Author: Andrew

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.

What do Private Equity firms look for when hiring bankers?

First and foremost, private equity firms want Analysts that have had good deal experience.  That is, Analysts that worked on, and played significant roles on live transactions.  Private equity firms also want Analysts with excellent financial modeling, valuation and other technical skills.  In addition, its important to demonstrate a solid understanding of the business side of things.  In other words, what are the key drivers of a company’s growth, where are the risks, what types of costs might be excessive, etc.  Lastly, but just as important, PE shops want to hire Analysts who have a high level of maturity and have excellent communication skills.  Note that Analysts who move to private equity firms are generally granted the title of Associate.

What are my odds of getting into Private Equity, not having been an Analyst?

Unless your uncle is Henry Kravis, your odds are, unfortunately, pretty slim.  Even the large private equity firms are tiny relative to banks and employ few people.  While PE firms may hire laterally (that is, from other private equity firms), the only way for most people to enter the industry is out of a good investment banking analyst program (either pre or post-MBA) or at the very senior level (i.e. CEO).  For better or worse, that’s life.

What are some exit opportunities after being an Analyst?

Being an Analyst at an investment bank is a great entree into other areas of finance.  These days, many Analysts move into the world of Private Equity or Hedge Funds.  Others go straight into Business School (MBA Programs) or occasionally law school.  Another possibility is to move into a corporation, large or small, in a corporate development capacity.  Some Analysts leave finance altogether to start businesses.

How long should my cover letter be?

I’m a big fan of SHORT cover letters.  Basically, in one sentence, state the job you are applying for or how you heard about it.  Mention that you’ve enclosed/attached your resume.  Then in not more than 2-3 sentences mention some relevant facts about yourself.  Lastly, thank them and tell them how they can reach you or that you will follow up.  That’s it.

Is it true that as an investment banker, I get free dinner every night?

Yes, at most banks if you work past 8:00 or 9:00 at night (though you don’t necessarily have to wait until that time to eat), you can have dinner delivered to you on the bank’s tab (generally up to about $35).  Since Analysts generally have no lives, and expect to be working far past 8:00, they will often congregate together in a conference room to eat and relax for a little while.  Associates, more often eat at their desks as they may still have the hopes of getting home before their loved ones or friends are asleep.  VP’s and above are usually gone by then but it’s always funny when a late working and hungry Managing Director has to ask an Analyst to order them food because they don’t know how to use Seamless Web (the standard food ordering website subscribed to by most banks in New York).

Of course, the consequence of having $35 each night to order dinner is that many Analysts gain a lot of weight.  After all, if the company’s paying, let’s max out and add that Tiramisu to my order.  More enterprising Analysts, stealthily use some of their daily $35 to pay for groceries for their apartments.

What if I’m asked a technical question to which I don’t know the answer? How should I handle that?

If you have no idea of the answer, say you don’t know or you don’t remember or you’d have to think about it.  Technical questions are not just posed to see if you know things but also to see how you handle stress.  You’ll generally score more points in an interview if you calmly, coolly and matter of factly, state that you don’t the answer than you will fumbling around for ten minutes trying to B/S your way through it.  And if you know part of the answer, state the part you know, what you don’t know and move on.

What are your weaknesses?

Even more so than the question about strengths, it’s unusual to be asked about your weaknesses.  There is no good way to answer this question so the best advice is to try to move on as quickly as possible.  Obviously you don’t want mention real weaknesses (I’m dumb, I’m lazy, I require 12 hours of sleep a night).  You also don’t want to say things that make you look silly like “I work too hard” and you can’t say you don’t have any weaknesses because you’ll come off as too arrogant.  So try to think of something relatively innocuous that also might highlight a strength.  For example, “I can get occasionally get impatient with peers/coworkers who don’t have the same abilities as me or don’t show the same commitment that I do.”  Or, “Sometimes I can be so focused with or driven by the task on hand that I wind up tuning out other aspects of my life.”  You can also usually say something like, “I think my skills are very good compared with my peers but, of course, I’m new to investment banking, and I obviously need more experience.  Experience which I’m confident I’ll get working for you…”

Occasionally, a really difficult interviewer will ask you for 3 weaknesses, knowing that your first 2 will be bullshit answers.  To which I would respond that my major weakness is, “I’m really bad at bullshit interview questions.”

What are your strengths?

This is one of those generic interview questions that you are less likely to get in banking interviews.  If you do get this question, this is one of your best opportunities to make your case that you’d be a good banker.  Some of the skills that you probably want to highlight include your analytical/quantitative skills (especially for an Analyst), communication skills (especially for an Associate), ability to learn quickly, detail orientedness and ability to work really hard.  You should definitely be prepared to back up what you state as your strengths, using one or two concrete examples from past jobs or school.

What is goodwill and how is it calculated?

Goodwill, a type of intangible asset, is created in an acquisition and reflects the value (from an accounting standpoint) of a company that is not attributed to its other assets and liabilities.  Goodwill is calculated by subtracting the target’s book value (written up to fair market value) from the equity purchase price paid for the company.  This equation is sometimes referred to as the “excess purchase price.”  Accounting rules state that goodwill no longer should be amortized each period, but must be tested once per year for impairment.  Absent impairment, goodwill can remain on a company’s balance sheet indefinitely.

If a company with a low P/E acquires a company with a high P/E in an all stock deal, will the deal likely be accretive or dilutive?

