The FinancialModelTraining Blog


Investment Banks in New York and London

Sep 01, 2010
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Tags: Financial Modeling, Financial Modelling, Financial Model, Investment Banking, New York, London

A list of the biggest Investment Banks that operate in New York and London includes the following firms(a great starting place for graduate job searching in the investment banking, broking and investment management industries!):

 


Contributed by Paul Mason

Investment Banking Careers

Aug 16, 2010
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Tags: Corporate Finance, Financial Modeling, Financial Modelling, Investment Banking, Careers

I have been asked the question "What do I need to do to get into Investment Banking/Corporate Finance/Equity Research?" by lots of people looking to make the move, so I thought it good time to write a bit about how I broke into the field.

If you look at any job advertisements for Investment Banking, Corporate Finance or Equity Research roles, you will generally see four things on the job add that are required:

  1. Financial Modelling Skills;
  2. Post-Graduate Studies;
  3. Relevant Work Experience;
  4. Top Undergraduate grades;

Let's talk about these 4 criteria in a bit more detail (in reverse order):

Top Undergraduate Grades: Some firms are stricter on this than others, and as an undergraduate applying for a graduate program, to break into the bulge bracket this is basically a necessity. If you don't have top marks my recommendations are to either network like crazy and try and meet someone in a position of power at the firm you are targetting, do something entrepreneurial that is impressive enough to overcome the lack of grades, or look at heading into a Commercial Bank to start with and apply for one of their Corporate Finance programs (easier on the grades than IB by a long way...). Otherwise you will need experience or a Postgraduate degree to help your resume along...

Relevant Experience: I started out in a Commercial Bank as I studied Law at University and didn't initially have the Finance knowledge to get into an IB. Once in the Commercial Banking graduate program I quickly identified which parts of the company did similar work to an Investment Banking role and made my way to a job in Credit Research and Deal Structuring within an Institutional Relationship Banking business. This strategy paid off as a large part of the analysis done in the Institutional Relationship Banking business (in Credit Research and Deal structuring anyhow...) is about understanding the value and debt capacity of a business, which is also a core component of Investment Banking, Corporate Finance and Equity Research roles. From there moving into Corporate Finance and Distressed Debt was not a big jump. Generally junior analyst roles in IB, Corporate Finance and Equity Research require a couple of years experience, and Relationship Banking can be a great place to get this experience.

Post-Graduate Studies: Two key things about my resume helped me make the numerous jumps I have made in my career, 1. Financial Modelling skills and 2. CFA study. I cannot recommend enough how big a boost to your resume the CFA study program can be. After I passed the Level 1 exam I began receiving calls from recruiters asking me about moving roles (albeit they had my resume earlier, only they started actually being quite interested then...). After I passed the CFA level 2 exam I received more calls, and started getting straight-up serious offers from Investment Banks and even a Hedge Fund, and after having passed the CFA level 3 exam I have literally received a phone call from a recruiter at least once a month asking me to move roles to Investment Banks and various buy-side roles. There are lots of jobs out there that require either CFA study or progress through a Post-Graduate (usually Masters level) degree for candidates. My experience has shown that the CFA is probably the most highly regarded post-graduate program for the Investment Industry in the world, and I cannot recommend it enough to anyone looking to break into the industry. It is a hard program, but that is why it is so worthwhile. The only deficiency with the CFA program in terms of training you for Investment Banking is that it doesn't teach you how to use the theory you learn in the way you will need to in an Investment Banking job. That's where we come in:

Financial Modelling Skills: For any entry level job in an Investment Bank or brokerage, you will need Financial Modelling skills. Every job I have had in finance, I was asked about my financial modelling skills in the interview, and on two occassions I was asked to submit models as part of the interview process. Having financial modelling skills as an entry-level candidate will demonstrate a pro-active attitude and differentiate your resume from the crowd. When you are a junior analyst a large part of your job will involve building and updating financial models so having actively sought these skills shows you know what you are getting yourself in for and that you will be able to contribute from day 1. In general the options for obtaining these skills are:

So there you have it, if you want to break into the industry, do the following:

  1. Get Financial Modelling skills;
  2. Consider a post-graduate program, my recommendation is the CFA;
  3. Get relevant experience and/or get great marks in your Undergraduate course.

Contributed by Paul Mason

Porter's Five Forces

Aug 10, 2010
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Tags: Corporate Finance, Financial Modeling, Financial Modelling, Financial Model

Porter's Five Forces is a simple but effective framework for understanding a company's position and prospects in an economy. When developing assumptions for financial modeling exercises, Porter's five forces is a great starting point for testing the merits of your assumptions.

