoughtfulness in your decisions, showing that your choice of banking wasn’t solely money driven or following the business school crowd, but a deliberate reason for taking an MBA, why you are in London and why you are passionate about (eg) corporate finance advisory? • Your experiences/anecdotes should reflect transferable skills for banking. Always support your statements with an anecdote from your past. For example when your boss had an emergency and left you in charge of a
LBS guide to IB interviews project at the clients’ site or reporting directly to the CEO. Also highlight any finance related or deal experience. The general format to structure an answer is SOAR: Situation, Objective, Action, and Result. A final word of wisdom, it’s very important to be structured in your exposition. Banking usually involves multitasking on different projects with tight deadlines. The best Associates are the ones able to communicate clearly, concisely and quickly to time-poor senior VPs and MDs. Therefore, think in bullet points when communicating. For example: Why an MBA at LBS? I decided to do an MBA for three main reasons: • First, I felt I touched a ceiling in my past career and the role was unlikely to stretch me intellectually and I understood a move to London would give me the best chance of building a Career in IBD since it is the International Finance Capital of the world. • Second, I wanted to learn how to work effectively with professionals with different background and nationalities, and LBS is the most diverse business school in the world. • Third, I wanted a broader understanding of business that only a two year MBA can offer, which will hopefully help to make me a better business leader/manager in the long term.
LBS guide to IB interviews 5.4 Financial knowledge: use of core courses, training on campus and other resources Key Takeaways: Three main areas of knowledge: accounting, corporate finance and markets understanding. For the first two, use the core courses, the training events and the material suggested. For an understanding of the markets it is necessary also to read the leading financial publications regularly.
For many career changers the technical side is usually one of the scariest parts of the banking interviews. What is considered to be acceptable financial knowledge? Before answering this question, you should know that recruiters will test you on your technical skills in order to understand how prepared you are. The financial side will involve mainly three areas: • Accounting: the accounting class will cover the majority of what you need to know. While it is highly unlikely that you will get a basic T-account question, it is important to understand how money flows through the three financial statements. You should have a clear understanding of what they are and how a change to one statement will affect the other two. This may be asked using a “real-life scenarios” like what happens to the 3 statements when Apple manufactures and sells iPads? Sometimes, you may also end up with more advanced questions such as what goes into shareholders’ equity, LIFO vs. FIFO, and less common topics like revenue and expense recognition, M&A accounting, deferred taxes etc. • Valuation/Finance: the corporate finance class and the finance club events (modelling and valuation workshops) will cover the majority of topics that will come up during investment banking interviews, including: - DCF (WACC, CAPM, Beta deleveraging): Use a company’s projected cash flows, discount them for the time-value of money and cost of capital, then sum those with the company’s discounted terminal value to find its present value. - Public comps: Look at publicly traded comparable companies and the multiples they trade at, and then apply those multiples to the company in question.
LBS guide to IB interviews - Deal comps: Look at what buyers paid for companies in similar industries and with similar financial profiles and apply those multiples to your own company. - Accretion/Dilution analysis: will a company have higher or lower earnings per share (EPS) after acquiring another company? This is an analysis of the trade-off between using cash, stock, or debt to finance an acquisition. - Leveraged Buyout (LBO) Models – calculating the return to a PE firm when it buys a company. Most typical questions include: “Walk me through an LBO model”. - Brainteasers: Although not about finance, you may end up with a brainteaser. The main purpose is usually to test your thought process. For a good list of examples (and answers) use the guide: “Heard on the Street” • General financial awareness: these questions test your “real” understanding of what’s going on with the markets/economy. An example could be: “where do you think the UK economy will be in the next year?”, “if you had a $1m, where would you invest it?”, “How would you sell the equity story for Groupon IPO?” This knowledge cannot be found in the coursework. It is only obtained by regularly reading the Financial Times, The Wall Street Journal and The Economist and by discussion with classmates. Many students in the past years have found these other resources to be very useful: • Adkins Matchett & Toy Midnight Manuals: practical manuals covering the everyday work of analysts. It also includes basic modelling guides (highly recommended!). • Investment Banking of Joshua Rosenbaum and Joshua Pearl: a detailed practical guide covering an analyst’s role. • Vault guide to finance interviews. • Mergers & Inquisitions IBD guide: interesting guide with over 200 questions to practice.
LBS guide to IB interviews 5.5 Company Research Key Takeaways: recruiters will ask questions about their firms. They will test your preparation (would you go to a client’s meeting without knowing its share price and main financials?) and interest in the company. Banks appreciate a student’s ability to differentiate amongst banks. Every firm has its own culture, which is dictated by their history and the particular nature of their services. Recruiters will probe your knowledge of the market and your interest in their particular company versus others. You should modify your pitch for each bank. Why should they hire someone who did not even bother to seriously understand the firm he or she has applied to? Lack of preparation is definitely not a characteristic of a good associate. When preparing, remember that your knowledge of the banks should reflect your knowledge of the industry, your potential fit with the firm and your ability to prepare for important business meetings. Many students find it helpful to make a one page slide on each bank that they apply to. A good cheat sheet should include: • Market position: bulge bracket, mid market, commercial bank or independent bank? (Morgan Stanley, Unicredit, Citi, Moelis) • Geography: US vs. European headquarters (Morgan Stanley, Deutsche Bank) • Breadth of services: lending (balance sheet?) division (Citi, J.P. Morgan) • Financials: revenue breakdown • Market cap/share price/PE ratio/ROE (current vs. 52 weeks high/low) • Chief executive officer • People you have met at the firm • Culture (web site and networking) • Major deals done in the past year - The Banker and the FT, Investment Weekly News, Global Banking News, Euromoney and many other banking and finance magazines and newspapers are available in full text in the database FACTIVA (available to students and alumni on and off campus) • Key points made at the company presentations (strengths, culture)
LBS guide to IB interviews Some students have also found it useful to read the broker reports on the banks, available through the Library services, analysts’ reports, company data, M&A, bond, and private equity data are all available on and off campus in Thomson One Banker: Portal>Library Services>A-Z list of databases>Thomson One Banker
LBS guide to IB interviews 5.6 Practice interviewing Key Takeaways: Study groups and mock interviews are absolutely key in your preparation. • Practicing is crucial to performing effectively in interviews. Many students who are committed to finding an internship in banking form study groups of 2-3 people. • IBD recruitment is a long marathon and having the right group to support you will quickly become invaluable. In selecting your teammates, try to make a choice based on potential, commitment and diversity. • Study groups are usually very helpful for sharing information and practicing mock interviews. Interviewing each other is probably the best way to prepare. Use the Career Services resources as well, including mock interviews with external consultants (Natalie is one of the best) and PLP sessions. • Listed below are some considerations to keep in mind when practicing with your group: • Complete interviews: practice some complete 30 minutes interviews, with a full spectrum of questions (motivational, behavioural and technical). Also simulate interviews with different banks so that you can practice bankspecific questions. It is not easy to maintain the right amount of energy for the entire interview, so practicing is a great way to become accustomed to real life situations. • Practice as it was real: find a quiet room with chairs and table, and take it seriously. • Delivery: you may know the right answer to all the questions, but how you communicate/deliver the message is vital. As previously emphasized, be structured in your answers. It is okay to use “bullet points”. Also, pay attention to how you speak, show excitement when talking about important aspects of your life.
5.7 Mock interviews in group of three: it can help to interview in a group of three, with one as the interviewer and another observing and taking notes.
LBS guide to IB interviews Final considerations Key Takeaways: Find the right attitude and style of communication. Approach every question as an opportunity to market yourself to the interviewer. Maintain an elegant and appropriate body language. Keep calm: • The interview period is draining, but with the right amount of practice you can become more comfortable and better able to control your nerves. Therefore, keep practicing and try to simulate a real interview situation. • It is also important that you don’t appear too nervous or unsure. Can you imagine a client trusting a banker who doesn’t appear confident on a vital matter? Remain communicative and maintain a positive attitude during the entire interview. Avoid appearing arrogant. Keep in mind that interviews tend to follow a similar path: • First impression: be confident and upbeat when you walk in. The first impression is crucial in the interviewers’ opinion of you. • Tell me your story: this is usually the first question, even if it comes in different forms (walk me through your story, why IBD, etc). It is probably the most important question. Depending on whether your answer sounds credible and reasonable, the interviewer will decide how seriously he should listen to you for the rest of the interview. • Behavioural questions: use examples from your past to highlight why you would be a perfect fit for IBD and the bank. It is a great opportunity to market yourself. • Technical questions: be structured and concise in your answers. If you do not know the answer, remain calm and try to think through the answer aloud and ask questions in order to engage the interviewer. Often there will be no right answer, and the interviewer simply wants to see your thought process(be structured and consequential!). Last suggestion, never give up unless the interviewer changes the question. Maintain appropriate body language: • Posture: sit straight with your shoulders, do not cross your arms and keep your hands where the interviewer can see them. • Face: smile and make the interview an opportunity to learn from an expert practitioner.
LBS guide to IB interviews • Eye contact all the time: do not look down (not confident/shy) or up (evasive, afraid), but maintain a positive eye contact with each of your interviewers. It’s very important to do this when trying to convince someone that you are perfect for the job. • Voice: maintain enthusiasm, do not rush but maintain a good pace. Also vary your volume and speed according to what you are saying. • Legs: must not be crossed, and try not to let them shake.
LBS guide to IB interviews
6 INTERVIEW QUESTIONS Sources used to create this guide: • Adkins Matchett & Toy Midnight Manuals: • Investment Banking of Joshua Rosenbaum and Joshua Pearl: a detailed practical guide covering an analyst’s role. • Vault guides to finance interviews and advanced financial interviews. • Mergers & Inquisitions IBD guide: interesting guide with over 200 questions to practice. (internet website)
6.1 Motivation/fit/understanding banking questions View motivational question as an opportunity to present the main decisions of your life in a way that will highlight the characteristics necessary to be successful in investment banking. Banking is a highly demanding job, and recruiters want to be assured that you are passionate about it. You will also be heavily tested on your understanding of the industry players and main services. Answers should be clearly communicated: make use of points when talking. There is nothing worse than burying a good answer in a flood of words. Remember your interviewer will meet at least 10 students and will easily get bored and lose attention. Make use of specific anecdotes to support your statements. Whenever you are asked a behavioural or motivational question, you need to have anecdotes ready to back up what you say. Go through your resume and make sure you have stories prepared for the most common questions; you can modify them as necessary for any new question you get. It is also important to ensure consistency and credibility. Saying that you want to do banking because Uncle Tom is a banker and you always liked the guy is not a credible answer. Tell the interviewer exactly why you are passionate about advising companies on extraordinary operations. M&A transactions are a way to shape competition in industries and are usually life-changing operations for many companies. IBD projects are usually time-sensitive and critical to a client’s competitive positioning, often leading to a time frenetic environment where multi-
LBS guide to IB interviews tasking, time management, strong analytical and communication skills, stamina and team work are essential. Also keep in mind that how you answer the motivational questions is going to determine the interviewer’s attitude for the technical part. Below you will find a list of the most recurring questions. This is not an exhaustive list of all the questions you may get.
Background and personal questions 1. Walk me through your resume / tell me about yourself / tell me who you are: Almost every interview starts with this question. This is a way for bankers to form a preliminary opinion about you and to see how well you can sell your story. The answer should not take more than 2 minutes and you should focus on strengths and skills that are relevant to investment banking. You do not have to cover everything on your resume, but you should highlight all the main points by giving a short preview of the stories you want to tell them later. Focus on relevant achievements and transferable skills. By the time you go for your interview, you should have repeated your story so many times that even you should be bored of it. Be careful not to sound mechanical. 2. Why did you major in … ? If it was business related you can discuss your interest in the area. For different majors you can emphasize how you liked the challenge and/or you had a personal interest in the field. But also mention you took an MBA to study business. 3. Why LBS? LBS is the best finance business school in Europe, it’s also the most diverse and is located in the financial heart of Europe. Find your story building on the school strengths.
LBS guide to IB interviews 4. Why not a Master in Finance (or MBA for Master in Finance students)? For MBA students, emphasize how you believe that the role of a banker is not only about the technical side, but also about understanding client needs and how companies operate. An MBA will help you in being a well-rounded professional, enabling you to master a DCF and have a dinner with the CEO of a company at the same time For MiF students, emphasize that you are committed to finance and thus wanted to concentrate on that and be efficient with your time at school so that you could get into the job you are seeking sooner rather than later. 5. What do you do for fun? If you have anything unique or uncommon mountaineering, investing) you should bring differentiating point. You should also highlight quote some of the transferable skills that (multitasking, teamworking, leadership).
(climbing, wine tasting, that up. It will be a what is fun for you and may apply to banking
6. Tell me something interesting about you that is not listed on your resume Use common sense. Talking about a trip in Italy or the Manchester – Liverpool match you saw last month is totally fine. 7. What are your favourite movies /books? Pick something that you really liked, but avoid being overly finance focused with titles such as Liar’s Poker or Wall Street. Avoid saying you really like Harry Potter. Pick a balanced choice (you want to be seen as a normal person!). 8. Other background and personal questions • What other business schools did you get into? • Tell me about your extra-curricular activities at LBS
LBS guide to IB interviews • What’s your proudest achievement at LBS? • What has been your greatest learning at LBS? • Which subject did you find more interesting in LBS? Which did you enjoy the most? And the least? • Why did you choose your campus involvements? • How did you contribute to the LBS community? • What was unexpected, both positively and negatively, at LBS? • What was the last book you read for fun? What are you reading right now? • What three things would you want stranded on a desert island? • What’s your favourite quote? • Who is your idol/mentor? Other than a relative? • Whose personality do you think had the biggest contribution to your own personality to date, your mother or your father? Explain.
6.1.1 Commitment and motivation questions 1. Why investment banking? You were researching a lifesaving medicine or well on your way to becoming a top manager, so why on earth should you change your career to banking? Be honest with yourself and try to really understand what bankers do, it is the best way to find an answer. Then practice it every time you can. Prepare for strong rebuttals and think ahead about how you will respond to them. Recruiters will often question your reasoning in order to understand how solid you are. The answer to this question is very personal; it could vary from the focus on the client, the intellectual challenge, the teamwork, the colleagues and/or the project management skills. Many fail to understand what M&A really is: advising clients on decisions that will likely transform how they do business in their industry. Think of the example of the third and the fourth largest players in an industry merging and becoming the largest one. M&A is a strategic competitive response. Competitive pressures, changing markets, and other forces may put pressure on management to seek external means
LBS guide to IB interviews to improve shareholder value. Mergers, acquisitions and restructuring are an integral part of every company’s strategic development plan. 2. What do you know about the lifestyle of this industry? Do you think it will suit you? Say that you have been researching the industry and have talked with many bankers and that you are prepared to work as long as the client and your team need you to (80-100 hours per week). As an example, give one situation in your life when you were required to work that hard, and say that even if no one likes continuously long hours, you still enjoyed it because you like to be challenged and being part of a team. 3. What you don’t like about banking? There is no correct answer to this question. Usually no one likes working all the weekends for multiple months (unless you live only for your work and this would make you quite boring). Conclude saying that you understand that M&A situations are so critical for clients and often have tight deadlines; therefore investment bankers have to work so hard. It’s part of price you should be prepared to pay for doing such a challenging and exciting job. 4. I see you changed quite a few jobs before business school. If we hire and invest you, are you going to leave early? Your answer should show that you are a good team player and an ambitious young professional striving to grow. While it may be strange if you changed 4 jobs because you did not like the people, it is rational if you did so in order to grow professionally. You should also explain why you think that banking is a long-term choice (it has all the characteristics you were looking for when you were changing positions) 5. You have an engineering background. Why change your tech job with Banking?
LBS guide to IB interviews Keep it as personal as possible. Frame your precedent job in a positive light, but say that you like the business side of technology more than the tech side by itself. You want to advise tech companies in extraordinary operations that will change the competition in the industry. Many students also point out that they felt capped in their growth since limited advancement opportunities are typical in the corporate world. 6. You have been an auditor. Why you now want to switch to Banking? As usual, keep it personal. Your story is your differentiating factor. Many students find the faster pace of IBD and the career advancement opportunities more attractive. Say that you are excited about the opportunity to certify not just a small part of a balance sheet, but to help the CEO of a multinational corporation change the shape of a company and the competition dynamics. It is always helpful while making such statements that you also back up these statements with either personal examples or examples from a recent transaction. 7. You have been a successful M&A lawyer with a potential for being a partner in few years. Why would you forego a lucrative career and enter in banking as a summer associate? While being an M&A lawyer has many important transferable skills, many students with a law background find their job too narrow and focused on only one part of the deal. Point out how you would like to lead the client on business/investment side, which is of course the most important. 8. You have worked in a consulting firm for three years, why change for banking? Make your own story, starting from a good understanding of what M&A advisory is.
LBS guide to IB interviews Many students say that in consulting they learned how to approach management and analyse market and companies, but that the work was too project specific and that often you never got to see what appended after it. M&A advisory it is always a high-level view of the company and it is deeply dependent with the final results of the recommendation (bid price – deal closing). 9. In which other sectors are you interviewing? Only in banking? Only banking. You should already be committed to banking when at the interview, or someone else will. IBD is a very demanding job, with 80-100 hours per week. It requires passion and commitment. 10. Recently some Analysts and Associates have left for Private Equity. If the opportunity comes out, would you leave our team? Recruiters want to hire students with a long-term view on the job. You should say that Private Equity is a possibility that every banker has to consider in their career, but that you do not see a foreseeable career path in PE due to the lack of structure and internal promotion potential. Moreover, decreasing fund size and increasing competition are seriously threatening the traditional PE model. Back up statements with recent numbers. 11. You had been working in a small boutique, and you liked working in a small team. Why do you want to move to a larger bank? Always refer to your previous experience in a positive way. Say you loved it and you learned a lot, but that you felt you touched a ceiling in your growth (only middle market deals, only one country deals, the centre of the IB profession is London) and therefore moving to a large investment bank is your natural next step. 12. Which other banks you are interviewing with? It’s ok to say you are interviewing with all the other large banks. You want to work in investment banking and you want to maximize your probabilities to get a job. It’s perfectly rational and everyone should agree with you. It’s
LBS guide to IB interviews advisable to conclude by stating your interest in the interviewer’s bank of course. 13. When did you start being interested about finance? You say that you are very passionate and interested in investment banking. Why did it take you so long to make this switch? It should flow with your story. Make sure it’s reasonable and credible, and not too recent. Possibly you should have done your MBA as a way to move into a career in finance. 14. Why our bank? What are our strengths and why you would be a good fit in our team? Think about the banks specific characteristics and strengths and try to say why you feel you really appreciate/fit with their culture. Also, try to study the most recent annual report and the most current statements by the senior management of the bank. Ensure that you are aware of some of the major happenings relating to the bank. 15. I am concerned about (a certain area)… Can you explain more in detail? Everyone will be questioned on this line. If you worked in IBD they will ask why you left; if you are a career changer they have many angles to explore Ask your study group to question you on your reasons behind the career move, find out in advance what the main areas of concerns will be for recruiters and be ready (and proactive) to address them at the interview. Sometimes the interview can become quite stressful with your interviewers questioning everything you say in order to test the sincerity of your statements. Relax. it is just part of the process. If you have a well thought out story and you rehearsed your answers through many mock interviews you will be fine. 16. Where will you be in 10 years? What’s your career goal?
