Year: 2007

What are some characteristics of a company that is a good LBO candidate?

Notwithstanding the recent LBO boom where nearly all companies were considered to be possible LBO candidates, characteristics of a good LBO target include steady cash flows, limited business risk, limited need for ongoing investment (e.g. capital expenditures or working capital), strong management, opportunity for cost reductions and a high asset base (to use as debt collateral).  The most important trait is steady cash flows, as the company must have the ability to generate the cash flow required to support relatively high interest expense.

Let’s say you run an LBO analysis and the private equity firm’s return is too low. What drivers to the model will increase the return?

Some of the key ways to increase the PE firm’s return (in theory, at least) include:

  • – reduce the purchase price that the PE firm has to pay for the company
  • – increase the amount of leverage (debt) in the deal
  • – increase the price for which the company sells when the PE firm exits its investment (i.e. increase the assumed exit multiple)
  • – increase the company’s growth rate in order to raise operating income/cash flow/EBITDA in the projections
    decrease the company’s costs in order to raise operating income/cash flow/EBITDA in the projections

Why do private equity firms use leverage when buying a company?

By using significant amounts of leverage (debt) to help finance the purchase price, the private equity firm reduces the amount of money (the equity) that it must contribute to the deal.  Reducing the amount of equity contributed will result in a substantial increase to the private equity firm’s rate of return upon exiting the investment (e.g. selling the company five years later).

Walk me through an LBO analysis…

First, we need to make some transaction assumptions.  What is the purchase price and how will the deal be financed?  With this information, we can create a table of Sources and Uses (where Sources equals Uses).  Uses reflects the amount of money required to effectuate the transaction, including the equity purchase price, any existing debt being refinanced and any transaction fees.  The Sources tells us from where the money is coming, including the new debt, any existing cash that will be used, as well as the equity contributed by the private equity firm.  Typically, the amount of debt is assumed based on the state of the capital markets and other factors, and the amount of equity is the difference between the Uses (total funding required) and all of the other sources of funding.

The next step is to change the existing balance sheet of the company to reflect the transaction and the new capital structure.  This is known as constructing the “proforma” balance sheet.  In addition to the changes to debt and equity, intangible assets such as goodwill and capitalized financing fees will likely be created.

The third, and typically most substantial step is to create an integrated cash flow model for the company.  In other words, to project the company’s income statement, balance sheet and cash flow statement for a period of time (say, five years).  The balance sheet must be projected based on the newly created proforma balance sheet.  Debt and interest must be projected based on the post-transaction debt.

Once the functioning model is created, we can make assumptions about the private equity firm’s exit from its investment.  For example, a typical assumption is that the company is sold after five years at the same implied EBITDA multiple at which the company was purchased.  Projecting a sale value for the company allows us to also calculate the value of the private equity firm’s equity stake which we can then use to analyze its internal rate of return (IRR).  Absent dividends or additional equity infusions, the IRR equals the average annual compounded rate at which the PE firm’s original equity investment grows (to its value at the exit).

While the private equity firm’s IRR is usually the most important piece of information that comes out of an LBO analysis, the analysis also has other uses.  By assuming the PE firm’s required IRR (amongst other things), we can back into a purchase price for the company, thus using the analysis for valuation purposes.  In addition, we can utilize the LBO model to analyze the trend of credit statistics (such as the leverage ratio and interest coverage ratio) which is especially important from a lender’s perspective.

A car travels a distance of 60 miles at an average speed of 30 mph. How fast would the car have to travel the same 60 mile distance home to average 60 mph over the entire trip?

Most people say 90 mph but this is actually a trick question!  The first leg of the trip covers 60 miles at an average speed of 30 mph.  So, this means the car traveled for 2 hours (60/30).  In order for the car to average 60 mph over 120 miles, it would have to travel for exactly 2 hours (120/60).  Since the car has already traveled for 2 hours, it is impossible for it to average 60 mph over the entire trip.

Three envelopes are presented in front of you by an interviewer. One contains a job offer, the other two contain rejection letters. You pick one of the envelopes. The interviewer then shows you the contents of one of the other envelopes, which is a rejection letter. The interviewer now gives you the opportunity to switch envelope choices. Should you switch?

