Year: 2007

Should I include my GPA on my resume?

As with standardized test scores, if your GPA is very good (generally 3.5 is considered the threshold) and have graduated within the last few years, then you should include your GPA.  If you are applying to Analyst jobs while still in undergrad, you probably should put your GPA on you resume regardless, unless it is really bad (if you don’t include it, readers may assume it is really bad).  If your GPA in your major was better than your overall GPA, then include that too.

Walk me through a Discounted Cash Flow (“DCF”) analysis…

In order to do a DCF analysis, first we need to project free cash flow for a period of time (say, five years).  Free cash flow equals EBIT less taxes plus D&A less capital expenditures less the change in working capital.  Note that this measure of free cash flow is unlevered or debt-free.  This is because it does not include interest and so is independent of debt and capital structure.

Next we need a way to predict the value of the company/assets for the years beyond the projection period (5 years).  This is known as the Terminal Value.  We can use one of two methods for calculating terminal value, either the Gordon Growth (also called Perpetuity Growth) method or the Terminal Multiple method.  To use the Gordon Growth method, we must choose an appropriate rate by which the company can grow forever.  This growth rate should be modest, for example, average long-term expected GDP growth or inflation.  To calculate terminal value we multiply the last year’s free cash flow (year 5) by 1 plus the chosen growth rate, and then divide by the discount rate less growth rate.

The second method, the Terminal Multiple method, is the one that is more often used in banking.  Here we take an operating metric for the last projected period (year 5) and multiply it by an appropriate valuation multiple.  This most common metric to use is EBITDA.  We typically select the appropriate EBITDA multiple by taking what we concluded for our comparable company analysis on a last twelve months (LTM) basis.

Now that we have our projections of free cash flows and terminal value, we need to “present value” these at the appropriate discount rate, also known as weighted average cost of capital (WACC).  For discussion of calculating the WACC, please read the next topic.   Finally, summing up the present value of the projected cash flows and the present value of the terminal value gives us the DCF value.  Note that because we used unlevered cash flows and WACC as our discount rate, the DCF value is a representation of Enterprise Value, not Equity Value.

How do you use the three main valuation methodologies to conclude value?

The best way to answer this question is to say that you calculate a valuation range for each of the three methodologies and then “triangulate” the three ranges to conclude a valuation range for the company or asset being valued.  You may also put more weight on one or two of the methodologies if you think that they give you a more accurate valuation.  For example, if you have good comps and good precedent transactions but have little faith in your projections, then you will likely rely more on the Comparable Company and Precedent Transaction analyses than on your DCF.

Of the three main valuation methodologies, which ones are likely to result in higher/lower value?

Firstly, the Precedent Transactions methodology is likely to give a higher valuation than the Comparable Company methodology.  This is because when companies are purchased, the target’s shareholders are typically paid a price that is higher than the target’s current stock price.  Technically speaking, the purchase price includes a “control premium.” Valuing companies based on M&A transactions (a control based valuation methodology) will include this control premium and therefore likely result in a higher valuation than a public market valuation (minority interest based valuation methodology).

The Discounted Cash Flow (DCF) analysis will also likely result in a higher valuation than the Comparable Company analysis because DCF is also a control based methodology and because most projections tend to be pretty optimistic.  Whether DCF will be higher than Precedent Transactions is debatable but is fair to say that DCF valuations tend to be more variable because the DCF is so sensitive to a multitude of inputs or assumptions.

Do you have any questions for me?

At the end of almost every interview, you will be asked if you have any questions.  This is your opportunity to learn more about the job and the firm.  By asking good questions, it is also a chance for you to open up the interview into more of a conversation.

However, even if you have little interest in the job, or if you’ve already had all of your questions answered by the other 8 people with whom you interviewed that day, you should always be prepared with 3-4 questions that you can ask an interviewer.  Here’s a few examples:

– How long have you been with the bank and how has your experience been?
– What do you like best about working here.  Worst?
– How do you compare working here with other banks at which you have worked?
– How is the dealflow?
– On what types of deals are you currently working?
– What kind of responsibility does the typical Analyst/Associate receive?
– Can you tell me about your training program?
– How do Analysts/Associates get staffed?

Walk me through your resume…

The majority of interviews will start out with you being asked to introduce yourself and your background or “walk me through your resume.”  There are two reasons for this.  First, the interviewer wants to hear your “story” and second, it gives the interviewer a chance to quickly read over your resume while you are talking.  More often than not, he or she hasn’t had the time to read it before you walked in the interview room.

