www.ibtraining.com 2 Table of Contents I. Investment Banking Overview II. Ideal Investment Banking Candidates and Recruiting Season III. Resume Tips IV. Common Qualitative Interview Questions V. Common Technical Interview Questions VI. Interview Preparation and Tips 3 Investment Banking Overview Full-Service Investment Banks (Bulge Bracket Banks) Citigroup, Goldman Sachs, HSBC, Deutsche Bank, UBS, Morgan Stanley, Credit Suisse (and previously, Merrill Lynch, Lehman, Bear Stearns) Major IB groups within full-service investment banks Leveraged Finance provides debt package for LBOs Ideal for moving on to LBO shops and hedge funds Financial Sponsor dedicated financial sponsor community coverage Ideal for moving on to LBO shops Industry Groups Telecommunications, Industrial, Financial Institutions, Food & Consumer, Retail, Automotive, Technology, etc. M&A Groups Executes all the M&A assignments, include mergers, sell-side, buy-side, etc. Ideal for moving on to LBO shops and hedge funds Financial Restructuring some bulge bracket banks are beginning to establish these groups, although often there are conflicts Good for moving to hedge funds Capital Markets Debt and equity capital markets (IPOs, secondary equity offering, High Yield issues, convertible debt issues) 4 Investment Banking Overview (contd) Boutiques Refers to small investment banks with limited number of services M&A - Lazard, Greenhill, Centerview, Blackstone, Evercore Restructuring - Miller Buckfire, Houlihan Lokey, Chanin, Blackstone, Lazard, Rothschild Industry Focus Focused on one industry Allen & Company (media), Petrie Parkman (oil and gas) Middle Market Refers to smaller deals below $500 million in enterprise value Houlihan Lokey, Chanin, William Blair, Edward Jones, Duff & Phelps, Raymond James, Goldsmith Agio and many more 5 Investment Banking Overview (contd) Typical Hierarchy at Investment Banks Managing Director (MD) Markets banks services and brings in clients; big picture banker Director (2 years and up) Similar to Managing Director and is training to be an MD, but does more actual execution than MD Vice President (3 to 4 years) Responsible for execution of all aspects of transactions and pitches Primary contact for clients and other professional intermediaries Oversees junior financial staff (Associates and Analysts) and serves as the intermediary between the MD / Director and junior financial staff Controls and plans the projects Associate (3 to 4 years) Entry level position from MBA and there are also direct promotes from analyst programs Oversees and guides the analysts, checks work product, builds the more complicated models and financial analysis Analyst (2 to 3 years) Typical Analyst Program is two years, with some analysts being offered a third year (which often means a promotion to associate is implicit) Responsible for most of the financial analyses and presentations Administrative responsibilities (i.e. grunt work) 6 Table of Contents I. Investment Banking Overview II. Ideal Investment Banking Candidates and Recruiting Season III. Resume Tips IV. Common Qualitative Interview Questions V. Common Technical Interview Questions VI. Interview Preparation and Tips 7 The Ideal Investment Banking Analyst Recent undergraduates will enroll into the investment banks analyst program Analyst programs are usually for two-years with the top performers being offered a third year, usually implying a promotion to associate after completing the third year. Important traits of a good analyst Good attitude Hard worker / endurance Energy Attention to detail Do not necessarily need a finance / accounting undergraduate degree, but good grades and intelligence highly valued during interview Typical responsibilities will include the following: Pitch books and presentations Valuations (Trading, Precedent, DCF) Excel Models (LBO, Merger) Administrative such as Faxing and Delivery 8 The Ideal Investment Banking Associate Recent MBA graduates and Analyst Promotes will enroll into the investment banks Associate program After 3 to 4 years, Associates can be promoted to Vice President Important traits of a good Associate Knowledge of finance and transaction processes Strong understanding of finance concepts, strong technical / modeling skills, strong writing skills Good manager (calm under pressure) Good teacher / patience with analyst Client interaction skills (Presence) Attention to detail Good knowledge of excel, powerpoint, word Typical responsibilities will include the following: Explain/oversee assignments to analysts Pitch books and Presentations Complicated financial modeling (merger models, LBO models, valuation models, refinancing, etc.) 9 Lateral Analyst and Associate Hires Lateral Analyst and Associate Hires Bulge bracket and boutique investment banks will consider hiring analysts or associates that either have at least one year of experience as an analyst/associate at another bank, or have some other professional experience where skills are transferable to investment banking Other professional experience with transferable skills could be commercial banking, research (equity, debt, credit), corporate development at a corporation, experience in the insurance industry, accounting, etc. The important factor here is that the lateral analyst or associate can demonstrate that he / she has developed the skills necessary to be a good investment banker 10 Recruiting Season at Investment Banks New Analyst