LBS guide to IB interviews A business school graduate should be committed to a career in banking, or at least be able to convince the interviewer that he or she is. For a career changer, some degree of doubt is acceptable. However, you should state that you have networked and studied the industry thoroughly and you are ready to work long hours in a team on more than one deal, and you look forward to your summer internship so you can have the opportunity to put in practice everything you have learned. 17. Is there anything else you would like to tell me? Consider yourself fortunate if you get this question. This is an opportunity to sell yourself in total freedom, go with why banking, why this bank and why you. 18. If we were to make you an offer right now, would you accept it? Assuming you get an offer, how will you make your decision between us and other firms? Some banks are particularly sensitive about their acceptance rate; therefore they may ask the question to candidates at the final round. It is important to not say yes unless you mean it. If you say yes remember you are bound by your word, in line with the LBS Renege Policy. Recruiters talk to each other. It is not necessary to say yes in order to get an offer, but be ready to discuss what criteria would you use to evaluate multiple offers. The criteria can highlight some characteristics that match the strengths of the firm you are interviewing with. This is a way to show commitment without giving your word. It is also usually advisable to mention that your main driver will be the fit with the people you meet. Banking requires long hours, and if you do not get along with your team it can be a nightmare. 19. What are our greatest weaknesses? This question is rarely asked. It is designed to test your knowledge (and therefore level of interest) in the bank. Usually it is advisable to point out
LBS guide to IB interviews some “non dangerous” areas of improvement for the bank, such the lack of presence in Asia or lack of leverage or their unique international footprint. 20. Why do you think we selected your resume out of the hundreds that we received for an interview? Why we should hire you instead of your classmates? Were you surprised that we called you back for the second round of interviews? Consider yourself fortunate if you get this question. It is an opportunity to sell yourself on why banking, why this bank and why you. Do not make the mistake of not sounding sufficiently humble. The associate role requires a lot of self-confidence but also a good degree of humbleness. There will be a times when you will have to follow the guidelines of senior bankers even if you disagree or don’t fully understand them. Moreover, no one likes to work with overly narcissistic people. They are a problem for everyone. 21. If you were not offered a position in investment banking, what other jobs would you consider? How would you deal with a rejection? There is no perfect answer. However, you are in an interview and you should show commitment and thoughtful planning. Some non dangerous answers may be: - Small boutique bank in order to gain enough experience and then reapply for a bulge bracket - M&A/business development at a corporation - Project finance for a lending bank - Small cap PE fund 22. Which of our competitors do you admire the most? It is another question designed to test your knowledge of the market. It’s advisable to choose a bank with similar characteristics of the one you are interviewing for. For example a good comparable for J.P. Morgan would be Citi, highlighting their ability to cross sell products leveraging their lending capabilities.
LBS guide to IB interviews A good comparable for Morgan Stanley would be Goldman Sachs, saying that you really appreciate their pure investment banking model and their culture for excellence.
LBS guide to IB interviews 6.1.2 Behavioural questions Recruiters ask these questions in order to understand how you react to different situations, and consequently if they would like you on their team. It’s important to make a wise use of your “anecdotes” portfolio. You must always support your statements with real examples. 1. Tell me about a time you or your team succeeded/failed or your biggest achievement/failure: This is part of the “tell me about a time…” questions and is supposed to show the interviewer how you handle situations involving stress and emotions. What did you learn and what was your role? Your answer should be tailored such that the skills demonstrated should be the ones relevant to be a good associate. Good examples usually include a project that did not go as planned or a work situation that did not develop as expected. Avoid empty statements like my greatest failure was not getting a job at Morgan Stanley right after undergrad. Also avoid big mistakes. It is advisable to use real situations and then show how you used the failure to progress and learn, and how the next time you handled the same situation brilliantly. 2. What are your three major strengths? The interviewer is going to judge if you are a good fit for banking. Answer using the qualities described earlier for a good associate. 3. Tell me why I should hire you in three sentences/ what are the three words that best represent you? Welcome this question as a great opportunity to talk about your unique selling points. It is a variation of the three major strengths, but you should back-up your qualities with examples from your professional background. 4. What are your three major weaknesses?
LBS guide to IB interviews This is a delicate question and you should treat it accordingly. No one is perfect, so there is no fault in admitting it. Say a real weakness and most important tell the interviewer how you have been working on it and the improvements you have already achieved. However, avoid suicidal statements such as “I do not like working in teams” or “I am not good with numbers” or “I lose control under stress”. 5. If your best friend/classmates had to describe you in three words, what would they say? This question is a variation of the three major strengths. The interviewer is just trying to figure out if you would be a good addition to the team. Answer using the qualities described earlier in order to convey the right message. For each word you list you should also give an explanatory sentence, possibly recalling a short anecdote. 6. What would someone you have not gotten along with in the past say about you? Many students live these questions with anxiety. You should not, it is indeed another opportunity to sell yourself. It is a variant of the weaknesses question, but with the caveat that you should tell an anecdote of your past possibly related to a misunderstanding / team working situation. For example a time when you were in charge of delivering a project for the client and one of the advisors (for example the legal) was not delivering their work on time putting the entire operation at risk, so you had to step down and “push” in order to make the process flow again. 7. What would your ex-boss say about you? This is a variation of the strengths question and represents another great opportunity to sell your unique marketing points. Just ensure that you support your statements with real anecdotes.
LBS guide to IB interviews 8. Is there any reason we should not hire you? There is no right answer. It all depends on how your interview is going. You can view it as a variance of the weaknesses question. If the interview is going well and it appears that you would be a good fit, you can answer with a joke like “if you did not hire me you would probably not hire at all” or “I sincerely do not see any plausible reason!” Another option is to try to think about the recruiter’s perspective. Figure out what about your profile would worry a recruiter, and then convince them about how that is not a weakness at all. Make sure you support your statement with a relevant story from your professional background. 9. Do you have any questions for me? All interviews end with this question. The worst response to this question is, I have none. The interviewer wants to understand if you are naturally curious and can ask intelligent questions. It is another great opportunity to show how thoughtful your research has been and how well you would you fit in their team. Here is a suggestion on some common questions to ask: - Interviewer background: how did you get started in banking? Why did you choose your group? - Ask for advice: what distinguishes a good associate from a great associate? What are the key factors that make a summer internship successful? - Discussion: you can ask senior bankers on their view of their sector. While this is usually appreciated, you should be prepared to discuss the topic. While these are all good questions, you should try to use your intelligence and creativity. Final questions are a way of differentiating yourself.
LBS guide to IB interviews 6.1.3 Initiative / leadership questions Bankers are not employees, but independent professionals competing in the business arena for clients. Associates have often to use their own business judgment to lead analysts, while VPs and MDs have little or no time to follow them. Therefore, initiative and leadership (coupled with business judgment) are essential characteristics that recruiters look for in candidates. Use anecdotes from your professional background to support your statement. 1. Tell me about a time you when you showed leadership You should talk about an experience when you were requested to take the lead of your team and successfully obtained the results you waited for. • Start by stating the situation/problem and the objective. • Describe the team and relative roles. Explain delegated/managed the work flow. • State the results of your work and the client’s reaction.
how
you
This is also a good opportunity to talk about how you manage expectations with your seniors and how you can work well with others, try to state anecdotes and prove that you have the required skills of an Associate. 2. Define leadership and describe your leadership style There is no right answer, but a “balanced” approach is advisable. The best associate is able to lead analysts and leave them with a good grade of independency but at the same time will take responsibility/double checking (the mistakes of analysts) for delivering the output in time and with no mistakes. 3. Tell me about a time when a team did not work as intended. Tell me about a time when you successfully resolved a conflict. It is strongly recommended you use a story when a team wasn’t working until you began to fix it.
LBS guide to IB interviews Never be negative in an interview, therefore you should avoid pointing the finger against someone in particular. Many students take a situation where there was a personality clash between two members of the team (ensure you are NOT one of the two) which was blocking the workflow; and then explain how they worked to “bridge” the two antagonist’s positions, ultimately allowing the group to deliver results. 4. Are you a leader or a follower? The truth is you must be both (be a balanced person!). A good associate must be versatile and take the lead or take advice and follow, according to the team’s needs. 5. What was the most difficult situation you faced as a leader and how did you respond? Tell me about a time you overcame adversity/greatest challenged as a leader? Give me an example of a leadership role you have held when not everything went as planned. The answer is your opportunity to talk about a situation where you stayed calm and effectively managed the situation.
LBS guide to IB interviews 6.1.4 Teamwork / Interpersonal Associates constantly interact with analysts, other associates, other departments, VPs and MDs. Therefore, the ability to work in teams is a necessary skill. 1. Do you like to work with other people? Do you want that to be part of your job? As said before, of course you like it. Efficient teams achieve the greatest results and in the shortest time. 2. Tell me about a time you worked on a team. What was your role? Teamworking questions are meant to test your knowledge of the work of an Associate. They want to know if you will work well with senior bankers, peers in different groups and analysts, in a constant and pressing communication flow. Many students tell about a time when teamworking was complex and eventually very successful and they were both leader and followers in the process.
LBS guide to IB interviews 6.1.5 Problem Solving Associates often face problems with no easy or immediate solution. Therefore, problem solving and the ability to overcome any obstacle are essential skills for an Associate. Use these questions as an opportunity to show you would be a great addition to the team, someone who doesn’t just “pass” the ball, but that actually deliver value and take off “worries” from the shoulders of VPs and MDs.
LBS guide to IB interviews 6.1.6 Understanding banking questions 1. You have never worked in finance before, what do you know about the job of an associate? You should acknowledge that fact, but show how much research you have carried out (including talking to friends who work in banking etc) which means you have formed a good idea of the role and believe that you would be a great fit. Then you should talk about what you understand the role to be. eg. In IBD The associate leads the execution of all the work done by the team, from the pitch to the execution of the deal as well as acting as the coordinator of the team. The main qualities/roles of an Associate: - Successfully lead and coordinate with Analysts. - Get the number rights and are technically prepared. - Have business judgment (do not waste time of analyst by working on useless things). - Have commercial skills when facing a client. 2. What’s the work of a banker in managing an IPO? In an IPO the main role of banks is to guide companies in the process to raise money from equity investors on the public markets. The process is lengthy and involves many steps and different actors. Bankers are in charge of the coordination of the all process, with particular attention to the communication with potential investors. The final responsibility of the process being in time lies always on the bankers. In managing the IPO, banks have four main activities: • Coordination: - Coordination and planning of the process - Control and monitor work streams • Documentation/Listing filings: - Prospectus
LBS guide to IB interviews - Due diligence (legal, business, financial) - Legal filings - Documents/contracts (Underwriting agreement, opinion…) • Valuation / Equity story: - Valuation (price range) - Equity story (why the company is a good investment?) • Marketing: - Offer structure (index, size) - Communication - Roadshow/book building - Aftermarket (greenshoe, stabilisation)
legal
3. Tell me about a deal you have been following This question is highly important, even if it is not directly asked during an interview, it can be used during your interview and is nowhere else, you can use it during the last part of your interview when the interviewer asks if you have any questions for them, thus prepare a recent deal that the bank has done. This question reflects an everyday situation in banking. Often senior bankers ask analysts and associates to scout for information on specific deals and prepare a concise summary. However, the main purpose for this question is to understand your passion about M&A and how well you followed the market. If you are applying for a specific sector you should cover that with particular attention. Summarise the deal and why you think it is interesting in few sentences. Prepare a one-page deal summary on at least 4-5 transactions. You should include the following information: - Announcement date - Acquirer and target description - Enterprise Value and Equity Value - EBITDA and PE multiples (in line with industry average? Accretive or dilutive for the buyer?) - Structure of the deal (Cash vs stock, LBO?)
LBS guide to IB interviews - Deal rationale (VERY IMPORTANT, remember what’s M&A all about) - Synergies announced at transaction - What is the impact on the industry? - Market response - Banks involved 4. What do you think are the three most important criteria for hiring someone into this position? What about your background will make you a good investment banker? Use your story and the answer to the role of an associate to formulate your unique answer. 5. If you can relate a sports position on a team to an Associate's role, what would it be? If you played any sports it’s a good opportunity to link its particular skills with those required from an associate. Build the answer around “what makes a great associate?” 6. What do you expect to get from your summer experience? Again, this question is a test of your understanding of the job. Many students say that you look forward to contributing to your team and finally practicing/learning what you have been studying so hard. 7. Would you rather be on the buy-side or sell-side of a transaction? If it is an auction, of course you want to be on the sell-side because it is more probable you’ll earn the success fee. Think of an auction where 10 buyers are in competition to buy one company. The advisors on the buy-side are going to earn the success fee only if their client ends up buying the company, while those on the sell-side can sell to each one of the 10 buyers. If you had to be on the buy-side, you should prefer to be on the side of a strategic buyer, because they’re more likely to be able to pay more, since they will generate more synergies through the transaction than a financial buyer.
LBS guide to IB interviews 6.1.7 Investment evaluation questions Business judgement is one of the most important qualities of a banker. Knowing how to analyse an investment will make you stand out from the crowd. Most of the material produced by investment bankers includes an equity story and a risk and mitigants analysis. As an associate you will be required to draft pitches, info memorandums and management presentations, all analysing why a company should be attractive for investors. These kinds of questions tend to repeat themselves and usually involve how you would invest a large amount of money, evaluate the attractiveness of an investment, or decide whether to start a business on your own. While it’s very easy to start wandering around with your answer, the only good way is to be structured and ask the right questions: • Ask the interviewer what your goal is (understand the risk profile and expected return) • Ask whether there are any constraints such as time horizon, markets, assets class etc 1. If you had £1m, where would you invest? Ask for the goal of the investors. Is it a 20% return in one year or a longterm investment looking to cover your retirement needs? Build the portfolio of investments around your objective. If it is a shortterm capital gain you should pick a high beta stock. Good ideas can be found from the stock pitch competition organized every year from the Investment Management club. Evaluate the investment, stating why you believe the industry is attractive and then why the company is going to be able to capture value in the industry. If the investment goal is to create returns on a 30 year time horizon, a balanced portfolio may be the best option. Use the corporate finance class
LBS guide to IB interviews to prepare better for this question, but keep in mind that recruiters are interested in your ability to understand clients’ need, respect limitations and understand why some investments are better than others. Another strategy that can really help is if you have been building on your own portfolio, this can be a real winner as you have spent time on choosing certain sectors and or companies and while doing so you have built some understanding/rationales for the same. If you have done so, you will be able to very comfortably answer this question and possibly win over the interviewer. 2. In which sector/trend of the industry would you invest and why? This is an obvious question if you are interviewing for an industry team. They want to test your understanding and your passion for the industry, don’t miss out on this opportunity to show your preparation. Structure your answer by addressing: • Why this trend is going to create or shift demand • How the competition in the industry is likely to change • Why M&A activity may happen as a consequence (quote a recent deal if you can) • Returns in the sector • Regulatory environment and possible changes in the near future • Major players and their returns • Future of the sector You should pick a relevant and recent trend, and be specific. 3. If you owned a business and were approached by a large multinational for selling it, how would you make a decision on what to do? Recruiters want to see how well you reason about valuing an investment. In fact, if you do not sell, it means you are “investing” the lost price in the company. Therefore, from a pure financial point of view you expect the present value of future cash flows to be higher than the price offered.
LBS guide to IB interviews Of course there are other factors you would like to address, such as the cultural affinity, the governance and the fact that you may want to retain a decisional role in the company. From an evaluation point of view you should understand the future of your company and the potential business plan: • How attractive is the market? • Is the company going to capture value in the market? This will give you an estimate of the growth of the company. • At what price can the company be valued in 5 years? What’s the present value? This can be done by either looking at the intrinsic value of the company (done using DCF) or also looking at comparable public companies or even comparable transactions in the past. Also, try to get a range of an acceptable value for the company. This exercise will give you the guidelines to understand how to look at the value of your company. Then you should consider the key terms of the offer: • What’s the price vs the combination of the value of the company calculated in the previous step and the present value of the synergies the acquirer expects to realize • Payment structure (cash vs stock), for a better idea of what this means, have a look at the section on Merger Consequence Analysis. Finally draw your conclusions.
LBS guide to IB interviews 6.2 Technical questions / IBD Key Takeaways: study groups and mock interviews (Career Services/PLP/friends) are absolutely vital in your preparation. Technical questions are an important part of the interview and it is vital that you are well prepared. You should see it as a threshold you have to pass in order to be considered for the job. Technical questions will not ultimately get you the job. The behavioural part of the interview (your passion for banking and your potential to succeed in it) is much more important. If you do well enough on the behavioural part and you haven’t given the interviewer cause to think you don’t know finance, you may not even get any technical questions. Before even trying to understand the questions, you should have a solid knowledge of the basics of corporate finance. Then, you should use this section as a way to perfect your knowledge and fine tune your preparation. It’s not only important to know the answers to technical questions, but also to communicate clearly your thinking process. Recruiters are more interested in how you reach the solution of the problem. So, even if you do not know the answer to a particular problem, you should try to show the interviewer how you would structure/dissect the problem in order to reach a conclusion. Like an exam, the recruiter is going to give you partial credit for being on the right path, thinking the right way
LBS guide to IB interviews 6.2.1 The Foundation – Some very basic knowledge you should already have in place Key Takeaways: we are going to provide some very basic theoretical concepts before introducing the questions. They are not in any way a substitute of your own personal study, which you need to get to a higher level. We just want to provide some basic guidelines to help you orientate your personal studies. Enterprise Value The value of the Assets of a company is given by the fact that owning 100% of the company will give you 100% of all the future income generated from the company. Therefore, the value on the financing side (owners of the future income) is equal to value on the assets side (you are as rich as much it’s valued what you own). Usually companies are financed through a mix of debt and equity; therefore the enterprise value is equal to the sum of the value of debt and the equity Why debt is part of the EV? Think about the case you buy a house worth $100m using $70m of Debt. After one year you decide to sell the house, which is worth now $120m, how much is the value of the equity? You receive $120m, from the sale, but you have to repay your debts for $70m, so equity is what remains after you repay debt: $120 - $70 = $50m. Here we go.
Value of Assets: present value of the future income generated by the assets of the company.
LBS guide to IB interviews Value of Debt: present value of the payments to debt holders less the excess cash (Net Financial Position). Payments to interest holders include passive interests and capital repayments (think to your HSBC loan). Value of Equity: present value of payments to equity holders (if listed, share price x shares outstanding). Payments to equity holders include all the income left after having paid the debt holders. For this reason equity represents a “residual” claim on the value of the company assets. Therefore, in every valuation we will use the following equation: Enterprise Value = Equity Value + (Debt – Cash “net debt”) However, given that you are interviewing from LBS and have studied Corporate Finance, you need to come up with a more sophisticated answer to this question: Enterprise value = common equity at market value + preferred equity at market value + minority interest at market value, if any + net debt (debt at market value - cash and cashequivalents) + unfunded pension liabilities and other debt-deemed provisions - Long term and Equity Investments – Net Operating Losses + Capital Leases • Preferred and Minority Interest are just other types of equity and thus treated just as common equity is treated • Net Operating Losses – Should be valued and arguably added in, similar to cash. • Long-Term Investments – These should be counted, similar to cash. • Equity Investments – Any investments in other companies should also be added in, similar to cash (though they might be discounted). • Capital Leases – Like debt, these have interest payments – so they should be added in like debt. • (Some) Operating Leases – Sometimes you need to convert operating leases to capital leases and add them as well. • Unfunded Pension Obligations – Sometimes these are counted as debt as well.
