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Thanks for posting this.

I'm still in the middle of technical prepping, so I had to do these with pen and paper. Is this normal/expected/acceptable for an Associate interview? I'm usually pretty good at mental math but accretion/dilution thinking is still new for me.

1. Accretive for A. Say A is 8 shares of \$10 (earnings \$8), B is 10 shares of \$8 (earnings \$10). A issues 8 more shares, now has 16 shares of \$10 with earnings of \$18. P/E has gone from \$10 to 8.8/8.9
2. Accretive for A. You're borrowing \$80 at 5%, or a cost of \$4 to add earnings of \$10. It would break even at 12.5% (1/(P/E of B)).
3. It should be less than 9; you can't just average the P/Es, think about it as averaging the earnings and what that would mean if the market cap was the same (market cap of \$80 and earnings of \$9 = P/E of less (This is only a guess after having done the math; but I think there's some truth in not being able to add/average P/Es, even of same-size companies).
4. It will be less Accretive because the company that's making it Accretive has a lower weight.

Say A has earnings of \$16 and is \$16 shares of 10; they have to issue 8 more shares to make the purchase and now have a market cap of \$240 and earnings of \$26; \$234 would be P/E of 9 but it's higher, so ~9.25

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Pen and paper is ok for Level 3 and 4. Would be expected to do Level 1 and 2 without.

1. Correct.
2. Also correct.
3. I would relax your boundaries and say that it should be between 8 and 10. As per your answer to Level 1, it is slightly lower than 9. Basically, if B is negligible (ie doesn't move the needle), you would expect the PE not to move (be closer to 10). If the transaction is huge, the PF entity would be closer to the target so closer to 8. Close to 9 is not a bad guess, especially if they are the same size. This is a good lead in for the Level 4 question.

The first mistake I get is people averaging PEs which is NOT right. Try to find the right framework to get to the actual % accretion (Part B of this question). Once you have that, figure out the PF PE and see where you land.

1. Also correct. But need the actual exact % accretion.

General comment:
You've talked to me about aggregates (at the corporate level, net income), but what is the effect at the shareholder level (EPS)? What are the exact % accretion? That's why you could be allowed paper for this question. Could also technically do without if you can keep the numbers in your head.

The only way to get the exact number correctly is to use a framework to structure your thoughts.

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Thanks, my first thought was between 8 and 10 for #3 but I thought you wanted something more specific.

For #4, EPS was \$1 pre-acquisition in my example (16 shares, \$16 earnings), and is ~\$1.083 post-acquisiton (\$26 earnings, 24 shares), so it's 8.3% Accretive (or 1/12).

For #3, EPS was \$1 pre-acquisition and \$1.12 post-acquisiton, so it's 12.5% Accretive (1/8).

I'm not sure if I understand what you mean by framework; I had on my paper an easy way to look at the pre/post acquisition market cap/# of shares and earnings, which made it pretty easy to go from #3 to #4.

A good reminder that I need to remember to answer all parts of a question...

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Thank you for the questions - very helpful

I have a basic question regarding the financing impact on the P/E ratio
For level 2 question, a company issues debt to acquire company B. It is expected to pay interest at the end of the year and not right away. That said, should we deduct interest expense when calculating proforma earnings?

When calculating P/E ratio, do we usually calculate the P/E(fwd 12mnths) or P/E(current Earnings)?

Thank you

.

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I say framework because the numbers can always change or you can be given different pieces of information (I could have nailed down A's market cap and Net income instead of just giving you PE and letting you make up your own numbers).

For instance, what if I had said A had Market Cap of \$1000 and Net Income of \$100? Or A is trading at \$10, EPS of \$1 and there are 100 shares? Or what if I didn't give you the # of shares? Notice that all the information is consistent with the information I provided in the question.

The key point is that in a short period of time in an interview, if someone throws a few small twists, you should still be able to handle the math.

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Makes sense, I think the way I did it was still pretty adaptable, but hard to explain more without pictures of my work.

Thank you so much for providing the questions and such detailed feedback on my answers.

For level 3 and 4 don't you need the debt to equity ratios for part B of both?

Not really. If you make a simplifying assumption that you can assume the debt that is raised is either rolled or re-financed at a similar rate.

.

Best thread this month. Level 1&2 simply no need for math. Level 3, I knew average was not the way to go and considering the weight was more understandable so level 3 so not that hard. Level 4 b got me twisted. Can you pls explain with an example. Thanks

Here is my solution / framework for Level 3. You can use it to solve Level 4.

Step 1 - Describe Company A's Shares
No debt <-- you can also assume debt rolls, or is refinanced at a similar rate (keep it simple)
Price = \$10
EPS(A) = \$1 (by definition - PE of 10)
Assume 100 shares

Step 2 - Describe Company A as a Whole
Mkt Cap = \$1000
Net Income = \$100

Step 3 - Describe Company B as a whole
B's Standalone Share Stats don't matter as equity / cap structure gets wiped in acquisition.

B's Aggregate (Company) Stats:
Mkt Cap A = Mkt Cap B = \$1000 (This is given. For Level 4 - you just make this half instead. You can adjust for any ratio / size)
Shares of A issued to B = \$1000/ \$10 = 100
Net Income = \$125 (Mkt Cap of \$1000 divided by PE of 8)

Step 4 - Describe PF Company A as a whole
PF Mkt Cap A = Mkt Cap A + Mkt Cap B = \$2000
PF Shares of A = 200
PF Net Income A = Net Income A + Net Income B = 225

Step 5 - Work back down to PF A Shares
Price per share = \$10
EPS(PF A) = \$225/200 = \$1.125

\$ Accretion / share = EPS(PF A) - EPS(A) = \$1.125 - \$1 = \$0.125
% Accretion / share = EPS(PF A) / EPS(A) - 1 = (\$1.125 / \$1) - 1 = 12.5%

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What got me confused is when you said assume the same EV in level 3. I began to think about various combination of both company A&B capital structure which made it difficult until I saw that you assumed equity value are the same, hence the assumption of no debt you made at the beginning.

