The Gateway Guide to Investment Banking

Applying for an internship or a graduate job? Our guide to Investment Banking is an essential read
Investment banking
Introducing investment banking

Getting the job

It's all about preparation. You need to have crystal clear answers, thought out in advance, to prove your interest in and qualification for the job to which you are applying.

The key topics will be:

  • yourself - your study and career choices and your motivation
  • your chosen field - the investment banking landscape and the world of finance; key trends, recent deals
  • relevant theory - in particular you need a mastery of three key areas: 1.) valuation 2.) finance 3.) risk and risk management
  • your chosen employer - their place in the market
  • demonstration of relevant competencies - numerical reasoning, communication, relationship building.

Here's an array of the questions you might be asked and what books you should read to know the answers...

The 30 questions to which everyone interviewing for a graduate job in investment banking should know the answer

Study and Career History

1. Why did you choose your degree subject?

2. What have you learned from your studies that can be applied in your future career / career in investment banking?

3. What have you gained from the things you have done aside from your studies at university?


4. Why do you want to work in finance?

5. Within the overall field of finance, why do you want to become an investment banker?

6. Why do you think you are suited to a career in investment banking?

7. Is there anything that puts you off working in investment banking?

8. What other careers are you considering and why?

Understanding of the Job

9. What do you think you will be doing in your first X months / years in investment banking?

10. What types of financial models will you build? What purpose will they serve? What research will you be asked to do?

Understanding of the Market

11. What have been the main causes of the credit crunch? How will the credit crunch play out from here?

12. What opportunities does the credit crunch present to financiers?

13. Name a live investment banking deal that interests you / that the interviewing bank is involved in. What are the main issues at stake?

14. What is the current price / level of: FTSE100? S&P 500? Bank of England Base Rate? LIBOR? Barrel of Oil? Ounce of Gold? The Dollar? The Euro?

Understanding of the Employer

15. Explain our business model. What do we do different or better than our competitors?

16. What are the key milestones in our history?

17. Who is our CEO?

18. What deals that have been announced publicly are we currently involved in?

19. What are our values towards our customers? Our employees?

Theoretical Understanding

20. What are the different ways to value a company / a share / a bond? What are the strengths and weaknesses of each approach?

21. When is a good time to sell an asset? When is a good time to buy?

22. Why is accounting profit different from cashflow and why is cashflow a better measurement of a company's financial health?

23. How do you derive the cashflows to be entered into a DCF model? How do you calculate the discount factor to be used in the model? What is the formula?

24. What are the main issues to be negotiated in an M&A deal?

25. If there was a difference between the stand alone valuation of a target company in an M&A deal and the price demanded by its current owners to acquire it, what would justify paying this "control premium"?

26. What are (a) the various advantages or (b) the disadvantages of (c) equity finance or (d) debt finance to (e) the company raising the finance or (f) the investor investing the money?

27. When companies float to become listed on the public market, what are (a) the advantages and (b) the disadvantages? Why do some public companies become private again?

  1. What is the effect of rising interest rates on the following: Corporate valuations? Bond prices? Exchange rates? Inflation? Economic growth?

29. What are the risks inherent in the following: Buying a company? Selling a company? Lending money? Borrowing money? Taking out an option? Writing an option?

30. How can each of the above risks be mitigated?

Recommended reading: the 20 books that everyone interviewing for a graduate job in investment banking should have read


*1. "Vault Guide to Investment Banking" *- Tom Lott - the easiest-to-read and most informative guide we have seen about investment banking; essential reading

2. "Vault Guide to Finance Interviews" - D. Bhatawedekhar - introduction to some of the technical knowledge required across all aspects of banking and finance

3. "All You Need to Know About the City: Who Does What and Why in London's Financial Markets" - Christopher Stoakes - An interesting and comprehensive introduction to the world of banking. Easy to read.

** 4. "Accounts Demystified"** - Anthony Rice - the best introduction we have seen to accounting for non-accountants

5. "The Age of Turbulence" - Alan Greenspan - the best insight into global macro economic forces over the last 30 years, despite the recent bursting of the Greenspan bubble.