LBS guide to IB interviews How do I find the value of an Asset? Good question, the value of an asset depends on the cash you will receive from it. But because future cash flows are risky, we have to discount them in order to account for risk and time value of money. Discount Rates - how do you value something that is uncertain and in the future? By using discount rates, which reflect the cost for the time value of money and the cost for remunerating the risk of volatility of the future cash flows. How do you find the right discount rate for cash flows to equity investors? Using the CAPM: Return of market portfolio = Rf + Beta (Rm – Rf) Let’s start from a basic question, what does return to equity investors compensate? It compensates for the time value of money and for the risk of the investment. • Time Value of Money: imagine a US govt T-bill which matures in 1 year. It is assumed to carry no risk (US Govt will not default), but is still offering a positive return on your investment. Why? The return offered from a T-bill (Rf) is compensating the investors for the fact that if you lend money today you will not get it back for a year. • Risk: risk arises from the standard deviation of the cash flow profile. As we have seen, a T-Bill carries no risk (standard deviation = 0), because the US government is asumed to be able to pay back the exact amount promised. However, if you are buying a market portfolio ( eg ETF on SP500), you will require a higher expected return than T-Bills since it does not offer the same certainties of return. Since there is a higher risk that you might lose money, you want to be compensated for that by receiving a greater return. But how do we find out about risk and how we measure it? It all boils down to the variability (standard deviation) of cash flows, which are influenced by two kinds of risks: • Unique project risk: These are the risks associated with the fact that there are some perils which threaten the success of an individual company but not necessarily the economy in general (management, plant failure, etc.)
LBS guide to IB interviews • Market risk: These are the risks arising from the fact that there are economy wide perils which threaten all businesses (nuclear meltdown, recession, FED interest rates…) Good, but should investors be worried about both types of risk? If you own only one stock in your portfolio, of course the unique project risk is going to be important, but if you own more than 20 stocks, you are going to worry more about the covariance of the stocks of your portfolio (market risk). Think in the following way: if the specific risk of each stock is idiosyncratic, it means that it moves randomly. If each specific risk in your portfolio moves randomly it means that their net effect will be zero (one stock goes up and some other goes down, net effect averages zero). Therefore, for a reasonably well-diversified portfolio, only market risk matters since it influences all your stocks in the same direction. This is the risk you can’t diversify. That is why stocks have a tendency to move together, and that’s why investors are exposed to market uncertainties, no matter how many stocks they hold. Which risk should then be remunerated? As we have just seen, the risk of a well-diversified portfolio depends only on the market risk of the securities included in the portfolio, in others words from the covariance of the stocks with the market portfolio. Why the market portfolio? Because market risk is by definition measured by the movement of the market portfolio (SP500 for example). Great, and how do I measure the market risk of a stock? You simply measure how sensitive it is to market movements. The sensitivity of an asset to the market is called beta. Stock with betas greater than 1.0 tend to amplify the overall movements of the market. Stocks with betas between 0 and 1.0 tend to move in the same direction of the market, but not as far. Of course the market is the portfolio of all stocks, so it has a beta of 1.0. Example: a stock with a beta equal to 1.20 will amplify market movement by a factor of 1.2 (market movement +10%, the stock will perform +12%). I see, so how does CAPM find the required return?
LBS guide to IB interviews CAPM states that the return required by equity investors in order to invest in a stock, is a function of the market return and its sensitivity with it (remunerates only non diversifiable risk). Required return for stock A = Rf + BetaA (Rm – Rf) Rf = Risk free Rm = Return on the market portfolio Beta A = Beta of company A CAPM can be expressed graphically: CAPM relation 14.0% 12.0% CAPM return
10.0% Return
8.0% 6.0% 4.0% 2.0% 0.0% 0
Data: Rf = 3% Rm = 9%
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 Beta
1
1.1 1.2 1.3 1.4 1.5
For Beta = 1 Return is equal to the mkt return
Rf: Risk free return, ie the yield on a US bond, no risk of default and no risk of variability of cash flows. It’s the return offered when there is no risk at all. Rm: return of the all stock market, if you owned the “market portfolio” you will get exactly the market return. (Rm – Rf): is the market risk premium (MRP), how much more is the market offering in order to attract investors to invest in the market instead that in risk free assets? Rm should always be higher.
LBS guide to IB interviews Ok great; we have just seen how the value of a company is equal to the present value of the future cash flows it will pay. But how does a company generate value for its shareholders? As easy as that, it should generate a return higher than the required return by investors. In doing so it will become a positive NPV investment and its stock price will appreciate. What if a company can’t deliver the required rate of return? Investors will discount expected cash flows with the required return, thus achieving a lower valuation. Stock price will go down in order to align it with the required rate of return. We talked about discounting the cash flows, but what exactly are we discounting? That depends on what you want to value. A company produces Revenues through its business activities on an ongoing basis. Then it pays all the operating costs, taxes and makes important investments decisions for the future. What remains is called “unlevered” cash flow, which is not influenced by how the company is financed. However, the financing mix dictates how this cash flow is then divided among holders of rights on the company. If there is debt, debtholders have a fixed claim and get paid first. What is left goes to equity holders. So, if you discount the cash flows to debtholders using the debt discount rate, you will find the value of the debt. In the same vein, if you discount the cash flow to equity holders using the CAPM discount rate, you will find the equity value. Adding the value of debt and equity will give you the enterprise value. However, what do you derive if you discount the unlevered cash flows? You will get directly to the Enterprise Value, but of course the discounting rate will be the weighted average of the cost of debt and the cost of equity (CAPM), which is called WACC (Weighted Average Cost of capital)
LBS guide to IB interviews The formula of the WACC is: WACC = Rd (1-tc) * D/EV + Re * E/EV
Return on Assets (WACC)
Unlevered Cash Flows (Enterprise Value)
Return on Debt (Rd) Return on Equity (CAPM)
Cash Flows to Debt Holders Cash Flows to Equity Holders
LBS guide to IB interviews 6.2.2 How would WACC change if debt were to go up? How would WACC change if tax rates were to go up? These are the category of questions, which are derived from the formula given above, so if debt were to go up, given that it is a cheaper source of capital, WACC would go down. Now answering the second question, if tax rates were to go up, WACC would go down as the after tax cost of capital has come down. Thus, remember the formula and also reason what the effect of each component of WACC’s formula is on WACC and why. How would you find the WACC of a private company with no debt? Firstly, here WACC is simply the cost of equity or in other words how much should the equity sponsors be compensated for taking on the business risk of the company. The answer lies in looking at similar companies on the basis of the following criteria: • Industry • Size • Geography ….
LBS guide to IB interviews
6.2.3 General Finance and Banking 1. What is an Income Statement? What are the major line items on it? The income statement provides the results of a business’ operations during a specified period of time. • Revenues: Income that arises from the sales of goods and/or services and is recorded when it’s earned. • Expenses: Commonly includes COGS, SG&A, D&A, Interests and Taxes, which are the costs a business incurred over a specified period of time to generate the Revenues reported. • Net Income = Revenues minus expenses. 2. What is Revenue? Sales (or Revenue) is the first line item, or “top line,” on an income statement. Sales represents the total dollar amount realized by a company through the sale of its products and services during a given time period. Sales levels and trends are a key factor in determining a company’s relative positioning among its peers. All else being equal, companies with greater sales volumes tend to benefit from scale, market share, purchasing power, and lower risk profile, and are often rewarded by the market with a premium valuation relative to smaller peers. Revenue = Units Sold * Price 3. What is COGS? Cost of Goods Sold includes all the costs directly related to the production of products and services, such as raw materials, direct labours, plant costs. 4. What is Gross Profit? Gross profit is the profit earned by a company after subtracting COGS. As such, it is a key indicator of operational efficiency and pricing power, and is usually expressed as a percentage of sales for analytical purposes.
LBS guide to IB interviews Gross Profit = Revenue – COGS Gross Profit % = Gross Profit / Revenue 5. What is SG&A? Selling, General & Administrative Expense usually refers to all the “central” costs, and includes expenses such as salespersons' salaries and commissions, advertising and promotion, travel, office payroll and expenses, and executives' salaries. 6. What is EBITDA? EBITDA = Revenues – COGS (not including depreciations of plants) – SG&A (not including amortisation) EBITDA Margin = EBITDA / Revenue
It refers to Earnings Before Interests, Taxes, Depreciation and Amortisation. It is generally considered a proxy of the operating cash flow generation of a company, but does not include change in working capital, capex, principal repayment’s and dividends. EBITDA is widely used for financial analysis and valuation and is considered a proxy for operating cash flow since it reflects the company’s total cash operating costs for producing its products and services. In addition, EBITDA serves as a fair “apples-to-apples” means of comparison among companies in the same sector because it is free from differences resulting from capital structure (i.e., interest expense), tax regime (i.e., tax expense) and accounting policy (D&A). [However, you will also find advocates who prefer using EBIT as they believe that the company’s investment in CAPEX is an indicator of the future growth of the company, and one such advocate is Warren Buffet] It is also considered a good indicator of the ability of the company to generate profits, because it measures the profitability of the company after having paid all the operating costs. However, it does not include the cost of the tangible and intangible assets which for, particular industries such as Telecom, could be significant. In these cases analysts often use EBITDA-Capex
LBS guide to IB interviews You should also remember that even EBITDA can be influenced by individual company accounting decisions (revenue recognition, unjustified rise in account receivables, etc…). 7. What is EBIT? EBIT = Revenues – COGS (not including depreciation) – SG&A (not including amortisation) – Depreciation – Amortisation EBIT Margin = EBIT / Revenue EBIT refers to earnings before interests and taxes and is commonly referred as “operating profit”. EBIT is generally considered a proxy of the operating profitability of a company and it is independent by the capital structure (before interest). It is used to compare companies, but as it includes non-cash expenses (D&A), it can be impacted by particular accounting policies of the company. Since those policies may differ from company to company, comparability may be affected. 8. What is Net Income? Net income (“earnings” or the “bottom line”) is the residual profit after all of a company’s expenses have been subtracted. Net income can also be viewed as the earnings available to equity holders once all of the company’s obligations have been satisfied (e.g., to suppliers, vendors, service providers, employees, utilities, lessors, lenders, state and local treasuries). Wall Street tends to view net income on a per share basis (i.e., EPS). 9. What is a balance sheet? What are the major line items on it? The balance sheet is a snapshot of the financial position and the economic resources of a company. • Assets: resources that a company uses to operate its business o Current Assets: assets that could reasonably be expected to be converted in cash within one year. These are important because they
LBS guide to IB interviews fund day-to-day operations. Include mainly receivables, inventory, cash & equivalents. o Long-Term Assets: assets which are not liquid, such as Plant & Equipment. • Liabilities: claims that creditors and shareholders have on company resources: o Current Liabilities: include both operational (payables) and financial obligations due within one year. o Long-Term Liabilities: include both operational (payables) and financial obligations not due within one year. Shareholders’ Equity: the book value of the equity of a company. It comprises the original “paid-in” capital plus any subsequent issues of new equity plus the retained earnings less the dividends, which “flow through” from the income statement each period 10. Describe the three main parts of the cash flow statement Net Income + Non Cash Expenses (D&A) Change in Working Capital Cash from Operating Activities: Cash flows related to producing and delivering goods/services + -
Capital Expenditure (Capex) Disposals Acquisitions
Cash from Investing Activities: Cash flows related to acquiring or disposing of long-term assets + + -
Issue of Debt Repayment of Debt Issue of Equity Dividends and Buy-backs
LBS guide to IB interviews Cash flows from Financing Activities: Cash flows related to obtaining cash from lenders and shareholders, and repayments of amounts borrowed. 11. What is Enterprise Value? Enterprise value is the value of the assets of the company. It reflects the discounted future cash flows to all claimants, whereas equity value reflects the discounted future cash flows only to equity holders. Since the assets side of a balance sheet must be equal to the liabilities side, we can derive that EV is equal to the value of all the financing instruments emitted by the company (ie bonds).: EV = Equity Value + Net Financial Position + Minority Interests + Preferred Stock 12. What is Equity Value (market cap)? Equity Value (“market capitalization”) is the value represented by a given company’s basic shares outstanding plus “in-the-money” stock options, warrants and convertible securities (called fully diluted shares outstanding). It is calculated by multiplying a company’s current share price by its fully diluted shares outstanding. Equity Value = Share price * Fully Diluted Shares Outstanding 13. How do you find the number of Fully Diluted Shares Outstanding? A company’s fully diluted shares are calculated by adding the number of shares represented by its in-the-money options, warrants, and convertibles securities to its basic shares outstanding. The incremental shares represented by a company’s in-the-money options and warrants are calculated in accordance with the treasury stock method (TSM). The TSM assumes that all tranches of in-the-money options and warrants are exercised at their weighted average strike price with the resulting option proceeds
LBS guide to IB interviews used to repurchase outstanding shares of stock at the company’s current share price. In-the-money options and warrants are those that have an exercise price lower than the current market price of the underlying company’s stock. As the strike price is lower than the current market price, the number of shares repurchased is less than the additional shares outstanding from exercised options. This results in a net issuance of shares, which is dilutive (ie, it increases the outstanding share count) If the CEO of a company owns 100 call options with a strike price of $18 and the current stock price is $20, the CEO will pay the strike price to the company 100*$18 = $1,800 in order to exercise these options. The company receives the money but has the obligation to give to the CEO 100 shares (which are worth $20 each). Therefore, it uses the $1,800 to buy shares on the market. $1,800/$20 = 90 shares, but it has to give to the CEO 100 shares, so it has to issue the difference: 100-90 = 10 shares, which is the addition to account for the dilution of the in-themoney options. Treasury Method (New Shares)= ((Share Price – Strike Price) / Share Price)* Number of Options 14. What’s the difference between common stock and preferred stock? How do they trade relative to each other? Preferred stock are shares with a guaranteed dividend, while common stock are not. Moreover, in case of bankruptcy, preferred stock shareholders have priority over the commons stock. As a result, they have claims on the same cash flows, but just as debt usually requires a lower cost of capital (Rd) than the cost of equity (Re) because it has a precedence on being satisfied, so preferred stock cash flows are a little safer than common and so returns will be lower than those offered to normal shareholders.
LBS guide to IB interviews 15. What are Minority Interests? Minority interest occurs when one company purchases a controlling stake in another but does not acquire 100% of the Equity. Due to consolidation accounting, however, even if you acquire only 70% of a company, the acquiring company will recognize 100% of the acquired company’s assets and liabilities on its own balance sheet. Minority Interest is the line item on the balance sheet where you will net out the 30% you do not own. Let’s say LBS is listed and buys 90% of the shares of Columbia, what happens to the 10% that they did not buy? The Columbia shareholders become minority shareholders and keep their 10%. 16. Why is Minority Interest not included in the Equity Value calculation (market cap)? Think about if from a cash flow perspective. 10% of the cash flows coming from the subsidiary are owned by minority shareholders, not regular shareholders. So you can’t have what is not yours… but it is still part of the enterprise value, which is the present value of all cash flows discounted for the appropriate WACC. 17. If one of your clients had some extra cash, how would you tell him to invest it? First of all we should define “extra cash” (keeping in mind that the industry maybe cyclical, and what is extra cash in one period may be necessary in the next). Every business requires some level of cash and working capital to run operations on a day to day basis. Anything that is not required to meet these day-to-day cash flow obligations is excess cash. If the managers have positive NPV investments they should undertake them by definition. If they do not have where to invest they should return money to stockholders via dividend or stock repurchase. They may also repay debt, but only if this would be useful to move the D/E ratio toward the optimal ration (minimise the WACC thanks to tax shield).
LBS guide to IB interviews 18. In a tax free world, if you have a company with an Enterprise Value of $10bn and you issue $2bn in debt, what is the new EV? This question represents the type of questions where the interviewer is trying to test your ability to connect the three statements, so try to work with the interviewer one statement at a time. In this question, it is just the balance sheet, issuing $2bn in debt increases the assets side of $2bn of cash, but also the liabilities side for $2bn of cash. So the net effect is zero, value is $10bn. 19. What if after issuing the debt you use the $2bn to pay a dividend? If the company uses the cash raised with the debt to pay a dividend, equity goes down by $2bn. The firm value therefore remains at $10bn. Remember that the value of a company depends only on its future cash flow and the return on assets. Capital structure matters only if there is a tax shield on debt or for the present value of financial distress. 20. What if, instead of paying a dividend, the Company uses the $2bn to invest in a new project with an NPV of $3bn? Enterprise Value increases by the NPV $3bn and the Investment $2bn, therefore of $5bn. New firm value is $15bn. 21. Why do you subtract cash in the formula for Enterprise Value? In an acquisition the buyer would “get” the cash of the company, so effectively it is paying a price minus the cash he will receive back once he becomes the owner. Theoretically, it’s not very accurate since one should only subtract the “excess cash”, the amount of cash the company has above the minimum needed to fund its operations. 22. In a world with taxes, if you issue debt for $100 and pay it out as a dividend, how does it affect your EV? Ignore the present value of financial distress. Simply speaking, you are decreasing the amount of equity in the company by increasing the amount of debt in the company, thus the presentation of debt
LBS guide to IB interviews (cheaper source of capital and also having a tax shield) has increased and presentation of equity has decreased, thus enterprise Value increases by the PV of the tax shield generated by the new debt (please refer to the APV method of calculating the enterprise value of the company for a better understanding). 23. Could a company have a negative equity value? No, but it could be zero if the value of the assets are lower than the value of the debt. You can’t have a negative share price or a negative number of shares outstanding. 24. Can a company have a negative enterprise value? Yes, a company can have a negative enterprise value if the company has loads of cash. 25. Why are some stock options relevant to valuation? Unexercised, in-the-money options represent implicit equity value that will dilute current shareholders. Theoretically, it should already be reflected in the company share’s price. 26. When looking at establishing the price of a company, do you pay more attention to the Enterprise Value or the Equity Value? Enterprise Value, since it represents the present value of all the future cash flows generated by the real assets of the firm.