I was going mad because I have studied the crap out of technical and experienced some deals .It would be very depressing to miss or have no idea about the question.

Thanks for detailed example.

NA

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Maybe I am reading this wrong, but two scenarios.
Scenario 1
Co. A Equity 10\$
Earnings 1\$
10 Shares
1\$ per share
EPS of .10\$
P/E of 10

Co. B Equity 8\$ Debt 2\$ or Debt/Equity of .25
Earnings 1\$
8 Shares
1\$ per share
EPS of .125
P/E of 8

-Both have same Enterprise Value
Co A aquires B
Equity of 18\$ Debt of 2\$
Earnings of 2
18 Shares
1\$ Per Share
EPS of .1111\$
PE is 18/2 or 9
Accretion of (.1111-.1)/.1 = 11%

Scenario 2
Co. A Equity 10\$
Earnings 1\$
10 Shares
1\$ per share
EPS of .1
P/E of 10

Co. B Equity 4\$ Debt 6\$ or Debt/Equity of 1.5
Earnings .5\$
4 Shares
1\$ Per Share
EPS of .125
P/E of 8

-Both companies have same Enterprise Value
Co A acquires B
Equity of 14\$ Debt of 6\$
Earnings of 1.5\$
14 Shares
1\$ Per Share
EPS of .10714
PE is 14/1.5 or 9.3333
Accretion of (.10714-.1)/.1 = 7.14%

It seems that you need the D/E or maybe I just misread your instructions or maybe I just haven't learned anything from the CFA institute.

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No, you are right. I normally simplify by saying market cap is the same or make the simplifying assumption that they have the same "optimal capital structure" (that the companies are otherwise identical). I said EV was the same in this case. So you are right. Which is a good point that you need to make assumptions about the debt to equity mix.

someone they can stand to be around 80 hours a week

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I think I read somewhere that Blackstone was going to double the size of its M&A group in the next few years...maybe hiring will be more lenient.

"We are lawyers! We sue people! Occasionally, we get aggressive and garnish wages, but WE DO NOT ABDUCT!" -Boston Legal-

Thank you for posting this. Great conceptual questions.

bump.

any thought on the above?

M&A interviewers are in general more technical and demanding than other areas of the firm.

On the style and mood of the interviewer. If your background is quantitative, and your prior work experience and educational background is solid, your interviewers will likely focus more on fit, how polished are you, and do you know what you are getting into, versus technical skills they would expect to teach you on the job.

thanks guys.

I'm not worried about fit too much. however, i might end up with a group that advises on different sectors than what i'm used to (general M&A vs. Real Estate Private Equity, which is what i do).

any input on the kind of technical aspects that they might as about?

SF? NY?

does it really matter?

No, it doesnt matter, but its probably sf anyways cause its tech.

I interviewed at several boutiques in sf and wasnt even asked a single technical question in any round at any bank. what a ridiculous thing to ask for.

its actually in San Diego, not sure why they asked for something this technical...

It's not that ridiculous. It lets them know

• how your finance background is
• how your communication/presentation skills are when you explain it
• how creative you are, sloppy, etc
• how you deal with ambiguity

you get the idea

are you going to take the job? had a similar interview last year, but the job had the M/A title and company talked about how much bonuses analyst can make 100K+ but at the end of the day it was pretty much cold calling. good luck and i would love to hear how it turned out!

Round 2 interviews coming up this week. I will let you know how it goes.

so did u come up with the answer to your post to get to round 2?

Update: so I did R2 today and it went really well.

I put my answers in a PowerPoint which scored points!

I had one slide on the M&A company
1 slide as an overview of the target company
1 slide analyzing financials
1 slide on valuation

He asked for referrals and will call me within a week or so....

Any questions I have to ask?

Anything I should look out for? (good or bad)

keep applying to places just in case this thing doesn't work out.

Btw, another piece of advice. Know certain reciprocals by heart. Saves the need for a calculator.

1/6 = 16.7%
1/7 = 14% (15% ish)
1/8 = 12.5%
1/9 = 11.1%
1/11 = 9%
1/12 = 8.25%
1/15 = 7%

PE of 9 has ke of 11.1%.

If you use simple numbers (mkt cap of 1000) this can help your math. You might even be able to do without paper.

Is this with the Palo Alto office?

ML's Tech M&A has done a few deals recently that are worth looking into. They advised Postini's sale to Google (650mm?), as well as RFMD's purchase of Sirenza (900mm). Expect the questions to be very technical. Small group w/ around 5 or 6 analysts but good deal flow. PM me with anymore specific questions about the PA office in general.

Thanks all for the feedback. If others have more specific deal/group information, please do share.

Pelbo

umm are these kind of questions common for entry level interviews?

Can be. I had a buddy get asked up to Level 3 for a second round. It depends. Your interviewers can always push you. I'd say Level 1 and 2 are fairly common for first round.

I don't think you need to use the tax. I believe the max price to avoid dilution is \$100 per share. I would give an explanation, but I'm not sure if it's right. If someone confirms that I'm right, I'd be happy to explain how I did it.

