5 Resources Career services – Danielle Dagenais (Finance, Investment Banking, Investment Management) – Offers help with Resume & Cover Letter Job Opportunities Preparation for interviews and mock interviews Evaluation of internship and job offers McGill Investment Club workshops Prep Documents – Breaking into Wall Street – Mergers & Inquisitions – Vault guide – Queen’s Commerce Prep Guide – BCom Career Handbook Myself Use the resources available to you!
7 How to Make a Good Impression Dress for the job Be on time! Actually, be 10 min early! – If there are other candidates, receptionists, talk to them Keep your cell phone off at all times Offer a strong firm handshake and follow person to room with conviction Look in the eyes and sit fully erect Smile and use your hands to emphasize the points you are making – Do not fidget, scratch… Beware of excess familiarity but mirror your interviewer
8 Must Do’s in an Interview Ask for a business card at the end if not given When asked “do you have any questions”, absolutely ask some! – Prepare 3-4 questions you could ask to any interviewer that are not generic – Don’t ask about the salary – It is ok to ask about the next steps in the process Thank them twice at the end (for the opportunity and for taking their time) Again, send a follow-up/thank you note Make sure you can easily be reached after the interview and be ready for calls at random hours
10 Prepare for Fit Questions Your story Happy and sappy experiences Structures Practice – BCom Career Handbook Practice live 10
11 Walk me through your CV? Tell me about yourself? Why should I pick you? Tell me about your experience? What should I know about you? What would make you a good XYZ? What brings you here? 1.Be chronological 2.Show how each experience along the way led you in the direction of finance 3.State why you’re here interviewing today (important to land the question) 4.Aim for 2-3 minutes max 11
12 Key Experiences Happy: – What are your strengths ? – When did you demonstrate leadership? – Tell me about this part of your resume? – How do you handle conflict? Sappy: – What is your greatest weakness? Any other? – Tell me about something you would do differently? – What is your greatest failure? – Tell me about a time you failed to honour a commitment 12
13 Variants Variants of strengths and weaknesses question: -What kind of feedback did you receive in your internship last summer? -If your friends could describe you in 3 words, which ones would they choose? -If I talk to somebody who doesn’t like you, what would they say about you? -Why would we NOT hire you today? In 3 sentences why would we hire you? -1 st sentence: School -2 nd sentence: Previous relevant experience -3 rd sentence: Something that makes you unique
14 Most Fit Questions 14
15 Personal Questions Where do you see yourself in 5 years? -OK to say that you are not sure and that it is not prudent to make predictions now, especially given the fact that you have never tried the job -However, make sure to say that given what you know now, this is what you think you are best fitted for and where you can contribute the most as an individual What do you do for fun? -Bankers will spend hours/week with you in the office. They want to know if they can spend some time with you talking about other things than finance -In this case, the worst possible answer would be “I love reading the WSJ and researching stocks” -Don’t necessarily have to be very original, but show that there is more to you than good grades and a passion for finance
16 Personal Questions Why do you want to work in Toronto? -Again, given that finance has high employee turnover rates, it is important for banks to now that you are committed to stay with the office -This is especially true for regional offices like Montreal and Calgary from where a lot of people want to transfer to Toronto or New York Tell me something interesting about you that’s not listed on your resume -It’s a difficult question that can be surprising given that we usually put most of what is interesting about us on our resumes -Here, it is important to be somewhat original and show that there is something unique about you -It doesn’t have to be an interest, it can be a special story or event -Nothing illegal! Nothing related to sex, religion or politics.