The opportunity to walk through your resume is your chance to talk about your background and to make your case why you want to be an investment banker.  The most important thing is that you tell a story that makes sense to the interviewer and shows a progression leading up to you being a banker.  Even if the choices that you’ve made (schools, degrees, jobs) don’t follow a natural progression, you need to describe your experiences in a manner that flows convincingly.  Now, that isn’t to say that you necessarily need to find commonality in everything you’ve done, or “weave a thread” through each job, as long as you can demonstrate some sensible flow.  For example, highlight how each job enabled you to take more responsibility or required more finance knowledge than the one before it.  Even if you’ve switched careers or reversed directions, talk about what you’ve learned from those decisions that make you a good investment banking candidate.

Remember, this is your opportunity to make a first impression and perhaps your only opportunity to make your case as you see fit, so don’t underestimate the importance of this part of the interview.

Why do you want to be an investment banker?

As someone trying to break into the industry, this is the most important question that you can be asked.  And even if you are not asked this explicitly, other questions will likely try to elicit from you the same information.  Most people trying to get a banking job have the intellectual abilities to be a banker.  The question is do they have the attitude, the mindset, the willingness to sacrifice and the attention to detail.  There are a range of answers that will help you portray that you have both the ability and attitude to be a banker.  Here are a few:

– I’ve always enjoyed the aspects of my past jobs/classes in school that involve corporate finance.
– I like the fast paced environment of banking as I’ve always excelled in pressure situations.
– I am excited to be able to work on many projects at the same time and the fact that I’ll never be bored.
– I can’t wait to be in an environment where I’ll always be learning.
– Even though I know I’ll be playing a junior role for a number of years, I like that ultimately I will be able to help advise senior management of companies.
– I enjoy reading about M&A transactions in the newspaper.
– All of the bankers that I have met are really smart and I want the opportunity to work with them and learn from them (just make sure you say this one with a straight face)

Whatever responses you give, make sure that you can back them up with actual stories and details from your experiences.

What is an investment bank?

While there is no precise definition of an investment bank, generally speaking, an investment bank is an institution that advises and raises money for companies, governments and wealthy individuals.  The large investment banks (“bulge bracket”) that most of us are familiar with (e.g. Goldman Sachs, Morgan Stanley, Merrill Lynch, etc.) do many other things besides traditional “investment banking.”  For example, they have departments that sell and trade various securities (Sales and Trading/Capital Markets), provide research to institutions and individuals about such securities (Sell-Side Research), manage the investments of institutions (Asset Management), advise and manage the money of wealthy individuals, their families and estates (Private Client Services/Private Banking/Private Wealth Management), trade the bank’s own money (Proprietary Trading), and others.

On this site, when we speak about investment banking, we are speaking of the division within the investment bank that specifically advises companies (and occasionally governments) on (1) transactions, such as a merger, acquisition or leveraged buyout, and (2) capital raisings such as an initial public offering (IPOs) or debt issuance.

What is the general role of the Managing Director?

As the senior level banker, the role of the Managing Director (“MD”) is mostly one of client development.  The MD will likely be the one with the senior level company relationships (CEO, CFO, head of Corporate Development) and is typically responsible for spearheading marketing efforts.  On a live transaction, the MD often plays only a minor role, getting involved when difficulties arise in the deal and during high level negotiations.

What is the general role of the Director/Senior Vice President (SVP)?

Depending on the person (and sometimes the bank), the Director or SVP may either act more like a Managing Director (play a high level client development role) or more like the VP (play a project manager role).  Sometimes, the Director/SVP’s role will depend also on the specific situation and/or other dealteam members.  Ultimately, for Director/SVPs to be promoted to Managing Director, they will have to demonstrate that they can form client relationships and have the ability to market and to bring in new business.

What is the general role of the Vice President (VP)?

The primary role of the Vice President is to be the “project manager,” whether for marketing activities or on a transaction.  It is the VP that typically decides the structure (usually the Table of Contents or “TOC”) of the presentation (e.g. a pitchbook).  On live engagements, the VP is typically the banker “running the deal.”  The VP must manage the client, manage the senior bankers and manage the Analysts and Associates that are actually doing the work.  It is often at the VP level that bankers begin to form valuable relationships with clients.  Depending on the individual and also the bank, some VPs will start to play a role in client development and marketing.

What is the general role of the Associate?

Associates are typically either folks directly out of top MBA programs or Analysts that have been promoted.  Typically, bankers will be at the Associate level for three and a half years before they are promoted to Vice President.  Associates are also categorized into class years (i.e. First Years, Second Years and Third Years or say, Class of ’05, ’06 and ’07).