If you assume you pay by cash (this is the reason why they give you the tax rate, see below)
Let's note X the amount you will pay, you will have to borrow X at the cost of debt which we assume is 5%. The cost of debt after taxes is 5%(1-40%)=3% because the interests costs are deductible
Pro-forma net income = (120+10-3%
X)/Number of shares
Since it's a all-cash operation, the numnber of shares remains the same, therefore the breakeven price is when 10-3%*X=0 so X=300

Then if you assume you pay with shares, you don't need the tax rate and your answer seems good

(I know it's not traditional, but:)
What if you assume that you purchase the company with existing cash on hand. Would the calculation then be the same as an all stock purchase of the company, yielding a purchase price of \$100 (if you want 0 dilution)?

Assuming an all-stock transaction and no other complications (e.g. no synergies, no increased amortization, etc.), the breakeven price is indeed \$100. Very simply, the transaction will be breakeven when the P/E of the target matches the P/E of the buyer. A P/E of 10x for Company B implies a Price of \$100 (10 * \$10 NI). Note that this is a signficant discount (67%) from where company B is currently trading (30x).

The tax rate is irrelevant in the above scenario. Tax rate will only come in to play if this is a partial or all-cash deal or if there are other adjustments that need to be made to proforma net income (like those synergies or amortization).

further to Londoner's post, in an all-cash transaction with 5% interest rate, the breakeven purchase price should be \$333, not \$300. Note that this is analysis is highly sensitive to the interest rate.

Yes, you'right, sorry. 10/0,03=333

Response to waanabebanker, no it's not the same as there is a cost of opportunity when using the cash you have on hands, and we generally assume this cost is the same than the cost of borrowing

don't worry Londoner, I won't tell your associate :)

You may want to be able to quickly prove out your \$100 conclusion, rather than just say "apply the 10x PE to the target NI". Make it easy by assuming 1 share outstanding of A and determining that paying ~0.0833 shares for the target will keep the the PE at 120 with the acquired net income (mkt cap of \$1200 x 0.0833 = \$100).

whoops. should have said "PE at 10" in last line

Great explanations, thanks a lot guys

ok, I'm assuming that the question is asking P/E dilution or mkt cap/earnings
\$333 would only be correct price if we are assuming market cap of the company doesn't change post all cash transaction.
post transaction P/E = (1200 + X) / (120 + 10) = 10 ---> X = 100 (stock purchase, pretty straight forward.), same result as earlier post.

Cash purchase

P/E = (1200 + X1) / (120 + 10 - X2 * 3%) = 10 ---> X = 77M
where X1 = additive mkt cap effect of target post transaction,
X2 = price paid for the target.
If X1 = X2, as it theoretically should assumming no synergies, then X1 = X2 = 77M.
If you set X1 = 0, then X2 = 333M.

It would make sense if you think about this intuitively, if you're paying interest post-merger thereby reducing your post merger earnings, then the price you'll be paying for the company has to be reduced for P/E to stay the same.
\$333M seems to have illusion of working (it works mathematically at least) is because you're negating the additive earnings effect of the target (\$10) by paying the price such that the interest payment equals earnings (\$333M*3%=\$10M).

The price you're willing to pay for stock purchase and cash purchase obviously differs due to tax basis, interest tax benefit, and a host of other reasons, but if it changes the number by more than 3X (not saying it's not possible, I've seen it happen albeit not too often), you should always double and triple check your logic. Or your associate will catch that mistake anyway, so no harm done.

Having said that, the question isn't a very good one, typically you worry about diluting book value per share, not P/E. Price unpredictably moves around all the time, especially post merger depending on how people view the transaction, and when you are buying a company you don't tell the target's advisor that you're only paying a certain amount because your P/E is so and so. It's like saying I'm only gonna pay you \$40,000 for your ferrari because my last car purchase was 10% of my salary, and so 40K is that 10%. In all honesty, mgmt do ask dumb questions like "i want to keep my P/E the same post merger." especially smid cap mgmts who don't have much deal experience. then you say, P/E should rise post deal as market will react positively to the great synergy possibilities for the two companies. Then tell'em to focus on book value per share discussion, which is far more important as it naturally leads to discussion on how you want to fund it (equity or debt).

Good question or not, it is a pretty common interview question

Dilution/accretion are definitely something bankers and management look at and it's one of the first thing you communicate to the markets. It is not a measure of value creation but it's a way to warm up the markets about the transaction. And as an IB analyst, you will have to build this kind of small model very often.
Of course, this example is simplified (no synergies/ restructuring costs for instance) because it's an interview question..

Are we assuming NE * PE = MktCap = Break Even Price since only 1 share of the company exists?

I'm going for FT and I had no idea what to do with this question until I read the posts. Are these the type of things you naturally pick up at work?

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Wow! I do business valuation and spent some time this summer teaching my son, who is going into his second year at USC and wants to go into I-banking, some valuation principals but we were doing CAPM, dupont/ratio analysis and adjustments to get normalized income and from NI to FCF. Sounds like he'll kill it when the time comes

wow you and your son sound like a blast!

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Crack, Timothy Falcon, Heard on the Street: Quantitative Questions fromWall Street Job Interviews, Crack, 2007

Anybody have any recommendations on books you can read to learn this kind of stuff? Appreciate the help.

Technical as hell- good culture- some of the guys I met were very personable. I got dinged at the door in technical- huge emphasis on EV, LBO, valuation in general. I would say that they, just like in any other BX group, care more about what you know than you as a person, in the first round.

did you interview for advisory or PE?