17 With Practice 17
19 Employer Questions Why do you want to work for XXX? -Extremely important to be able to back up arguments! Everybody will say “You have an amazing culture”, but how do you show that this is true? -Typically, you need to talk to professionals or fellow students who have worked there to get a sense of what it’s like -Be able to talk about the bank’s strengths and recent important deals Where else are you interviewing? -If you’re interviewing for an IB position, say that you are interviewing only for IB at other banks too (shows that you are convinced this career is right for you) -Often times, banks will feel more rushed to give you an offer if they know you have attracted attention from competitors, but don’t be too cocky about it! -Don’t lie about it, they can check very easily
20 Employer Questions Why do you want to work in Montreal? It’s a regional office with a very small team -Working in a small office has a lot of advantages! -If you are good, people will give you more work and trust you with more challenging tasks earlier on -Senior people are much more approachable -You can work on a lot of different kinds of projects -More opportunities to attend client meetings and have direct exposure to the job Why do you want to work in metals and mining? There is hardly any activity these days -Highlight your long-term view and cyclical nature of this industry and capital markets -Once activity picks up, there will be a vacuum for human capital and more opportunities
21 Employer Questions What do you think is our biggest weakness / which of our competitors do you admire most? -Important to do your research beforehand! -Saying something like being “weaker in some geographic region” or “lacking experience in a given industry” is acceptable to say, but indicate how it doesn’t really matter because they are really strong in something else -Always talk with respect about competitors! Who is our CEO? -Absolutely crucial to know and makes you look very bad if you can’t answer
Understanding the Job
23 Understanding the Job Why do you want to do Investment Banking? -Everyone should have a personalized answer and his own reasons why they want to do it. You want to sound credible and passionate about this job -Worst possible answer here is to say “I’m not sure” or “for the money” -Common answers include: “I want to be pushed to my limits”, “I want to work with the smartest people” and “Investment Banking will teach me a lot”
24 Understanding the Job What will you actually be doing as an intern? -As an investment banker summer analyst, you cannot expect to be making models and other fancy stuff -It is important to recognize that you will spend most of your time working on pitch books and researching companies/industries -However, even if the tasks appear simple, you should also recognize that you will actually be exposed to a ton of very smart people and that you will learn a great amount about the industry What is a pitch book? -Sales tool of the investment bank. There are three main types: -Market Overview / Bank Introduction -Deal Pitches (M&A, IPO, debt issuance, etc.) -Management Presentations
25 Understanding the Job How much do you expect to work in a typical work week? -As an investment banking summer analyst, you will probably spend anywhere between 80 and 100 hours per week in the office -This is true for the analyst level, but the hours do get better as you progress towards associate and VP How do companies select the bankers they want to work with? -Everything in finance has to do with relationships, and this is especially true in investment banking -Typically, all the banks will pitch to the company in what is called a “beauty pageant contest” You are asked to summarize a company on one slide with four quadrants -This question tests your ability to summarize the most important facts about a company in a restricted space. Typically, you would probably include some valuation metrics, a company description, share performance chart and summary of management
30 Optimal Capital Structure The advantage of debt is that it gives tax shields to the company through the interest paid It would NOT be optimal for the firm to add on 100% debt as bankruptcy costs eventually become more important than the benefits derived from tax shields
31 Enterprise Value Enterprise Value =Market Capitalization +Debt +Minority Interest +Preferred Equity -Cash +Underfunded Pension +Capital and Operating Leases +Contingent Liabilities +Long-term Provisions +Tax Liabilities -Short-term Investments
32 Capital Structure Questions Why do you subtract cash from EV? Is it always accurate? Should you use the book value or market value of each item when calculating EV? Why do we look at both Enterprise Value and Equity Value? What’s the difference between Equity Value and Shareholder’s Equity? Should cost of equity be higher for a $1B or $100B company? Same question for WACC?
34 Traditional Valuation Methodologies 34 Value based on net present value of future cash flows (enterprise or equity cash flows) Discounted Cash Flow Value based upon applying observed financial metrics from comparable past transactions Precedent Transaction Analysis Value based upon applying observed current trading metrics of comparable, public companies Comparable Trading Analysis
Discounted Cash Flow