Corporate Finance / M&A

6."Acquisition Essentials: A Step-by-Step Guide to Smarter Deals" - Denzil Rankine & Peter Howson - a good introduction to the different stages of a deal

** 7.***"Corporate Valuation"* - David Frykman - the best introduction to the key subject of valuation; easier to read than either of the classics Copeland or Brearley and Myers

** 8. "Valuation: Measuring and Managing the Value of Companies"** - Tom Copeland - classic textbook, quite technical

9."Principles of Corporate Finance" - Richard Brearley and Stuart Myers - classic textbook, rather heavy and very technical

10."Monkey Business" - two years in the life of an investment banking analyst...easy to read and quite humorous

*11. "Big Deal" *- Bruce Wasserstein - dauntingly large book, but actually very readable and easy to understand; starts with account of major recent M&A deals, then reviews the classic M&A / corporate finance services and techniques

12."Barbarians at the Gate" - Bryan Burrough and John Helyar - classic business biography of the take-over of RJR Nabsisco in 1988; a thrilling account of a real deal; reads like a novel.

Financial Markets

13. "Vault Guide to Sales and Trading" - Gabriel Kim - the best starting point for this area; we cannot recommend the Vault Guides highly enough

*14. "Vault Guide to Investment Management" *- Andrew Schlossberg - again, great introduction; pulls off that rare trick of balancing being easy-to-read with having sufficient detail

15. "How the Bond Market Works" - Robert Zipf - easy to understand textbook

16."Mastering Credit Derivatives: A step-by-step guide to credit derivatives and their application" - Andrew Kasapi

17."Market Wizards - Interviews with Top Traders" - Jack Schwager - strange book - quite involved and is a compilation of interviews with traders about their trading strategies - for wannabe traders

18."Liars Poker" - Michael Lewis - classic real-life account of Michael Lewis' career as a bond trader at Salomon in London, where he reported to John Merriweather (see When Genius Failed)

19."Den Of Thieves" - James Stewart - similar in style to 'Barbarians', but gives an account of the insider trading in the 1980s that brought down Michael Milken and Drexel Burnham Lambert; again reads like a thriller

** 20. "When Genius Failed - The Rise and Fall of Long Term Capital Management"** - Roger Lowenstein - true-life account of the rise and fall of the largest hedge fund in the world run by John Merriweather - the star character in Michael Lewis' Liars Poker.

Recommended employers: the 10 firms that everyone interviewing for a graduate job in investment banking should aspire to work for

*1. Goldman Sachs *- by far the best investment bank in the world, bar none, year in year out and just about survived the credit crunch albeit with a loss of its pure-form investment banking status. There is Goldman, then there is everyone else

*2. Morgan Stanley *- second only to Goldman. Usually credited as having a more humane internal culture and renown for employing very high quality staff

3. Rothschild - British in style and with Lazard largely focussed on corporate advisory work rather than all-round investment banking business

*4. Lazard *- see Rothschild. Largely turned round after its troubles surrounding its flotation

5. J.P. Morgan - sheer size means always a force to be reckoned with and benefits from the old Cazenove business in the UK

*6. Greenhill *- with Jefferies, next, emerging as the top two super boutiques, although little difference these days in lifestyle between them and the bulge brackets

7. Jeffferies - see Greenhill

*8. Citi *- big US powerhouse just about remaining as a monolithic business despite calls for a break-up; similar in structure to JP Morgan and Deutsche

9. Deutsche Bank - main European player, striving to establish a major investment banking presence independent of its Debt Capital Markets business

*10. Credit Suisse *- survived the credit crunch better than most, and surprisingly has exhibited better risk management than its normally more cautious brethren UBS

And one other to note...

*11. Blackstone *- tiny M&A department compared to the others here, but you are surrounded by the finest financiers in the world in the private equity business down the hall.

Doing the job

OK. So now you know what it takes to get the job. What you will be doing once you start?

What will you actually do on a day-to-day basis? The following is a guide to life in the day of a M&A Analyst...