The answer is yes.  Say your original pick was envelope A.  Originally, you had a 1/3 chance that envelope A contained the offer letter.  There was a 2/3 chance that the offer letter was either in envelope B or C.  If you stick with envelope A, you still have the same 1/3 chance.  Now, the interviewer eliminated one of the envelopes (say, envelope B), which contained a rejection letter.  So, by switching to envelope C, you now have a 2/3 chance of getting the offer and you’ve doubled your chances.

Note that you will often get this same question but referring to playing cards (as in 3-Card Monte) or doors (as in Monte Hall/Let’s Make a Deal) instead of envelopes.

A windowless room has 3 lightbulbs. You are outside the room with 3 switches, each controlling one of the lightbulbs. If you can only enter the room one time, how can you determine which switch controls which lightbulb?

Turn on two switches (call them A and B) on and leave them on for a few minutes.  Then turn one of them off (switch B) and enter the room.  The bulb that is lit is controlled by switch A.  Touch the other two bulbs (they should be off).  The one that is still warm is controlled by switch B.  The third bulb (off and cold) is controlled by switch C.

You are given 12 balls and a scale. Of the 12 balls, 11 are identical and 1 weighs EITHER slightly more or less. How do you find the ball that is different using the scale only three times AND tell if it is heavier or lighter than the others?

Significantly harder than the last question!  Weigh 4 vs 4 (1st Weighing).  If they are identical then you know that all of 8 of these are “normal” balls.  Take 3 “normal” balls and weigh them against 3 of the unweighed balls (2nd Weighing).  If they are identical, then the last ball is “different.”  Take 1 “normal” ball and weigh against the “different” one (3rd Weighing).  Now you know if the “different” ball is heavier or lighter.

If, on the 2nd weighing, the scales are unequal then you now know if the “different” ball is heavier (if the 3 non-normal balls were heavier) or lighter (if the 3 non-normal balls were lighter).  Take the 3 “non-normal” balls and weigh 1 against the other (3rd Weighing).  If they are equal then the third ball not weighed is the “different” one.  If they are not equal then either the heavier or lighter ball is “different” depending on if the 3 “non-normal” balls were heavier or lighter in the 2nd Weighing.

If, on the 1st Weighing, the balls were not equal then at least you know that the 4 balls not weighed are “normal.”  Next, take 3 of the “normal balls” and 1 from the heavier group and weigh against the 1 ball from the lighter group plus the 3 balls you just replaced from the heavier group (2nd Weighing).  If they are equal then you know that the “different” ball is lighter and is 1 of the 3 not weighed.  Of these 3, weigh 1 against 1 (3rd Weighing)  If one is lighter, that is the “different” ball, otherwise, the ball not weighed is “different” and lighter.

If, on the 2nd weighing from the preceding paragraph, the original heavier group (containing 3 “normal” balls) is still heavier, then either one of the two balls that were NOT replaced are “different.”  Take the one from the heavier side and weigh against a normal ball (3rd Weighing).  If it is heavier, it is “different,” and heavier otherwise the ball not weighed is “different” and lighter.  If, on the 2nd weighing, the original lighter side is now heavier, then we know that one of the 3 balls we replaced is “different.”  Weigh one of these against the other (3rd Weighing).  If they are equal, the ball not weighed is “different” and heavier.  Otherwise, the heavier ball is the “different” one (and is heavier).

If you get this right and can answer within the 30 minutes alloted for the interview, then you probably do deserve the job.

You are given 12 balls and a scale. Of the 12 balls, 11 are identical and 1 weighs slightly more. How do you find the heavier ball using the scale only three times?

First, weigh 5 balls against 5 balls (1st Use of Scale).  If the scale is equal, then discard those 10 balls and weigh the remaining 2 balls against each other (Second Use of Scale).  The heavier ball is the one you are looking for.

