Market & Economics Flashcards
Let’s say you had $10 million to invest in anything. What would you do with it?
Always ask for the investor’s goals first. Are they looking to have big capital gains over 30-40 years? Are they looking for tax-free retirement income? What types of assets interest them?
Based on the response, you can give an appropriate answer. So if they’re investing over 30-40 years and going for high capital gains, a well-diversified portfolio is probably best; if they are more concerned with tax-free income, maybe you should tell them about municipal bonds.
If you owned a small business and were approached by a larger company about an acquisition, how would you think about the offer, and how would you make a decision on what to do?
The key terms to consider would be:
- Price.
- Form of payment – cash, stock, or debt.
- Future plans for the company vis-à-vis your own plans.
Of course, there is much more to an M&A deal than this – you could list literally hundreds of different terms.
But those are the key points. To make a decision you’d have to weigh each one – there’s no “magical” way to decide. You might also point out that if something is particularly important to you – such as retaining a role in the company – then a difference of intentions there could be a “deal-breaker.”
We do most of our work with technology companies. Can you talk about a trend or company in the industry that has piqued your interest lately?
This is very common if you’re interviewing for any industry group – do some research beforehand on trends and recent M&A deals in the market. It’s easy to find this information for Technology and anything that sells to consumers, but it’s a bit harder for something like Chemicals.
Most interviewees make 3 mistakes with this question:
- They describe something that is not recent or relevant. Don’t talk about the emergence of the Internet – talk about how companies are shifting their software to the Internet.
- They don’t explain the “why” – they’re shifting to the web because it’s cheaper and lower maintenance for them.
- They don’t explain the impact on the market as a whole – such companies are growing very quickly while more traditional companies are either struggling or shifting to that model.
Let’s say you could start any type of business you wanted, and you had $1 million in initial funds. What would you do?
You’ll want to ask follow-up questions to see if the interviewer is looking for something more specific, because this one is wide open.
If no further direction is provided, you probably want to say that you’d think about some type of niche business with high margins that requires little startup capital ($1 million is not enough to build 10 factories) and ongoing maintenance – those make it harder to turn a profit and sell the business one day.
(This is one reason why some private equity investors focus on software companies).
It’s better to focus on a niche market because most broad, horizontal markets are already dominated by major companies (Microsoft, Goldman Sachs, Exxon Mobil, etc.).
You should also explain your reasoning on why this type of business would be attractive and how it could grow with minimal future investment.
Can you talk about a company you admire and what makes them attractive to you?
Do not use a brand-name or “hot” company. Saying Google, Apple, or Facebook, for example, would be bad.
Instead, go more obscure and pick a company no one knows so that they can tell you’ve done your research and so that they’re less likely to ask probing questions.
You don’t necessarily need to give financial details, but if the company is public and you can easily find the information, it definitely helps.
When you talk about what makes the firm attractive, emphasize qualities that investors would find appealing, such as a great and well-diversified customer base, a unique competitive advantage in the market or a high-margin business model. Don’t say that you like them because your new iPhone is awesome.
Let’s assume you are going to start a laundry machine business. How would you analyze whether it’s viable?
To assess whether it’s “viable,” you have to determine whether you can make a profit with the business. For a laundry machine operation, you’d start by looking at the location (the most important part of any retail business), estimate how many customers you could get, how frequently they do laundry and how much they pay each time to do their laundry. Those variables give you an idea of monthly / annual revenue.
On the expense side, the biggest cost would be the upfront construction and/or purchase of the building and the machines. You would probably need a loan for this unless you had a spare $500K in your bank account.
You would also have to take into account the cost of maintaining and servicing the machines, building maintenance, and hiring someone to collect cash, clean, and open/close the building each day.
Overall, location plays the biggest role in the success of this type of business – if you put your new company next to an apartment complex where everyone has laundry machines, you’re doomed from the beginning.
Incidentally, laundry machines happen to be very profitable businesses if run correctly mostly because they are not labor intensive and do not require huge investments after you’ve gotten started. So you could even use this as an example for the “What kind of business would you start with $1 million?” question.
Tell me about an M&A deal that interested you recently.
You want to say who the buyer and seller were – and include background information if they are not household names – as well as the price and the multiples (Purchase Price / Revenue, Purchase Price / EBITDA) if they are readily available.
Read the relevant Wall Street Journal article on it, and discuss the dynamics of the deal how it developed, if anyone else was interested, and what implications it has for the industry.
You don’t need to be an expert, but you do need to sound intelligent and know the basics. If they start asking for information you don’t know, just admit upfront that you don’t know whatever they’ve asked for.
Pitch me a stock.
You can refer to #5 in this section – the company you admire – because both these questions are quite similar. One difference is that if the question is “pitch me a stock,” you need to mention specific financial figures. Since the company is public, it shouldn’t be too hard to find those.
Even if you can’t get Revenue or EBITDA multiples, looking up its P/E multiple and saying whether it’s higher or lower than competitors is a step in the right direction.
The 2 most common mistakes:
- Failing to list specific financial figures.
- Saying how the company stacks up relative to its competition, and why its prospects are more favorable.
Structure your answer with the following 5 points in mind:
- Give the name and summarize what the company does.
- Give a brief overview of its financials to indicate its size and how profitable it is.
- State how it’s undervalued or more attractive than its rivals, due to any competitive advantages it has.
- Say how there is a long-term trend in its favor – it’s not just looking good in the past month.
- Talk about how the next 5-10 years will be really good for the company.
Can you explain the European debt crisis of 2010-2011?
In a nutshell: European countries had lent so much money to other European countries such as Greece, Spain, Portugal, Italy, and Ireland (the “PIIGS”) that the default risk for those countries rose to dangerously high levels.
In the case of Greece, the EU actually stepped in to bail out the country in exchange for budget cuts, higher taxes, and other measures aimed at restoring fiscal sanity in the country; a similar bailout then happened for Ireland and one is being negotiated for Portugal as I write this.
There was a lot of controversy over this because countries with stronger economies such as Germany – were reluctant to step in and sacrifice themselves to help countries with mismanaged economies.
This crisis was really just an extension of the subprime crisis from 2007 and the lending bubble that had existed before that – broke countries lending too much money to other broke countries, which in turn had lent too much money to other broke countries.
Some pointed to the social welfare programs and European countries living beyond their means as the root cause; others pointed out that with a single central bank in Europe, individual countries could not use monetary policy (lower interest rates) to counter a downturn.
What do you think about the banking reform legislation passed in the US and Europe in 2010?
First, note the main effects of this reform: in the US, prop trading, derivatives, and internal PE/HFs at banks were greatly limited and many banks have to divest divisions; new risk management and consumer protection provisions were also introduced.
In Europe there were a number of limitations on bonuses, the percent cash that bonuses can be paid in, and so on.
The best answer here is to say something like, “The reforms were well-intentioned but don’t really address the full causes of the financial crisis – for example, in the US nothing related to Fannie Mae or Freddie Mac was passed, so effectively legislators have completely ignored residential mortgages. Investment bankers’ bonuses had little to do with the crisis, so the reform seems even less effective in Europe – plus it’s vague and the implementation will be much different than what you see in writing.”
There is a more detailed discussion of the reform here:
http://www.mergersandinquisitions.com/2010-financial-reform/