First and foremost, the Associate’s role is to check the work of the Analyst.  In reality however, “checking the work” sometimes takes the following form:

Analyst:  “I’m finished with the valuation”
Associate: “Is it right?”
Analyst:  “I think so”
Associate:  “Well, check it again and come back when you are SURE it is right”

In addition to overseeing the Analyst’s work, the Associate will often help write the text for the presentations as well as do much of the modeling work.  On live transactions, the Associate, while also playing an administrative role with the Analyst, will likely have significant ongoing interaction with the client and with the opposing investment bank (i.e. the buyer’s advisor if the Associate is on a sell-side deal).

What is the general role of the Analyst?

Analysts are typically men and women directly out of undergraduate institutions who join an investment bank for a two-year program.  Top performing Analysts are often offered the chance to stay for a third year, and the most successful Analysts can be promoted after three years to the Associate level.

As Analysts are the bottom rung on the investment banking ladder, they do the bulk of the work.  Broadly speaking there are three types of work that Analysts do:  presentations, analysis and administrative tasks.  Presentation work involves the putting together and writing of various PowerPoint presentations including marketing documents (“Pitches” or “Pitchbooks”) and documents for live transactions (for example, a presentation to management or the Board of Directors).   These PowerPoint presentations get printed in color and are bound with professional looking covers for meetings with clients and prospective clients.

The second main task of an analyst is analytical work.  Pretty much anything done in Excel is considered “analytical work.”  Examples include entering historic company data from public documents, analyzing such data for valuation purposes and projecting a company’s financial statements (“modeling”).  Administrative work, being the third type of task, involves things like scheduling and setting up conference calls and meetings, making travel arrangements and keeping a list of dealteam members up to date.  While on live transactions, Analysts often refer to themselves as “glorified admins,” given all of the administrative work for which they are responsible.

What is the typical hierarchy/ladder within an investment bank?

Just about all investment banks have the same strict hierarchy or ladder of professionals.  From junior to senior, the typical hierarchy is (1) Analyst, (2) Associate, (3) Vice President, (4) Senior Vice President/Director and (5) Managing Director.  Some banks deviate from this hierarchy a bit, for example having the Senior Vice President and Director be separate positions.  Other banks, especially non-U.S. banks, have the same hierarchy but with somewhat different names for each position (Associate Director for Associate, Director for Vice President and Executive Director for SVP).  One exception for U.S. banks is that Bear Stearns calls the Senior Vice President/Director position a Managing Director, and calls Managing Directors, Senior Managing Directors.  However, regardless of the names, the general job functions of each relative position tend to be consistent bank to bank.

What is a boutique bank?

Pretty much all banks that are not considered “bulge bracket” are referred to as being boutiques.  Boutiques, while ranging in size from a few professionals to hundreds or even thousands of professionals, can generally be categorized into three types:  (1) those that specialize in one or more products, (2) those that specialize in one or more industries and (3) those that specialize in small or mid-sized deals and small or mid-sized clients (generally less than $500 million).

There are boutiques that specialize in any number of the products that bulge bracket banks offer.  Boutiques known for M&A, for example, often compete with the bulge bracket banks for M&A transactions.  A few examples include Lazard, Greenhill, Evercore and Gleacher.  Other boutiques offer many different products but specialize in one or more industries.  Such boutiques often compete with the bulge bracket banks on the basis of their industry knowledge and expertise.  A few examples include Cowen & Co. (healthcare), Allen & Co. (media) and Thomas Weisel Partners (technology).  The third type of boutique, those that offer many products and cover many industries but compete only for “middle market” or smaller deals include Jefferies & Co., Piper Jaffray, Raymond James and Robert W. Baird.  Many of these middle market boutiques are regionally focused. Some boutiques, including several of the M&A focused banks, are considered to be as (or even more) prestigious as the bulge bracket banks.

What is a bulge bracket bank and who are they?

The term “bulge bracket” generally refers to the large investment banks that cover most or all industries and offer most or all of the various types of investment banking services.   While there is no official list of bulge bracket banks, most people would consider the following banks to be bulge bracket:
Bank of America
Barclays
Citigroup
Credit Suisse
Deutsche Bank
Goldman Sachs
JP Morgan
Morgan Stanley
UBS
Bear Stearns
Lehman Brothers
Merrill Lynch

Note: in this market environment, this list may change at a moment’s notice