36 Discounted Cash Flow - Principles 36 Projected after-tax unlevered free cash flows Forecast period should be long enough so that business reaches a steady state by the end of period and incorporates a cycle (if a cyclical industry) Typically 5 to 10 years Terminal value Value of perpetual cash flows following end of forecast Terminal year should best mirror company's normalized future steady state Discount rate Weighted average cost of capital (“WACC”) Depends on capital structure (typically weighted average cost of equity and debt) WACC should reflect optimal and sustainable capital structure and underlying estimate of business risk “Value determined by calculating the present value of a stream of projected cash flows over a certain period and a terminal value” Enterprise Value PV of cumulative cash flows to all claim holders Unlevered Free Cash Flow “UFCF” + EBIT*(1-tax) + Depreciation & Amortization - Capital Expenditure - ∆ in Working Capital Discounted Rate Weighted Average Cost of Capital “WACC”
37 Discounted Cash Flow – Terminal Value 37 “Determining the terminal value involves the application of one of the following going concern approaches” Comparable Trading / Transaction Multiple Perpetual Growth Based upon current trading multiples ~ multiples of EBITDA Based upon multiples paid in comparable company transactions Industry or company considerations may make the current environment not comparable to the terminal year Implies a perpetual growth rate from the terminal point onward Single stage – constant growth perpetuity Unlevered Free Cash Flow * (1+ Perpetual Growth Rate) / (WACC – Perpetual Growth Rate) 2 stage – growth rate 1 for n years followed by growth rate 2 Ideal when company is in steady state Very sensitive to changes in inputs, especially perpetual growth rate assumptions Implies multiples as if the business was transacted in the terminal year PracticeConsiderations
38 Discount Cash Flow 38 StrengthsLimitations Based on well accepted corporate finance theory Flexibility to handle different patterns of cash inflows and outflows Recognizes time value of money Allows explicit consideration of project risks Focuses on future operations False perception attributed to sophisticated technique due to inherent subjectivity in forecast, terminal value and WACC Demands extensive set of forecast data and related due diligence Sensitive to long term growth assumptions Lacks external reference to reconcile valuation differences
Comparable Company Analysis
40 What is comparable company analysis? Provides a market-based valuation perspective on comparable publicly traded companies It is based on publicly available information; reflects what the many independent investors that comprise the market think Implied valuation does not reflect premium for control or any synergy potential Effectiveness of this valuation method depends on the comparability of the companies selected and metrics used to compare the companies Comparable Company Analysis (‘’Comps’’) Comparable trading analysis: Key Valuation Metrics / Multiples 40 Enterprise ValueEquity Value Revenues EBITDA Unlevered Cash Flow Earnings Levered Cash Flow Book Value Multiples based on economics that all stakeholders are entitled to (debtholders and shareholders) Multiples based on economics that only shareholders are entitled to
41 Comparable Trading Analysis 41 General Preference for Enterprise Value / EBITDA Multiples… Less affected and easier to interpret when there are capital structure differences Permits the use of statistics less affected by accounting policy variations More comprehensive – focuses on the business and not just the equity investor’s stake More flexible – can be modified to exclude non-core assets
42 Making a comps table 42 Select the right peer group Focus on the appropriate financial metric and ratios: each sector utilizes a standard set of ratios/metrics Make the necessary adjustments to ensure comparability (non-recurring items, accounting policies, M&A activity) Strategic Positioning Value DriversIllustrative Considerations Relative Risk Profile Relative Growth Size Profitability Capital Structure Others Growth Profile Market / Product leadership Client-base & supply chain Technology & patent Market presence, operating “leverage” Good proxy for risk Cost structure Margin analysis Consistency Financial leverage Quality of management Non-recurring items Different accounting practices Sales, EBITDA, earnings Consistency of growth / volatility Growth potential
43 Comparable Trading Analysis 43 StrengthsLimitations Objective comparison reflecting all publicly available information on the overall sector and the individual companies Growth / profitability expectations Sector trends Risk factors Often provides a reliable, useful first order approximation of value May be forward looking, and can also be backward looking Ease of understanding and application Requires fewer assumptions (e.g. Discount rates) Standard practice when valuing emerging companies, as forecasting cash flows is difficult Challenge of finding true “comparability” within peer groups Very difficult to adjust for differences in underlying business of comps Company specific issues may limit analysis and effectiveness (e.g. limited liquidity) Other external factors may impact share price performance Market sentiment, M&A activity in the sector and regulatory issues Analysis is focused on trailing date and on next 1-2 years, thus ignoring future performance and long-term issues Assumes market prices of comparable companies correctly reflect all available information
Precedent Transaction Analysis