and Associate Hires All of the bulge bracket banks and many boutique investment banks have entire recruiting departments focused on hiring new analysts and associates The primary recruiting source are universities / undergraduate programs for analysts and MBA programs for associates Many investment banks have a target list of schools, which typically number about 20, and usually include the ivy-leagues and other high-ranking universities The banks work closely with the universities job placement services to arrange off-campus and on-campus recruiting events and interviewing schedules If your undergraduate institution / MBA program is not on the target list, you have to work a little bit harder, but you can still get interviews 11 Recruiting Season at Investment Banks If your school is not on the target list, you should; Network, network, network: call everyone you know that works in investment banks (analysts, associates, vice presidents, etc.) and send them your resume and try to get informational interviews Contact the investment banks recruiting department directly find the name of the person that is in charge of analyst or associate recruiting Find the names / email addresses / phone numbers of analysts, associates and vice presidents that work in the bank / group where you want to work (website information); send them an email with short introduction of yourself and what you want (i.e. a job) and attach your resume; follow up the following week with a phone call Start early: dont wait until the recruiting season is already underway 12 Recruiting Season at Investment Banks The investment banking recruiting season for full-time analyst and associate class starts in September of the year prior to the start date for the new class The typical start date of the new analyst and associate classes is the August or September following graduation Therefore, the interview season for this start date is the prior September (i.e. when analyst candidates start their senior year and associate candidates start their second year of MBA program) However, many investment banks fill their full-time analyst and associate needs through their summer internship programs Many analyst and associate candidates attain summer internships at investment banks for the summer between their junior and senior year / summer between first and second year of MBA program Investment banks recruiting season for summer interns starts in January of the same year of the summer internships Often following the summer internships, the summer analysts and associates receive full-time offers to start the following fall, once they finish school 13 Lateral Analyst and Associate Hires Lateral analyst and associate hires occur all year long, and are more linked to current needs at the group or bank level Interested lateral analyst and associate candidates can learn of opportunities by contacting the investment banks recruiting group or the investment bankers / group directly Often, investment banks hire headhunters to find lateral analyst and associate candidates 14 Table of Contents I. Investment Banking Overview II. Ideal Investment Banking Candidates and Recruiting Season III. Resume Tips IV. Common Qualitative Interview Questions V. Common Technical Interview Questions VI. Interview Preparation and Tips 15 Resume Overview and Tips Besides having good academic credentials and work experience, structure and formatting of the resume are very important Most bankers (interviewers) will glance at the following important sections and will not read the whole resume Previous work experience (internships for undergrads) and any relevant transactions School, major, GPA, standardized test scores (GMAT, SAT) Outside activities Common resume mistakes Formatting (think of it as an art piece) Should not be longer than one page No typos and grammatical mistakes (double check everything!) Make sure you are familiar with your resume and can discuss every point Do not embellish your roles on any previous financial transactions 16 Resume Example Review resume sample 17 Table of Contents I. Investment Banking Overview II. Ideal Investment Banking Candidates and Recruiting Season III. Resume Tips IV. Common Qualitative Interview Questions V. Common Technical Interview Questions VI. Interview Preparation and Tips 18 Common Qualitative Questions? Please walk me through your resume and tell me a little bit of yourself Candidates should take this opportunity to go through their academic and professional history quickly, and emphasize any academic or professional experience that make them good candidates Academic Example: - I majored in accounting and finance, and earned A's in all of the accounting and finance classes; my overall GPA was 3.9 and my SAT scores were 1500; I was the president of my schools finance club as well as the editor for the school newspaper Professional Example: During my time at Company XYZ, I spent a lot of time building pitch books and buyers lists, spreading comparable companies and building models such as DCF, Merger and LBO Outside Activities: show ability to multi-task and still be successful: Eg: While I know that any spare personal time would be limited while working here, during school, I was captain of the rowing team which took about 25 hours a week, at the same time that I maintained a 3.8 GPA Eg: I worked 30 hours a week to put myself through school, at the same time as I did a double-major