The five forces as described by Porter are:

  1. Threat of new entrants to an industry;
  2. Intensity of current competitive rivalries in an industry;
  3. Threat of substitute products or services to an industry;
  4. Bargaining power of buyers (customers);
  5. Bargaining power of suppliers.

Threat of New Entrants: If people see that an industry is earning above average risk adjusted returns, by competitive forces other parties will become interested in entering the industry to share in the excess profits until those profits are competed away. Things that can protect excess profits in an industry are:

This is not a conclusive list, but a good start. When examining a company in an industry that earns above normal returns on investment it is important to understand how that return is derived in order to be able to form a view of whether that return will continue or diminish.

Intensity of Competition: If there are numerous competitors in an industry then the prospects of earning an above average return are not substantial, as many competitors are vying for a limited number of sales. High competition leads to price reductions to compete for business, and price reductions will in turn reduce profitability. Conversely a monopoly participant can take the position of a price-setter in order to find an optimum supply level to maximise profits. Different types of industry competition levels include:

Threat of Substitutes: A company that produces redundant products or services will find it difficult or impossible to generate a sufficient return. Consider cassette manufacturers as an example. Previously some of these companies enjoyed strong returns while their technology was state of the art, but nowadays their market share has been competed away by more advanced products such as mp3 players, ipods and the like. Substitution can be a threat from a price stand-point as well as a technological stand-point. Consider the case of transportation. A consumer has the option of driving a car, riding a bike, catching public transport, walking or running, and their final choice will be decided by factors including time, cost and lifestyle choices. As such if one becomes uncompetitive from a price stand-point it runs the risk of losing market share to another alternative mode of transport. Substitution threats can emerge from:

Bargaining Power of Buyers: If customers to a company have many similar products to choose from, a favourable industry structure for the customer, and a low physical need for a product then the customer will have substantial bargaining power with the company in regards to the price of the product. If on the other hand there is a high need for a product, limited number of suppliers and the industry structure favours the producer, then the company will have much larger influence over the price. If the company can control or dictate prices it can increase returns, and if it cannot control or dictate prices then it will likely experience lower returns. Summary of bargaining power forces include:

Bargaining Power of Suppliers: If a company is reliant on a single supplier and has no alternatives then it will have to accept the price the supplier dictates and attempt to pass through this price to its own customers. This generally leads to lower returns for the company as it experiences higher costs. Conversely if the company has numerous choices for supplier because the input is created by numerous parties and/or is generic in nature then the company can force down the cost of its inputs. If a company has a strong negotiating position with its suppliers it can generally enjoy stronger returns than if it is a price-taker from its suppliers. Summary of bargaining forces include:

We recommend that analysts developing assumptions for a financial model use a similar framework, and in particular use this framework to compare assumptions about a company against broader industry trends to test for reasonableness.

To learn more about analysing companies and financial modeling we recommend you sign up to our Level 1 & 2 courses today!!!

We hope you have enjoyed this post on Porter's Five Forces.


Contributed by Paul Mason

Financial Modeling Basics: Forecasting Sales

Aug 03, 2010
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Tags: Corporate Finance, Financial Modeling, Financial Modelling, Financial Model

Forecasting Sales is probably the most important step in building a Financial Model and valuing a company. If you get sales very wrong then all your other numbers will be wrong as well, as sales is the key driver of any non-financial services business.

For mature companies there are generally two methods that analysts use to forecast sales:

Using a growth rate to forecast sales is generally appropriate under the following conditions:

  1. The level of detail you have available about products sold is limited;
  2. The company has demonstrated relatively stable or predictable sales levels that appear linked to an identifiable driver;
  3. The fundamental drivers affecting sales levels are easy enough to comprehend.

To model sales using Growth Rates, you will have one single assumption per period being modelled, which is the growth rate in sales for that year compared to the prior year. Then the formula structure to use is: This Year's Sales = Last Year's Sales x (1 + growth rate)

The Build-up method requires more detail but can deliver greater accuracy and also identifies which particular drivers are causing sales to increase/decrease/remain unchanced.

The Build-up method requires more information than the Growth Rate method. In order to effectively use the build-up method, you need the following information, or at least assumptions around the following information:

  1. You need to identify each product that the company sells;
  2. You need assumptions about the average price each product is sold at throughout the period
  3. You need assumptions about the number of units of each product that are sold throughout the period.

So if a company has 5 products, you need 10 assumptions to forecast sales per period being forecast.