45 Precedent Transactions Analysis 45 Relevance Considerations Size Information Comparability of precedent deals and the acquired companies Was the deal completed under comparable economic conditions Is the other consideration comparable (cash vs. stock)? Eliminate all deals that are too small or too large compared to the potential transaction Look at relative size of acquirer versus target Only include deals where sufficient / reliable information is available Private deals: if no public data is available, do not use in deal comparison Timing: the more recent the data, the more relevant the benchmark Auction / Interlopers: competition for the assets drives valuation up Valuation based upon applying observed financial and operating metrics from comparable transactions Provides useful information on valuation multiples that acq Provides indication of private market value Value of consideration that willing buyers and sellers are prepared to exchange in current economic environment Many considerations discussed in Comparable Trading Analysis section apply, however three specific nuances to this methodology must be addressed Type of Deal
46 Precedent Transactions Analysis 46 StrengthsLimitations Based on public information Reflects different premium at which transactions have been completed in the past (important to isolate impact of economic cycles) Overview of potential interlopers based on historical behaviour and their strategic approach to M&A Ease of understanding and calculation Commonly used yardstick / rule of thumb Relevance deteriorates over time Important not to miss context for the premium paid in different transactions to avoid drawing misleading conclusions. Financial versus strategic investor; Governance issues, commercial agreements, etc.; Asset competition driving up prices; and Distressed sales. Important to distinguish what kind of assets were traded in order to achieve like-for-like comparisons. Market conditions at the time of a transaction can have substantial influence on valuation (ie. Sector consolidation) Challenge of true “comparability”
48 DCF What is the purpose of a Discounted Cash Flow analysis? – Obtain intrinsic value of company by forecasting free cash flows 5 to 10 years into the future, discounting them and the terminal value to today
51 DCF Questions Why do we use 5 to 10 years for DCF projections? What are the two ways to calculate Terminal Value? – Terminal EV / EBITDA multiple (try to think where the company will be in 5-10 years) – Long-term growth (be careful with aggressive figures) How do you know if your DCF is too dependent on future assumptions? What are some other weaknesses of doing DCF’s? Does it make sense to value an oil and gas or mining company with a DCF? Best way to understand the mechanics of a DCF is to do one yourself!
52 Comparables Questions How to select comparables? Which multiples to use? LTM vs. NTM? What if a company has negative EBITDA? Why do we sometimes use the median as opposed to the mean? What are the cons of this valuation method?
53 Precedent Transactions Questions Precedent transactions can only be useful if the firm is considering being bought out Useful when firm is considering to sell a division Also relevant for undervalued firms Incorporates acquisition premium (usually 20-30%)
54 Valuation Questions Which of the three methods yield the highest/lowest valuations? How do you present valuation methodologies to a company? Why can’t you use an Equity Value / EBITDA multiple? Why do you actually use valuations? Why would someone want to use EV / EBIT multiples instead of EV / EBITDA?
56 Classic Machine Question On January 1 st, company A buys a new machine for $100, financed with $50 in cash and $50 in debt. It will be depreciated on a straight line basis for 10 years. It will also contribute to revenue in the coming fiscal year by an additional $10 and COGS of $5. How will this affect all three financial statements at year end on December 31 st ? Assume a tax rate of 40% and interest rate of 10%.
57 Other Accounting Questions If depreciation is a non-cash expense, how does it affect the cash balance? What happens to the financial statements if inventory goes up by $10 and it is financed with cash? Why is the income statement not affected by changes in inventory? When would a company collect cash from a customer and not record it as revenue? What is the difference between accounts receivable and deferred revenue?
59 Other Questions Are you more of a leader or a follower? What was the most difficult situation you faced as a leader? Can you talk about a team project that went badly? What is your career goal? If I was to give you an offer right now, would you take it? Recently, some analysts left early. Would you do the same if some opportunity came up? What is your favourite (finance) book? What was your favourite class? What is your personal beta? Tell me a joke
61 Most Common Mistakes 1.Fail to structure answers properly 2.Fail to use specific anecdotes to support arguments 3.Answers too generic every question is opportunity to differentiate yourself 4.Lack of preparation 5.Memorizing answers by heart
62 General Lessons Learned Be genuine Be relaxed Be smart about what you ask for – Montreal vs. Toronto vs. New York – Navigating full time offers Be patient – Don’t be afraid to leverage your first offer to get the one you really want Plan your networking – Don’t network too early – Make sure you have questions prepared Be honest about your preferences Make a checklist before each interview: CEO Name, strength, stock price, etc. Prepare 3 – 5 key experiences you can draw on to answer almost any behavioural question
63 Summer 2014 Student Experiences Jeremy Kertzer – RBC Capital Markets (Investment Banking) – Belal Yassine – RBC Capital Markets (Investment Banking) – Alyssa Obert – J.P. Morgan Chase (Investment Banking) – Colton Dick – CPP Investment Board (Private Equity) –
65 Contact Xavier Le Sieur – Bank of America, Merrill Lynch (Investment Banking) –