LBS guide to IB interviews 6.2.4 Valuation 1. How do you value a company? There is almost a 100% chance that you will be asked this question, so please pay extra attention to each method and also how one is different from the other. To value a company you can create a football field showing the results of main Valuation methodologies: • Discounted Cash Flows: measures the “intrinsic value” of a company by discounting to the present value all the future cash flows of the firm available to stakeholders. This can be done using the WACC or APV. • Public Comparables: measures “relative value”, looks at a group of listed peer companies to understand how the market values companies in the same business or industry along relevant metrics, such as EV/EBITDA and P/E. You might use different metrics depending on the industry. • Acquisition Comparables: Analyses which prices and multiples companies in the same business or industry have been bought and sold historically. • Accretion/Dilution analysis: it is an affordability analysis of what the acquirer can pay rather than an analysis of the value of the target. • Leveraged Buyout: indicates how much a financial sponsor should pay a company given a targeted IRR, the debt capacity of the firm and an exit hypothesis. Another two methodologies are also widely used to frame the value of a company: • Liquidation Value: Examines how much the assets of the company are worth if sold on a stand-alone basis and used in potential distressed situations. • 52 week Trading Range: if the company is listed, then market valuation is an important benchmark 2. Which valuation methods tend to lead to the highest valuation? To be honest, there exist many versions to this question; however, following is the most highly accepted answer during the recruitment season for 2012 interns:
LBS guide to IB interviews • DCF tends to give the highest valuation as this valuation is generally based on the estimates (growth) by company and for obvious reasons, every company would want to get the highest valuation and thus get the maximum price. • Acquisition comparables tend to give a higher valuation than public comparables because strategic buyers generally generate synergies in an acquisition, which will drive a higher valuation. In addition, there is also an acquisition premium to public comparables because the acquiring entity will win control of the company and will now have access to that company’s cash flows (a public shareholder can’t decide how to allocate cash flows) • Leveraged Buyout Valuation (LBO) will be driven by financing terms available in the market. • Public Comparables tends to lead to the lowest valuation 3. What are the pros and cons of each method? • DCF it is probably the best measure of the “intrinsic value” of a firm as it discounts the unlevered free cash flow of the company by its cost of capital. It takes into account the synergies, management expectations and the tax shield generated by the desired capital structure. However, DCF is extremely sensitive to changes in its assumptions, in particular on growth expectations and discount rates. Moreover, the WACC method works only if the capital structure (D/E) doesn’t change, otherwise you must use the APV method. Finally, it is “subjective” because it reflects only your view. • Public Comps have the great advantage of showing the market valuation/expectations on companies in the same business. The main disadvantage is that depends on the availability of good peers and it relies only in public information. It also does not include a control premium which would be relevant in you are trying to value the company for purposes of an acquisition. • Deal Comps show how valuation in M&A transaction for companies in the same business has evolved in the past. However it suffers of the same comparability problem of public comps, exacerbated by the often lack of information on the deal. Moreover, M&A transactions are cyclical (move in
LBS guide to IB interviews waves), tend to respond to shocks in the industry (include a strategic premium) and include synergies that are very hard to extrapolate. • Leveraged value is basically a DCF with special conditions. It gives you the value that a financial sponsor can pay given a certain business plan, an exit multiple and a targeted IRR. 4. Walk me through a DCF To create a DCF valuation involves 5 steps: • First, you look at the financial statements of the target in order to derive the historical financials such as Revenue, COGS, SG&A, EBITDA, CAPEX, Change in Net Working Capital, D/E, etc. • Second, project financials (usually 5-10 years) in order to derive future cash flows available to both debtholders and shareholders (unlevered FCF) for the business plan period. There are two ways to extrapolate FCF, both give you the same result: METHOD 1 EBITDA - D&A EBIT - Taxes NOPLAT + D&A - Capex - Increase in Working Capital Unlevered Free Cash Flow
METHOD 2 Net Income + Interest expense * (1-Tc) + D&A - Capex - Increase in Working Capital Unlevered Free Cash Flow
• Third, find the right discount rate. Bankers often use the WACC, which is very convenient when you use a long-term D/E and you don’t expect the capital structure of the company to change dramatically.
LBS guide to IB interviews Where Re is the Return required by equity investors (CAPM), Rd is the cost of debt, Tc is the marginal tax rate, and D/E is the long-term capital structure for the company. If the D/E ratio is expected to change dramatically you need to use the APV method. Basically you first calculate the value of the company as if it were all equity financed (WACC = Re if there is no debt) and then you add the present value of the tax shield created by interest expense and subtract the present value of the financial distress. • Fourth, determine the Terminal value of the company, in other words the present value of all the future cash flows after the least year of projections/business plan. There are three ways to find the TV: o Gordon Growth Model (Perpetuity formula): present value at the last year of projections of an infinite series of cash flows growing at g and discounted at WACC. Perpetuity growth is obviously highly sensitive to the long-term growth assumptions, which is usually calculated between inflation and long-term GDP growth (2-5%).
FCF (last year) * (1+g) WACC - g o Exit multiple: terminal value is most commonly calculated as a multiple of the EBITDA or EBIT in the last year of projections. Of course, a high EBITDA multiple implies high growth expectations. The multiple you use is generally based on the average multiple observed for companies of this type in the public market (ie, from your public comparables analysis) o Liquidating value in the terminal year (used for example in mining) • Fifth, obtain the Net Present Value of the company by discounting to today using the WACC the cash flows for the year of projections and the terminal value.
LBS guide to IB interviews 5. Walk me through how you get from Revenue to Unlevered Free Cash Flows. And to cash flows to equity holders? METHOD 1 Revenue - COGS Gross Profit - SG&A EBITDA - D&A EBIT - Taxes NOPLAT + D&A - Capex - Increase in Working Capital Unlevered Free Cash Flow - Interest expense * (1-Tc) - Principal repayments Free Cash Flow to Equity
6. What percent of the company NPV is usually in the Terminal Value? The terminal value typically accounts for a substantial portion of a company’s value in a DCF, sometimes as much as three-quarters or more. Therefore, it is important that the company’s terminal year financial data represents a steady state level of financial performance, as opposed to a cyclical high or low. Similarly, the underlying assumptions for calculating the terminal value must be carefully examined and sensitized. The weight on the value depends mainly on: • Length of projections period before using the TV (visibility of the business) • Long-term growth rate (g) used to calculate the TV. Note that if you used the exit multiple method, your assumption would be the same. A high multiple corresponds to a high growth rate, and you can always calculate the implied perpetuity value to an exit multiple value by finding the g where the two values are equal.
LBS guide to IB interviews 7. Why would you use (1+g) in the Terminal Value? Mathematically, (1+g) grows the last projected year out another year (to the first year of the perpetuity method). Why? The simple formula without (1+g) is: FCF / (WACC-g) says: “give me a constantly growing stream of cash flows that starts at the end of the year and I will give you the value of that cash flow stream at the beginning of the year. However, you need the present value of the cash flows to fall at the end of the last projected year, not at the beginning. 8. What is an unlevered cash flow? A business generates cash through its daily operations of supplying and selling goods and/or services. Some of the cash has to go back into the business to renew fixed assets and support working capital. If the business is doing well, it should generate cash over and above these requirements. Any extra cash is free to go to the debt and equity holders. The extra cash is the free cash flow to stakeholders. 9. Why does DCF use unlevered cash flows? Unlevered free cash flows are generated by the use of the company real assets, disregarding the company financial structure (D/E). Therefore, discounting unlevered cash flows will give you the enterprise value of the whole company. If, however, you discounted the cash flows to debt holders by the cost of debt you would be able to find the value of the Debt, while if you discount the cash flows to equity holders by the cost of equity you would be able to find the value of Equity. The unlevered free cash flow is equal to the sum of cash flow to debt holders and the cash flow to equity holders. 10. How do you get to the free cash flow to equity holders? There are two ways to extrapolate FCF to equity holders, both give you the same result:
LBS guide to IB interviews METHOD 1 EBITDA - D&A EBIT - Taxes NOPLAT + D&A - Capex - Increase in Working Capital Unlevered Free Cash Flow - Interest expense * (1-Tc) - Principal repayments Free Cash Flow to Equity
METHOD 2 Net Income + Interest expense * (1-Tc) + D&A - Capex - Increase in Working Capital Unlevered Free Cash Flow - Interest expense * (1-Tc) - Principal repayments Free Cash Flow to Equity
Important note: you should know both ways of calculating FCFs as the interviewer might be bored of hearing one kind and then might want you to tell him the other ways, so be prepared, this happened to me. 11. What is the WACC? WACC is the Weighted Average Cost of Capital of a company including the tax shield generated by the tax-deductible nature of interest. It reflects the riskiness of the cash flows you are discounting and can be seen as an opportunity cost of capital or what an investor would expect to earn in an alternative investment with a similar risk profile. For example, a large utility company should have a lower cost of capital than a more risky start-up in social media. Most companies use a combination of debt and equity to finance their assets; therefore their cost of capital will be a combination of the cost of debt adjusted for the tax shield and the cost of equity. WACC is the combined, weighted cost of debt and equity: WACC =
Debt Total Capital
* Cost of Debt * (1-Tax Rate) +
Equity Total Capital
* Cost of Equity
Cost of Equity = is the return required by equity investors, which is dependent by the riskiness of the cash flows (Return on Assets) and the financing mix (D/E). Cost of Debt = yield to maturity implied by the trading price of a company publicly traded debt.
LBS guide to IB interviews D/E = Long-term ratio of the company, usually in line with the industry and the long-term strategy of the management. In the absence of explicit company guidance on target capital structure, the banker examines the company’s current and historical debt-to-total capitalization ratios as well as the capitalization of its peers. Tax Rate = use the marginal tax rate, not the effective. 12. Why do you put tax savings from interest in the WACC? The WACC uses the after tax cost of debt because unlevered free cash flows do not include the effect of interest when you calculated taxes. However, most businesses have debt and interest payments, and the WACC picks up the tax savings from interest payments. The idea is that because interest payments are tax-deductible, the cost of debt to the firm is actually lower than the stated coupon. 13. How do you estimate the cost of equity? What is the CAPM?1 Cost of equity is the required annual rate of return that a company’s equity investors expect to receive (including dividends). Unlike the cost of debt, which can be deduced from a company’s outstanding coupons and maturities, a company’s cost of equity is not readily observable in the market. To calculate the expected return on a company’s equity, the banker typically employs a formula known as the capital asset pricing model (CAPM). The Capital Asset Pricing Model is based on the premise that equity investors need to be compensated for their assumption of systematic risk in the form of a risk premium, or the amount of market return in excess of a stated risk-free rate. Systematic risk is the risk related to the overall market, which is also known as non diversifiable risk. A company’s level of systematic risk depends on the covariance of its share price with movements in the overall market, as measured by its beta.
1
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl, Investment Banking, Wiley Finance
LBS guide to IB interviews By contrast, unsystematic or “specific” risk is company or sector-specific and can be avoided through diversification. Therefore, equity investors are not compensated for that form of risk. As a general rule, the smaller the company and the more specified its product offering, the higher its unsystematic risk. Here is the formula:
Cost of Equity (Re) = Risk Free + Beta Equity * (Market Risk Premium) Risk-Free Rate (rf): The risk-free rate is the expected rate of return obtained by investing in a “riskless” security such as U.S. government securities such as T-bills, T-notes, and T-bonds. The general goal is to use as long dated an instrument as possible to match the expected life of the company (assuming a going concern), but practical considerations also need to be taken into account. Due to the lack of liquidity on the issuance of 30-year Treasury bonds, bankers often use the 10-year T-bond. Market Risk Premium (Rm - Rf): The market risk premium is the spread of the expected market return over the risk-free rate. Finance professionals, as well as academics, often differ over which historical time period is most relevant for observing the market risk premium. Some believe that more recent periods, such as the last ten years or the post-World War II era are more appropriate, while others prefer to examine the pre-Great Depression era to the present. Ibbotson tracks data on the equity risk premium dating back to 1926. Depending on which time period is referenced, the premium of the market return over the riskfree rate (rm – rf) may vary substantially. For the 1926 to 2007 period, Ibbotson calculates a market risk premium of 7.1%. Many investment banks have a firm-wide policy governing market risk premium in order to ensure consistency in valuation work across their various projects and departments. The equity risk premium employed on Wall Street typically ranges from approximately 4% to 8%. Consequently, it is important for the banker to consult with senior colleagues for guidance on the appropriate market risk premium to use in the CAPM formula. Beta: Beta is a measure of the covariance between the rate of return on a company’s stock and the overall market return (systematic risk), with the S&P 500 traditionally used as a proxy for the market. As the S&P 500 has a beta of 1.0, a stock with a beta of 1.0 should have an expected return equal to that of the market.
LBS guide to IB interviews A stock with a beta of less than 1.0 has lower systematic risk than the market, and a stock with a beta greater than 1.0 has higher systematic risk. Mathematically, this is captured in the CAPM, with a higher beta stock exhibiting a higher cost of equity; and vice versa for lower beta stocks. A public company’s historical beta may be sourced from financial information resources such as Bloomberg, FactSet, or Thomson Reuters. Recent historical equity returns (i.e., over the previous twoto-five years), however, may not be a reliable indicator of future returns. Therefore, many bankers prefer to use a predicted beta (e.g., provided by MSCI Barra27) whenever possible as it is forward-looking. The exercise of calculating the Cost of Equity for a private company involves deriving beta from a group of publicly traded peer companies that may or may not have similar capital structures to one another or the target. To neutralize the effects of different capital structures (i.e., remove the influence of leverage), the banker must unlever the beta for each company in the peer group to achieve the asset beta (“unlevered beta”). The formula for unlevering beta is shown below: BLevered
BUnlevered = 1+
D * (1-Tax Rate) E
After calculating the unlevered beta for each company, the banker determines the average unlevered beta for the peer group. This average unlevered beta is then relevered using the company’s target capital structure and marginal tax rate. The formula for relevering beta is shown below:
BLevered = BUnlevered *
1+
D * (1-Tax Rate) E
The resulting levered beta serves as the beta for calculating the private company’s cost of equity using the CAPM. 14. Should the cost of capital be higher for a $10bn or $100m company with the same capital structure?
LBS guide to IB interviews In theory, the cost of capital of the smaller company should be higher, because its future cash flows are more sensible to movements in the macro-economy factors (higher beta).
15. How do you calculate the WACC for companies with different business segments? WACC can also be thought of as an opportunity cost of capital or what an investor would expect to earn in an alternative investment with a similar risk profile. Companies with diverse business segments may have different costs of capital for their various businesses. In these instances, it may be advisable to conduct a DCF using a “sum of the parts” approach in which a separate DCF analysis is performed for each distinct business segment, each with its own WACC. The values for each business segment are then summed to arrive at an implied enterprise valuation for the entire company. 16. If you discount the free cash flow to equity with the cost of equity, what do you get? Equity Value 17. How do you value a private company? The methods are always the same, with some complication on how to find the data, especially the cost of debt and equity for computing a WACC for the DCF. To find Re: • Find the Leverage beta of a group of comparable companies and then unlever it. In this way you will get to a measure of the industry unlevered beta (Beta Assets). • Relever the unlevered beta using the target long-term D/E for the private company. • Recalculate the cost of equity using the CAPM. To find Rd:
LBS guide to IB interviews • Some private companies have public traded debt; having the price and the payment structure of the bond will give you the YTM requested by the market. • If the debt is not traded, estimate the credit rating of the company based on its leverage ratios and operating statistics and use the current market yields for similarly rated companies in that sector. Many banks have a credit rating advisory group or debt capital markets team that can help with this. 18. Two companies operate in the same business and have the same beta, however, one of them has debt while the other does not. Which has the lower WACC? Because the cost of debt (interest expense) is tax deductible, the WACC of the company using leverage will be lower. However, the company must have sufficient earnings to use the tax shield and the amount of debt must be sustainable. 19. Draw for me the relationship between WACC and “use of leverage” and explain it to me.2 Like for the graph used to show the CAPM relation, we use in the X-axis the D/E ration and on the Y-axis the WACC. WACC =
Debt Total Capital
* Cost of Debt * (1-Tax Rate) +
Equity Total Capital
* Cost of Equity
The graph in shows the impact of capital structure on a company’s WACC. When there is no debt in the capital structure, WACC is equal to the cost of equity. As the proportion of debt in the capital structure increases, WACC gradually decreases due to the tax deductibility of interest expense. WACC continues to decrease up to the point where the optimal capital structure is reached. The optimal point is the financing mix that minimizes WACC, thereby maximizing a company’s theoretical value (lower discount rate, higher EV). Once this threshold is surpassed, the cost of potential financial distress (i.e., the negative effects of an over-leveraged capital structure, including the increased probability of insolvency) begins to override the tax advantages of debt. As a 2
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl, Investment Banking, Wiley Finance
LBS guide to IB interviews result, both debt and equity investors demand a higher yield for their increased risk, thereby driving WACC upward beyond the optimal capital structure threshold
20. How do you do a public comparable valuation3? Comparable companies provide a market benchmark against which a banker can establish valuation for a private company or analyze the value of a public company at a given point in time. The foundation for trading comps is built upon the premise that similar companies provide a highly relevant reference point for valuing a given target as they share key business and financial characteristics, performance drivers, and risks. Therefore, the banker can establish valuation parameters for the target by determining its relative positioning among peer companies. The core of this analysis involves selecting a universe of comparable companies for the target (“comparables universe”). These peer companies are benchmarked against one another and the target based on various financial statistics and ratios. Trading multiples are then calculated for the universe, which serve as the basis for
3
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl, Investment Banking, Wiley Finance
LBS guide to IB interviews extrapolating a valuation range for the target. This valuation range is calculated by applying the selected multiples to the target’s relevant financial statistics. Comparable companies analysis is designed to reflect “current” valuation based on prevailing market conditions and sentiment. Market-trading levels may be subject to periods of irrational investor sentiment that cause valuation to differ on a constant basis. Furthermore, no two companies are exactly the same, so assigning a valuation based on the trading characteristics of similar companies may fail to accurately capture a given company’s true value. As a result, trading comps should be used in conjunction with other valuation methodologies. A material disconnect between the derived valuation ranges from the various methodologies might be an indication that key assumptions or calculations need to be revisited. Therefore, when performing trading comps (or any other valuation/financial analysis exercise), it is imperative to diligently footnote key sources and assumptions both for review and defense of conclusions. To perform a public comparable valuation, perform these 5 steps: • Step I. Select the Universe of Comparable Companies: look at companies with similar operations (products/services, customers/clients, distribution and geography) and financial aspects (size, profitability, growth profile, ROI, Credit Profile). You can screen for comparable companies from: o Previous analysis of other bankers such as fairness opinions and equity reports. o Proxy statement and 10-K o Industry reports o Screen by SIC or NAICS code using databases such as Capital IQ, Factset, Thomson, Bloomberg. • Step II. Locate the Necessary Financial Information (both historical and future) to calculate key financial statistics, ratios, and multiples for the selected comparable companies: o Latest 10-K and 10-Q in order to get the historical financials (mainly for Revenues, EBITDA, EBIT, Net Income, Diluted Shares Out, Net Financial Position, Minorities).
LBS guide to IB interviews o Equity research or IBES estimates for the future three years. o Market information, such as share price and dividends. • Step III. Spread Key Statistics, Ratios, and Trading Multiples: Calculate the key financial statistics and ratios, such as: o Enterprise Value and Equity Value. o Key financial data such as Revenue, Gross Profit, EBITDA, EBIT and Net Income. o Calculate key trading multiples such as P/E, EV/EBITDA, EV/EBIT, EV/Revenue. • Step IV. Benchmark the Comparable Companies: analyze and compare each of the comparable companies with one another and the target. The ultimate objective is to determine the target’s relative ranking so as to frame valuation accordingly. • Step V. Determine Valuation: the trading multiples for the comparable companies serve as the basis for deriving an appropriate valuation range for the target. The banker typically begins by using the means and medians, min and max, of the most relevant multiple for the sector (e.g., EV/EBITDA or P/E) to extrapolate a defensible range of multiples.