If on the first weighing (5 vs 5), one group is heavier, then of the heavier group weigh 2 against 2 (2nd Use of Scale).  If they are equal, then the 5th ball from the heavier group (the one not weighed) is the one you are looking for.  If one of the groups of 2 balls is heaver, then take the heaver group of 2 balls and weigh them against each other (Third Use of Scale).  The heavier ball is the one you are looking for.

You’ve got a 10 x 10 x 10 cube made up of 1 x 1 x 1 smaller cubes. The outside of the larger cube is completely painted red. On how many of the smaller cubes is there any red paint?

First, note that the larger cube is made up of 1000 smaller cubes.  The easiest way to think about this is how many cubes are NOT painted?  8 x 8 x 8 inner cubes are not painted which equals 512 cubes.  Therefore, 1000 – 512 = 488 cubes that have some paint.  Alternatively, we can calculate this by saying that two 10 x 10 sides are painted (200) plus two 10 x 8 sides (160) plus two 8 x 8 sides (128).  200 + 160 + 128 = 488.

Four investment bankers need to cross a bridge at night to get to a meeting. They have only one flashlight and 17 minutes to get there. The bridge must be crossed with the flashlight and can only support two bankers at a time. The Analyst can cross in 1 minute, the Associate can cross in 2 minutes, the VP can cross in 5 minutes and the MD takes 10 minutes to cross. How can they all make it to the meeting in time?

First, the Analyst takes the flashlight and crosses the bridge with the Associate.  This takes 2 minutes.  The Analyst then returns across the bridge with the flashlight taking 1 more minute (3 minutes passed so far).  The Analyst gives the flashlight to the VP and the VP and MD cross together taking 10 minutes (13 minutes passed so far).  The VP gives the flashlight to the Associate, who recrosses the bridge taking 2 minutes (15 minutes passed so far).  The Analyst and Associate now cross the bridge together taking 2 more minutes.  Now, all are across the bridge at the meeting in exactly 17 minutes.   Note, that instead of investment bankers, you’ll often see the same question using members of musical bands (usually either the Beatles or U2).

You are given a 3-gallon jug and a 5-gallon jug. How do you use them to get 4 gallons of liquid?

Fill the 5-gallon jug completely.  Pour the contents of the 5-gallon jug into the 3-gallon jug, leaving 2 gallons of liquid in the 5-gallon jug.  Next, dump out the contents of the 3-gallon jug and pour the contents of the 5-gallon jug into the 3-gallon jug.  At this point, there are 2 gallons in the 3-gallon jug.  Fill up the 5-gallon jug and then pour the contents of the 5-gallon jug into the 3-gallon jug until the 3-gallon jug is full.  You will have poured 1 gallon, leaving 4 gallons in the 5-gallon jug.

If the banking lifestyle is so tough, what’s the upside?

First and foremost, the money.  There are very few careers that pay as well as investment banking, especially taking into account the level of risk (trading or hedge fund compensation, while potentially equal to or vastly exceeding that of banking is significantly more volatile).  Second, the exit opportunities.  Many people treat investment banking as a stepping stone to other finance careers, including private equity and hedge funds.  Third, for what you learn.  Being a junior investment banker teaches you two things.  It teaches you about finance and it teaches you how to work and survive in a difficult and detail obsessed environment.  Both skills are likely to prove valuable regardless of future career choice.  Fourth, for ego.  Many people get a kick out of telling others that they are in banking and for seeing their deals on the front page of the Wall Street Journal.

Explain the concept of synergies and provide some examples.

In simple terms, synergy occurs when 2 + 2 = 5.  That is, when the sum of the value of the Buyer and the Target as a combined company is greater than the two companies valued apart.  Most mergers and large acquisitions are justified by the amount of projected synergies.  There are two categories of synergies:  cost synergies and revenue synergies.  Cost synergies refer to the ability to cut costs of the combined companies due to the consolidation of operations.  For example, closing one corporate headquarters, laying off one set of management, shutting redundant stores, etc.  Revenue synergies refer to the ability to sell more products/services or raise prices due to the merger.  For example, increasing sales due to cross-marketing, co-branding, etc.  The concept of economies of scale can apply to both cost and revenue synergies.