All three divisions- PE, M&A, Restructuring

BX Restructuring and/or M&A is in line with MS M&A, GS TMT, UBS/CS LA

expect a tough interview..

yes, highly technical. very smart guys. just make sure you have your stuff down. understand the finance, rather than just memorizing it.

has been very different. I wish I had had a technical interview. Instead, I spoke with two people and it was purely blah-blah-blah... Strange experience overall...

I interviewed in the same day with M&A Restructuring and BAAM and found that the M&A and Restructuring were the standard accounting and finance questions that are easily prepared for

They asked the "negative equity" question which was a little different and the M&A guys also asked 7^3 and that fu&king clock question but other than that standard

pretty weird dudes tho, btw....harvard, princeton, etc. not the socially optimal level of intelligence

Got a summer offer for BX Tech M&A (Boston) last spring. Really small group, seemed like very sharp guys who worked very hard. Heard solid things about exit opps for the Boston + NYC advisory groups (although not as strong into BX PE as I would have hoped, but other top PE firms seemed common). Got a bit of a bad vibe after getting the offer... they played some slightly shady games.

I turned it down for an MBB consulting gig, because I wanted to do more strat, less finance, and didn't want the 100 hr/week lifestyle. But I'd recommend the group to someone who's thinking about banking - looked like you'd get great exposure to senior people (who will definitely help you advance your career).

Thanks for this, awesome post. That said, I have a conceptual question for the M&A guys (which I am certainly not): I get the point about Company A buying cheap earnings, and thus getting an increase in EPS (aka Accretive), but at the same time the P/E has gone down, meaning as a shareholder, I can now sell my shares at only approx. 9x EPS, so depending on exactly the EPS amounts and relative sizes of the companies, the value of my shares may have increased OR decreased, no?

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Good question. So the logical follow up is "why is accretion important"? In reality, accretion is a bit of a bull shit number. Value is only truly created through synergies. Sometimes a 5x business is only worth 5x. Even if an 8x business acquires it, if no synergies exist the deal may be Accretive, but no value is created.

One of the key assumptions I made was that the PE's already had premium and synergies built in (to keep the math simple). What happens in real life is that synergies create value in the deal and are split between buyer and seller through premium.

Redo the question above, but now assume that premium is built into the PE, but synergies are not. Assume synergies increase B's net income by 30%. How what does the math show? (in this case, B's contribution to A's PF equity value if you assume the PE remains constant) should increase by 30% (not a super robust assumption, but close enough... some value is created) then this value is shared pro rata via ownership splits. So imagine equity value goes from \$1000 to \$1300 and PF A mkt cap goes to \$2300 but A and B own equal shares, then A's implied share price over 200 shares is now \$11.50 and your value accretion per share is \$1.50 or 15%. Another way to look at it (mathematically consistent) is that the deal creates \$300 in value which is split evenly between A and B (\$150) divided by A's standalone shares of 100 (or \$1.50 value accretion).

If you overpay for a business (pay premium of \$400 when only \$300 of synergies are created) it can also be value destroying to A shareholders.

... Doing some shorthand math in my head, I think A's share price will only increase if it purchases B for a PF implied multiple of B (with premium and synergies baked in) that is cheaper than B standalone (what you got was "cheaper" than what you paid for it on a PE basis).

Very similar to BB M&A interviews from my experience. Make sure you know valuations down cold. I also had a case study involving a valuation using Excel. Had to calculate key financial ratios (current, turnovers etc.) and working capital. Best of luck.

I see you're in San Diego. PM me. I think I have a good idea who you're interviewing with.

i got asked about beta and how it would differ based on the different firm profiles and business types.

monkey12345:

i got asked about beta and how it would differ based on the different firm profiles and business types.

If just looking at P/E, I think a pretty easy way to go about it using relative size is to use weighted average "returns" (E/P) rather than going through the whole framework of NI, EPS, Market Cap, and what have you. For #3, this means averaging 10% (reciprocal of 10x) and 12.5% (reciprocal of 12x) to get 11.25% (reciprocal of 8.9x [if doing on paper, just below 9 since 9x would be 11.1%]). Similarly for #4, weighted averages of 2/3 * 10% (6.7) and 1/3 * 12.5% (4.17) would yield 10.83% (reciprocal is 9.23x, kind of hard to do on paper). The % increase in returns are clearly 12.5% and 8.3% respectively (this would get harder if Company A had a P/E other than 10x), and that's also the % increase in EPS (algebraic proof: if E/P values are in a certain ratio, then EPS's will be too since you're multiplying by a constant, price).

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You are absolutely right. But take a look at why weighted averages work in this case. If you weight the average by size like you suggest, you are using math that is mathematically equivalent to using the frame work. Using weighted averages is just my way of moving to aggregates from per share values Step 1 to Step 2 and back down to per share values again from Step 4 to Step 5. It's not a bad shortcut.

Your math is 100% correct. But again, I would suggest the point is to demonstrate you know what's happening, the thought process etc. It's nice in an interview to hear the candidate use the right terminology. It's not just about getting to the right answer.

Plus if things get more complicated (like @littleredman suggested by changing up the debt to equity mix, using weighted averages become a bit more complicated.

For sure, and I actually did the "full" way out in Excel to confirm. I think the method people take is probably going to be suited to the tone of the interviewer. If he's asking it with a rapid-fire tone urging a fairly quick result (P/E or % accretion or whatever), then I think the scratch way to do it works. Like you said, though, some interviewers will want to walk through the full paper merger model, so it's definitely a useful underlying framework to understand why the shortcut works. Great post btw

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Be prepared for questions regarding synergy models and acc/dilu...

The answers have been revealed but I thought there were concise ways to look at like.

1. Accretive for A since you're using a more expensive currency of share A to buy cheaper shares of B. (Not sure if there are more eloquent ways.

