How to Be an Investment Banker

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3 How to Be an Investment Banker

4 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisers. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our web site at

5 How to Be an Investment Banker Recruiting, Interviewing, and Landing the Job Andrew Gutmann

6 Cover Design: Leiva-Sposato Cover Images: columns, Fuse / Getty Images; financial chart, Danil Melekhin / Getty Images Copyright 2013 by Andrew Gutmann. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) , fax (978) , or on the Web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) , fax (201) , or online at Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) , outside the United States at (317) or fax (317) Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-ondemand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at booksupport.wiley.com. For more information about Wiley products, visit Library of Congress Cataloging-in-Publication Data: Gutmann, Andrew. How to be an investment banker : recruiting, interviewing, and landing the job / Andrew Gutmann. pages cm. (Wiley finance series) Includes bibliographical references and index. ISBN (cloth) ISBN ISBN ISBN Investment banking Vocational guidance. 2. Investment bankers Employment. I. Title. HG4534.G dc Printed in the United States of America

7 To my wife, Julie, who reminds me daily that she thought she married an investment banker.

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9 Contents Introduction Overview of the Book Who Is the Book For? Structure of the Book Acknowledgments xi xii xiii xiii xix Chapter 1 Introduction to Investment Banking 1 Overview of an Investment Bank 2 Overview of Investment Banking 7 The Life of an Investment Banker 22 Frequently Asked Questions 47 Chapter 2 Accounting Overview 55 Introduction to Accounting 56 The Income Statement 58 The Balance Sheet 69 The Statement of Cash Flows 83 Integrating the Three Financial Statements 88 End-of-Chapter Questions 99 Chapter 3 Finance Overview 101 The Financial System 102 Principles of Finance 107 Introduction to Corporate Finance 114 Valuing Securities 130 End-of-Chapter Questions 145 vii

10 viii Contents Chapter 4 Financial Statement Analysis 147 Sources of Financial Information 148 Financial Statement Analysis 158 Analyzing Different Time Periods 169 Normalizing the Financials 174 End-of-Chapter Questions 177 Chapter 5 Valuation 179 Introduction to Valuation 180 Comparable Company Methodology 194 Precedent Transaction Methodology 210 Discounted Cash Flow (DCF) Analysis 219 Valuation Conclusions 238 End-of-Chapter Questions 245 Chapter 6 Financial Modeling 247 Overview of an Integrated Cash Flow Model 248 Building an Integrated Cash Flow Model 262 End-of-Chapter Questions 292 Chapter 7 Mergers and Acquisitions 293 M&A Overview 293 The M&A Process 302 M&A Analysis 310 End-of-Chapter Questions 322 Chapter 8 Leveraged Buyouts 323 Overview of LBOs 324 LBO Modeling 331 LBO Conclusions: Do We Do the Deal? 347 End-of-Chapter Questions 348 Chapter 9 Recruiting, Interviewing, and Landing the Job 349 What Are Investment Banks Looking For? 350 The Recruiting Process 354

11 Contents ix Resumes and Cover Letters 360 Networking and Informational Interviews 368 Interviewing 375 Receiving an Offer and Being a Banker 398 Conclusions 403 Further Reading 405 About the Author 407 About the Website 409 Index 411

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13 Introduction Some years ago, in the fall of my second year of business school, I had a final round interview scheduled with a boutique investment bank. The night before the interviews all of the candidates from different schools were invited to dinner so that the firm could get to know us a little better. The dinner was held in a private room of a nice Italian restaurant in midtown Manhattan, and we were all assigned to a table. Each table consisted of six people, evenly split between bankers and students. Toward the beginning of the evening, one of the other candidates at my table asked me if I was ready for the next day s interviews. Sure, I said, trying not to sound arrogant. After all, I considered myself to be a pretty good interviewer. What resources did you use to prepare for the technical interview? my friendly tablemate followed up with. Huh? Don t you know that one of the interviews tomorrow will be solely technicals? This firm is known for its tough technical interviews. To be honest, I don t recall my response. But I do remember thinking that, well, at least I got a nice dinner out of the deal. My interviews started at 9:00 am the next day. The first one was a fit interview. It went fine. Piece of cake. The next one was the technical. I recall walking into a small office and seeing this little guy sitting with his feet up on his desk, holding a sheet of paper, and trying his best to look intimidating. He looked pretty young. I figured he must have been an analyst, though I found out later he was a vice president. Anyway, one at a time, reading from the piece of paper in his hand, he started firing away with technical questions. A question about calculating enterprise value. Something about the inputs to a Black Scholes model. Something else about discounting net operating losses. I tried to remember what I could from the accounting and finance classes I had taken during my first semester of business school (not much). Being hung over from the previous night didn t help either. Finally it was over. I m not sure if he reached the end of his questions, or if he just felt sorry for me and stopped. I went on with the rest of my interviews that morning. They were easy. They re usually easy when you feel like you have nothing to lose. Lucky for xi

