Why would you choose our bank over (GS,MS,JPM)?

Hey a couple questions: I'll start with the one the title is about.

Let's say I am in an interview with MS and they ask me "if you got an offer from both Goldman Sachs and us, who would you choose and why?"

Obviously I would say.. Oh I would definitely choose (your bank) over (their bank).

But why?

I am thinking I would say something "both of you do great work, but from my understanding, the culture of (their bank) is just a little bit too [insert adjective here] for me. Your bank seems like a better fit for me because it is (tighter-knit, more focused on X/Y/Z, etc), and your culture would simply allow me to do better work."

So first: if I fill this in in a logical way, is this an acceptable and good answer to the question? If it is, can someone go over how the top 5-10 BB's differ in terms of culture for the purposes of answering that interview question? It doesn't seem logical to say.. "Oh well you just do better work than Goldman.." for instance, so I think it comes down to culture. Does this make sense?

Second question:
When you do a DCF, you use unlevered FCF with WACC as the discount rate to calculate enterprise value. However, the price you pay to the current owners to acquire the company would be equity value, right? If so why do they need to calculate enterprise value for the purposes of M&A? Why not just straight to equity value? What would the use of enterprise value be?

When you go to calculate the equity value that should be paid for acquisition of the company, would this usually be calculated by adding back cash and subtracting debt from enterprise value? Couldn't it also be calculated by doing a DCF with levered free cash flow and cost of equity as the discount rate? Why would a bank do one or the other?

Thank you for your help.

Comments (7)

Most Helpful
Jul 3, 2019

Point to 3-5 people you've networked with, spoken to, or been interviewed by and explain how they made a big impact on you for X, Y, and Z reasons. They've really demonstrated the culture of the firm more so than any other bank and you'd love to work with others like them. Thats what I'd use for why A bank over B bank.

Culture talk is cheap but if you can point to specific people you've met with that adds a lot of weight.

As a side note, I'd avoid talking down about other firms / people. Makes you look bad. Don't say that the other firm is too X, instead say the firm you're interviewing for does Y better.

    • 9
Jul 4, 2019

Enterprise value is what you need to pay to buy the company from shareholders and also payoff the debtors. You could calculate equity value if you use levered FCF since in that case the debtors do not hold a stake in the valuation produced. In that case you then would add debt and subtract cash to calculate the final price.
Correct me if anyone knows differently but since usually debt covenants will require full payment in the case of change in ownership, a buyer must pay the combined value of the equity value and debt-cash to acquire a company.

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Jul 5, 2019
ThatOneGuyLetsHireHim:

When you do a DCF, you use unlevered FCF with WACC as the discount rate to calculate enterprise value. However, the price you pay to the current owners to acquire the company would be equity value, right?

Yes correct. Equity value is the amount paid to shareholders at completion which is calculated based on Enterprise Value plus cash in the business less debt in the business at completion. There may be other adjustments at completion that alter the final payment to shareholders but I would not worry too much about this now.

ThatOneGuyLetsHireHim:

If so why do they need to calculate enterprise value for the purposes of M&A? Why not just straight to equity value? What would the use of enterprise value be?

Well in general Enterprise Value (I'll just call it EV) has become the standard valuation metric for comparative purposes in M&A. People will generally use EV/EBITDA multiples to value business. An EV multiple is always compared to EBITDA because they both essentially ignore debt. An equity multiple like P/E would need to use net income and this can be vastly different for similar business due to a number of one off adjustments in a given year. EBITDA is generally seen as more representative of operating cash flow and it could be argued it is better for comparison. Net income will also be effected by different capital structures of businesses making it less suitable for comparison (and by extension making equity value less suitable for comparison).

Enterprise value is also representative of the total cost to acquire a business. Sure the equity value of two businesses might be $100, but if one has debt of $100 and the other has no debt they are very different propositions for an acquirer (from a cost perspective).

But there is also an important practical reason why EV is used. If we agree on an offer for the business, the deal will likely not complete for a number of months (DD, SPA negotiation, other issues). During this time the debt and cash profile of the business will be changing and therefore the cost to acquire that business will be changing. As a result It is typical to agree an offer value up front based on an EV on a debt free/cash free basis.

Here is an example:

We agree an EV of $100 for the business. At this time the business had $50 net debt (debt less cash) and therefore the seller would receive $50 (the equity value). Fast forward 6 months and we are about to complete the deal. The EV is still $100 as agreed but the net debt is now only $20. The equity value is now $80 (the seller still owns the business and thus gets the benefit of the additional cash generated during the 6 months period). It is much clearer and easier to adjust like this than going from an equity value and for this reason EV has become the standard to base the offer on.

It should be noted that there is no rule on this. You could of course do a deal based on an equity value (I have done such a deal before where we agreed equity value and fixed the balance sheet value at completion) but it is just far less common and everybody is more comfortable with EV as it is standard.

ThatOneGuyLetsHireHim:

When you go to calculate the equity value that should be paid for acquisition of the company, would this usually be calculated by adding back cash and subtracting debt from enterprise value? Couldn't it also be calculated by doing a DCF with levered free cash flow and cost of equity as the discount rate? Why would a bank do one or the other?

Yes you are correct. You could calculate using levered FCF and cost of equity as the discount rate which will get you equity value rather than EV. You would then add debt and subtract cash to get back to EV. Perfectly legitimate but generally not the approach taken for the reasons mentioned previously.

Any questions let me know (although ask here and not in PM so others can see answer).

    • 4
Jul 5, 2019

This is all correct. Just to add a nuance, in practice the definition of "net debt" can be itself highly negotiated. So too are asset valuations, working capital definitions, provisions (e.g. for bad debts), minimum cash, off-balance sheet arrangements, and a myriad of other factors. Therefore, bidders in real life really have to show their work in defining both equity and enterprise value in a transaction.

EDIT: @MaddCow is completely correct regarding the "why this bank" question. It's almost a trick question, has nothing to do with the bank or league tables and everything to do with the people you've met and what you have gleaned from those interactions w.r.t. the culture and job.

Jul 5, 2019

I think this is an important point for people to understand. In a DCF, you can use levered or unlevered FCF. You just have to use cost of equity for the former and WACC for the latter. Almost everyone is taught to unlever the FCF first. Mostly, it's just the standard. But as you will see as you do more deals, 'standard' doesn't mean 'ubiquitous'.

The only time I did a deal based on equity value was in working with a relatively small (<$50m in revenues), founder-owned business in technology services. He had no debt, but kept some cash on the balance sheet instead of sweeping it into his accounts. He was using a small regional law firm as his counsel, and had no M&A advisor. They didn't know what they were doing, and instead of schooling them and making them feel dumb, we just went with it since the balance sheet was so clean. If the company had a more complicated balance sheet, I wouldn't have done that.

In practice, everything is negotiable. I have literally spent hours arguing minutia on working capital assumptions, duration of escrow, key man clauses and basically anything else that impacts when the seller gets his money. That's really the key thing. If the clause impacts how much money they're getting, when they receive it, or what might cause them to lose out on a payment, you need to be prepared to spend time talking through it. Even if you're using 'standard' terms, they're only standard to you. If you're dealing with a founder/CEO, this might be the only deal they've ever done. It's probably the most important deal they've ever done, and they're not used to feeling dumb, so you need to get used to plain English explanations of all of your assumptions. Very few bankers, lawyers, consultants or investors do this well. We all get too used to speaking with one another so when we speak to laypeople, a lot of us struggle. I know I find it challenging.

    • 3
Jul 5, 2019

"i wouldnt choose your bank"

Jul 5, 2019
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