2. Accretive since you're buying B by 5% cheaper. The breakeven would be B's cost of equity at 12.5%

3. If the companies are the same size, B has more earnings than A does. Thus, it won't be an average - it would be if they had same earnings. Because B has more earnings, it'd be weighted more closer to 8 than 10 so the reasonable bounds would be between 8 and 9.

The accretion would be 12.5%. I think there's a short cut. EV doubled but there was nothing transformative about A. B experienced a "multiple arbitrage", going from 8x to 10x, which is a 25% accretion. Total accretion for A' would be (1/2)*(25%) = 12.5%

4. It would be less accretive, and >9 as A is more weighted now in the combined company (the fact that A has more earnings). Thus, the accretion would be (1/3)*(25%) or 8.33%.

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Edit: As someone mentioned before, yes you definitely need to assume what D/E is otherwise, the math is off. I assumed D=0, and I think that's what the OP intended.

I would suggest being able to discuss the recent uptick in M&A activity and the expectation for continued deals in the space. Definitely know a few deals backwards and forwards (e.g. companies involved, control premium, cash vs. stock vs. debt vs. some combination of these, whether the deal is Accretive/dilutive for the buyer, rationale/synergies driving the deal etc). I would also be able to walk your interviewer through an accretion/dilution analysis (e.g. what happens if the P/E of the acquiring company is higher than the target etc). There is a great article on www.ibankingfaq.com, a site run by a regular WSO poster, that gives a great synopsis of the topic. I had a brief phone interview for a top tier M&A group (think MS/JPM) and the interviewer asked me to walk him through any finance topic of my choice, so maybe be prepared for something like that. Since you mentioned that you have been working a lot, be prepared to discuss some of the deals that you have worked on. If your deals are M&A based rather than capital markets transactions, be able to discuss any modeling you did as well as the multiples and unique aspects of the deals. And to answer your last question, maybe only discuss if it is brought up by your interviewers? Frankly, I'm not sure how to handle this topic. Hope this helps.

1) Walk through a DCF

2) Understand the differences between Perpetual Growth & Exit Multiple Method for calculating a TV

3) Talk about accretion vs. dilution

4) Talk about a recent M&A transaction (dilutive? , strategic or financial? , other industry trends)

http://www.Amazon.com/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/0470442204/ref=sr_1_1?ie=UTF8&s=books&qid=1259778233&sr=8-1

Hey guys, from all of the things you are saying to be prepared for, how do you get that info?

I read the journal and all and follow deals on websites but I never really see any in depth insight on the deal like stock vrs. debt, control premium, etc. I am an undergrad. I wont have to know any of the accretion dilution analysis will I? not all that familier with that.

wallstwarrior19:

Hey guys, from all of the things you are saying to be prepared for, how do you get that info?

I read the journal and all and follow deals on websites but I never really see any in depth insight on the deal like stock vrs. debt, control premium, etc. I am an undergrad. I wont have to know any of the accretion dilution analysis will I? not all that familier with that.

Usually, most analyses of deals include a brief discussion of a premium and the general details of the deal. Take a look at the link below for a Dealbook report on the recent Baker Hughes/BJ Services merger as an example. As for the accretion/dilution stuff, I would definitely recommend having a good handle on that even as an undergrad. At the very basic level, you might get asked whether a deal is accretive/dilutive based on the P/E ratio. However, being able to give an in-depth answer on the topic might make you stand out from other candidates in an interview. These sort of questios are rare in SA interviews (from my experience) but may and definitely do arise during FT recruiting or if you're directly interviewing for an SA position in the M&A group.

http://dealbook.blogs.nytimes.com/2009/08/31/oil-s...

Expect the interviews to get very technical. I had several M&A interviews with BB's, and even with no finance background, I was expected to be able to do DCF's using WACC's and some simple comps, in addition to knowing basic accounting. And be sure to know beforehand some recent deals that the bank/group has worked on.

Do the interview guides (WSO, BIWS) cover these types of questions? I most likely would've gotten that wrong.., but then again I just started the M&A module in BIWS. Just purchased the Interview Guide and curious to know whether or not a question like this will be covered in there.

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thanks squawkbox...anyone have M&A interviews recently and get some odd questions?

what's your background - junior going for SA stint, lateral move?

if you're a lateral, you should know how to drill down on the following technicals:

Accretion / Dilution analysis
Walking someone through a M&A model
Purchase accounting
m&a process (solicitation, auction process vs. exclusive sale, negotiations,

Vault can help you somewhat, beat the street from wetfeet - not really helpful. i haven't seen the wso guides so can't really comment.

if you wanted to purchase or read something: ibankingfaq.com is a good start, for most of the technicals - "investment banking: valuation, leveraged buyouts, mergers and acquisitions" is pretty solid.

I'm making it up as I go along.

im a lateral... thx for the response. Are brainteasers common for these interviews?

Hello. your post prompted me to look into this accretion/dillution stuff. i've answered the first two questions by being as general as possible and by showing what assumtions have been made. for example for the first one if my calculations are right then it's not sufficient for PE(A)>PE(B) if there is a control premium.
Can you also please explain what PF means, that's what blocked me in question 3/4
thank you

http://postimg.org/image/bofdex7t5/

You are correct about control premium, however, that's why I mentioned as part of the assumptions that premium and synergies are included.

PF is shorthand for "pro forma", latin for "as a matter of form". It basically means the information is presented on an "as if" basis.