Often companies will disclose some level of detail on the number of products they sell, and the average price and volume of units for each product, however sometimes you will need to make an assumption yourself. For instance if we were forecasting the level of sales for Coca-Cola Amatil in Australia in a year we might use the following build-up (note these assumptions are not verified for accuracy and may misrepresent CCL's actual revenue drivers!):

Then we can sanity check this against their historical levels to see whether our assumptions made sense: In 2009 Coca-Cola Amatil had total trading revenue of $4.40B so our forecast assumes an implicit growth rate of 6.4% in trading sales which seems within the bounds of reason.


Contributed by Paul Mason

5 Minute Leveraged Buyout Deal

Jul 18, 2010
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Tags: MBO LBO Private Equity Valuation

In this blog we are going to run through a Leveraged Buyout Transaction in very short form to demonstrate some basics of how an LBO deal is put together.

First of all, as a Leveraged Financier, a Private Equity Firm who is a client of yours has brought you some assumptions around a deal that they want to conduct (in $millions) captured in the table below. As an explanatory note, firstly we are assuming that we are back on 1/1/2010, secondly, each of the Financial Years listed below is for year ended 31/12/2010, and thirdly, last year's EBITDA was $100m:

In practice a Private Equity Firm may look at selling assets or cutting costs to improve EBITDA and Cash Flow Available for Debt Service (CFADS), however for simplicity in this example we are going to stick to basic forecasts listed above.

Lets now assume that companies in the industry of the target generally achieve a 6x EV/LTM EBITDA multiple for acquisition transactions, where LTM stands for Last Twelve Months. This means that the Enterprise Values we are dealing with to buy the company and sell the company are:

Purchase EV Price: $600m

Exit EV Price: $900m

So from this we can see that the anticpated net gain over the transaction period from beginning of 2010 to End 2014 is $300m. Next we need to figure out what initial Equity investment now will receive a 20% IRR by receiving $300m in additional proceeds in 5 years time. This means that if our purchase price is E, then the following equation finds our maximum initial Equity Contribution to achieve our 20% return:

E x (1 + 20%)^5 = E + 300

Therefore 2.48832 E = E + 300

Therefore 1.48832 E = 300

Therefore E = $201.56m

For simplicity lets round this to $200m. This is the most the Private Equity Firm can contribute to the transaction in order to achieve its target return of 20%. This means that to make up the required purchase price to buy-out the company we need to come up with $400m of debt funding to support the transaction at the anticpated required purchase price of $600m. Now we need to quickly look at whether the company can support $400m in Debt. Our cost of Debt is 7% for a 5 year term, which means that annual interest payments will be 7% x $400m = $28m. We can compare this to CFADS throughout the forecast period and see that the company can easily support $28m in interest payments per year. In fact, the NPV of the CFADS is $374m so if the Private Equity Firm can deliver on the forecasts they have provided you, then they could potentially pay down the vast majority of the debt throughout the forecast period.

So, only two things to look at left:

  1. Can you trust the forecasts the PE Firm has brought you? As an analyst working on the LBO you need to conduct a thorough examination to satisfy yourself, your boss and your Credit Executive that the forecasts are achievable and the deal is a good one.
  2. Will the existing shareholders accept the deal? We are going to pay the company $600m initially of which $200m will go to existing debt repayment. This leaves $400m for the equity holders versus an existing Market Cap. of $250m. This represents a 60% premium to the current trading value of the firm. This is a pretty strong premium to pay and in a lot of circumstances will be enough to get existing shareholders over the line.

So based on this we think the deal can be done as we think the existing shareholders, Private Equity Firm and Leveraged Financiers are all getting a return they are happy with.

In practice you will note that there is the potential for much larger returns than 20% under this transaction, as there is a lot of additional cash generated each year above the amount required to satisfy the debt holders.


Contributed by Paul Mason

Working on Wall Street - Corporate M&A

Jul 01, 2010
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Tags: Graduate Jobs, Wall Street, USA

This post is part of the Wall Street - Where to start your Corporate Finance Career series contributed by Neil Venters of mergersandacquisitionsjobs.com

A corporate job?
An often overlooked avenue is corporate M&A. Many acquisitive corporations have an M&A or Corporate Development department whose sole mission is to evaluate and acquire smaller businesses. Technology, beverage, manufacturing, and virtually any industry have companies who are looking to grow via acquisition.

 

Why is this a good idea again?
The person who sees the glass half-empty will tell you that corporate jobs do not pay as much. That’s true, but also consider the following:

 

In Summary…
Similar to the boutique banks, Corporate M&A teams are too small to have a solid corporate finance training program. Before approaching them you should make sure you have a very solid set of technical and modeling skills, and be sure to advertise this fact quickly. It also helps to demonstrate some interest and knowledge of the industry and a grasp of corporate strategy.