14 xii Introduction me, it worked out. I wound up getting an offer from that firm, and I worked there as an associate for about three years. Needless to say, I was somewhat unprepared for the investment banking recruiting process. My goal in writing this book is to make sure you won t be. Overview of the Book Competition for investment banking positions is fierce. To be successful in the recruiting process and to become an investment banker requires three types of knowledge. First, you need to be knowledgeable about the industry. You need to understand what it is that investment banks do and what it is that investment bankers do. If you come across as naive about investment banking, you have no shot. Second, you need to possess a basic understanding of accounting and finance; have the core technical skills of financial statement analysis, valuation, and financial modeling; and be able to converse about mergers and acquisitions and leveraged buyouts. As part of the investment banking interview process, you will be evaluated on how well you answer technical interview questions. While you need to understand the theory and principles that underlie the work of a banker, what you need to know goes far beyond what is typically taught in school. You need to know how investment bankers apply this theory and these principles in order to advise clients and to execute transactions. That is, you need to understand how things are done in practice, in the real world, in the world of investment bankers. Third, you need to be prepared for the recruiting and interview process itself. You need to understand what banks are looking for and how you will be evaluated. You need to know how to differentiate your resume and how to tell your story in a way that will make you an attractive candidate. And you need to know how to network your way into interviews and how to turn those interviews into job offers. The purpose of this book is to introduce you to the basic technical skills required in investment banking and to help prepare you for the investment banking recruiting and interviewing process. We will start off with an indepth discussion of the field of investment banking, and the work and lifestyle of an investment banker. The bulk of the book focuses on teaching you the technical skills you need to know, starting with the very foundations of accounting and finance and up through the advanced skills of valuation, financial modeling, mergers and acquisitions (M&A), and leveraged buyouts (LBOs). Understand these concepts and you will be able to answer nearly any technical interview question you will encounter. Finally, we will wrap up the book with an extensive overview of the investment banking recruiting and

15 Introduction xiii interviewing process, with an emphasis on the kind of very tactical advice that will help you to succeed and to become an investment banker. Who Is the Book For? First and foremost, this book is meant for undergraduate and MBA students and recent graduates interested in recruiting for investment banking analyst or associate positions. Because we start with the first principles of accounting and finance, you should be able to learn from this book even if you are a liberal arts, science, or engineering major, and have never before taken an accounting or finance class. However, business major and MBA students will find that we go far beyond what is typically taught in school and should find even the first few chapters helpful in preparing for technical interview questions. This book is also intended to be a guide for anyone else looking to learn about investment banking and to brush up on the fundamental knowledge and skills used in the industry. This includes new and current bankers at any level. Different from many other available resources, we will actually explain the concepts behind the work that you do. So if you have ever wondered why certain formulas are the way they are, or why you do a particular analysis in Excel, this book will help you be a better banker. Finally, while our core focus is investment banking, nearly everything we will discuss is applicable to other areas of finance, including equity research, asset management, hedge funds, private equity, corporate development, and corporate banking. So if you are recruiting for one of these areas, or are already a professional in one of these fields, this book is for you, too. Structure of the Book The book is structured as follows. Chapter 1 will provide an introduction to investment banking, and a general overview of the work and lifestyle of an investment banker. Then we get into the heart of the book, which is the technical content. Chapters 2 4 cover the fundamentals of accounting, finance, and financial statement analysis, which together from the foundation for everything that a banker does. Chapters 5 and 6 focus on the two most important core technical skills of investment bankers: valuation and financial modeling. Chapters 7 and 8 take those technical skills a step further and discuss the more advanced topics of mergers and acquisitions and leveraged buyouts. Finally, we conclude the book with Chapter 9, which contains a detailed account of the recruiting and interviewing process.