Also, can tell you are very comfortable with math as your notation for your proof is very clean, but I think I need to red flag a potential error in your math. In your proof for Level 1, step 3 you say:
The post-acquisition EPS'(A) = (E(A) + E(B)) / (#A + x)

The error here is you are adding EPS when you should be adding net incomes (EPS' in aggregate). You'll notice that is the primary purpose of the level 3 question. I know it's nit picky, but you have to be very precise with your language.

Also, as a piece of advice, level 1 and 2 questions don't require as robust a math proof as you provide. You have to understand that IBD is a FO position so you have to be able to explain concepts in simple terms. The interview is as much about how you present as well as getting to the right answer.

Actually E(A) & E(B) denote the Earnings of A & B respectively and not their EPS which are always called EPS in my proof.
To me the new EPS is equal to the sum of earnings of A & B divided by A's new number of outstanding shares. is that wrong ? would be weird if it wasn't correct since i did get to the condition PE(A)>=PE(B)

Thanks for the explanation on what PF means. i'll answer the other questions shortly.
Your post has been very instructive so thanks :)

Lazard is a pretty decent firm so nice job

ive heard they are technical

What country is this? I have a feeling you are not in the US.

I interviewed intern candidates earlier this year for an elite boutique. Generally (and I did tailor to each candidate's CV) my questions were in the following categories:

1) Do you know what this job entails? What do you think makes you suited to this job? (please give examples if possible from your experiences to date)

2) Why this firm? Where else are you applying?

3) Valuation - and this was tailored to candidate's experience (i.e. one guy had real estate investment exposure so I asked him about key sector specific metrics when dealing with comps for example)

4) Wider strategy / commercial aptitude - for example, one candidate had experience at a PE fund, so I asked him how a PE firm generates returns, specifically what a PE firm would look to do with a business (e.g. operational improvement, buy-and-build etc. etc.) and routes to exit

In terms of expectations, candidates needed to be able to deal with 1 and 2 without any blips. Candidates were expected to be able to go through the 3 most used methods of valuation (trading / transaction comps and DCF). 4 was then used to let the really good candidates differentiate themselves.

Hope this helps.

Thanks guys! Indeed I am not from the US but from Amsterdam...indeed the city where we all get fucked up all day long ;-)

Another question, I know how to deal with the 3 most used methods of valuation but could use a little bit more insight into how/where a sector specifically influences the valuation and method used, any idea on where to obtain this info?

Hi, TorontoMonkey1328. Thanks for the questions. I am studying for summer analyst positions in Toronto, and I was wondering, how in depth do we need to know Accretive/dilutive concepts? I've never heard about it in my finance classes, so I couldn't even get past Level 2. Are these the types of questions I should be focusing on more? Thank you.

The London SA ACs went down like this (not sure if the FT one will be the same though ..)

Friend:

As for your first question, this late in the game, it's likely that there is a specific group with a hiring need (perhaps ask your interviewers which groups still need people).

Brown_Bateman:

The London SA ACs went down like this (not sure if the FT one will be the same though ..)

Friend:

As for your first question, this late in the game, it's likely that there is a specific group with a hiring need (perhaps ask your interviewers which groups still need people).

I had my final round interview at Citi M&A in london just recently for the full time position July 2011. the structure is exactly as Brown_Bateman detailed it... it was also very technical (but im not sure if thats just because of my previous experience in M&A)

Thanks a lot Brown, thats really helpful.

Can I ask where you got that quoted post from? Appreciate your input above as well.

My fb inbox.

Hi, just thought I'd bump this in case anyone has any more advice/info for me before the big day tomorrow!

Thanks.

curlyarmstrong:

Hi, just thought I'd bump this in case anyone has any more advice/info for me before the big day tomorrow!

Thanks.

Hey buddy, mind sharing your experience of the AC? Thanks!

I don't know where you got your information on Lazard, but the only interview I ever had there was with the Head of Investment Banking, and we talked about Freakonomics the whole time.

I got the job.

Generally, senior MDs don't ask technical questions. They don't care that you don't know (nor should you). Lazard will teach you what you need to know and how they want you to do things. It's more important that you got laid in college/b-school than if you know how to do a back-of-the-envelope lbo model.

Just be yourself. If you don't fit in with Lazard culture, you won't get the job. And you'll not like it if you don't fit in, so don't try to be something you're not. I don't suspect you would have got the interview in the first place if you didn't attend Harvard, Wharton, Princeton, Stanford, Yale, or (cough) Columbia in the US. And in London, if you didn't go to Oxford, Cambridge, LSE, Imperial, Durham, Warwick or Edinburgh, you wouldn't make it past the milkround. You write like an American, so I am guessing you're interviewing in New York.

Be prepared for technical questions only from juniors. Why? Because juniors haven't interviewed too many people in the past, and tend to forget that they didn't know anything either when they were on the other side of the table.

I have also interviewed at BX, but for BAAM, not M&A. The interviews there are also almost entirely fit-based, so good luck.

brotherbear:

I don't know where you got your information on Lazard, but the only interview I ever had there was with the Head of Investment Banking, and we talked about Freakonomics the whole time.

I got the job.

Generally, senior MDs don't ask technical questions. They don't care that you don't know (nor should you). Lazard will teach you what you need to know and how they want you to do things. It's more important that you got laid in college/b-school than if you know how to do a back-of-the-envelope lbo model.

Just be yourself. If you don't fit in with Lazard culture, you won't get the job. And you'll not like it if you don't fit in, so don't try to be something you're not. I don't suspect you would have got the interview in the first place if you didn't attend Harvard, Wharton, Princeton, Stanford, Yale, or (cough) Columbia in the US. And in London, if you didn't go to Oxford, Cambridge, LSE, Imperial, Durham, Warwick or Edinburgh, you wouldn't make it past the milkround. You write like an American, so I am guessing you're interviewing in New York.