In practice, synergies are “easier said than done.”  While cost synergies are difficult to achieve, revenue synergies are even harder.  The implication is that many mergers fail to live up to expectations and wind up destroying shareholder value rather than create it.  Of course, this last fact never finds its way into a banker’s M&A pitch.

Why might one company want to acquire another company?

There are a variety of reasons why companies do acquisitions.  Some common reasons include:

  • – The Buyer views the Target as undervalued.
  • – The Buyer’s own organic growth has slowed or stalled and needs to grow in other ways (via acquiring other companies) in order to satisfy the growth expectations of Wall Street.
  • – The Buyer expects the deal to result in significant synergies (see the next post for a discussion of synergies).
  • – The CEO of the Buyer wants to be CEO of a larger company, either because of ego, legacy or because he/she will get paid more.

Is the number of hours the worst thing about investment banking?

Most junior bankers will tell you that the worst thing about the banking lifestyle is not the number of hours required per se, but the unpredictability to those hours.  Said differently, that you have NO control over your life, as you are expected to be reachable at all time, day and night. This lack of control makes it extremely difficult to schedule time to see friends and family.  Analysts and Associates find themselves routinely having to cancel dinner plans, weekend plans and even vacations at the last minute.  Many bankers, after a few months on the job cease scheduling events altogether, for fear of having to cancel.

How does the lifestyle in New York differ from investment banking jobs elsewhere?

Always a touchy subject, but generally, the life of an investment banker is tougher in New York than anywhere else.  The other big international banking centers, London and Hong Kong, come in next.  The West Coast of the U.S. is indeed more laid back, as per its stereotype.  Bankers in secondary cities (often satellite offices) also tend to have better lifestyles.  Having said all that, banking is still banking, and just because you may have a view of the beach from your cube, don’t expect to work 9 to 5.

Will the lifestyle be better/worse in some groups than others?

Just like with bulge bracket banks vs. boutiques, it’s tough to generalize here too.  Often the lifestyle of a particular group depends most on the dealflow in that sector or product and on the personality and culture portrayed by the group head(s) or senior bankers in that group.  Obviously if there are a lot of deals in say, Industrials but few in Healthcare, then the bankers in Industrials will likely be busier.  However, if the head of Healthcare is really aggressive about marketing, then the healthcare bankers may be working 24/7 on pitches.

Alas, some groups do have reputations for having better or worse lifestyles.  Bankers in product groups (M&A, Leveraged Finance) on average probably work more hours than bankers in industry groups, except during markets when there are few deals being executed.  Groups such as Debt Capital Markets (DCM) and Equity Capital Markets (ECM) are sometimes referred to as “banking-lite” and offer better lifestyles (and lower compensation) than other groups within investment banking.

How does the lifestyle differ at bulge bracket banks vs. boutiques?

It’s always tough to generalize about boutique banks because there is such a broad range of them.  There are boutiques that have cultures similar to those of bulge bracket banks and there are plenty of boutiques where the lifestyle is significantly better (and some that are worse).  Having said all that, there are some generalizations that can be made that will hold true much of the time.  Analysts and Associates at boutiques often have the opportunity to take more responsibility than their bulge bracket equivalents, as deal teams are often smaller.  Junior bankers at boutiques also tend to have more interaction with senior bankers and clients and may be invited to attend more pitches and meetings.  There also tends to be less “face time” at boutiques than at bulge bracket banks, meaning fewer hours spent in the office.

As a banker, how much will I have to travel?

Senior bankers tend to travel a lot, perhaps being out of the office on average 60% of the time.  Most of the travel for senior bankers is spent marketing and pitching.  Sometimes Analysts and Associates will be invited to go to pitches and sometimes not.  The majority of a junior banker’s time will be spent in the office.  However, junior bankers may have a significant opportunity to travel when they are working on live deals.  For example, when working on a sell-side M&A transaction, often the Analysts and Associates will spend a significant amount of time at the client site, especially at the beginning of the engagement.  As the process progresses, the junior bankers might continue to travel to the client’s headquarters to oversee (babysit) management presentations or to travel to oversee (babysit) due diligence site visits by the prospective buyers.  Working on an Initial Public Offering (IPO) will likely require significant travel during the roadshow process.

