Understanding Banking Flashcards
You’ve never worked in finance before. How much do you know about what bankers actually do?
I’m going to break this question down into three parts:
a. I understand that investment banks advise companies on transactions such as mergers and acquisitions, debt or equity issuance, and restructuring. Investment bankers act as agents, connecting companies with suitable buyers, sellers, or investors.
b. I’ve researched the day-to-day tasks of investment banking. I know the work involves creating presentations, marketing materials such as investment teasers and executive summaries, and conducting financial analysis. I am very familiar with the three financial statements and various types of financial models. Through the Wall Street Prep program, I’ve developed models such as DCF and LBO. Additionally, I completed an 8-week fellowship where we applied this knowledge to complete a project, equipping me well for the quantitative aspects of the job.
c. I have spoken with several industry professionals and have close friends who have completed summer analyst positions. I am fully aware of the workload, intensity, and discipline required in investment banking. I believe I will thrive in this environment because it offers extensive learning opportunities in a short amount of time, and with my thirst for knowledge, I am confident I will flourish.
Let’s say I’m working on an IPO for a client. Can you describe briefly what I would do?
If you were working on an IPO for a client, you would start by meeting with the client to gather basic information, including their financial details, industry overview, and customer information. Next, you would collaborate with other bankers and lawyers to draft the S-1 registration statement, which describes the company’s business and markets it to investors. You would revise this document based on SEC feedback until it is acceptable. Following this, you would embark on a “road show” to present the company to institutional investors and convince them to invest. Finally, after raising the necessary capital, the company would begin trading on an exchange.
How much do you know about the lifestyle in this industry? Do you know how many hours you’re going to work each week?
I’ve done my industry research and fully understand that it is going to be an 80-100 hour per week position. I’ve done similar hours when I was interning for The Zalaquett Group and participating in the Year Up program simultaneously. I was also involved in the BASTA fellowship which involved a few hours of work a week. That summer taught me how to manage my time and handle multiple tasks while under tight deadlines. I believe these experiences will enable me to quickly adapt to the demanding work hours of an investment banking environment.
Can you talk about a time when you had to work long hours and make sacrifices?
During my summer internship at The Zalaquett Group, I simultaneously participated in the Year Up program and committed full-time hours to both endeavors. I was also participating in the BASTA fellowship which required an additional couple of hours per week. As the summer concluded and my time at The Zalaquett Group came to a close, I transitioned to full-time school alongside the Year Up program, maintaining a demanding schedule that necessitated sacrificing leisure time, extracurricular activities, and hobbies to manage my responsibilities and workload effectively.
Can you tell me about the different product and industry groups at our bank?
I know J.P. Morgan provides a comprehensive range of products and services for its clients. In terms of product groups, J.P. Morgan offers Mergers & Acquisitions (M&A) advisory, debt capital raising, equity capital raising, and syndicated leveraged financing options. The bank’s industry groups span various sectors, including standout groups such as healthcare, financial institutions, and technology. For example, I recently followed a specific deal where J.P. Morgan advised on [INSERT SPECIFIC DEAL HERE]. This deal was particularly interesting because [MENTION WHY YOU FOUND IT INTERESTING].
1. Product groups
a. M&A
b. Debt capital markets
c. Equity capital markets
d. Leveraged finance
2. Industry groups
a. Consumer retail
b. Energy and infrastructure
c. Financial institutions
d. Healthcare
e. Industrials
f. Media and communications
g. Public sector
h. Commercial real estate
i. Technology
What’s in a pitch book?
It really depends on the bank, but a pitch book can include a variety of components tailored to the client’s needs. It often features the bank’s credentials, such as previous deals they have worked on, and the services they provide. It also includes current market trends and industry insights relevant to the client, testimonials from former clients, and a proposed strategy along with financial projections or models tailored to the client’s goals. Essentially, a pitch book is designed to persuade the client why they should choose that specific bank.
How do companies select the bankers they work with?
Banks typically form relationships with companies well before any deals need to be made. When a company is about to undertake a major financial transaction, it invites all the investment banks it has relationships with to pitch why they should be chosen. This process is known as a “bake-off.” Each bank aims to demonstrate why they are the best choice to handle the transaction. The company then evaluates the pitches and selects the bank it believes will provide the best service.
Walk me through the process of a typical sell-side M&A deal.
Of course, I’d love to.
1. Preparation: The first step involves meeting with the company to prepare initial marketing materials, such as the Executive Summary and the Offering Memorandum. These documents are used to attract potential buyers and provide an overview of the company.
2. Investment Teaser: The next step is to create an investment teaser and distribute it to potential buyers to generate initial interest. This document provides a brief summary of the investment opportunity without disclosing sensitive details.
3. Non-Disclosure Agreements (NDAs): Interested buyers who wish to receive more detailed information must sign NDAs to ensure confidentiality.
4. Detailed Information and Due Diligence: Once NDAs are signed, buyers receive more detailed information about the company. They are allowed to conduct due diligence to thoroughly evaluate the company’s financials, operations, and other critical aspects.