21. What are the main key trading multiples?4 While various sectors may employ specialized or sector-specific valuation multiples, the most generic and widely used multiples employ a measure of market valuation in the numerator (e.g., enterprise value, equity value) and a universal measure of financial performance in the denominator (e.g., EBITDA, net income). For enterprise value multiples, the denominator employs a financial statistic that flows to both debt and equity holders, such as sales, EBITDA, and EBIT. For equity value (or share price) multiples, the denominator must be a financial statistic that flows only to equity holders, such as net income (or diluted EPS). Among these multiples, EV/EBITDA and P/E are the most common. 4
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl, Investment Banking, Wiley Finance
LBS guide to IB interviews • Equity Value Multiples: equity multiples compare the value of common shares to the earnings available to common shareholders. Use equity multiples to calculate the value of a company’s equity: o Price Earnings Ratio / Equity Value to Net Income: The P/E multiple gives investors an idea of how much the market is paying for a company’s earning power. P/E ratios are typically based on forward-year EPS (and, to a lesser extent, LTM EPS) as investors are focused on future growth. Companies with higher P/Es than their peers tend to have higher earnings growth expectations in earnings. While the P/E ratio is broadly used and accepted, it has certain limitations because by using earnings it is influenced by the company’s capital structure (interests), differences in accounting policies (depreciation and taxes) and one-off expenses. P/E Ratio = Price of Stock / Earnings per Share o Enterprise Value to Revenue Multiple: EV/sales is also used as a valuation metric. Sales may provide an indication of size, but it does not necessarily translate into profitability or cash flow generation, both of which are key value drivers. In certain sectors, however, as well as for companies with little or no earnings, EV/sales may be relied upon as a meaningful reference point for valuation. Enterprise Value / Revenue o Enterprise Value to EBITDA or EBIT Multiple: EV/EBITDA serves as a valuation standard for most sectors. It is independent of capital structure and taxes, as well as any distortions that may arise from differences in D&A among different companies. For example, one company may have spent heavily on new machinery and equipment in recent years, resulting in increased D&A for the current and future years, while another company may have deferred its capital spending until a future period. In the interim, this situation would produce disparities in EBIT margins between the two companies that would not be reflected in EBITDA margins. For the reasons outlined above, as well as potential discrepancies due to acquisition-related amortization, EV/EBIT is less commonly used.
LBS guide to IB interviews Enterprise Value / EBITDA Enterprise Value / EBIT 22. What quantitative and qualitative factors drive the P/E multiples? • Quantitatively, P/E is moved by changes in share price and earnings through the numerator and denominator, respectively. • Qualitatively, share price is affected by market perception/expectation of risk, growth, quality of earning and general investor confidence. 23. What do you get when you multiply a firm’s net income by its P/E ratio? Market capitalization (equity value). 24. How would you present the valuation of a company using all the main methodologies to a client? Bankers use football fields to summarise the outcome of each valuation method. 25. When would you not use a DCF for valuing a company? If the company has unstable or unpredictable cash flows, you cannot discount them. It doesn’t apply for banks and financial institutions. In addition, in a distressed situation, a liquidation valuation methodology would be more appropriate. 26. Would you use Enterprise Value/Net income as a multiple? No way! Total value to debt holders and shareholders (EV) should be matched only with the flows available to them. Remember, enterprise multiple use earnings above the interest line of the P&L; equity multiples use earnings below the interest line.
LBS guide to IB interviews 27. What is a precedent transaction analysis?5 Precedent transactions analysis, like comparable companies analysis, employs a multiples-based approach to derive an implied valuation range for a given company. It is premised on multiples paid for comparable companies in prior M&A transactions. The selection of an appropriate universe of comparable acquisitions is the foundation for performing precedent transactions. This process incorporates a similar approach to that for determining a universe of comparable companies. The best comparable acquisitions typically involve companies similar to the target on a fundamental level. There are four main issues with valuations using M&A multiples: • Timing and market condition: as a general rule, the most recent transactions (i.e., those that have occurred within the previous two to three years) are the most relevant as the relevant market conditions (state of capital markets) were probably similar to current conditions. • Control Premium: buyers generally pay a “control premium” when purchasing another company. In return for this premium, the acquirer receives the right to control decisions regarding the target firms business and its underlying cash flows. • Strategic buyers often have the opportunity to realize synergies, which supports the ability to pay a higher purchase price. Synergies refer to the expected cost savings, growth opportunities, and other financial benefits that occur as a result of the combination of two businesses. • There is limited availability of public information on the deal terms and multiples. You will often be relying on rumors, articles or footnotes to financial statements to determine the purchase price for the company and financial information for the acquired company. 28. How would you value an early stage company (such as Groupon or Facebook) that has no profit? If you can predict cash flows in the future, use a DCF. If you can’t, avoid it. 5
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl, Investment Banking, Wiley Finance
LBS guide to IB interviews You can look at creative multiples such as EV/Unique visitors, EV/Pageviews. 29. Why do some investors prefer EBIT multiples versus EBITDA multiples? EBIT reflects the depreciation of Capital Expenditure, which is the price paid for building the company’s real operating assets, which in turn are used to generate profits. That’s why some investors prefer EBIT multiples, EBIT accounts for a different level of investments. The difference between EBIT and EBITDA is particularly important in capital-intensive industries. 30. When would you use liquidation value? It is the most common method when a company is about to default and banks have to assess whether the value of the assets will be enough to cover the value of the debt. It is also used in deciding whether a company should be refinanced, sold as whole or broken up and its assets sold separately. 31. Why would a company with similar growth and profitability to its comparables be valued at a premium? • The company has higher cash generation. • It is the market leader in the industry and has a stronger and more sustainable competitive advantage. • The company has reported stronger than expected earnings and the market expects this to continue. 32. When would the liquidation value give a higher value than a DCF? This can happen when the company has substantial tangible assets that can be sold on the market but very poor cash flow generation in the ongoing business.
LBS guide to IB interviews 33. Let’s say a company has 100 shares outstanding at a share price of $10 each. It also has 10 options outstanding at an exercise price of $5 each, what is the fully diluted equity value? • Shares outstanding * Share Price: $10*100 = $1,000. • 10 options are exercised, the company receives the strike price $5*100 = $50. • The company uses the $50 to buy shares from the market, $50/$10 = 5 shares. • The company must issue 5 new shares in order to pay the call option: 5*$10 = $50. • So the fully diluted shares number is 100 + 5 = 105 and the market cap is 105 * $10 = $1,050 34. Let’s say a company has 100 shares outstanding at a share price of $10 each. It also has 10 options outstanding at a strike price of $15 each. What is the fully diluted equity value? The options are not in the money, therefore there is no dilutive effect on the market cap. 35. What are some common ratios used to compare equity performance? • • • •
Price/EPS Market Value / Net Income Market Value / Book Value PEG Ratio: Price to Earnings / Growth Rate
36. You never use Equity Value/ EBITDA, but is there any case where you might use Equity Value /Revenue? This may happen only if the company has a negative Net Financial Position (more cash than debt), so that the Enterprise Value is equal to the Equity Value.
LBS guide to IB interviews 37. Why would you use Sum of the Parts valuation? When you have a company with completely different divisions, such as broadcasting and chemicals, you should value each division separately, with its own cost of capital, and then add them together to get to the Enterprise Value. 38. How do you normalize earnings? Many times you’ll see one-off expenses or income items on an income statement. “One-off” means they will not recur. If you include them in your calculation of the multiples, they will distort your multiples and therefore your valuation. Your earnings number in a multiple should reflect the company’s underlying profitability, not a one-time event. • When you are using EBITDA and EBIT to calculate a multiple, just add back the non-recurring expenses and subtract the non-recurring income. • When you are using earnings after tax, you must adjust the tax expense. For example, you can remove a non recurring cost by multiply the increase in profits by (1-Tax Rate). 39. How do you annualize or calendarize? Companies in the set of comparables may not have consistent year-end dates. You can adjust for these timing differences by annualizing the data. Annualization or calendarization means you must calculate a time weighted average of two year-end numbers. You are simply taking part of one year and adding it to part of another year to adjust for different year ends. 40. What do we do if debt is not traded and thus, we do not have a market value of debt available? If the yield has not significantly changed since the issue of the debt then the book value is a good proxy of the value of the remaining coupon payments and principal (In fact on the books we always use the yield at the time the debt was issued and then we expense the interest each year using this yield. We adjust the bond payable account for coupon payments, both in the case of a bond issued at a premium or
LBS guide to IB interviews at a discount.) If you observe that the yield in the market is significantly different from the coupon rate, either because the company has become riskier or because the interest rate has changed, then we have to recalculate the market value of the debt. To do so, we look at the cash flow that the debt contract has promised in the future and discount it at the right yield to find the market value. 41. Why do we use the market value of equity and market value of debt? We use market value of equity because we want to find the market value of assets. The market value of assets is given by the discounted free cash flow to assets. The free cash flow to assets is then divided between the equity holders and the debt holders. If we assume that the equity is fairly priced by the market then the market has incorporated all the information about the future cash flow to assets (considering part is going to equity holders and part to debt holders). If the market has fairly priced the securities, i.e. it has evaluated the present value of cash flow to equity and the present value to debt; the firm becomes a portfolio of the securities at their market value. Thus, we say that the value of assets is the present value of the cash flow to assets that can either go to equity holders or to debt holders 42. Why do we use cash flow? Cash flow and assets are two drivers of value for capitalholders. Provided the company is viewed as an ongoing enterprise, you calculate cashflows to derive a value for the company. Cash flow is not the same as net income. Net income captures non-cash expenses like depreciation and interest expense depending on the company’s debts. Net Income thus, doesn’t give the true value of the cash flows to the assets. 43. What are the drawbacks of WACC? • It assumes that the capital structure of the firm, and consequently the Debt/(Debt+Equity) ratio and Equity/(Debt+Equity) ratio, remains constant during the life of the company. This is restrictive and an approximation. If it changes as it does in an LBO we cannot use WACC. • WACC assumes that the company can take advantage of tax savings, i.e., the company will make a profit in order to actually pay for taxes. • WACC includes the effect of the debt tax shield the firm gets by leveraging up but it does not account for the cost of financial distress, i.e., the cost of
LBS guide to IB interviews additional default risk due to the higher leverage. It is very difficult to formally model the effect of financial distress on the return on debt and therefore model it into WACC. • For conglomerates you should calculate a WACC for each of the divisions since the risk that the assets bear may be different for each division and also the way divisions are leveraged may be different. 44. What is APV (Adjusted Present Value)? APV is another method used to discount the unlevered cash flows of a company. In this case we separate the evaluation of the operations from the evaluation of the benefit we derive from financing. Thus, we need to calculate the NPV of financing (i.e. the tax shield benefit) and also the cost of financial distress. It is important to include the cost of financial distress because without this calculation the firm value would only increase with higher leverage. Higher leverage will increase the risk of bankruptcy of the firm. 45. What are steps to calculate value of a firm using APV? Discount unlevered free cash flows with the unlevered cost of equity cost to derive the value of the firm as if the firm were entirely equity financed plus Present value of the tax shield Minus Present value cost of financial distress. This would the reduce the value of the company. While debt adds value to the firm because interest is tax deductible, the debt also increases the risk to the company. Too much debt could result in losses due to too much interest expense and this probability of loss should be considered in the valuation. In the WACC we included the tax benefit of interest in the calculation, but did not include the cost of financial distress. We discount the free cash flow and the terminal value using the return on asset, which is an unlevered return. We go through the same steps as we did in the DCF analysis. The next step is to find the beta of the Assets by looking at comparable betas and the effect of unlevering as described elsewhere, and applying the CAPM to find the
LBS guide to IB interviews return on the assets. You then use the return on assets to discount the unlevered free cash flow (of the specific period - we examine 5-10 years) and the terminal value. To this you add the value of the tax shield. To calculate the value of levering up the company, calculate the debt tax shield in any year of the specific period being analyzed. D/V and E/V need not be constant in the periods. The interest expenses for each year are: Interest expenses = rdebt × Debt Thus, the tax shield for each year is: DTS = τ × rdebt × Debt
46. What discount rate do we apply to the debt tax shield to calculate the present value of the debt tax shield? If we assume that the risk of using the tax shield is as much as the risk of the asset (that is as risky as the cash flow assuming that the company has profits on which it will pay taxes and thus, can have a tax shield) then we use the return on asset (i.e. the cost of unlevered equity). If we say that the risk of capturing the tax shield is as much as the risk of the debt then we use return on debt. In particular, we should also judge the probability that the company has to use the debt tax shield which is dependent on the probability of the company actually being profitable and paying taxes. 47. What does cost of financial distress cover? • Direct bankruptcy cost like court fees • Indirect bankruptcy costs like difficulty of managing a company that is undergoing restructuring (additional cost of supplies) • Conflicts of interest between bondholders and stakeholders may lead to poor operating and investing decisions that may add to losses (stakeholders may try to play games at the expense of bondholders; the contract should avoid this but there is a cost of setting up the contract and enforcing it
LBS guide to IB interviews 48. What are the differences between WACC and APV? The main difference between the WACC and the APV is that the WACC takes the target ratio Debt/(Debt+Equity) as a constant whereas APV removes the effect of this target ratio in the calculation of the value of the assets from the cash flows and takes it into account in calculating the debt tax shield. The APV is more of an academic method and it is often problematic to find data to apply it. Investment banks in general use WACC 49. What is a rights offer? It is a way in which a company can raise more cash in Europe. It is very uncommon in USA. The company gives existing shareholders the right to buy one additional share for every share they own, at a price lower than the one at which the share trades currently at. Shareholders can decide to exercise the option (rights) or decide to sell them. Anyone who buys the rights will then have the option to buy the share at the “rights” price. 50. How can we increase a stock price? • Pay or increase dividends. • Increase the transparency of the financial statements. • Acquire a company paying less than its NPV. • Any positive NPV projects. • Work on the capital structure of the company and leverage up the company to increase the value because of the debt tax shield (provided the company is profitable and is paying taxes, also provided the company expects to be able to service the debt in future and has a good, stable cash flow to do this). • Give some signal to investors that the stock is undervalued by buying back stock (this is a way to redistribute cash or assets to shareholders but it is not perceived to be a long term commitment). 51. What is a PEG ratio? Price/earnings divided by the growth rate (of earnings per share): • More than 1 is poor. • Less than 1 is good. • Less than 0.5 is excellent.
LBS guide to IB interviews 52. What is a private placement? Private placement is the issuance of stock to private parties. This does not require registration with the SEC but it must be to less than a certain number of investors. Often insurance companies are not concerned with marketability and thus, the market for not traded debt has increased. If the placement is large then an investment bank can be involved to deal with the investors. 53. What happens if a company buys back stock? Share price should increase: • Earnings per share: If a company buys back stock, the earning per share will increase afterwards and the investors anticipate this and drive the prices up. (However, value is driven by cash flows, not earnings) • Signaling effect: a company that buys back its own stock gives a good signal of what the company management believes are the prospects of the company, “who else has better information about the company than its own management?” • Debt Tax Shield: Buying back stock drives up the net debt, thus increasing the effect of the debt tax shield and the valuation goes up; the company is changing its capital structure by buying back stock and replacing it with debt. • The taxes for shareholders are different on capital gains and on dividends. There is also a reason why the price may go down instead. The fact that the company is distributing excess cash could mean that it has utilized all growth opportunities with a positive NPV. 54. What information do dividends carry? Generally the dividends controversy is complex but the way market reacts to dividend announcements proves that the dividends actually carry information to the market (in a Modigliani-Miller world, the dividend policy should not matter). The assumption behind the signalling effect is that the managers are reluctant to change dividends unless they have concerns about the future prospects of the firm. Therefore the signalling effect is negative if dividends are reduced and positive if increased. Thus, a firm should pursue a policy of dividend stabilization.
LBS guide to IB interviews 55. Company A trades at P/E of 20. Company B trades at P/E of 10. Both are considering acquiring Company C, which trades at P/E of 15. For which of the two acquiring companies would the deal be dilutive? For which would it be accretive? Explain why for each. Before you even start answering this question, it is important to ask if the deal is an all-stock one: • For Company A the deal would be Accretive, this is because company A is paying less for earnings (of company C) than what the market is paying for company A’s earnings, this is reflected in the price to earnings ratio of both companies • For Company B the deal would be Dilutive for the same reason as stated above. • The earning per share will increase for A after the merger. It will depend on the sum of the earnings after the merger and the number of total share after the merger. 56. Now, lets say that the transaction is changed so that the acquirer gets debt from the market at lets say 5% and then uses this money as cash for the acquisition, whether the deal is still accretive or dilutive? The first step is to calculate the acquirer’s P/E, which has now become 1/interest rate *(1-t), as t = 0 (or so we can assume), acquirer’s P/E is now 1/5% = 20, and as given in the question above, target’s P/E is 15, thus the deal is accretive.
LBS guide to IB interviews 6.2.5 Mergers & Acquisitions 1. Why do companies undertake M&A transactions? Which major factors drive M&A? Companies undertake Mergers and Acquisitions mainly for three reasons: • Commercial synergies / growth opportunities: This is a wide category which includes access to new markets, new geographies, new products, gaining market share and bargaining power with customers, cross – selling in the same distribution channels, vertical integration, network effects and brand recognition. • Cost synergies / savings: This refers to economies of scale and scope. When companies merge, they are usually able to reduce their overhead/administration costs, including IT and rent expenses. They can also optimize their supply chain and gain bargaining power with suppliers. • Strategic concerns: M&A transactions often happen after a shock in the industry, such as deregulation or a threat of new entrants and potential substitutes. M&A activity is a strategic tool that managers have to quickly reshape the competitive profile of their company. 2. A client comes to you and would like your opinion on whether it should do an M&A deal. To evaluate an M&A deal you should cover three main areas: • Shareholder value: As discussed previously, the major consideration when valuing an acquisition is whether it creates value for the shareholders or not. Investments create value only if NPV>0. • Financial considerations: Accretion/dilution analysis in the EPS post acquisition, capital structure and financing of the acquisition, impact on margins, tax implications and cost of capital concerns.
LBS guide to IB interviews • Strategic considerations: Does the M&A deal make strategic sense for the company? Is it improving its competitiveness? Does it include growth in market shares, industry growing trends, vertical integration or regulation changes? 3. What is a fairness opinion? A fairness opinion is a professional evaluation by an investment bank or other third party as to whether the terms of a merger, acquisition, buyback, spin-off, or going private deal is fair for the shareholders. The board of directors of public companies under takeover often request it, in order to determine whether to accommodate the buyer or not. 4. Company A wants to buy company B for $500m, the maximum they think it is worth. Under what circumstances might company A agree to pay $530m in a stock transaction rather than a cash one? The answer should address two hypotheses: • Why is Company A paying $30m more? Company A uncovers additional synergies which will lead to a present value in excess of $30m. Another option is that the company has a deferred tax asset with a present value higher than $30m. • Company A agrees to pay $30m more but to convert the deal to a stock one because it believes its stock price is currently overvalued. 5. What are some common hostile takeover defenses? • Poison pill, issue of new shares that can be redeemed at a premium in case of hostile takeover, thus diluting the acquirer. • Poison pill, staggered board of directors. So that a hostile buyer cannot gain the majority of the board of directors until a certain number of years (buyer can change a limited number of directors each year). • Buy a number of small companies in order to dilute the shareholders.
LBS guide to IB interviews • A white knight or "friendly investor" may be a corporation, or a person that intends to help another firm and buy it in order to protect it from a hostile bid. • Increase leverage massively and spend all the cash available (for example in the form of an extraordinary dividend). • Greenmail, buying shares back from the acquirer at a price at which he is happy to sell (definitely not the preferred way). • Golden Parachute: is a clause in an executive employment contract that provides the executive with a significant severance package in the case that the executive loses his job through firing, restructuring, or even scheduled retirement. This can be in the form of cash, equity, and other benefits, and is often accompanied by an accelerated vesting of stock options 6. A company has 4 divisions and its stock price is depressed because of the underperformance of one of the divisions. What are five things you could do to improve the stock price? • The best option is to improve the performance of the divisions (restructuring). • Spin-off or sell the division trying to achieve the highest valuation possible. • Shut down the division. • Ensure that the accounting methods allocate headquarters costs correctly so that you don’t have cross subsidization among divisions 7. What are the pros/cons on a stock vs. cash acquisition? Without issuing any debt, the company can finance an acquisition in three ways: • Use cash accumulated on the balance sheet. • Issue equity to the public and use the cash raised to finance the acquisition.