I’m trying to make the switch into banking from another career. How do I get interviews?

In order to get interviews, you have to get your resume in front of the right people.  Occasionally, this can mean HR, but more often than not, it’s going to take a banker looking at your resume.  Like every other type of job search, you’ve got to network.  First thing to do is to contact any friends and acquaintances that are already in banking.  Ask them to look at your resume and to pass it on to the right people.  Without a doubt, you’ve got a much better chance if a banker passes your resume to HR than you do sending to HR directly (but do that too).

The next best thing to people you know, is your alumni network.  Almost all schools have them, and almost all schools (undergrad and MBA) have alumni on Wall Street.  Talk to alumni, ask about job openings, ask for advice and ask for informational interviews.  Informational interviews are when you meet with (in person or over-the-phone) a banker for 15-30 minutes just to chat and to learn more about the job and the bank.  Even though they are not technically interviews, definitely treat them as such.  If the person likes you, he or she may be able to get you actual interviews.

Once you’ve exhausted your friends and your alumni network, try cold calling/emailing bankers.  Most calls or emails won’t get returned but remember, it only takes one.  And make sure to expand your search.  There are literally thousands of boutique investment banks out there and boutiques are typically more flexible about their hiring practices than are the bulge bracket banks.  And cover all your bases.  Try headhunters and try to sending your resume to HR or applying online if the bank has an online application system.

Most importantly, don’t get discouraged.  Networking and looking for a job is a difficult and ego bruising process.  Some would say it’s a full-time job in and of itself.  If you really hit a brick wall, then think longer term.  Are there other jobs which could be stepping stones to banking?  Or should you be considering an MBA?

I’ve had 10 interviews with a bank. Does everyone have to like me in order to get an offer?

It depends.  At some banks, if you get negative feedback from even one person with whom you’ve interviewed, you won’t get an offer.  At other banks, 8 or 9 “yes’s” will be enough to outweigh 1 or 2 “no’s,” provided that the “no’s” aren’t very strong and aren’t coming from the most senior bankers.  Occasionally, the opinion of the head of the group can be enough to get you an offer, regardless of the other feedback.  Unfortunately, you will never know the dynamics of the situation when you interview so the best advice is to take all of your interviews seriously.

How important is it to have done a banking internship?

In this job market, an internship is almost mandatory.  Having done an internship in banking (either over the summer or during the school year) shows (a) that you are serious about banking and (b) that you have a good idea of what you are getting into.  Being able to demonstrate both A and B because of an internship will go along way in helping you differentiate yourself during the interview process.

For MBA students (who were not Analysts pre-business school), a summer banking internship is extremely important when it comes time for full-time recruiting.  Interviewers will tend to question how serious is your interest in banking if you did your internship in another industry.

I’m thinking about Private Equity after my Analyst program. Will being in certain groups help me more than others?

The best advice I can give is that given the option, go to the group where you will get the best deal experience, and the most modeling experience.  Having said that, yes, certain groups will likely give you an advantage when applying for private equity jobs.  These groups include M&A, Leveraged Finance (Lev Fin) and Financial Sponsors.  M&A and Lev Fin, are two groups that are typically more analytically intensive.  Financial Sponsor Groups cover private equity firms so being in a Sponsors group will likely get you some direct exposure to PE firms, which will help your job search later on.  If you want to join a PE firm that specializes in a particular industry, by all means, look to join that industry group.

What do Hedge Funds look for when hiring bankers?

This is a tougher question to answer than ones about private equity, because the hedge fund world is so broad.  However, most investment bankers that move into hedge funds, wind up doing either fundamental type investing or event driven investing (merger/risk arbitrage or distressed).  For analyst positions at fundamental based hedge funds, you will need to demonstrate excellent technical skills, especially valuation and modeling.  Moreover, you will need to show that you not only have a strong interest in investing, but that you have the ability to make or recommend investment decisions based on your analysis.  This is a key difference between the buy-side (e.g. hedge funds) and the sell-side (e.g. banking).  In banking, the goal is do analysis that is accurate, with assumptions that you can back up.  In investing the goal is to be right.  You will need to have the confidence to act on your analysis, not just format it.  Note also that many hedge funds, in the interview process, will ask you to either do an analysis of a position or recommend an investment.