Be prepared for technical questions only from juniors. Why? Because juniors haven't interviewed too many people in the past, and tend to forget that they didn't know anything either when they were on the other side of the table.

I have also interviewed at BX, but for BAAM, not M&A. The interviews there are also almost entirely fit-based, so good luck.

There's a posting from Lazard IBD in my school and I do not go to one of the schools you mentioned in the US.

brotherbear:

I don't know where you got your information on Lazard, but the only interview I ever had there was with the Head of Investment Banking, and we talked about Freakonomics the whole time.

I got the job.

Generally, senior MDs don't ask technical questions. They don't care that you don't know (nor should you). Lazard will teach you what you need to know and how they want you to do things. It's more important that you got laid in college/b-school than if you know how to do a back-of-the-envelope lbo model.

Just be yourself. If you don't fit in with Lazard culture, you won't get the job. And you'll not like it if you don't fit in, so don't try to be something you're not. I don't suspect you would have got the interview in the first place if you didn't attend Harvard, Wharton, Princeton, Stanford, Yale, or (cough) Columbia in the US. And in London, if you didn't go to Oxford, Cambridge, LSE, Imperial, Durham, Warwick or Edinburgh, you wouldn't make it past the milkround. You write like an American, so I am guessing you're interviewing in New York.

Be prepared for technical questions only from juniors. Why? Because juniors haven't interviewed too many people in the past, and tend to forget that they didn't know anything either when they were on the other side of the table.

I have also interviewed at BX, but for BAAM, not M&A. The interviews there are also almost entirely fit-based, so good luck.

Awesome, thanks for the insight - surprised to hear that your interviews weren't technical though. What kind of personality would you say fits in well at LAZ or BX M&A?

brotherbear:

I don't know where you got your information on Lazard, but the only interview I ever had there was with the Head of Investment Banking, and we talked about Freakonomics the whole time.

I got the job.

Generally, senior MDs don't ask technical questions. They don't care that you don't know (nor should you). Lazard will teach you what you need to know and how they want you to do things. It's more important that you got laid in college/b-school than if you know how to do a back-of-the-envelope lbo model.

Just be yourself. If you don't fit in with Lazard culture, you won't get the job. And you'll not like it if you don't fit in, so don't try to be something you're not. I don't suspect you would have got the interview in the first place if you didn't attend Harvard, Wharton, Princeton, Stanford, Yale, or (cough) Columbia in the US. And in London, if you didn't go to Oxford, Cambridge, LSE, Imperial, Durham, Warwick or Edinburgh, you wouldn't make it past the milkround. You write like an American, so I am guessing you're interviewing in New York.

Be prepared for technical questions only from juniors. Why? Because juniors haven't interviewed too many people in the past, and tend to forget that they didn't know anything either when they were on the other side of the table.

I have also interviewed at BX, but for BAAM, not M&A. The interviews there are also almost entirely fit-based, so good luck.

Definitely agree with this. I had a final round there and the senior guys didn't ask me anything remotely technical, whereas the junior guys did. Not more or less technical than other places, except that the interviews weren't as structured like they were at bigger banks. That being said, I'm sure if you have a finance/econ/math background then they will ask more technical questions, whereas if you are an art history major they won't expect you to know much along the lines of finance/accounting (and yes, there are art history/English majors working there).

^ You know those places recruit other than your mentioned schools.

Since when was Durham placed in "target" status?

I win here, I win there...

It's not unheard of for Lazard to recruit outside of the schools I listed, it's just not that common.

We can include UChicago, Northwestern, Berkeley, CalTech, Rice, UTAustin, Dartmouth, Brown, Cornell, etc (as Lazard now has a middle-markets team that is more geographically dispersed). In the UK, BX and Laz don't recruit from many places. Durham is not really a 'target,' but it used to have quite a bit of prestige, and there are still several top bankers and barristers that went to Durham 20-30 years ago. Durham is sort of like Dartmouth--it's a good school, but too far away from anything to really attract many recruiters.

In the London office, we recruited from Oxford, Cambridge, LSE, Imperial, and UCL. There was one kid from Birmingham, one from Bristol, none from Warwick, none from Edinburgh, none from St. Andrews, and none from Durham or York in my analyst class. There was a girl from Bocconi and one from Sciences Po (I think).

There is a difference between accepting kids from other schools, and recruiting there. In the US, recruiting involves on-campus interviews, not just a posting on the careers website. In the UK, things are a bit different, but the 5 schools I listed are 'targets' if such a thing exists at all in England.

That's not to say you can't get a job at Lazard without having attended one of those schools--you can. You may just be a little out-of-place if you lack that pedigree.

How's their culture?

Thanks for the insight, brotherbear!

I win here, I win there...

cut throat culture for Lazard boys

Would be very surprised if they detract points for giving an acquisition from +2 days ago but then again the UK deal rate is a lot lower - I would probs try and aim to cover Q4 deals as well as any ongoing discussions. Would think being able to talk sensibly and say something beyond WSJ/FT articles talk about is more important. Its probably also worth checking out Dealogic or Thomson M&A activity rates for 2010 to give your answers some context and also cover the major deals 2010 from your sector in case you need to give anecdotal evidence to broad/trend questions. I got asked this question in a FT TAS interview last year - mind went blank and had to politily decline. Got offered the job luckily, thats the Big4 for you I guess. Congrats on the interview and good luck.

Usually you want to talk about recent deals but I'm sure you can talk about a deal within the 14 days if it's that "big". The main thing they are looking for is that you know the basics of the deal and why it was intriguing to both parties. All the deals that I've talked about in my interviews have been within the last 4 days and it has worked out well.