The Work of the Bank

First, a refresher of The Big Picture...

The services that the Bank provides to its client include the following: -

  • *Sell-side mandate *- selling a company whole, or undertaking a partial sale of subsidiaries or divisions - called divestitures
  • *Buy-side mandate *- helping a company acquire another company or division
  • Fairness opinion - advising shareholders or debt-holders on the fairness of an offer to buy or sell, with the lead advisory role often held by another bank
  • Strategic Review - a wholesale review of a company's strategic position and its options in the market; the results of the review might to be recommend M&A or corporate finance activity.

In addition, although not strictly M&A work, but occasionally undertaken by M&A practitioners:

  • Restructuring - it means providing advice to companies on refinancing and rationalising its capital structure, for example by refinancing its debt or swapping debt for equity or vice versa; it is more corporate finance work, and could result in recourse to the equity or debt capital markets.

Finally, the rest of the Investment Banking Division will be involved in capital markets work. However, it is key not to categorise this as M&A work:

  • Equity Capital Markets - helping a company to float for the first time on a public stock exchange, via an Initial Public Offering ("IPO") or a company that has already floated return to the market to raise additional funds through a secondary offering or rights issue
  • *Debt Capital Markets *- helping a company raise debt finance through a variety of different means, including regular loans, bond issues, syndicated offerings, securitisations, structured or project finance.

While all work falls into three categories...

  • Origination / Marketing - work that contributes to the Bank winning a mandate for a transaction
  • Execution /Transaction work - work that contributes to executing or completing a transaction that has been mandated
  • Developing in-house knowledge - developing proprietary knowledge that might be useful for origination or execution work in the future.

...there is not always a clear distinction between when the origination phase ends and the execution phase begins because the Bank's advisory relationships with its clients are a continuum.

The Work of the Analyst

Company Research

The research is most likely to be of companies, but also be of investment funds or individuals.Research on companies could include:

  • Financial and operational performance, both historic and future, analysed by: Product; Geography; Office locations.
  • Competitor analysis
  • Porter's Five Forces Analysis
  • Possible takeover targets / acquirers
  • Brokers commentaries and price targets
  • News commentary
  • Share price performance, including annotated share price graphs
  • Historic valuation
  • Trading / comparable multiples
  • Shareholder register
  • Board / management profiles

Research of individuals might analyse their suitability for an appointment to the Board, or in their capacity as an investor or shareholder, their actions in precedent M&A situations.

Other research might analyse precedent situations, such as what other companies have done historically in the same situation in other M&A deals as a client or target. Such situations could include a deal (looking at due process or management or shareholder reactions), disputes or what happens to share prices after profit warnings.

The Analyst could also analyse the work of other banks, monitor press coverage of clients or relevant events.

Most of this research will be written up into powerpoint slides to be incorporated into "Books" - to be presented to an external audience such as the client or a potential investor.

Modelling Financials

As a starting point for likely further valuations modelling work, the Analyst will model the Company's financial projections. The input numbers will be derived from management or from external analysts, brokers or consultants.

The Analyst may reorganise the forecasts into the most useful format to be used for subsequent valuations work.

The Analyst will almost certainly produce profit and loss and cashflow forecasts, and may or may not produce a balance sheet. Income and expenditure information could be split by any number of variables including product, operating division, office location, geography etc.

The above work will be done in Excel. The model will include presentational output tables and graphs that will be copied into powerpoint slides for incorporation into Books as necessary.

Modelling Valuations

Different valuations models are undertaken to provide answers to different questions about target or acquiring companies or offers. These questions include the following:

  • What is the market's view of the current value of the target
  • How much is the target worth to us?
  • What is the value of any synergies produced by the merger of the target with the client company?
  • How much should we offer / pay for the target?
  • How should we finance the acquisition of the target?
  • How much might offer bidders potentially bid for the target, if (a) strategic i.e. industry buyer? (b) private equity i.e. financial buyer?
  • What will be the effect on our share price of buying the target, for a certain price, for a certain combination of finance?