Those interested in merger/risk arbitrage or distressed investing are going to need to demonstrate strong understanding of the M&A process or the restructuring/bankruptcy process, respectively.

What are some exit opportunities after being an Associate?

Unlike Analysts, who typically stay at a bank for two or three years, Associates are considered candidates for long-term banking careers.  However, that doesn’t mean that many Associates don’t move on to do other things after a few years of banking.  Hedge funds and other buy-side jobs tend to attract ex-Associates.  Corporate Development jobs are appealing to those bankers that want to stay in finance but are looking for a better lifestyle.  It is not unusual for Associates to join a company for which they had helped advised as a banker.  Some Associates start their own businesses or join startups.  The one area where Associate opportunities are far more limited than those for Analysts is in the world of Private Equity.  Private Equity firms rarely hire Associates who were not Analysts previously or have not had private equity experience.

What NOT to ask…

How much money did you make last year?/How much money will I make?/How were bonuses last year?/How much vacation will I get?…
No explanation needed…I hope.

What is the lifestyle like?/How many hours will I be expected to work?/Is there face time at this bank?
Any questions regarding lifestyle and hours, risk giving the interviewer the impression that you are not willing to work hard.  Now, if you are interviewing at a boutique and the interviewer has already talked about how good the lifestyle is here, then it may be okay to ask these things.  But if you are interviewing at a bulge bracket bank or the like, don’t ask about lifestyle.

What do you know about our bank?

Somewhat similar to the last question (Why do you want to work here?), you need to demonstrate your knowledge of the bank.  You might talk about a deal or two that you’ve heard or read with which the bank has been involved.  Or, if you know the bank is strong is certain product areas (such as M&A or leveraged finance) or industry coverage, then mention that.  Perhaps the bank focuses on cross-border deals or deals in emerging markets.

By no means will you be expected to be an expert but you should be able to talk about a few things.  If you don’t know anything, rather than make something up and sound stupid, be honest.  Say something like, “I really don’t know many specifics, and one of the reasons that I’m really excited to interview with you is to learn more.”  If you can ask the interviewer about the bank, then you can learn some things for your next interview, for when you are asked the same question.

How NOT to answer the question, “Why do you want to be an investment banker?”

I want to make a lot of money/I want a house in the Hamptons/I want to date models, etc.
Yes, everyone in banking is in it for the money.  Anyone who says otherwise is delusional or lying.  But, you still can’t say it in an interview.

I love working all night…
Yes, you can say you want to be challenged.   But NOBODY likes working on pitchbooks at 3:00 am and you won’t either.

I want to learn how businesses work so I can advise CEOs.
Two issues here.  First, the typical banker knows (a little about) finance but nothing about operations and how businesses really operate.  Second, as an Analyst or Associate, it will be years before you will be advising CEOs, if ever.

If I am asked to “walk through my resume,” where (when) should I start?

It’s really up to you and whatever you think tells the best story.  Some people start with where they grew up.  Others start with college or their first job out of college while more experienced or older individuals might start with Business School or other graduate program.  Just keep in mind that your most recent experiences are going to be more relevant so don’t get bogged down with stories of your first lemonade stand or how well you invested your Bar Mitzvah money.

What are some signs than an interview has gone poorly?

If an interview lasts for less than its scheduled time, then it is usually an indication that the interview did not go well.  Another indication is if you are not given then chance to ask any questions of the person with whom you are interviewing at the end of the interview.  Often, the interviewer’s facial and body reactions will give you clues that he or she doesn’t like your answers or is not “buying your story.”  Finally, if you ask for a business card and they refuse, you’re probably not getting the job.

What are some signs that an interview has gone well?