where I maintained a 4.0 in my major courses 19 Common Qualitative Questions? (contd) Why do you want to be an investment banker? I think Investment Banking provides the best opportunity to develop my financial skills such as financial modeling and company valuation skills as well as honing my client interaction skills. I want to be challenged, I know that investment bankers work under difficult work environments but I want to be challenged mentally and physically I love the financial markets and follow them closely I would like to read about transactions that I have worked on in the Wall Street Journal and other financial magazines Investment Banks have a positive influence on the economy. For example, the concept of 1 + 1 = 3 is derived from synergies extracted from merging two companies 20 Common Qualitative Questions? (contd) What are your strengths? The following are nice strengths such as: (a) attention to detail (b) endurance (c) good attitude (d) excel skills (e) understanding financial concepts (i.e., valuation, modeling, etc.) (f) ability to learn quickly (g) ability to multi-task (i.e., history of holding jobs while in school, being on sports teams, etc.) (h) good communication and writing skills (i) intellectually curious The strategy to answer this question is to work into the answer these skills and how the you already have them, by giving quick examples for each skill 21 Common Qualitative Questions? (contd) What are you weaknesses? This is a TRICK question. You should not actually tell them your weaknesses, but spin it. For example: (a) too anal (b) work too hard (c) perfectionist (d) check work product too often (e) dont sleep enough You can also take this opportunity to address some obvious weakness in your resume and buff it up. For example: If you have no academic financial / accounting background, you can say, Well, from my resume you probably noticed that I didn't major in accounting or finance, but I do learn quickly as you can see from my high GPA and SAT scores. I work very hard to get up to speed, as you can see from my success at my prior firm 22 Common Qualitative Questions? (contd) Why do you want to work at our bank? Candidate should fully understand the bank in terms of banks size, culture, target market, and industry focus. It helps to do prior research Is it a boutique or a full-size bank? If it is a boutique, you may say, I know that the junior staff receives more responsibilities and there are more opportunities to step-up on transactions If it is a full-size bank, you may say, This bank has the global resources to serve the fortune 500 clients and I want to be involved in the high profile deals that this bank has been involved with recently. (Make sure this statement is true, so you need to do the research) Another universal line can be I have heard that this bank is based on meritocracy and you are given more responsibilities as long as you are able to handle it or "this group really values and encourages junior bankers to "step up" on transactions 23 Common Qualitative Questions? (contd) Where do you see yourself in 5 years? Currently, I definitely want to stay in the financial services sector, and would love to be an Associate (VP or Director depending on entry position) in this group You do not want to mention that you are using Investment Banking as a stepping stone to another job. You want to be an investment banker for LIFE! (even if you dont) What was your favorite class in school? And why? Math was my favorite class in school. Numbers came very easily to me and I enjoy solving complex math problems as well as puzzles. I love to write so English was my favorite class. I also read a lot in my spare time. 24 Table of Contents I. Investment Banking Overview II. Ideal Investment Banking Candidates and Recruiting Season III. Resume Tips IV. Common Qualitative Interview Questions V. Common Technical Interview Questions VI. Interview Preparation and Tips 25 Common Technical Questions What is total enterprise value? It is the total value of the company which can be attributed to all the financial stakeholders (equity, debt and preferred holders) How do you calculate total enterprise value? Equity Value + Debt + Preferred Equity + Minority Interest Cash What is the difference between total enterprise value and equity value? TEV represents value of whole enterprise, and is calculated as equity value + debt + preferred equity + minority interest cash Equity value represents only the equity value of the company, and is calculated as current share price * shares outstanding, or TEV debt preferred equity minority interest + cash What is minority interest? If you own more than 80% but less than 100% of another entity, you are required to consolidate 100% of the asset and income in the companys financial statements. Minority interest represents the portion that your company does not own it is a liability 26 Common Technical Questions How do you calculate equity value? Stock Price x Shares Outstanding What is the difference between basic shares outstanding and fully-diluted shares outstanding Basic shares outstanding represent the current number of shares that are currently issued and outstanding; you can find this number on the cover of the most recent 10-K or 10-Q, Bloomberg, Yahoo finance, etc. Fully-diluted shares represent the current number of shares outstanding plus the dilutive impact that any in-the-money options, preferred