It would obviously be good to know - especially because you might be selling your mandates to financial sponsors AKA private equity funds. They will want to see your model.

I woulnt worry about modeling questions. I had associate super day interviews at 5 banks and no one asked anything about modeling. The underlying finance concepts are all you need, and even these questions were a very small part of the interview.

DCF Strength
- Can be sensitized at every line item
- Can be performed for every level of entity (project, division, firm-wide)
- Pure evaluation of cash generating ability (intrinsic vs. relative valuation)
DCF Weakness
- Based on revenue/expense forecast (generated by the target - biased)
- Dependent on growth rate estimate (discount rate)
- Sensitive to CF timing (beginning or end)
- Dependent on WACC estimation (3 components - difficult for private firms)
- Nominal value heavily dependent on terminal value (calculated with perpetuity or backed into with multiple approach)

Summary:
- Everyone's beef is that it is dependent on so many variables and forecasts that it is a shot in the dark
- Its redeeming quality is that it can be sensitized on every level to mitigate that dependence

On another note - search WSO for these answers as they have been given hundreds of times, topic posting is not a proper query method, if you need answers to questions as basic as this I suggest the WSO tech guide it's 19.99 and it is fundamentally sound

"You Want details? Fine. I drive a Ferrari, 355 Cabriolet, What's up? I have a ridiculous house in the South Fork. I have every toy you could possibly imagine. And best of all kids, I am liquid."

Don't forget...DCF does NOT take into account Synergies and Control Premiums when determining Enterprise Value. For this you should reference precedent transactions to get a general idea of the valuation multiples

idragmazda:

Don't forget...DCF does NOT take into account Synergies and Control Premiums when determining Enterprise Value. For this you should reference precedent transactions to get a general idea of the valuation multiples

This is incorrect, a DCF analysis is based on implied control of the target company and the enterprise value it spits out implicitly includes a control premium. Also, in an M&A setting the projections used in a DCF analyses often incorporate synergies, so synergies will be taken into account if they are embedded in the projections.

Another prior post did a good job of answering the strengths and weaknesses questions, so i wont repeat.

.

That might be the case, but you can make some basic assumptions that x% revenue synergies and x% cost synergies

Are you interviewing for a position that would start now or next summer? If it starts now, then when did you apply for this position?

Thanks.

I doubt they will require you to have complex knowledge of finance. You did engineering, they understand that. They are looking to hire you cause they see potential. I would brush up on some valuation methods just to be safe. It wouldn't hurt to have some knowledge of financial statements and how they tie together. Just my .02

Good luck.

"Don't quit. Suffer now and live the rest of your life as a Champion" - Muhammad Ali

Dude, you might want to read up on DCF modelling, general steps in doing an lbo model, and random things like TSM (treasury stock method).

Still I Rise

i applied for this position about a month ago...then got a call to come to the 1st round of interviews...

a BB firm in london.....year round internship starting in fall....

I'm sure if your technical skills are as high as you just described, you ought to be fine. I'd focus more on fit were I you, demonstrate your interest in the firm and do as much as you can to learn about the culture of the group or some of the people there as you can, be relatable and come across like someone they'd like to have in the pit next to them. Number-crunching will be a huge part, but that's a given for you already.

"Number-crunching will be a huge part, but that's a given for you already." - Exactly. Do you have any examples? This is what I am concerned about. I am a pretty good fit for them and know everything about the firm.

-DCF modeling
-walk through a LOI or NDA process
-comps (i.e. "Discuss the benefits of the different comps analysis and which yields highest multiples.")
-the differences between perpetual growth & exit multiple method for calculating a TV

etc.

Thanks!

No problem. Best of luck. I'm not sure how difficult it would be at the associate level, no familiarity there.

Depends if you are a good listener and if you get a question you don't know - depends how well you can highlight your strengths. From what I hear in the US, the first round is all fit. Focus on the behavioral guide.

RBC? 1st year analyst spot? Did you get it through a college resume drop?

Nope, not RBC. Canadian BB though. Submitted my application through job postings offered at a conference. Thanks for the responses.

al865149:

Nope, not RBC. Canadian BB though. Submitted my application through job postings offered at a conference. Thanks for the responses.

I'm assuming BMO? Anyway, I would spend the most time reviewing the technical questions honestly. Spend time researching the company too. And don't get totally nervous if you don't know the answer to a technical question in the interview. If you are somewhat familiar, then say what you know, but if you have never heard of w/e it is, then just say 'I'm not sure about that one'. Don't BS any technicals.

If its BMO i can tell you what my superday was like. Pm me

None of the BBs are based in Canada but I know what you mean... What is your major? If it's Econ or Finance expect tech questions. If it's history or gov or something else you might not get any but the fit questions are just as important so you still have to be well prepared

PM me details of superday?

I have superdays with 2 of top 3 Guatemalan BB's next week

Thanks!

Thanks for the tips guys. It was purely fit and "what is the goal of M&A type questions". The interviewer threw in a few very basic technicals but nothing that anyone on here would have any difficulty with.

yes, usually, although the associate may be instructed to focus only on technical questions and grill you. have fun!

Analysts interview you in earlier stages typically to test your intellectual fit. Later rounds tend to be heavily weighted with MDs and VPs to judge your character. You have to remember that analysts are on the bottom of the totem pole in banking. Ideally, you would think that analysts should be the one's judging fit since we spend the most time together in the bull pen. However, the cycle of analysts being considered worth nothing except our ability to pound out work makes our opinion beyond intellectual capability worthless.