5. Indication of Interest (IOI): Buyers who are still interested submit an Indication of Interest, outlining their preliminary terms and interest in pursuing the acquisition further.
6. Management Meetings: Management meetings are scheduled with interested buyers to provide an in-depth look at the company. Buyers can ask questions, request additional information, and continue their due diligence.
7. Letter of Intent (LOI): Buyers who wish to proceed with the acquisition submit a Letter of Intent. This document outlines the proposed terms of the deal, including the purchase price and key conditions.
8. Negotiation and Purchase Agreement: After selecting the preferred buyer, the final purchase agreement is negotiated and drafted. This agreement includes all terms and conditions of the transaction. Once agreed upon, the deal is closed, completing the transaction.
Walk me through the process of a typical buy-side M&A deal.
Of course!
1. Define Strategy and Identify Targets: The process begins with defining the M&A strategy, including the types of companies or assets that align with the buyer’s strategic goals. Extensive research is conducted to identify and screen potential acquisition targets.
2. Selection and Filtering: After generating a list of potential targets, the buyer undergoes multiple cycles of selection and filtering with the help of their advisors. This involves assessing which targets best fit the strategic criteria and financial objectives.
3. Initial Outreach: The buyer initiates contact with the selected targets to gauge their interest in a potential sale. This may involve informal discussions or preliminary meetings to assess receptivity and gather initial information.
4. Detailed Due Diligence: For targets that show serious interest, the buyer conducts comprehensive due diligence. This involves a thorough examination of the target’s financials, operations, legal matters, and other critical aspects to determine the appropriate offer price and assess any risks.
5. Negotiate Terms and Sign Purchase Agreement: After completing due diligence, the buyer negotiates the price and terms of the acquisition with the seller. Once the Purchase Agreement is signed, the transaction is formally announced and the deal is closed.
6. Post-Merger Integration: After the deal closes, the buyer begins the post-merger integration process.
Walk me through a debt issuance deal.
While a debt issuance deal can involve many detailed steps, the main stages are fairly straightforward.
1. You begin by meeting with the client to understand their financing needs and objectives, as well as conducting due diligence to gather the necessary financial information.
2. Once you have the necessary information, you use a leveraged buyout (LBO) model to determine key elements such as the type of debt instrument, the appropriate level of leverage, and suitable covenants.
3. After this, you create the essential marketing materials, such as the investor memorandum, and look for potential debt investors to finance the deal.
4. The last step is to finalize the terms and pricing of the debt issuance based on investor feedback and execute the debt issuance.
How are Equity Capital Markets (ECM) and Debt Capital Markets (DCM) different from M&A or industry groups?
ECM and DCM are specialized groups within an investment bank that focus on raising capital through equity and debt markets, respectively. M&A groups focus on advising clients on strategic buy-side and sell-side transactions. Industry groups provide sector-specific expertise that supports a wide range of transactions. While in ECM and DCM you go more in-depth on certain parts of the deal process, you do not get as broad a view as you might in other groups.
What’s the difference between DCM and leveraged finance?
Both are similar in that they deal with debt financing, but they do have distinct focuses. DCM deals with a broad range of debt instruments and focuses on raising capital through various types of debt offerings, including investment-grade bonds and municipal bonds. Leveraged Finance, on the other hand, focuses on higher-risk debt involving higher leverage, such as high-yield bonds and leveraged loans, which can offer higher returns but come with greater risk. There is often overlap between the two groups, and some investment banks may combine their functions, while others may separate them or have just one group covering both areas.
Explain what a divestiture is.
A divestiture occurs when a company sells off or shuts down a specific division or operating unit. This decision can be driven by various factors, such as a desire to refocus on core operations, regulatory requirements for mergers, or the underperformance of the division. Divestitures can be more complex than typical M&A deals because they involve only one part of the company. The transaction structure and valuation processes are often more intricate due to the need to isolate and assess the value of the specific unit or asset being divested.
Imagine you want to draft a 1-slide company profile for an investor. What would you put there?
I would put the name of the company in the header, then divide the slide into 4 equal parts. The top left would be for the business description, headquarters, and key executives. The top right would have a stock chart and key historical and projected financial metrics and multiples. The bottom left would have descriptions of products and services and the bottom right would have key geographies with a color-coded map to make it look pretty.
Let’s say you’re hired as the financial advisor for a company. What value could you add for them if they ask you about their suggested growth / M&A strategy?
As an investment banker, my first step would be to understand the company’s goals and identify the best strategies to achieve them. Once these objectives are clear, I would add value in several ways. I would introduce the company to potential M&A targets and strategic partners that align with their growth objectives, providing insights into which companies might be most receptive to a merger or acquisition. By advising on expected valuation ranges and pricing strategies, I would ensure the company pays or receives a fair price. I would make sure the company is aware of the entire M&A process and assist in negotiating terms and conditions that work best for them, ensuring a favorable outcome.