Often, if the interview lasts significantly longer than its allotted time (typically 30 minutes) it is a good sign.  This is especially true if you are interviewing with a relatively senior banker.  Another good sign is when the banker with whom you are interviewing ceases to ask you questions and starts telling you about the benefits of the firm.  This is known as switching into “sell mode” and generally indicates that the banker thought highly of you and wants you to work there.  A third potential sign of interest is if you are asked with what other banks are you interviewing and how far along you are in the recruiting process with those banks.  Finally, it generally indicates a good interview when the interview feels more like a conversation than a formal question and answer session.

Why I think technical questions are dumb…

Ok, so reading this particular post isn’t going to help you get a job.  But I happen to feel strongly that asking applicants technical questions in interviews is silly (though few in banking share my viewpoint).  Here’s why:

1. Banking is easy.  That is to say, the knowledge that you need to be a successful investment banker is not that difficult to learn.  “Banking is not rocket science.”  You’ll hear that phrase thousands of times. It’s true.

2. You learn on the job.  No matter how many corporate finance classes someone has taken, nobody comes into banking knowing how to value a company or do a model or put together a pitch.

Therefore, I don’t care if you’ve memorized the formula for WACC or the key assumptions of a Black-Scholes model.  You need to be smart and you need to have the right attitude.  Convince me of that and I’ll teach you to be a good banker.

What should I NOT state in a cover letter?

First and foremost, you do not need to restate your entire resume.  Anybody reading your cover letter will also have your resume.  Second, you do not need to kiss the ass of the reader by saying things like “I know that bank XYZ has the smartest people, most dealflow and is the coolest place to work!”  If you have a concrete reason why you want to work at that bank then yes, say so (in ONE sentence) but if you go too far, you come off sounding naive.  After all, for the most part banks (at least bulge brackets) are pretty much the same.

Third, don’t go overboard stating how great you are.  Just about everyone applying to investment banking is “smart,” “hardworking,” “enthusiastic,” etc.  The reader will judge these traits by your resume (where you went to school, degrees, GPAs, test scores, prior work experience/internships, etc.). Finally, don’t say how the firm is going to benefit by letting you work there.  To them, you are just one more potential Analyst or Associate.  That is to say, you are a commodity.  No Analyst or Associate that is new to banking is going to be able to contribute significantly for months, so to state otherwise makes you once again seem naive.

I’ve read elsewhere that I need to tell my “story” in a cover letter. Why are you saying that they should be short?

First, few people (in investment banking) read cover letters.  You are going to get judged almost exclusively on your resume.  And generally, the only time a cover letter will have an impact on your chances is if you say something stupid or have typos.  That is to say, cover letters (or cover emails) are usually necessary but are likely to hurt you more than help you.  So since (1) few people read them and (2) they are more likely to hurt you, you might as well keep them short and to the point.

How difficult is it to switch from law to banking?

Switching from being an Associate at a law-firm to Associate at a investment bank is difficult but definitely doable.  A fair number of lawyers make the switch every year.  The more experience you have as a lawyer doing deals (M&A transactions, for example) and/or working directly with investment bankers, the easier it is going to be.  One area of law from which lawyers very often make the switch over to banking is bankruptcy/restructuring.

In making the switch, there are two broad questions that you will have to answer during the interview process:  (1) why do you want to switch and (2) can you count.  Answering the first question obviously requires you to emphasize your interest in the banking side of transactions as well as general “business” topics.  You should also be ready to answer the question of why did you become a lawyer rather than a banker in the first place.

“Can you count?”  This is banker shorthand for saying, “Will you be able to do the analytical work required of a banking Associate – the valuation work and the modeling”  “Do you understand financial statements and basic accounting?”  And “Can you use Excel?”

Of course, “Can you count?” is a very silly question to ask a lawyer since most of us know that keeping track of billable hours in twelve minute increments is a lot harder than most of the analytical work required of a banker.  In all seriousness, the truth is that the average lawyer (at a top law firm) is smarter than the average banker.  And in fact, ex-lawyers often make the best senior bankers.  But because some bankers have issues with inferiority, they can have a built-in bias against lawyers trying to switch to banking.  Hence, the generalization that lawyers “can’t count.”

Can you recommend any books about finance and the technical aspects of investment banking?