Other things being equal, if the Price to Earnings ratio (P/E) of the acquiring company is lower than the P/E of the target, then the deal will be dilutive to the acquiror’s Earnings Per Share (EPS).  This is because the acquiror has to pay more for each dollar of earnings than the market values its own earnings.  Hence, the acquiror will have to issue proportionally more shares in the transaction.  Mechanically, proforma earnings, which equals the acquiror’s earnings plus the target’s earnings (the numerator in EPS) will increase less than the proforma share count (the denominator), causing EPS to decline.

What factors can lead to the dilution of EPS in an acquisition?

A number of factors can cause an acquisition to be dilutive to the acquiror’s earnings per share (EPS), including: (1) the target has negative net income, (2) the target’s Price/Earnings ratio is greater than the acquiror’s, (3) the transaction creates a significant amount of intangible assets that must be amortized going forward, (4) increased interest expense due to new debt used to finance the transaction, (5) decreased interest income due to less cash on the balance sheet if cash is used to finance the transaction and (6) low or negative synergies.

Walk me through an accretion/dilution analysis…

The purpose of an accretion/dilution analysis (sometimes also referred to as a quick-and-dirty merger analysis) is to project the impact of an acquisition to the acquiror’s Earnings Per Share (EPS) and compare how the new EPS (“proforma EPS”) compares to what the company’s EPS would have been had it not executed the transaction.

In order to do the accretion/dilution analysis, we need to project the combined company’s net income (“proforma net income”) and the combined company’s new share count.  The proforma net income will be the sum of the buyer’s and target’s projected net income plus/minus certain transaction adjustments.  Such adjustments to proforma net income (on a post-tax basis) include synergies (positive or negative), increased interest expense (if debt is used to finance the purchase), decreased interest income (if cash is used to finance the purchase) and any new intangible asset amortization resulting from the transaction.

The proforma share count reflects the acquiror’s share count plus the number of shares to be created and used to finance the purchase (in a stock deal).  Dividing proforma net income by proforma shares gives us proforma EPS which we can then compare to the acquiror’s original EPS to see if the transaction results in an increase to EPS (accretion) or a decline in EPS (dilution).  Note also that we typically will perform this analysis using 1-year and 2-year projected net income and also sometimes last twelve months (LTM) proforma net income.

What are the different types of groups within an investment bank?

Broadly speaking, there are two types of groups within a typical investment bank (or investment banking division):  product groups and industry groups (also called sector groups or domains).  The three most well known product groups are mergers and acquisitions (M&A), leveraged finance (lev fin) and restructuring.    Bankers in product groups have product knowledge and tend to execute transactions (respectively, M&A transactions, leveraged buyouts (LBO’s) and restructuring transactions/bankruptcies).

Bankers in industry groups cover specific industries and tend to do more marketing activity (pitching).  Industry bankers tend also to have more of the relationships with companies’ senior management than do product bankers (though some senior product bankers have excellent relationships as well).  Examples of common industry groups include FIG (Financial Institutions Group), Healthcare, Consumer/Retail, Industrials, Energy and Utilities, Natural Resources, TMT (Telecom, Media and Technology), Gaming and Lodging and Real Estate.  Often subgroups exist within the broader group.  For example, a Healthcare group may be segregated into biotechnology, medical devices, managed care, pharma, etc.  Though not covering a specific industry, one other group that falls under the category of “industry” groups is Financial Sponsors.  Bankers in a Financial Sponsors group cover (have relationships with and market their services to) private equity firms.

How do we use the Treasury Stock Method to calculate diluted shares?

To use the Treasury Stock Method, we first need a tally of the company’s issued stock options and weighted average exercise prices.  We get this information from the company’s most recent 10K.  If our calculation will be used for a control based valuation methodology (i.e. precedent transactions) or M&A analysis, we will use all of the options outstanding.  If our calculation is for a minority interest based valuation methodology (i.e. comparable companies) we will use only options exercisable.  Note that options exercisable are options that have vested while options outstanding takes into account both options that have vested and that have not yet vested.

Once we have this option information, we subtract the exercise price of the options from the current share price (or per share purchase price for an M&A analysis), divide by the share price (or purchase price) and multiply by the number of options outstanding.  We repeat this calculation for each subset of options reported in the 10K (usually companies will report several line items of options categorized by exercise price).  Aggregating the calculations gives us the amount of diluted shares.  If the exercise price of an option is greater than the share price (or purchase price) then the options are out-of-the-money and have no dilutive effect.

The concept of the treasury stock method is that when employees exercise options, the company has to issue the appropriate number of new shares but also receives the exercise price of the options in cash.  Implicitly, the company can “use” this cash to offset the cost of issuing new shares.  This is why the diluted effect of exercising one option is not one full share of dilution, but a fraction of a share equal to what the company does NOT receive in cash divided by the share price.

I’ve heard that bankers are arrogant. Should I be arrogant in an interview to show that I will fit in?

It is certainly true that many bankers have arrogant tendencies.  But no, you should never be arrogant in an interview.  Confident yes, but arrogant no.  You obviously want to give the impression that you’re smart, qualified, hard working, etc.  And it’s okay to confidently and explicitly talk about those traits in an interview, as long as you can back them up and as long as you do it in a respectful but not arrogant manner (regardless of the demeanor of the interviewer).