M&A bankers are having a great year. And M&A teams are hiring - especially at the junior end. If you're attending an interview, which M&A interview questions should you anticipate, and how should you prepare to answer them? Here's our definitive guide.
If you work in M&A, it's quite possible that you will be putting in 90 hour weeks. It is quite possible that you will be spending every single waking hour with your colleagues. As a result, you will need to get on with them, and you will need to get on with them very well. "If I were faced with equal candidates with a solid education and a good track record, then what would make me hire you is the fact that you’re fun," Linoks Lekkas, managing director and head of corporate and investment banking for CEEMEA at Citigroup told us a few years' ago. "In this industry you spend a lot of time with colleagues and life’s too short to be miserable," Lekkas added.
What kinds of 'fit questions' will you be asked? Guillaume Tardy-Joubert, a former M&A analyst at Moelis & Co. and co-founder of Coaching Assembly, a website offering IBD interview preparation tools, says you need to be prepared to answer questions such as, 'Why do you want to do this job? Why do you want to join this particular firm? What interests you outside work?.'
Whilst there are no prescribed answers to any of these questions (indeed, banks will want you to come up with some novel answers of your own), Tardy-Joubert suggests reading between the lines on what banks are really asking here. When they ask, 'Why this job?', what they really want to know is 'Why do you want to work days and nights for years and years.' When they ask, 'Why this firm?', what they really want is to see that you've done some detailed research into what makes M&A at that particular bank stand out. And when they ask, 'What interests you outside work?', they want to see that you're an interesting and fun person - not just an automaton.
Mark Hatz, an ex-Goldman Sachs and Perella Weinberg associate who now offers advice on preparing for investment banking interviews, says a lot of people attending M&A interviews have very similar backgrounds. You need to differentiate yourself in your responses to fit questions. "Everyone's going to say they like playing tennis and golf etc. If you have any original extra-curricular activities, you should mention them and be prepared to talk about them in detail."
Fit questions can also be 'competency based'. Here, banks will probe your past experience for evidence that you possess the skills and behaviours they're looking for. "They'll ask you things like, 'Walk me through your work experience... What's you're number one achievement? Tell me about a time at work when you had to deal with a conflict-based situation," says Hatz.
Competency based interview questions can be answered using the STAR technique, in which you describe the situation you were in, the task at hand, the action you took, and the result you achieved. Competency questions can be anticipated and prepared for. Hatz says you also need to think about your delivery: "Your physical demeanor is really important here. You need to smile, talk clearly, listen and not interrupt."
Brain teaser-type questions have fallen out of fashion ever since it became apparent that they made no difference whatsoever to the caliber of people hired by Google. Nonetheless, they still crop up in banking.
If you're attending an interview for a junior M&A job, it's quite likely that you'll be asked questions along the lines of, "How many pigs are there in China?". Answering these questions is all about method and attitude, says Hatz. Banks aren't expecting you to come up with an answer that's absolutely correct, but they do want to hear your thought processes and to see that you're flexible enough to attempt a solution. "It's all about attitude," says Hatz. "You need to show that you're rational and flexible."
If you're attending an M&A interview, you will also almost certainly encounter 'technical questions'. This 'technical stuff' is becoming more important, says Matan Feldman, a former J.P. Morgan associate and founder of Wall Street Prep, a global investment banking training firm which offers boot camps on financial modelling prior to banking interviews. "The dynamics of hiring have changed since the crisis," says Feldman. "Banks are hiring more business and finance majors and have greater expectations of them in interviews. Technical questions are being used as a litmus of your interest in the banking industry."
The most popular technical question in an M&A interview is: "How do you value a company?" When you're answering this question, you'll need to be able to talk your interviewer through the use of discounted cash flow models (DCFs), says Feldman. A DCF proposes that the value of a productive asset equals the present value of its cash flows. You'll also need to talk about relative valuation multiples, in which you value a company similar to its peers based upon measures like Enterprise value/Revenue, Enterprise value/EBITDA, and the price/earnings ratio. When you're taking about the relative value method, Wall Street Prep says it helps to research particular industries before the interview. That way,you can refer to the valuation methods used for real-life sectors.
Do you know how to perform a leveraged buyout (LBO) analysis? You'll need to. "You'll usually be asked about LBO models," says Hatz. "Only the best candidates know about them, so this is a good way to differentiate yourself."
So, what do you say when some inquires about your LBO expertise. "The short answer is that equity returns (internal rate of return (IRR) or cash on cash multiples) are calculated based on the investor's entry and exit equity values," says Hatz. "So to calculate an LBO return, you want to find out the investor's projected equity value at exit: the investor entry equity value you already know (it is the equity amount the investor is injecting to acquire the company)."
That's the easy bit - from there, things become more complicated. "Now, equity value at exit (we will assume exit happens in year 5) simply is the company's selling price (say, 10x last twelve months (LTM) EBITDA), minus net debt," Hatz goes on. "In our example, 10x is the price at which the company is sold. EBITDA in year 5 comes from the company's income statement projections (management / investor projections). Net debt in year 5 is debt in year 5 minus cash in year 5. Debt in year 5 is debt at entry plus debt increases (typically 0) minus debt repayments over the investment period, as reflected in your debt schedule (assuming an amortizing tranche, the debt balance gradually reduces along the years as cash flow covers principal repayments). The company's cash balance at exit is based on initial cash balance plus cash flows generated over the term of the investment (the bottom line in your CFS every year).
"And the IRR formula is (investor's exit equity value / investor's entry equity value)^(1/n)-1. The cash on cash formula is (investor's exit equity value / investor's entry equity value)...."
Technical questions in M&A interviews are heavily angled towards accounting knowledge. Feldman says all M&A interviewees should also be familiar with cashflow questions. Wall Street Prep recommends that you start with net income and go through the statement line by line. You'll need to cover major adjustments, such as depreciation, changes in working capital, and deferred taxes.
Feldman says you should also be prepared to answer questions on what happens to companies' accounts following an acquisition. Your answer will need to be nuanced as the effect is not always the same.
"The impact on the income statement of the acquiring company depends on the type of acquisition," says Feldman. "If the deal is a stock deal, the the major adjustment is the additional shares the acquirer issues diluting the acquirer’s pro forma share count. Offsetting this is the target net income that is consolidated onto the acquirer’s income statement."
If the deal is a cash deal, Feldman says there is no impact on the acquirer’s share count. "Instead the major adjustment is the incremental interest expense assuming the cash deal was financed with debt, or the interest income foregone if the deal was financed with existing cash balances. As with a stock deal, offsetting this dilution is the target net income that is consolidated onto the acquirer’s income statement."