LBS guide to IB interviews • Offer stock as payment for the target firm. i.e. Structure the payment in terms of a stock swap. A variety of factors should be considered when deciding the best option, such as: • Cash position: Obviously if the company has no cash available at hand it cannot use it to finance a deal. • Perceived value of the stock: Managers have private information and are able to assess if the company is fairly valued by the market. If they believe that the stock is trading at a price significantly below value, they should not use stock as currency on acquisitions. • The acquirer is not sure about the value of synergies. In this case by issuing equity it will “keep in” the former shareholders. • Tax issues: Stock deals offer a tax advantage to sellers because they do not have to pay taxes until they sell the stocks. Therefore the present value of taxes is lower. 8. What advantages do financial buyers have? • Financial sponsors tend to move quicker than corporate buyers since their decision process is leaner. • Financial buyers are often favored by incumbent managements since they tend to keep former management in place and offer conspicuous incentives packages. 9. What is an accretion/dilution analysis? Bankers use accretion/dilution analysis to measure the pro forma effects of the transaction on earnings, assuming a given purchase price and financing structure. The acquirer’s EPS pro forma for the transaction is compared to its EPS on a standalone basis. If the pro forma EPS is higher than the standalone EPS, the transaction is said to be accretive. Conversely, if the pro forma EPS is lower, the transaction is said to be dilutive. As a general rule, public companies are reluctant to pursue dilutive transactions due to the potential detrimental effect on their share price. Therefore, a given
LBS guide to IB interviews public buyer’s perception of valuation and corresponding bid price is often guided by EPS accretion/dilution analysis. 10. Who would pay more for a company, a financial sponsor or a strategic buyer? Strategic buyers should be able to pay more for targets because they are able to achieve synergies. However, in periods that had hot leverage markets, financial sponsors were often able to achieve higher prices. 11. What are the pros and cons of a purchase of assets instead of equity? An assets’ deal is usually very advantageous for the buyer because it can depreciate the price paid and therefore have a tax shield. Moreover, it allows the acquirer to pick and choose the assets of the company he wants to take. However, this is allowed only if the remaining entity keeps its ongoing business open. In the event that they don’t,, tax authorities require an equity deal
12. Why are accretive transactions sometimes not well received by the market? There can be plenty of reasons; the bottom line is that EPS is not cash flow, and present value (NPV) of future cash flows is the ultimate driver of shareholders’ value. 13. If a company with a lower P/E multiple acquires through a stock merger a company with a higher P/E multiple, is the transaction going to be accretive or dilutive? If the exchange ratio is 1:1, the transaction is going to be dilutive. The acquiring company is going to give to the target shareholders 1 of its shares in exchange for 1 share of the target. The acquisition decreases the acquiring company’s EPS because the price paid by the buyer exceeds the addition to EPS.
LBS guide to IB interviews Dilution can be minimised or completely avoided by issuing debt or using cash to buy the company. 14. When pursuing an accretion/dilution analysis, which factors impact the pro-forma company’s EPS? In the numerator, the pro-forma earnings of the combined entity are a result of the buyer’s and the target’s net income, the expected level of synergies, the amount of new interest from debt and goodwill amortization. In the denominator, the pro-forma shares number is a function of the acquirer outstanding shares and the number of shares issued to fund the acquisition. 15. How do you derive a breakeven price on the EPS for an all-stock transaction? Target EPS * Buyer’s P/E Ratio 16. What is likely to yield the highest synergies? A diversification or a consolidation deal? A consolidation deal enables (in theory) the buyer to extrapolate cost, commercial and strategic synergies.
LBS guide to IB interviews 6.2.6 Capital Structure and Financing 1. What factors should be considered in determining the optimal capital structure? • • • • •
Optimal D/E structure minimizing the WACC. Tax considerations. Dilution by issuing new shares. Signaling effects. Strategic concerns.
2. Why is equity riskier than debt? Equity is a residual claim, meaning that it gets satisfied only after all the bondholders have received their money back in full. However, debt holders have limited upside on their investment. 3. What is the LIBOR? The London Interbank Offered Rate is the rate at which international banks lend money to each other; it is often used as a basis for many other corporate loans, which pay the LIBOR plus a spread. 4. What are the major factors that affect the yield on a corporate bond? The yield to maturity of a corporate bond is usually expressed as a spread over the risk free rate (such as LIBOR). The spread is driven by the creditworthiness of the company and the standard deviations (riskiness) of its future cash flows. The riskier the company the higher the yield it must pay to convince investors to buy its bonds.
LBS guide to IB interviews 5. How would you value a bond? The value of a bond is equal to the present value of its future payments (coupons and principal repayments) discounted at the market rate. If the bond is traded, the discount rate is equal to the YTM. If the bond is not traded, determine the credit rating the company would have given its D/E. Once you have the rating, try to find out the cost of debt of similar companies or ask the debt capital markets department. The difference between a company’s cost of debt and the benchmark rate (usually LIBOR or government debt) is called spread. Bankers talk about spreads when discussing a company’s cost of debt. 6. What type of debt is the most expensive? The least? Apart from the cost, why might a company might choose one type of debt over the other? • Senior Debt is the least expensive, because it is usually secured by the assets of the company and it is the first to be repaid in case of default. It also tends to have covenants that limit the firms’ ability to undertake extraordinary operations. • Unsecured debt is usually the most expensive debt because it is not secured by any asset of the company and in case of distress it gets repaid senior debt. The covenants are also usually quite light. 7. Describe the difference between a bond issued at par, at a discount or at a premium. The amount borrowed is the nominal value (principal) of the bond. The coupon rate is the interest rate that the company will pay its bondholders and is calculated as a percentage of the outstanding nominal value. Sometimes the market will require a higher cost of debt than the coupon rate. In this case, the price of the bond will go down so that its yield to maturity will increase accordingly • A bond is issued at the par when the coupon rate is equal to its yield to maturity (market rate).
LBS guide to IB interviews • A bond is issued below par (at discount to the nominal value) when the coupon rate is lower than the required market rate, which will decrease the price of the bond. • A bond is issued at a premium when the coupon rate is higher that the market rate, which will raise the price of the bond. 8. How would you approach the valuation of a convertible bond? A convertible bond has two parts: a bond and a warrant (an option to buy equity). To calculate the value of the convertible bond you add these two components: • PV of the bond • PV of the warrant (Black Scholes model) 9. When should a company issue equity rather than debt? • Growth firms, or in general high-risk profile companies (high volatility in cash flows), find it problematic to get access to debt. • A company has too much debt and wants to lower its D/E ratio. • A company with predominantly intangible assets will find it more difficult to get access to debt. • Market signaling: when managers expect to have higher earnings in the future, issuing debt is a better idea because of the tax shield and the fact that they are then keeping all the upside for current shareholders. Conversely, if managers expect earnings to decrease, equity may be a better choice since it will lower the interest expense burden. 10. How can a company reduce its Debt/EBITDA ratio? How can you achieve it without increasing EBITDA or paying down debt? • Acquire a company with a lower Debt/EBITDA ratio. • Convert the debt to operating leases (not preferred, it’s still part of the debt). 11. Why does an issue of equity tend to decrease the share price?
LBS guide to IB interviews This is partially explained by the signalling theory. Managers who believe that their share price is overvalued will have an incentive to issue stock at the current price. If they believed that the stock was undervalued, they would issue debt or buy back stocks. Moreover, if managers need the funds to invest in a positive NPV project, they should issue debt, thus keeping the all upside of the project for the existing shareholder base rather than diluting it. Finally, the fact that the management is taking on additional debt shows the market that they are confident about the prospects of the company. 12. If you were pitching to be the underwriter for an IPO, what would be the table of contents for the pitch book? • Executive Summary. • Industry overview and main trends (is the industry attractive?). • Company positioning, track record and financials (why the company is going to be able to capture value in the market?). • Equity story. • Preliminary valuation (Trading comps, DCF, Deal Comps). • Credentials of the Bank 13. Why are IPOs generally underpriced? • Conservatism, issuers do not want their stock to lose value the first day it trades. • Attract investors to the IPO in order to generate demand. • Compensation to initial owners for the risk they are taking.
14. If a company with a market cap of $80m issues $20m of new equity, what % of the company will new shareholders own? 20 / (80+20) = 20% Old shareholders get diluted to 80%.
LBS guide to IB interviews 15. Why would an entrepreneur embark on an IPO? • Need capital to undertake new strategic opportunities with a positive NPV. • Need capital to fund its business. • Looking to diversify/monetize his/her wealth by selling part or all of the shares. 16. What are the implications for cash dividends versus share buybacks? Why should you use one instead of the other? In deciding, you should keep three main facts in mind: • Signaling effect of regular dividends - quality of earnings and confidence for the future. Because of a certain degree of freedom in accounting policies, sometimes investors are not able to separate marginally profitable firms from the best ones. Therefore, investors interpret managers’ actions to assess the quality of a company. We can understand, therefore, why investors would value the information content of dividends and prefer to believe a firm’s reported earnings were backed up by an appropriate dividend policy. Of course, firms can cheat in the short run by overstating earnings and scrapping up cash to pay a generous dividend. But it is hard to cheat in the long run. A firm that is not making enough money will not have enough cash to pay out and will have to lower the dividend (with a consequent drop in the share price). Therefore, most managers don’t increase dividends until they are confident that there will be sufficient cash flows going forward to pay them constantly. Dividends anticipate future earnings. This of course applies only to an increase in regular dividends. An extraordinary one-time dividend does not carry this information. • Signaling effect of share repurchases - stock price may be undervalued. Share repurchases, like dividends, are a way to hand cash back to
LBS guide to IB interviews shareholders. But unlike dividends, share repurchases are frequently a oneoff event. So a company that announces a repurchase program is not making a long-term commitment to earn and distribute more cash. A share repurchase tends to increase stock prices because it signals that management thinks the firm’s stock is undervalued. Other effects are an increase in net debt from the use of cash, increasing the tax shield. • Taxes. In some jurisdictions capital gains taxes have a lighter taxation than dividends (income). Therefore, handing cash to investors also can be interpreted as: • Confidence in the future, positive message (price increase) • The company does not have positive NPV projects to invest in (price decrease) In conclusion, increase cash dividends only if you think you can commit to the new pay-out ratio for the long-term.
LBS guide to IB interviews 6.2.7 Financial Sponsors and LBOs 1. What is a Financial Sponsor? The term “financial sponsor” refers to traditional private equity (PE) firms, merchant banking divisions of investment banks, hedge funds, venture capital funds, and special purpose acquisition companies (SPACs), among other investment vehicles. PE firms, hedge funds, and venture capital funds raise the vast majority of their investment capital from third-party investors, which include public and corporate pension funds, insurance companies, endowments and foundations, sovereign wealth funds, and wealthy families/individuals. Sponsor partners and investment professionals may also invest their own money in particular investment opportunities. This capital is organized into funds that are usually established as limited partnerships. Limited partnerships are typically structured as a fixed-life investment vehicle, in which the general partner (GP, i.e., the sponsor) manages the fund on a day-to-day basis and the limited partners (LPs) serve as passive investors. These vehicles are considered “blind pools” in that the LPs subscribe without specific knowledge of the investment(s) that the sponsor plans to make. General partner’s goal is to purchase assets, which they plan to sell in the shortmedium term for a substantial profit. • Their time frame is typically 3/5 years. • They fund a substantial portion of the purchase price using debt. • Leveraged valuation established the maximum price a financial buyer can pay for a business. 2. How many types of LBO deals there are? • Institutional buy out (IBO): Private Equity buys all the equity and does not involve the current management.
LBS guide to IB interviews • Management buy-out: Private Equity buys the equity of current owners in conjunction with the current management team. • Management buy-in: the Private Equity buys the equity of current owners and brings in a new management team. • Leverage recapitalization: an existing LBO deal is refinanced to release some cash to equity investors through an extraordinary dividend. 3. What are the advantages and the disadvantages of high leverage? The main advantages are: • Returns: value gains are not shared equally thereby enhancing potential equity returns. • Fiscal: interest expense is generally a tax-deductible expense. • Discipline: high leverage increases default risk, forcing business efficiency. The main disadvantages are: • Volatility: fixed costs increase, as high proportion of profit and cash flow is used to service debt, thus increasing earnings and cash flow volatility. • Default risk: higher leverage and higher volatility result in higher default risk. 4. What deal metric is most important for PE firms in evaluating deals? • IRR: it is the breakeven discount rate or return that equals the present value of future cash flows to zero. The price that can be offered by a financial sponsor will be heavily influenced by the IRR required by the PE to invest. The IRR captures both time-weighted and cash flow metrics. • Money Multiple: it is still used but it does not take in account the time value of the money. 5. What is a leveraged buyout? A leverage buy-out is the acquisition of a target company primarily financed with debt collateralized by the target’s cash flow (or in some cases its assets). A company’s value is derived by establishing how much a financial buyer could pay given two constraints:
LBS guide to IB interviews • A target cost of equity (required minimum IRR). • The maximum sustainable leverage given the forecast cash flows. Financial buyers maximise their returns by purchasing companies using as much as leverage as possible. Debt is paid down using the cash flow of the acquired company. The debt tax shield is one of the “magic” ingredients that enhance the financial sponsors’ return. They expect a high return on their equity usually between 20% and 30%. 6. Describe the steps in the evaluation of an LBO*6 Step1: Understanding the story looking at the qualitative aspects of the target company, trying to find answers to: • Is this a good debt story? in terms of stability of revenues, margins, requirement of working capital; also looking at the requirement for future capex investment; track record of the management team etc • What are the risks and mitigants? • Are you convinced with the projections? Step2: Normalize EBITDA Step3: Construct the sources and uses, where the typical sources would be Senior Debt, Senior Subordinate Debt, Revolver, Management Rollover Equity, Sponsor Cash Equity (this is what the acquirer company is putting in); and the typical uses are Refinancing of debt, transaction costs and purchase price (this is the plug in). And obviously sources equal uses. Step 4: Calculate IRRs, assuming exit multiple = entry multiple; running various scenarios Step5: Evaluate if the LBO makes sense given the debt multiples, are the coverage ratios (described in the next question) adequate, and most importantly (amongst other things), are the IRRs acceptable to the sponsors given the contribution and the risk being taken. 7. What multiples are traditionally stated as financial parameters for an LBO? • Leverage Ratio: Net Debt/EBITDA – 4.0x – 5.0x *
http://pages.stern.nyu.edu/~eofek/InvBank/LBO%20Overview.pdf
LBS guide to IB interviews • Interest Coverage Ratio: EBITDA / Interest Expense - >2x • Equity Contribution: Equity/EV, before credit crunch was 20-30%, recently 40-55%. 8. If you buy a company for $100 and sell it for $100 two years later, how can you make money? • You paid yourself dividends. • You paid down debt. 9. Why you should take private, through an LBO, a listed company? The company is perceived as undervalued by the acquirer. Thus, to take control of the company the financial sponsor uses leverage and equity to offer an attractive price to current investors. Once private, the acquirer puts in place a new management team and works on improving the performance of the target. After 3-5 years, when the company performance is improved and therefore it is worth more, the financial sponsor sells the company, thus making a profit. 10. What are the criteria for finding a good LBO candidate? • • • • • •
Strong and stable cash flows Good management team Limited Capex Undervalued Motivated seller Viable exit strategy
LBS guide to IB interviews 6.2.8 Accounting 1. Tell me about the three financial statements. What is the connection between the three? • P&L shows the economic performance of a company for a determined period. However, because of the matching principle and the accruals method, profits are not equal to the cash generation of a company. • The Balance Sheet is the picture of the value of a company’s assets and liabilities at the end of the period (end of fiscal year or quarter). It describes the financial status at a specific time, and it shows the business’s economic resources that creditors and shareholders can claim. • The Cash Flow statement is what connects the P&L to the Balance Sheet. In fact, cash flows can be inferred from income statements and balance sheet alone. Here is an exemplified version: Net Income + Non Cash Expenses (D&A) (Decreases Assets and Net Income) Change in Working Capital (Receivables, Payables, Inventory) Cash from Operating Activities: Cash flows related to producing and delivering goods/services Capital Expenditure (Capex) (Increases Assets) + Disposals (Decreases Assets) Acquisitions (increases Assets) Cash from Investing Activities: Cash flows related to acquiring or disposing of long-term assets + Issue of Debt (Increases Liabilities) Repayment of Debt (Decreases Liabilities) + Issue of Equity (Increases Shareholders’ Equity) Dividends and Buy-backs (Decrease Shareholders’ Equity) Cash flows from Financing Activities: Cash flows related to obtaining cash from lenders and shareholders, and repayments of amounts borrowed.
LBS guide to IB interviews By adding the three cash flows you have the change in cash & equivalents during the period. 2. If you have to choose two statements to value a company, which would you pick? P&L and BS, since the cash flow can be approximately inferred looking at the change year to year. 3. What is working capital? Net Working Capital is the difference between a company’s short term assets and liabilities. • The principal short-term assets are accounts receivable (customers’ unpaid bills) and inventories of raw material and finished goods. • The principal short-term liabilities are accounts payable (bills that you have not paid). Net Working Capital = Receivables + Inventory – Payables • Receivables are a way to finance the firm’s customers by extending payment terms, so the company is temporary financing its clients. • In the same vein, payables can be seen as a short-term loan from company’s suppliers. • Inventory is comprised of finished goods and works in progress and can be seen as money that the company spent to produce the products that have not yet been sold From a valuation perspective, the changes in net working capital impact cash flows. An increase in net working capital is associated with a decrease to cash flow because more cash is being used to finance the purchase of short-term assets such as inventory than is being generated through a decrease in short-term liabilities such as payables. Similarly, a decrease in new working capital is associated with an increase in cash flow.
LBS guide to IB interviews 4. Why is income statement not affected by changes in inventory? Expenses (COGS) are recognised only when sales are realized due to the matching principle and accrual-based accounting. Therefore, an increase in inventory only represents an accumulation of finished goods and work in progress that have not yet been sold. When this inventory is sold, the corresponding expense of the product will be matched with the revenue realized at the sale. 5. Where do you look to find the full depreciation expense of the year? In the cash flow statement since depreciation is added back (a non cash expense). 6. Let’s say a company is buying $100m of new factories using leverage. How are all the three statements affected at the beginning of the first year? • P&L: at the beginning of the period there is no transaction recorded. • Cash Flow Statement: Cash Flow from Investing will go down of $100m, but Cash Flow from Financing will go up of $100m (debt issue). Net Effect is zero. • Balance Sheet: o Assets: PP&E goes up of $100m o Liabilities: Debt goes up of $100m o Shareholders’ Equity: unchanged. 7. Now let’s go at the end of the first year, Assume the debt is “bullet” so the principal is not repaid, and assume an interest rate of 10%. Also assume that the plant depreciates at 10% per year. • P&L: o o o o
Depreciation of 10% * $100m = $10m Interest Expense of 10% * 100m = $10m Net effect pre taxes = -$20m Net effect on net income = -$20m * (1-40%) = $12m
LBS guide to IB interviews • Cash Flow Statement: o Add back non cash expenses (depreciation) = +$10m o Net effect on the cash flow = -$12m from net income + $10m of Depreciation = -$2m • Balance Sheet: o Assets: Cash goes down by $2m. o Assets: PP&E goes down though Depreciation by $10m. o Assets net effect is -$12m. o Liabilities: Net Income goes down by $12m; therefore Shareholders’ Equity goes down by $12m. Net Effect on Liabilities is -$12m.