There are various modelling methodologies that are either specifically geared to answer one of the above questions, or transcend a number of them.

The three classic valuations models are:

  • Discounted Cashflow Analysis ("DCF") - discounting the free cashflows produced by a company or project at the opportunity cost of its capital; the purpose is to determine the Net Present Value ("NPV") of the target
  • Comparable Companies Analysis ("Comps") - applying multiples of value drivers to the target company drawn from comparable companies; such value drivers include Price / Earnings (P/E), and EV / EBITDA, as well as industry specific drivers; the purpose is to determine the market value of the target
  • Precedent Transaction Analysis - similar to Comps but where multiples are derived from previous completed deals where companies similar to the target have been acquired; again the purpose is to determine a market-tested value of the target; the key difference between the Comparables Companies and the Precedent Transactions Analyses is that the latter will contain a control premium that a buyer has paid.

In addition:

  • Sum of the Parts ("SOTP") - uses any combination of the first three methodologies to value an overall company, by applying specific valuations to individual subsidiaries or operating divisions; the purpose is to derive a valuation for a target where a blanket valuation across its whole would fail to take account of materially different financial or operational issues when analysed at a subsidiary or divisional level

Four other models answer specific questions:

  • ***Premium Analysis* - in the same vein as Precedent Transactions; where precedent transactions are analysed to calculate the percentage premiums that were offered to acquire companies vis a vis their share price or valuation prior to the announcement of offers to acquire them; the purpose is to find out what premium might have to be paid to acquire the target by referring to previous deals and the current market climate
  • *In Price Analysis *- analyses the weighted average price that an investor has bought into the shares of the target company in order to see at what price they might be minded to sell
  • *Impact Analysis / Merger Model *- analyses the impact of the client company combining (i.e. merging) with its target and shows the effect on its financial performance and capital structure; the purpose of this model is to determine whether the merger is accretive or dilutive to earnings per share ("EPS") and the effect on its financing covenants
  • *Leveraged Buy-out ("LBO") model *- analyses a private-equity buy-out where a high level of leverage (i.e. debt financing) is used to buy the target; the model shows the cashflows produced by the target (without discounting them to account for the time value of money, as is done in a DCF) then uses the cashflows to meet interest payments and repay debt; the purpose of this model is to see how much a private-equity buyer could afford to pay for the target company; this model will usually be run even if the buyer is not a private equity house, because an industry acquirer will need to be able to pay a price that would beat one that might come from the private equity community; the model can uncover the maximum price that can be paid, assuming the company borrows a certain amount of debt and will show the internal rate of return that a private equity buyer will earn over the life-time of its investment. The above work will be done in Excel, copied into powerpoint slides for incorporation into Books as necessary.

Client Management / Transaction Process Management

The Analyst will also get involved in producing the documentation that will regulate the relationship between the Bank and the client and in the various legal and administrative processes that are required by the law, relevant codes or precedents to complete a deal.

  • Engagement letters - producing the document that regulates the Bank's relationship and engagement with the client - specifically what fees will be paid and when
  • Confidentiality and Non-Disclosure Agreements
  • Compliance Documentation - ensuring the deal and the Bank's work comply with the FSA and City Code
  • Information Memoranda - producing a document that acts a teaser to the market to garner interest in the Bank's client; for example, for a sell-side mandate, the Bank will produce a short document that summarises the client's business and sends it to prospective buyers
  • Organising then observing conference calls and meetings - communication with the client, its other advisers and all the various counter-parties takes a lot of time; the Analyst will arrange these and usually listen in or observe, take minutes etc.
  • Due Diligence - this could be a subject in itself
  • Creation of a data room or virtual data room - making available documents, including reports and accounts, shareholders register, debt debentures and covenants, meeting minutes etc. for review by the various parties and advisers in a deal
  • Arranging and attending the closing dinner, ordering the tombstones. Internal Administration, Business Development and Training

As a junior member of the Bank's staff, the Analyst will spend time on a variety of other tasks that help the Bank's work. This will include: attending recruitment events to hire other staff; training and personal development.

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