convertible stock, convertible debt and other convertible-to-equity securities that exist Should you use basic shares outstanding or fully-diluted shares outstanding to calculate the equity value of a company? What is the treasury stock method? It is used to calculate the dilutive shares from employee stock options and outstanding warrants 27 Common Technical Questions (contd) Please name a few line items from the current assets and current liabilities section of the balance sheet? Assets: Current assets: cash, inventory, accounts receivable, other current assets, prepaid accounts Gross PP&E, cumulative depreciation, Net PP&E Other long term assets, intangibles, goodwill Liabilities and Shareholders Equity Current liabilities: accounts payable, other current liabilities, revolving credit facility Long Term liabilities: debt, other long term liabilities, pension plan liabilities Shareholders Equity: retained earnings, other Total Assets = Total Liabilities + Shareholders Equity Tell me how the cash flow statement is structured and state how they are different from one another It is separated between cash flow from Operations, Investments and Financing Operations represents the cash that is generated from the companys operations. Net Income + Depreciation & amortization +/- other non-cash expenses / income + / - changes in working capital + / - changes in other assets / liabilities Investments related to capital expenditures and business acquisitions and proceeds from disposition of assets Financing related to raising new equity and debt financing as well as paying down debt 28 Common Technical Questions (contd) How is depreciation expense integrated within the three financial statements? Depreciation expense is expensed in the income statement. However, it is added back in the cash flow statement because it does not represent actual cash that is going out of the company. Depreciation expense is also reflected in the balance sheet since the net P,P&E is decreased by the depreciation expense for that period What are the typical valuation multiple metrics? TEV/Revenues, TEV/EBIT/ TEV/EBITDA, P/E Can you use TEV/Earnings ratio for valuations? No. TEV represents a value to all the stakeholders (debt and equity) and earnings are only attributed to the equity holders - interest expense is already subtracted from the earnings figure 29 Common Technical Questions (contd) If a company with a high P/E ratio acquires a company with a low P/E ratio in a stock transaction, assuming everything else stays constant, will the transaction be accretive or dilutive to the acquiring company? Accretive assuming that the earnings of the combined company will still trade at the higher P/E ratio How do you value a company? There are three main valuation methodologies that you will use: Discounted Cash Flow Trading Multiples Precedent Transaction Multiple 30 Common Technical Questions (contd) Briefly describe the three valuation methodologies DCF projects the cash flow in the future and it discounts it back to calculate Net Present Value (NPV) Trading Multiples Uses the stock prices of publicly traded companies to calculate valuation metrics such as TEV/EBITDA Precedent Transactions Uses the actual offer price from an acquisition to calculate valuation metrics such as TEV / EBITDA What is the main valuation principle difference between trading and precedent multiples? Precedent multiple should be higher because it includes a control premium 31 Common Technical Questions (contd) Please describe the DCF model in laymans terms DCF projects the free cash flows generated by the company and discounts these cash flows using a WACC, which considers the risk of the projected cash flows (Net Present Value of Free Cash Flows) DCF then calculates the terminal value of the company using either the EBITDA terminal method or the Perpetuity Terminal Method The DCF value of the Company is the NPV of free cash flows + terminal value How do you calculate free cash flow? FCF = EBIT less: Taxes Increase/decrease in working capital (WC) Capital expenditures (CapEx) plus: Depreciation and Amortization 32 Common Technical Questions (contd) How do you calculate the terminal value from using the perpetuity growth method / Gordon Growth method? Terminal Value = FCF(5) x (1+g) (d g) g = Terminal Annual Growth Rate d = WACC Rate How do you calculate the terminal value from using the terminal multiple approach? EBITDA multiple * terminal EBITDA / (1+d)^n How do you determine the discount rate to be used in the DCF? WACC 33 Common Technical Questions (contd) What is WACC and how do you calculate it? WACC represents the discount rate that you will use in the DCF to calculate NPV WACC = [Ke x (E/(E+D)] + [(Kd x (D/(E+D)) x (1-T)] Ke = cost of equity Kd = cost of debt E = MVE of subject company D = FMV of debt (same as face value unless distressed) of subject company T = tax rate How do you calculate cost of equity? Use the Capital Asset Pricing Model (CAPM) CAPM = Rf + Beta x (RM Rf) Rf = risk-free rate RM = market rate RM Rf = market premium 34 Common Technical Questions (contd) Please explain the concept of beta in laymans terms Beta measures the sensitivity of the stock relative to the market as a whole (systematic risk risk that can by diversified away) For example, if the company has a beta of 2, that means that if the market moves up by 2%, then the companys stock moves up by 4% Which one is more expensive, equity