8. Walk me through how additional depreciation of $10 would affect the financial statements. Assume a tax rate of 40%. • P&L: EBIT would go down by $10, Net income by $6. • Cash Flow Statement: Cash flows goes up by the tax shield $10*40% = $4. • Balance Sheet: o Assets: PP&E go down $10. o Cash: goes up of $4. o Liabilities: Shareholders’ Equity goes down of the minus income, $6. 9. What line item is usually found in all three financial statements? Net Income (P&L, Beginning of Cash Flows, Part of Shareholders’ Equity). 10. If depreciation is a non-cash expense, why does it affect the cash balance? Depreciation is tax deductible. 11. If you had to choose only 1 statement to assess the health of a company, which one would you choose?
LBS guide to IB interviews There is no right answer to the question. A well-done profit & loss it’s the best representation of the economic performance of a company. However, because of a certain degree of freedom in accounting practices, a company’s earnings (including revenues) can be easily manipulated. Since what drives the value of a company is cash flow generation, many would probably vote for the cash-flow statement. However, it’s useful to note that cash flows can be manipulated as well in the short term (for example a company can increase payments terms to win additional customers). 12. If a company changes its inventory accounting policy from LIFO to FIFO, how would that impact on the three financial statements? It would depend whether the cost of materials has been increasing or decreasing. If costs are increasing, by passing from LIFO to FIFO the COGS will decrease (using past raw materials) and operating and net income will increase. Taxes will go up as well. However, the net effect of the cash flow should be negative since the inventory will go up.
13. What happens when Inventory goes up by $10 assuming you pay for it with cash? • P&L Statement: no changes in the income statement. Inventory has not been sold. • Cash Flow Statement: inventory is an asset, part of working capital. Increase in working capital decreases your cash flow. Therefore, cash goes down by $10. • Balance Sheet: Inventory goes up $10, Cash goes down $10. (A = S+L)
14. What do you do if you understated depreciation by $100 and discovered the error in a period after the statements are issued? Use a tax rate of 35%.
LBS guide to IB interviews • P&L Effect: Depreciation is a non-cash expense, however is tax deductible. Therefore, Net Income decreases of $100* (1-0.35) = $65. • Balance Sheet Effect: o Liabilities: Shareholders Equity will decrease by $65, (Net Income). o Assets: PP&E will decrease by the new depreciation of $100. o Assets: A deferred tax asset is created = $35. • Cash Flow Statement Effect: Cash Flow remains the same, because we are looking at the past we have created the deferred tax assets to balance the accounting equation (A 0 L + SE): o Net income goes down of $65. o Add back new depreciation of $100. o Take out $35 of deferred tax assets. Net Income (P&L, Beginning of Cash Flows, Part of Shareholders’ Equity). 15. What is FAS 142? How does it treat goodwill? Goodwill is not longer amortized on the P&L, but is subject to impairment every year. In case of impairment, goodwill is impaired and the impairment passed as a one-off charge through P&L. 16. What are deferred taxes and liabilities? How do you treat them? • Deferred Tax Assets arise because taxes from the P&L are different from the amount of taxes effectively paid to authorities. Cash Taxes are usually calculated more on a cash basis than a P&L basis. An example could be a prepayment, when you receive the payment for a service you still have to supply to the client: o The Company pays taxes on the prepayment. o However, for the matching principle the Revenues from the prepayments have not been recorded in P&L, therefore no taxes are shown for it.
LBS guide to IB interviews o A deferred tax asset is created in balance sheet, so that when in the next period revenues will booked and taxes show in the P&L, there will be an adjustment for the use of the deferred tax asset. • Deferred Tax Liabilities arise from booking taxes in accrual terms prior to payments to tax authorities. An example could be the use of accelerated depreciation for tax purposes while use straight-line depreciation for the income statement. This would create a deferred tax liability. 17. In calculating the Net Tangible Assets for the Balance Sheet, is the value a market value or book value? Book value. 18. Walk me through the impact of an asset write-down on the financial statements When the net book value of an assets is lower than its market value (present value of the assets), the asset is impaired. The impairment loss is equal to the difference between the net book value and the market value. The loss is then recorded in the P&L, reducing net income and therefore shareholders’ equity. 19. What’s the difference between an operating and a capital lease? When a company leases equipment, it’s providing itself with a long-term financing for the asset. It can account for the its leases in two ways: • As an operating lease. Accounting treats operating leases like rentals. The P&L shows only an expense and no assets or liabilities appear on the balance sheet.
LBS guide to IB interviews • As a capitalized lease (finance lease). Accounting treats capitalized leases as though the company used a loan to purchase the leased asset. The company records the depreciation of the assets and the interest expense from the loan on the income statement. The balance of the loan and the undepreciated amount of the asset appear on the balance sheet. 20. How do you distinguish between an operating and a capital lease? A lease is a capital lease if it respects at least one of the following conditions: • Transfer of ownership at the end of the lease term. • Contains a bargain purchase option • It lasts at least for 75% of the assets’ life. • The present value of the payments it is more than 90% of the fair market value of the asset. 21. How can a bond’s cash payment and interest expense be different during a given period? • The cash payment of a bond is equal to the face value multiplied by the coupon rate. • The interest expense of a bond is its market yield times the value of the balance sheet debt liability. If the bond was issued at par, its market yield and the coupon rate are the same. If the bond was issued at premium or discount, the rates will differ. 22. Why the operating and finance leases are important to valuation? A company with operating leases expenses them before interest: they are part of EBITDA but to do not appear on the balance sheet. A company with finance leases expenses the lease in the depreciation and interest lines, which are not included in EBITDA, but shows them on the balance sheet. It is important to know how to convert an operating lease into a finance one for two reasons:
LBS guide to IB interviews • When comparing companies with different accounting policies, you need to make the accounting for leases consistent across all companies. • Companies sometimes may try to hide debt in the balance sheet through the use of operating leases. • The loan connected with a finance lease should be considered as part of the net financial position of a company. 23. How do you convert an operating lease to a finance one? Most analysts convert operating to finance leases. To do so: • Calculate the Present Value of the minimum operating lease payments at the current balance sheet date. • Add the Lease obligation and the value of the asset to the balance sheet. • Adjust EBITDA and by removing the rent expense, add back the amortization and the interest expense to find EBIT and Net Income. • Adjust Cash Flow Statement by removing the rent expense and adding back interest and amortization. Classify the repayment of the obligation as financing. As a shortcut, analysts use the rule of eight as a common method of estimating the equivalent finance lease liability. They multiply operating lease payments by eight in order to come up with an estimate of their value if capitalized. 24. What is goodwill? Does it affect net income? Goodwill is the excess cash paid over the net identifiable assets of the target company as well as the “write-up” of the assets’ historical value. Goodwill generated internally to the company is not recognized in the balance sheet. It is only recognized in case of an acquisition. The buyer recognizes the goodwill as an asset in its balance sheet. Goodwill is not amortized and its tested on an annual basis. The testing for goodwill impairment requires that the reporting unit being valued and the fair market value should be
LBS guide to IB interviews compared to the carrying value of the unit. If the carrying value is greater than the fair market value, the goodwill impairment should be reported in the income statement. Goodwill = Price paid for the acquisition – fair market value of tangible assets 25. What are two possible explanations of a declining ROE? • Net Income went down. • Shareholders’ equity has gone up (issue) 26. How a disposal of fixed assets in exchange for cash would be reflected on the GAAP/IAS cash flow statement. The gain or the loss on the disposal (versus the book value) is recorded on the P&L. The price received is recorded under the voice “net cash flow from investing activities”. The book value of the assets is removed from the balance sheet.
LBS guide to IB interviews
6.3 Global Markets In structuring this section, we will provide you a list of the most typical questions that you may encounter in an interview for an Associate level position. Please bear in mind that this list is not exhaustive and the type of questions you may actually get is potentially infinite. This is particularly true for market awareness questions. You will not find answer to all of the questions proposed below. For market awareness questions, giving an answer is actually impossible. Instead, we will provide a guideline for a good general answer. For technical questions, we provide answers only for some of the trickiest and less obvious questions. The answers we provide are what, according to our experience, recruiters want to hear. However, it is strongly suggested that you review and study each subject for which you do not feel confident. Finally, remember that practice is crucial. You want to be over prepared for the interviews as this is the best thing to do to secure your job. On top of these questions, you should read all the books that contain interview questions. The most popular book is probably “Heard on the Street: Quantitative Questions”. We strongly advise you to learn that book by heart.
LBS guide to IB interviews 6.3.1 Market awareness question 1. What is your global outlook for next year? This is a typical question. You are guaranteed to get a question of this kind during one of your interviews. While it is true that there’s no correct answer, there are good and bad answers. Here’s how to structure a good answer. You want to have two or three themes to discuss. After you state what the two or three main themes are you need to explain what the potential impacts on the global economy are. After you do so, it is very important to specify how likely that specific scenario is. What you really need to avoid is to give the interviewer a list of ten different issues without explaining anything about a particular theme. 2. If you were Trichet (King), what would you do at the next BCE (BoE) meeting? These questions are fairly common. Note that this question is similar to question 1, but it also asks you to elaborate on the possible actions following a particular scenario that may happen. So a good answer should first focus on highlighting what you think are the most important issues out there. Then, you would elaborate on these issues as suggested in question 1. At this point, you need to tell the interviewer what actions you would take given the scenario you imagined. 3. How would you invest €100M? Again, you should try to have two or three investment ideas ready to use. Interviewers are not looking for a particular answer, but they are instead particularly interested in hearing a structured answer. Giving a structured answer means covering the following three aspects: a) Explaining the rationale behind each investment idea b) Describing what factors can negatively affect your idea c) Give a rough estimate of the expected return, riskiness and time horizon of the investment (e.g. I think this investment can generate a 50% return in one year time, although there is substantial downside risk) 4. Additionally, during the recruitment for Summer 2012, there were many questions on the Euro Crisis and what the future of the Euro
LBS guide to IB interviews Zone Economy looks like. Some were even asked what the solution could be. Thus, read up on the Euro Crisis and keep yourself updated. Its not possible to give an answer as the Euro Crisis is just getting deeper and deeper with every passing day.
LBS guide to IB interviews 6.3.2 Technical questions The good news is that the typical interview is not extremely technical. You are unlikely to get hundreds of super complicated technical questions during an interview. And when you get technical questions you will not be required to write formulas and stuff. The bad news is that you will get one technical question each interview. And getting the answer wrong will inevitably lead to a rejection. So it is crucial that you “over prepare” The following questions cover some of the most typical questions for Associate interviews. However, you may get questions that are slightly different to the ones proposed. Alternatively, the interviewer may be geekier and wants you to write down the Black-Scholes equation. Hence, treat the following question as a starting point for further reading and studies.
6.3.2.1
Fixed Income
1. What is an interest rate swap (IRS) curve? The IRS curve represents the different swap rates (for the fixed leg) at different maturities. Generally speaking, it will have a shape similar to the yield curve. However, the IRS curve will generally be slightly higher since it incorporates a counterparty risk. Remember, an IRS is an OTC derivative contract and you are always exposed to the counterparty risk. 2. What is duration? (why it's important) The important thing to tell here is that duration is an approximation of the change in bond price if interest rate changes. The interviewer expects you to be fully familiar with duration and how to use duration. 3. Can convexity ever be negative? Yes, convexity can be negative for callable bonds. 4. What is bootstrapping? Bootstrapping is a simple technique to derive yield curves when zerocoupon bonds are not available. This technique is covered in the Core Finance course, so there are no excuses
LBS guide to IB interviews 5. If interest rates drop 20 basis points, how much does a zero coupon 2yr bond's price increase/decrease? This is a fairly standard question which tests your knowledge of duration and how it can be used. First, as interest rates are dropping, bond price will increase. Second, you should know that for a zero coupon bond the duration is equal to the bond’s maturity. In this case, duration is 2 years. Now that you know this, you can estimate the % change in bond’s price by multiplying bond’s duration by the change in interest rates. By doing so, you can easily see that the bond price increases by 40 basis points. 1. Price me a 5 year zero-coupon yielding 5%. No calculators, you have 30 seconds to give me a price This is a popular question at some banks. You should know the price formula by hearth, which in this case will be 100/(1.05)^5. The problem is to compute 1.05^5 in your head. The trick is to know that 1.05^5 can be approximated as 1.05*5 which equals to 1.25. Knowing this, you can give a price of 80, which is very close to the actual price.
6.3.2.2
FX – Money Markets
1. What drives exchange rates? Don’t get lost in technicalities and do not start out by listing ten different items that may have an impact on exchange rates. Even though exchange rates are driven by thousands of different variables, there are three macroeconomic variables that are the main drivers of exchange rates. • Interest rates differential and expectations – this broad category refers to how different rates and future expectations about changes in rates may affect exchange rates. Note that there are several factors affecting rates expectations, such as inflation, debt problems, poor economic performance etc. • Trade balance – very generally, countries with trade surpluses (exports greater than imports, think of China) should expect currency appreciation. On the other hand, countries running trade deficits (think of the US) should see their currency depreciating • Purchasing Power Parity (PPP) adjustments – this is an economic factor which has impact in the very long run. The Economist Big Mac index is the most popular PPP index and may give some
LBS guide to IB interviews indications on disparities between countries. According to this PPP theory, exchange rates should adjust to eliminate these differences. These three factors play a role on exchange rates simultaneously. However, at any given point in time, one of the three will have a major role in moving exchange rates pairs. 2. What is the difference between appreciation and revaluation of a currency? The final effect on the currency is the same i.e. the currency will be more “valuable”. Appreciation refers to an increase in currency value when the exchange rates are floating. Revaluation refers to the same increase but for currencies that are fixed (e.g. China).
6.3.2.3
Options
1. How does a European option differ from US option? The main difference is that a European option can be exercised only at a specific date, while American options can be exercised whenever you want before the expiry date. If you are really into mathematics, you can also mention that there is no closed-formula for pricing American options. 2. What are delta and gamma? There is a fairly good chance that you will get some questions on the socalled “greeks”. Simply speaking, Greeks are measures of option’s value sensitivity to changes in different factors. Delta refers to the change in option value as the value of underlying security changes. Gamma is the change in Delta as the value of underlying security changes. 3. You are long a call option on XYZ Inc. stock and you have delta hedged your position. You read on the Internet that the CEO plunged from the roof of XYZ skyscraper in Canary Wharf. The stock plunges £5. How do you adjust your hedge (qualitatively) ? Other things being equal, the delta falls with a fall in stock price. However, you are long the call and short the replicating portfolio. This means that the number of units of stock you are short has to fall. So, you must buy back some stock.
LBS guide to IB interviews
LBS guide to IB interviews 6.4 Brainteasers and logic questions Brainteasers are a crucial part of any Sales & Trading interview. People think of brainteasers as unfair. Generally speaking, it is true that it is hard to get them right the first time. Moreover, the stress during an interview makes them even more difficult. However, many interviewers ask the same brainteasers again and again. Hence, if you go through as many brainteasers as possible, chances are that you will get asked something that you already know. Answering the question will then become extremely easy. Unfortunately, it may still be the case that you get one totally new. In these situations, it is extremely important to stay calm and try to break down the problem. You can still make a good impression even if you do not get to the right solution; interviewers are interested to see how you approach a problem under pressure. What follows is a list of brainteasers. This is a starting list to get you familiar with the most popular questions you can get. However, you should go beyond this list and practice as many brainteasers as you possibly can. 1. What is the expected value of a roll of a dice? This is basic probability and the correct answer is 3.5. 2. If you look at a clock and the time is 3:15, what is the angle between the hour and the minute hands? The answer to this is not zero! The hour hand, remember, moves as well. The hour hand moves a quarter of the way between three and four, so it moves a quarter of a twelfth (1/48) of 360 degrees. So the answer is seven and a half degrees, to be exact. 3. You have a five-gallon jug and a three-gallon jug. You must obtain exactly four gallons of water. How will you do it? You should find this brainteaser fairly simple. If you were to think out loud, you might begin by examining the ways in which combinations of five and three can come up to be four. For example: (5 - 3) + (5 - 3) = 4. This path does not actually lead to the right answer, but it is a fruitful way to begin thinking about the question. Here’s the solution: fill the three-gallon jug with water and pour it into the five-gallon jug. Repeat. Because you can only
LBS guide to IB interviews put two more gallons into the five-gallon jug, one gallon will be left over in the three-gallon jug. Empty out the five-gallon jug and pour in the one gallon. Now just fill the three-gallon jug again and pour it into the five gallon jug. (Mathematically, this can be represented 3 + 3 - 5 + 3 = 4) 4. A company has 10 machines that produce gold coins. One of the machines is producing coins that are a gram lighter. How do you tell which machine is making the defective coins with only one weighing? Think this through—clearly, every machine will have to produce a sample coin or coins, and you must weigh all these coins together. How can you somehow indicate which coins came from which machine? The best way to do it is to have every machine crank a different number of coins, so that machine 1 will make one coin, machine 2 will make two coins, and so on. Take all the coins, weigh them together, and consider their weight against the total theoretical weight. If you’re four grams short, for example, you’ll know that machine 4 is defective. 5. What is the sum of the numbers from one to 50? Easy question and fairly popular. Pair up the numbers into groups of 51 (1 + 50 = 51; 2 + 49 = 51; etc.). Twenty-five pairs of 51 equal 1275. 6. If you have seven white socks and nine black socks in a drawer, how many do you have to pull out blindly in order to ensure that you have a matching pair? Three. Let’s see—if the first one is one colour, and the second one is the other colour, the third one, no matter what the colour, will make a matching pair. Sometimes you’re not supposed to think that hard 7. If you invested $500 and it doubled in eight years, what was the interest rate? This is a nice little application of the so called Rule of 72. When approaching this question: 72 divided by a period of time where an investment has doubled (8 years in this case), equals your rate of return, or 9 percent. By extension, there is also something called the 7-10 rule. It takes 7 years to double money invested at 10% and it takes 10 years to double money invested at 7%. 8. You are given nine balls, one of which weighs less than the rest. You are also given a traditional two-sided scale. How many times do you need to weigh balls to determine which is the lightest one?
LBS guide to IB interviews Like the earlier weighing question, this one will challenge your process of elimination skills. Most people immediately think three times, but the answer is actually two. First, you would put six balls on the scale—three on each side. If the light one is in one of these two groups, you’d know. If not, you know it’s in the final group. Whatever the case, you weigh two balls (one on each side) from this lighter grouping. If they are equal, the light ball is the odd one out. If they aren’t, you already know the answer. 9. Picture a 10 x 1 0 x 10 "macro-cube" floating i n mid-air. The macrocube is composed of 1 x 1 x 1 "micro-cubes," all glued together. The outermost layer falls to the ground. How many micro-cubes are on the ground? The answer is 488. The best way to get to the correct answer is to think of the cube that will remain after the outermost layer falls. The remaining cube will have 8 micro cubes on each side. The number of micro cubes in the remaining macro cube is then 512 (8*8*8). So the number of micro cubes on the ground will be 1,000-512=488. 10. Give me the decimal equivalent of 13/16 and of 9/16? First you should know how much 1/16 is. You should know this by heart (because this is how US treasuries are still quoted) and the answer is 0.0625. Now, 13/16 is 1/16 + 3/4. So, it’s 0.0625 plus 0.75. Hence, the answer is 0.8125. Applying the same reasoning, 9/16 is really 1/2 plus 1/16. Thus, the answer would be 0.5625 11. You are dealt just two playing cards from a well-shuffled standard 52card deck. The standard deck contains exactly four Kings. What is the probability that both of your cards are Kings?? The correct answer is roughly 0.5%. There are four chances (out of a deck of 52) that the first card dealt is a King. Conditional on the first card being a King, there are three chances (out of 51) that the second card dealt to you is a King. Hence, the probability is 4/52 * 3/51 which is roughly 0.5%. 12. What is the standard deviation of (1, 2, 3, 4, 5)? To solve this question, you should first compute the variance and then take the square root. You should know that the variance equals the expected value of the squares minus the squared expected value. First compute the expected value which is equal to 3, which squared is 9. Second, compute the expected value of the squares, (ie 1, 4, 9, 16 and 25). This expected value is
LBS guide to IB interviews equal to 11. Hence, the variance of (1, 2, 3, 4 and 5) is equal to 2. Taking the square root you get the standard deviation, which is 1.414. 13. You hire a man to work in your yard for seven days. You wish to pay him in gold. You have one gold bar with seven parts-like a chocolate bar . You wish to pay him one gold part per day, but you may snap the bar in only two places. Where do you snap the bar so that you may pay him at the end of each day, and so that on successive days he may use what you paid him previously to make change?? Snap the bar into pieces that are one, two, and four parts long, respectively. On day one, give him one part. On day two, exchange your two parts for his one. On day three, give him back the one part. On day four, exchange four parts for his three. On day five, give him one more part. On day six, exchange your two parts for his one. One day seven, give him back the one part.