 

In-house M&A is an underestimated avenue that will equip you with very solid experience and valuable contacts for your future investment banking career.


Contributed by Neil Venters

Working on Wall Street - Boutique Banks

Jun 28, 2010
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Tags: Graduate Jobs, Wall Street, USA

This post is part of the Wall Street - Where to start your Corporate Finance Career series contributed by Neil Venters of mergersandacquisitionsjobs.com

Who are they and why should I even consider the ‘small fish’?
In 2007 the Wall Street Journal wrote “Now, students who may have otherwise settled for nothing less than big-name investment banks are seeking smaller, boutique and middle market [i.e. deals in the $100mln -$1billion range] investment firms that may offer more job stability.”

The statement is 10 to 12 times truer today for several reasons:

Boutique banks are oftentimes built around a competitive advantage, such as industry expertise (e.g. Tech M&A) or business model (e.g. Private Equity and Advisory business).  Since they do not have a big balance sheets to lure in the corporate clients with attractive financing, they focus on quality of the advice and more personal attention to client.

Where are the boutiques located?
Similarly to bulge bracket you will find a large number of firms in New York but also in most major cities in the US.  In fact, if you are not getting much traction with the top notch boutique firms on Wall Street, then try to shoot for regional banks who are often overlooked by candidates. Getting a job with a smaller, lesser known bank will still give you an exposure and experience that you can later use to upgrade your job. If necessary, shoot for a free internship over the summer or during the school year to gain the invaluable experience and an edge over your competition.

What else is different about boutiques?
One significant difference between Boutiques and Bulge Brackets is the training program. Bulge Brackets hire smart people and train them.  Boutiques hire smart people who are already trained, and can hit the ground running.  This is obviously because boutique banks do not have an infrastructure in place to set up methodical training. Hence if you are pursuing the boutique route, make sure you teach yourself relevant modeling skills and communicate that you did so early on when interacting with your contacts at the bank.

In summary…
I would recommend boutique banks to most people. You do not necessarily get the bulge bracket glamour or prestige from day one, but if you are smart, hardworking, and willing to learn, you will move up faster over time.


Contributed by Neil Venters

DCF - Discounted Cash Flow Basics - Scenarios

Jun 25, 2010
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Tags: DCF, Excel

This blog is going to run through how to incorporate multiple assumption scenarios into your DCF model. Scenario analysis is a pretty simple feature to incorporate into a model that can add a lot of value to your analysis of a company. Let's run through the basics of setting this up now.

Open up excel and set your worksheet up to look like the following example:

Next we need to data-validate cell C3 to be our trigger to switch between the scenarios. Data validation involves limiting what types of information can be displayed in a certain cell. Click on cell C3 then go to the Data Menu, then select Data Validation. This should bring up the following menu:

From the Allow menu featured in the picture above, select List. This should bring up the following screen:

Next we need to click on the small icon with the red arrow under the Source menu, and then select cells D1:E1. This should result in you seeing the following screen:

Select OK and you will have data-validated cell C3 so that it can now only contain the values that appear in cells D1:E1.

For the time being lets set cell C3 to equal 1 as per the example below:

 

Alright, now lets populate our scenarios with values so we can get this up and running. Put 5.00% in cells G7:I7, and put 3.00% in cells K7:M7 as per the example below:

Next is our formula. Go to cell C7 and type in the formula:

=IF($C$3=$D$1,1,0)*G7+IF($C$3=$E$1,1,0)*K7

This formula says that if the active scenario is set to 1 (C3) then select the growth rate for scenario 1, and if the active scenario is set to 2 select the growth rate for scenario 2. For a two scenario set-up there are shorter ways of doing this, however this formula style is best if you have lots of scenarios as you can keep adding scenarios 3, 4, 5 etc to the same formula without increasing the complexity of the formula or breaching excel's capacity to handle nested if statements (if you don't know what these are don't worry, not essential for understanding these concepts anyhow). Let's copy and paste that formula across cells C7:E7 and your screen should appear as per the example below:

And if you change cell C3 to 2, your screen should appear as per the next example:

You can then use the same formula to choose from a different set of operating assumptions for each line item you are modelling in your DCF model.

Your Financial Statement outputs will then link back to the active case, and you can compare how the company will have performed under different DCF modelling scenarios.

To learn more about Financial Modelling we encourage you to sign up for one of our courses today!

 

 

 

 

 


Contributed by Paul Mason

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