Understanding Banking Questions Flashcards
You haven’t worked in IB before, how much do you actually know about what bankers do?
Even though you haven’t actually worked in IB yet, you have friends who do and have done your research. Based on that, you know bankers advise companies on transactions - buying and selling other companies, and raising capital. They are agents that connect a company with the appropriate buyer, seller, or investor. The day to day work involves creating presentations, financial analysis, and marketing materials such as executive summaries.
Lets say I’m working on an IPO for a client. Can you describe briefly what I would do?
1st, you meet with the client and gather basic info, such as financial details, an industry overview, and who their customers are. Next you meet with other bankers and lawyers and draft the S-1 registration statement- which describes the company’s business and markets it to investors. You receive comments from the SEC and keep revising until acceptable. Then you spend a few weeks going on road shows to present the company to institutional investors. Afterwards the company begins trading on an exchange once you’ve raised the capital from investors.
How much do you know about the lifestyle of the industry? Do you know how many hours you will be working?
I do understand the lifestyle of the industry, and that I will be working 80-100 hours per week 6 or 7 days per week. While I have never worked that much, I have worked a 70 hour week before and I didn’t have a problem with it, in fact I relished the opportunity to show my work ethic, although I recognize that was only 1 week and not week after week.
Can you tell me about the different product and industry groups at our bank?
This one requires research. Typical product groups include M&A, leveraged finance, and restructuring. Equity capital markets and debt capital markets may also be considered product groups, but that’s debatable. Common industry groups include healthcare, retail, industrials, energy, natural resources, financial institutions, gaming, real estate, and technology, media and telecom (TMT). Not all groups structured in this way.
What’s in a pitch book?
Depends on the deal, but the most common structure is:
1) bank credentials
2) summary of a company’s options
3) valuation and appropriate financial models
4) potential acquisition targets or potential buyers
5) summary and key recommendations
How do companies typically select the bankers to work with?
Usually based on relationships. Banks establish relationships years before anything is needed, then the company pits different banks against eachother in a “bake-off” and the winner is selected.
Walk me through the process of a typical sell-side M&A deal
- Meet with company, create initial marketing materials like executive summary and offering memorandum (OM) and decide on potential buyers
- Send out executive summary to potential buyers to gauge interest
- Send NDAs to interested buyers along with more detailed info like the OM and respond to any due diligence requests
- Set a “bid deadline” and solicit indications of interest (IOIs) from buyers
- Select which buyers to advance to the next round
- Continue responding to info requests and setting up due diligence meetings between buyers and the company
- Set another bid deadline and pick the winner
- Negotiate terms of the purchase agreement with the winner and announce the deal
Walk me through the process of a typical buy-side M&A deal
- Spend a LOT of time upfront doing research on dozens or hundreds of potential acquisitions and go through multiple cycles of selection and filtering with the company you’re representing
- Narrow down the list based on their feedback and decide which ones to approach
- Conduct meetings and gauge receptivity of each seller
- As discussions become more serious, do more in-depth due diligence and figure out an offer price
- Negotiate the price and key terms of the purchase agreement and then announce the transaction
Walk me through a debt issuance deal
It is similar to the IPO process:
- Meet with the client and gather basic financial, industry and customer info
- Work closely with DCM/ leveraged finance to develop a debt financing or LBO model for the company and figure out what kind of leverage, coverage ratios, and covenants might be appropriate.
- Create an investor memorandum describing all of this
- Go out to potential debt investors and win commitments from them to finance the deal.
Difference from IPO: less banks involved and no SEC approval needed
How are equity capital markets (ECM) and debt capital markets (DCM) different from M and A or industry groups?
Both are more “market based”. In ECM/DCM most of your tasks are related to staying on top of the market, following current trends, and making recommendations to industry and product groups. You go more in-depth in certain parts of deals but don’t get the whole scope.
What’s the difference between DCM and leveraged finance?
They’re similar but leveraged finance is more modeling intensive and does more deal execution. DCM tracks the markets, follows trends and relevant data. There is some overlap between the two though.
Explain what a divestiture is.
It’s when a company decides to sell off a specific division rather than the entire company. Similar to sell-side M and A but a lot messier. Creating a standalone model is very important and the transaction structure and valuation are much more complex
Imagine you want to draft a 1- slide company profile for an investor. What would you put there?
Name of the company in the header, then split the slide into 4 parts. Top left for business description, headquarters, and key execs. Top right for stock chart, and key historical and projected financial metrics and multiples. Bottom left for descriptions of products and services. Bottom right for key geographies with a color coded map.
Lets say you’re hired as a financial advisor for a company. What value could you add for them if they ask you about their suggested growth/ M and A strategy?
At a high-level, ask them what their expansion goals are and how they can best achieve them. As an investment banker, you can provide value by making introductions to M and A targets and partners and then advise on negotiation strategy, what companies would be receptive, what price to expect and how to manage the process.