Sources used to create this guide: • Adkins Matchett & Toy Midnight Manuals: • Investment Banking of Joshua Rosenbaum and Joshua Pearl: a detailed practical guide covering an analyst’s role. • Vault guides to finance interviews and advanced financial interviews. • Mergers & Inquisitions IBD guide: interesting guide with over 200 questions to practice. (internet website)
LBS guide to IB interviews
7 ASIA RECRUITMENT 7.1 Networking and Presentations (September – October) Finance Club and Career Services will organise many bank presentations from September to December. Whilst networking with London based bankers has limited impact on your chances of getting an interview in Hong Kong, it is critical for Asian Trekkers to learn about each bank’s unique culture, business structure, strategy and value proposition. More importantly, Asian Trekkers also need to learn how to make a positive impression effectively - it’s a task many students find challenging but mastering it would reward you handsomely. • Pick your ‘battle’ (banker) – usually HR will introduce bankers from different sectors to network with after the presentation. You might want to focus on the bankers who are from the sector(s) you have prior knowledge of or you are interested in. Your job is almost half done once you choose the bankers you want to network with later – the subsequent conversation should follow its natural course. With some research done beforehand, making a positive impression should not be too hard. You will need this important skill during the trek. • Research in school portal on Hong Kong alumni and start your contact list, you will need this list later. 7.2
CV and Cover Letter (October – Mid-November)
While other MBAs are partying away, it is time for Asian Trekkers to start their resume and cover letters. Career Services usually will have dedicated time slots to review Asian Trekkers CV, but it definitely helps to start early. • Stress your ‘Asian’ connection: fluency in an Asian language definitely gives you an edge. However, if you do state you are fluent in Mandarin for example, be ready to prove yourself during interviews. • Be honest on your CV. Most banks’ background checking processes are rigorous. The last thing you want to happen is to be offered a position then fail the background check. • Start to contact the Hong Kong alumni (coffee chat or meeting during the bank presentations in Hong Kong). • Networking with bankers in London – keep honing your networking/communication skill. • Schedule your applications for December. You will find many deadlines are very close to each other, so it will significantly reduce your stress level if you schedule your submissions early.
LBS guide to IB interviews • Trek Leader: If you want to lead the Asia Trek, now is time to put your hand up and run for this position. Duties include: compose trek CV book, liaise with each bank’s HR for the detail of the visit, manage Bank Champions (who will research the bank and ask questions in the Q&A session after the presentation), develop detailed itinerary and lead your fellow trekker through the busy schedule in Hong Kong. Perks: you are more likely to be noticed by the banks hence higher chance to be interviewed. 7.3
Application (Late November – Early December)
Most banks’ applications are due between late November and early December. So yes, if you don’t have your CV and cover letters ready to go, you will struggle to submit all of them on time correctly. While you are researching the banks, it is worthwhile to take notes on their recent deals – it will be very helpful for the trek and often you won’t have time researching the banks when you are on the trek. • Allow two to three hours per application. You may not want to submit the application right after you complete it. Go away for a few hours/sleep on it, double check later then submit it. There are only a dozen banks offering summer internship and the competition is fierce. So make sure every application counts. • Mock interview - by now you should be able to answer most of the questions from the London Business School Guide to IB interviews. It’s very likely you will get interviewed in Hong Kong, so you should be ready for interview before you leave London. Don’t leave it until you get the interview invite email because your interview might be scheduled for the next day. • Follow up with the alumni and confirm meetings in Hong Kong (if possible). 7.4
During the trek (Mid-December)
The finance trek demands both physical and mental strengths. Typically day starts at 9AM and finishes at 5PM (officially). However, if you are lucky enough to score an interview while you are in Hong Kong (which happened to many of us in 2011), then be prepare to mock interview with your fellow trekkers until 2AM - the more you practise, the better you will be prepared for. Typical bank visit format: • The visit starts with a presentation, which usually goes for approximately an hour with one/two presenters (If two presenters, then one from IBD and one from Sales and Trading). The presentation often takes place in the bank’s auditorium, where you may sit with MBA students from other business schools (50-200 MBA students depending on the bank). • Q&A: The presentation usually ends with a Q&A session. It’s important that Bank Champions act swiftly to ask the first question. We find this is the best
LBS guide to IB interviews way to showcase the quality of our student body and re-enforcing London Business School brand in Hong Kong finance industry. • After the presentation, you will then meet the bankers in an informal environment – apply the skills you learned from Networking and Presentations. The strategy changes a little here. Whilst it is important that you make a positive impression effectively, it is also important to take as many business cards and meet as many bankers as you can. You may also meet some MBA students from other business schools - take it as an opportunity to make new friends and establish new connections. • Make notes on each banker immediately after the networking session – you will need this for the Thank-You email and the interview. • Thank You Email – always write the bankers you met a thank-you email after you get back to the hotel. Refer to the notes you made earlier today, your email should reflect some of the conversations you had earlier today so the banker could recall you easily. Many bankers are very helpful in Hong Kong (especially BoAML). Some bankers might even give you tips on your interviewer if you get along with them well. Of course, you will only get these tips if you have written them a Thank-You email. 7.5
First round Interview (Late December/Early January)
Usually the first round interview will be carried out via telephone. Downside: it is rather difficult to gauge your interviewer. Upside: you can have all your answers (ppt/doc) in front of you while talking on the phone. • Do it systematically. You will be interviewed by two people in the first round and each interview last for half an hour. IB interviews are usually very similar and there are a handful of questions you MUST know the answer of, so tattoo the answers to your arm if you need to. • Don’t panic if you don’t know the answer. First round interview usually focuses on communication skills, personal attributes, career aspirations etc. If you encounter a technical question that is beyond your knowledge, be humble, explain your thought process in a clear and logical manner and politely ask for the correct answer (and feedback if appropriate). Always thank your interviewer for his/her answer/time. • Smile during your telephone interview, trust me, it makes a huge difference. • Write your interviewers a Thank-you email after the phone interview.
LBS guide to IB interviews
7.6 Second round interview (Late January/Early February) Most second round interviews will be face-to-face. The benefit of Asia Trek really shows at this stage of the game. In many cases, you might have met either your interviewer or his/her colleagues already. It is very likely your interviewer will ask about who you have met in Hong Kong if he/she hasn’t met you before – so do remember the bankers’ names/job functions because it is a perfect icebreaker and shows your commitment to the bank. The format of second round interview varies from bank to bank: • Telephone interview (e.g., Standard Chartered): interview with two senior bankers and each interview lasts for half an hour. Again you can have your answers in front of you while you are interviewed. • Videoconference at your preferred location (e.g., BarCap): you can videoconference at home, at school or wherever you can find reliable Internet connection. Again, you will be interviewed by two bankers (can be scheduled on different dates) and each interview usually lasts for half an hour. Make sure you now know all the answers by heart. Dress properly (at least top half of your body), speak loud and clear, and test with your friends prior the interview to see the optimal angle/lighting/distance/background etc. • Videoconference at the bank’s meeting room (e.g., GS): you will go to the bank’s office and videoconference there. You are likely to be interviewed by three bankers in a row with 5 minutes breaks in between. It is quite an intensive experience – make sure you are well rested and mentally prepared for it. • Interview in person (e.g., BoAML), you will need to go to the bank’s office in London. You are likely to be interviewed by two or three bankers with 10 – 15 minutes breaks in between. Make sure you arrive on time, dress properly and have your ‘firm handshake’ ready. • Remember to write your interviewers a Thank-you email after the interview, no matter what the outcome is. Sharpen your blade: most of the interview questions will focus on career aspiration and technical material. Technical questions could be very academic or practical, so a solid preparation on fundamentals as well as current affairs is essential. Last but not least, don’t be disheartened by rejections. Rejection usually implies a natural misfit, there is no need to dwell on it.
8 SOME ADVICE FROM PREVIOUS YEARS STUDENTS 8.1 From KPMG to Morgan Stanley IBD
LBS guide to IB interviews Background: UK, MBA 2012 2008 – 2010: KPMG, Corporate Finance Senior Associate, lead advisor on midmarket M&A deals and restructurings 2004 – 2008: PricewaterhouseCoopers, Forensic Accountancy and Audit Associate 2002: Merrill Lynch, Intern, Prime Brokerage and Stock Loan trading desks IBD Recruiting Experience: Although there are a number of different ways of getting into IBD, in my experience most successful candidates follow the standard recruitment path from September to January. For me, the most important element in securing a position was preparation for every interaction with a banker. This really matters. Whilst clearly a poor interaction can harm your chances of being selected for interview, having strong, effective interactions with bankers through being prepared will differentiate you across the process. My hints and tips for preparing for the various stages in the process are shown below: Networking after bank presentations: The purpose of the networking is for you to find out about the bank and for the bank to find out about you (and hopefully identify you as a high calibre candidate). Hence before the presentation, make sure that you have spoken to LBS students who interned at the firm in IBD the previous year. They will be able to provide a briefing on the firm and its internship structure. If the LBS student received a full-time offer, then I would tend to mention their name in conversation with bankers at the event to show that you were pro-active ahead of the session. Knowing deals that the bank has worked on and recent news on the firm will also help. Crucially you need to have practised your pitch before the session on your background and why you want to move into banking. At the event you should then introduce yourself and your background to the bankers. The formal pitch may not always be appropriate however the key elements of it should be communicated. This sounds obvious but a lot of people don’t do this and are not remembered by the bankers! Coffee chats with bankers: Generally you will do these by yourself. Remember that you asked for the meeting, and so you should plan and outline at the start of the session what you want to cover with the banker. This sounds like a small task, though this logical organisation and structure will show the banker that you have thought about the meeting. They will typically like this approach – this logical style
LBS guide to IB interviews is used on the job, and so you are also showing that you can operate in this manner immediately. In terms of content I would look to introduce yourself to the banker (do your pitch) first, and then cover the other topics of interest to you (particular team, part of the bank, market trends etc). Do not be afraid about asking for other contacts at the end of the meeting if appropriate – if you have made a good impression then the banker may be willing to introduce you to their colleagues, or other members of the recruiting team. Other admin points: Take a copy of your CV to the meeting when you are happy with it and it has been reviewed. Some bankers will ask to see this and again shows preparation. Interviews: Preparation and practice is the key to success in interviews. I met up with 2 LBS colleagues and completed a mock interview almost every day from the end of December through to the start of February. There was absolute honesty on how well people had performed and areas for development. After that amount of time we had all been exposed to most types of questions. We also held “round table” sessions where we asked each person in turn a question - we covered technical, competency, and commercial awareness areas in a lot of depth. Almost every interviewer asked the following key questions. Walk me through your CV, why banking, why our firm. You need to nail these. If you do though, then that is great as these questions normally come first and so the interviewer may decide at that time that you are a strong candidate. Most interviewers then covered standard technical, commercial and competency areas. Hence it is worth spending most of your time on those general areas, and then spending a smaller amount of time looking into more advanced areas. If you have a finance background and put a deal on your CV then really, really know the deal. I worked in Corporate Finance pre LBS and was asked what the expected IRR of a PE investment was. The interviewer then passed a pen and paper and asked me to prove it through working through the numbers in detail. I was asked if it was a good deal, what other investments the PE house had made, what the condition of the sector was, likely exit valuation, likely buyers, considerations for investing in the sector etc. This could have been replicated for any of the 5/6 deals on my CV so be careful. You can also direct the interview quite a lot with your responses to open questions. If you have a topic that you want to talk about in the interview, then consider incorporating this into your answers. Often the bankers will drill down into the detail you have provided, and so this can be an effective method of directing the conversation. Similarly do not mention detail that you do not want to talk about – e.g. if you mention that bank X has worked on 8 out of the top 10 deals in 2010, then it is not unreasonable for the interviewer to ask what those 8 deals were (or at least some of them). Conclusion
LBS guide to IB interviews IBD recruiting is tough. There is immense competition and a large number of highly qualified applicants for each position. Planning for each stage of the process takes a lot of time and effort, however will allow you to differentiate yourself by interacting with the bankers in a manner which replicates that found on the job. 8.2 From M&A Lawyer to US Top Investment Bank Background: European, MBA 2012 M&A Lawyer Investment Banking interviews for MBA’s with a law background Having a law background may be an advantage if you want to pursue a career in investment banking, especially if you were an M&A or finance lawyer. As with other career changers, you will have to come up with a convincing story as to why you are willing to leave a successful career in your law firm for an uncertain career in investment banking. In interviews, you can emphasise that you love to work on transactions but feel limited by only advising on the legal side of deals. By getting exposed to M&A or capital markets transactions in your firm, you learnt that Investment Bankers are the ones who are actually driving these deals. This is what you would like to do as well, as opposed to writing down whatever the parties agree on, negotiating the nitty-gritty clauses and not being involved in the major decisions. Investment Bankers will generally appreciate the fact that you already have transaction experience, know how to deal with clients and that you are used to the hours. However, they will thoroughly test your quantitative skills. They know that you are good with words, but there is a widespread prejudice that lawyers are poor when it comes to numbers. You may therefore get some brainteasers during the interviews. What they are also looking for is whether you get the basics of corporate finance. Almost all interviews will therefore involve standard questions about different types of valuations, “walk me through a DCF”, accounting etc. Some interviewers will want to test you some more on the financial side and will ask detailed valuation questions. Questions about deal structures are rare, as they will expect you to know this already. As you do not have a finance background, they really want to test how much you’ve learned about Corporate Finance, Valuations and Accounting during your
LBS guide to IB interviews MBA. They will not expect you to be a corporate finance expert. It is however important to get the basics right. In addition, Investment Bankers will try to verify whether you have the drive to learn more about these topics. On your CV, make sure that you list some of the most important and high profile deals that you have been working on as a lawyer. However, expect questions from your interviewer regarding these deals, especially if the bank that you are interviewing with has been involved in those deals. As Investment Bankers have a different focus than lawyers, such questions are likely to be about the financials of the deal. Make sure that you know the respective multiples and have a detailed understanding of the financial structure. Many lawyers have successfully transferred into Investment Banking. As one interviewer said: “Ex-lawyers make both the very best and the worst investment bankers. The difference is whether they know how to count”. 8.3 From Natural Resources Corporate to US Top Investment
Bank Background – Australia - MBA 2012 As a career switcher looking to move into IBD, it was essential that I developed strong financial knowledge and networked well if I was to gain a summer internship. Even though I had previously worked for 5yrs as an engineer in oil and gas, having studied finance during my undergrad was helpful in allowing me to converse with bankers initially. How you approached the process, from networking to interviews prep My early focus was primarily on building my knowledge and technical skills in finance such that I could have more meaningful conversations with those that I met with over coffee. Although my first contacts within the industry were of various backgrounds, I asked for referrals to colleagues with similar backgrounds, i.e. nationality / sector, as I would naturally have more to discuss with them and be able to build a better rapport. My own background was in natural resources (NR) so to support my strategy I focused my daily reviews of the Financial Times on NR or similar subject matter, and also kept abreast of developments within financial services. Tools such as the school library’s Thomsom Reuters database, where I could access deal summaries, were also helpful in complimenting what I read in the news.
LBS guide to IB interviews Over time my relatively narrow sector knowledge was re-enforced by what I read and learned from bankers working in this area, and, relatively quickly I was able to build some expertise and a city wide network in NR. How your particular background influenced the process (questions you were asked) My approach was relatively successful and I gained interviews at most banks. Interviews with bankers in NR were particularly fruitful, but I should have prepared more in terms of general knowledge of different bank departments. Some particularly challenging interviews included in-depth discussion of wide-ranging subject matter including, private-equity and FIG, and I could have been better prepared for such instances. Fit questions were relatively easy once a number of interviews had passed as the repetition made it easy to remember and tweak your story, i.e. tell me about yourself Æ why banking Æ and why us, in a nutshell. I therefore suggest you form a ‘gorilla group’ to practice with from day 1. Technical questions within the general finance / valuation context were relatively routine, but again the idea is to know these cold such that you come across as strong in basic finance and can move on to more challenging material. Additionally, throughout the interview stage I took the fairly abnormal step of continuing to meet with people for coffee chats. If you know your finance material well these chats can be very valuable as they are like interviews and help to keep you up to date, relaxed and ‘front of mind’ with firms. Conclusion: Key success factors I think everyone’s strategy should vary to exploit personal strengths. In my case a sector focus was useful in developing my finance knowledge and network. It also helped to differentiate myself from other applicants. In summary some key success factors that I learned through the process were: • Be sure to start meeting people by mid-September to ensure you are on firm radars early (some make a decision on who they want very quickly, plus getting started early shows you are committed to the industry) • Leverage your background and continue to develop areas of expertise / strength that will set you apart from the competition, and use this to facilitate networking • Although I pursued a sector ‘expertise’ strategy it is important to remain ‘focused but flexible’ in terms of which department you would like to join at a firm (especially when speaking to HR or people from other departments and remembering that some firms may just not be hiring in your sector)
LBS guide to IB interviews • Work hard early to turn your technical knowledge of finance into an asset (you will need this for your interviews anyway so learn it early to come across knowledgeable whilst networking) 8.4 From Marketing to GS IBD Background UK - MBA 2012 Three years non-financial experience at a leading marketing strategy and advertising advisory firm. Pre-MBA internship at large multi-strategy hedge fund. Approach to the process + learnings: Approaching the preparation and interview process in a small group is extremely beneficial. If you work with a few similarly committed people you trust well, you can work closely and learn from each other, ultimately making each of you stronger. There are enough IBD jobs available that you can be comfortable sharing your insights with your study group. Focus on addressing your weaknesses when you are preparing and revising. What are your 'red flags', the parts (or gaps) of your background and experiences that investment bankers will worry about? Early on, spend time considering how to best reposition your 'story' to overcome your weaknesses and emphasise the key skills investment bankers looks for in candidates. Identify and work on the core concepts and questions that you need to know perfectly as a base level of knowledge (eg. 'why investment banking?'; 'walk me through a DCF'; 'why this bank?'). Practice mock questions. Repeatedly. Challenge each other with a wide range of difficult questions to make the real interviews feel easy. Make sure to focus your efforts efficiently. In general, I experienced a lot more questions on conceptual corporate finance topics than accounting. Network intelligently. Always make sure you are extremely pleasant, thankful and succinct when contacting alumni or other students. You need their help, not the other way around.