or debt? Equity is more expensive because it has the lowest seniority in the capital structure, thus higher risk and higher required return There are no obligations for dividends to be paid, and equity is the last group to be paid out in a liquidation scenario Which of the following will have the lowest interest rate: secured bank debt, subordinated debt, preferred equity and equity? Bank debt. It sits on top of the capital structure and the debt is collateralized with the assets of the company. It gets paid first in a liquidation scenario 35 Common Technical Questions (contd) What does it mean when a note has a PIK structure? PIK stands for Pay In Kind. The borrower does not pay cash interest to the lenders, rather the interest is added on top of the note balance and the next periods interest expense is accrued from the new balance Period 0 - $1,000 Balance and 10% Interest Rate per Annum Period 1 - $100 Interest Payment but is added to the old balance of $1,000 which results in a new balance of $1,100 Period 2 - $110 Interest Payment is added to the old balance of $1,100 which results in a new balance of $1,121 36 Common Technical Questions (contd) Explain how a company purchasing raw material from a vendor works its way through the income statement and balance sheet Company purchases $100 of raw material from vendor Inventory balance on b/s increases by $100 Accounts payable balance on b/s increases by $100 Company converts the raw material into a final product for sale Inventory balance on b/s increases by the value-added of $50 of the conversion to the final product: labor, other inputs, etc. Company sells the final product to customer for $200 Sales of $200 recorded in income statement COGS of $150 recorded in income statement Reduction of inventory by $150 Reduction of accounts payable by $100 (company pays vendor) Increase of retained earnings by $50 (profit on the finished good) 37 Table of Contents I. Investment Banking Overview II. Ideal Investment Banking Candidates and Recruiting Season III. Resume Tips IV. Common Qualitative Interview Questions V. Common Technical Interview Questions VI. Interview Preparation and Tips 38 Interview Preparation It is very important to prepare for all of your interviews in the following areas: Financial Markets Stay abreast of financial news and be able to talk about the major events (WSJ, Bloomberg, Reuters, Yahoo Finance, etc.) Company and Industry Specific Information - www.vault.com and www.wetfeet.com are great sources for industry and company specific information Common Financial Technical Questions This course will help. www.vault.com also sells an interview preparation book Common Qualitative Questions e.g., Why do you want to be an Investment Banker? 39 Interview Tips You have a very limited amount of time to make a good impression with the interviewers. Please be mindful of the main things below: Composure You want to be in control of your voice, emotions and body. Dont show that you are nervous and speak in a calm tone with a steady rhythm. Do not shake your legs or any part of your body Confidence You want to exude confidence but do not be arrogant. Dont ever tell the interviewer that you are the best or that they are wrong Dress Invest in a decent suit, shirt, tie and shoes. Make sure that there are no wrinkles and that you look neat. The style should be conservative 40 Questions to Ask During Interviews How many transactions are you on at one time? What % of your time is dedicated to live transactions compared to marketing activities? How many active engaged deals are there currently within the group? How many people are on the transaction teams and how are they staffed? How big are your target clients? Why did you join this firm from all the other wall street firms? How would you describe the culture at this firm? What are the main responsibilities of an analyst / associate on your deal team? 41 Following Up with Your Interviews It may not have a bearing on you getting a job with the firm, but thank you e-mails are nice to get If you choose to send a Thank You email make sure you double-check / triple-check spelling (firm, name of person, etc.) and that it is the right firm / position Thank You e-mails also show your interest in the firm and the position It is better to somewhat customize each letter since that shows more effort and the interviewers may compare letters in their down time Your goal is to get an offer from the firm even if you are not interested in working there it is nice to have the option If you have not heard back from the firm in a while, it is recommended that you call the contact to just inquire the timing and drop your interest (use these calls wisely since overcalling can be annoying) 42 Important Considerations Even within the same firm, group dynamics can be very different FIT - When considering which group/firm to work at, it is important that you feel that the people at the firm share the same moral values Hours Certain groups work more than other groups within the same firm. It is widely known that leverage finance groups, M&A groups and financial restructuring groups work very hard Reputation Even within the same firm, certain groups will have better reputation on the street than the other groups # of Deals It is always nice to have live, engaged transactions on your resume when you are interviewing again. Marketing pitches are not very marketable, unfortunately