Of course, I am partial to my own book, How to Be an Investment Banker: Recruiting, Interviewing, and Landing the Job + Website (Wiley Finance) which covers accounting, finance, financial statement analysis, valuation, financial modeling, M&A and LBOs.

In addition to my own book, there are really only two books that I would recommend if you are looking to learn about the technical aspects of investment banking (e.g. valuation).  Both of these are very good introductions to the way things are actually done banking (as opposed to books written by business school professors) and serve as excellent primers.

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions (Wiley Finance) by Joshua Rosenbaum and Joshua Pearl (published in 2009) has an excellent introduction to valuation and leveraged buyouts.  There is a short section on M&A covering only the sell side process with an extremely brief overview of accretion/dilution analysis.  There is virtually no discussion of the other aspects of M&A or of other types of investment banking transactions.  The book is available through Amazon and most book stores.

The Practitioner’s Guide to Investment Banking Mergers & Acquisitions Corporate Finance by Jerilyn Castillo and Peter McAniff (published in 2007) is available only through the publisher’s website at www.scoopbooks.com.  It is about twice as long and covers more topics than the Rosenbaum/Pearl book but is slightly weaker in its sections on valuation and LBO.

If you are looking for a more academic book on valuation, I recommend anything by the NYU professor Aswath Damodaran, such as Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (Wiley Finance).

What periodicals should I read to learn more about investment banking?

The Wall Street Journal has the best coverage of U.S. investment banking activity, so if you are going to read one newspaper, get the Journal.  Most bankers say they read the Journal (which given their busy schedules, means they subscribe, let unread papers pile up in their office/cubicle for about a week and then throw them out).  If you do have limited time, reading the front page and the Money and Investing section will get you almost all of the banking related news.  The New York Times business section also has good deal coverage and the Financial Times (FT) is good for international banking news.

Beyond mainstream newspapers, the Daily Deal (www.thedeal.com) is read by many bankers.  Bankers like to say they read the Economist to sound smart but few do.  As far as the business magazines go (Forbes, Fortune, Business Week and the like), they are not very helpful when it comes to learning about investment banking.

Where else on the Internet can I go to learn about investment banking?

As I state in the “About” section of this site, there are surprisingly few reliable sources of good information about the world of investment banking.  However, that doesn’t mean there is no information out there.  Wall Street Oasis  (www.wallstreetoasis.com) is the best.  It has message boards about lots of investment banking topics and contains some great info in the archives.

I also highly recommend the blog Mergers and Inquisitions (www.mergersandinquisitions.com).  Another blog, Epicurean Dealmaker (epicureandealmaker.blogspot.com) is a little highfalutin in its verbiage for my taste but is often amusing.  There’ s some good content about the way banking really is in the archives.

In addition, most of the bulge bracket investment banks also have some good info about banking careers and the recruiting process on their websites.

Are there any good books about life as an investment banker?

The first chapter of my own book, How to Be an Investment Banker: Recruiting, Interviewing, and Landing the Job + Website (Wiley Finance), contains a detailed description of the lifestyle and culture of investment banking.  Other than that, there are really only two books about investment banking that I would recommend.  The first is Monkey Business: Swinging Through the Wall Street Jungle by John Rolfe and Peter Troob, published in 2000.  This is the tale of life as Associates at the investment bank, DLJ (later bought by Credit Suisse).  The second is The Accidental Investment Banker: Inside the Decade That Transformed Wall Street by Jonathan Knee, published in 2006.  Knee shares some of his experiences mostly as a senior banker (Managing Director) while employed at Morgan Stanley and Goldman Sachs.

If I don’t know the answer to a technical question or get the answer wrong, should I ask for the correct response?

If you have no idea about the answer to the question posed, then you should just move on.  However, if you make a valid attempt, and get the answer wrong, then it probably makes sense to ask for the correct answer.  You never know if you will be asked the same question again in a later interview so you might as well get it right the second time.  The only time that I wouldn’t ask the interviewer for the answer is if you think the interviewer doesn’t know the correct answer (yes, bankers sometimes ask questions to which they don’t know the answer).  If the interviewer doesn’t know, then he or she is just going to look stupid, and that’s never going to help your cause.