k Trim Size: 7in x 10in Pignataro ffirs.tex V1 - 01/10/2017 5:21pm Pagei The Technical Interview Guide to Investment Banking k k k k Trim Size: 7in x 10in Pignataro ffirs.tex V1 - 01/10/2017 5:21pm Page ii The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, finan- cial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. k k k k Trim Size: 7in x 10in Pignataro ffirs.tex V1 - 01/10/2017 5:21pm Page iii The Technical Interview Guide to Investment Banking PAUL PIGNATARO k k k k Trim Size: 7in x 10in Pignataro ffirs.tex V1 - 01/10/2017 5:21pm Page iv Copyright © 2017 by Paul Pignataro. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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Library of Congress Cataloging-in-Publication Data is available: ISBN 978–1–119–16139–4 (Hardcover) ISBN 978–1–119–16141–7 (ePDF) ISBN 978–1–119–16140–0 (ePub) Cover Design: Wiley Cover Image: © Mikhail Zahranichny/Shutterstock Printed in the United States of America 10987654321 k k Trim Size: 7in x 10in Pignataro ffirs.tex V1 - 01/10/2017 5:21pm Pagev This book is dedicated to every investor in the pursuit of enhancing wealth—those who have gained, and those who have lost—this continuous struggle has confounded the minds of many. This book should be one small tool to help further this endeavor; and if successful, the seed planted will contribute to a future of more informed investors and smarter markets. k k k k Trim Size: 7in x 10in Pignataro ffirs.tex V1 - 01/10/2017 5:21pm Page vi k k k k Trim Size: 7in x 10in Pignataro ftoc.tex V1 - 01/05/2017 12:13pm Page vii Contents Preface ix Introduction xi About the Author xvii PART ONE Introduction to Investment Banking 1 CHAPTER 1 Investment Banking Recruiting 3 k PART TWO k Financial Statements 9 CHAPTER 2 Financial Statements Overview 11 CHAPTER 3 Financial Statements Questions 38 PART THREE Valuation 103 CHAPTER 4 Valuation Overview 105 CHAPTER 5 Valuation Questions 114 PART FOUR Mergers and Acquisitions 139 CHAPTER 6 Mergers and Acquisitions Overview 141 vii k k Trim Size: 7in x 10in Pignataro ftoc.tex V1 - 01/05/2017 12:13pm Page viii viii CONTENTS CHAPTER 7 Mergers and Acquisitions Questions 162 PART FIVE Leveraged Buyouts 207 CHAPTER 8 Leveraged Buyouts Overview 209 CHAPTER 9 Leveraged Buyouts Questions 228 About the Companion Website 261 Index 263 k k k k Trim Size: 7in x 10in Pignataro fpref.tex V1 - 01/05/2017 12:13pm Page ix Preface nvestment banks perform two major functions. First, they act as intermediaries between Iinvestors, or suppliers of capital, and entities that request capital such as corporations. Second, investment banks advise corporations on mergers, acquisitions, restructurings, and other major corporate actions. Jobs within the investment banking industry vary widely; some roles can be very lucrative and as a result be highly sought after and competitive. This book seeks to give any student or professional interested in the investment bank- ing industry the technical tools to ace an investment banking interview. Having worked in the investment banking industry, I will give my personal perspective on what the invest- ment banking interview process is like. I will provide advice and strategy on how to best navigate such an interview process. The book will contain a series of standard investment banking and interview preparation questions that increase in difficulty. We will also go through a series of case studies important for later-stage investment banking and private equity interviews. This book is the ideal go-to guide for anyone who is looking to break into the industry. k k HOW THIS BOOK IS STRUCTURED This book is divided into five parts: 1. Introduction to Investment Banking 2. Core Financial Statements 3. Valuation 4. Mergers and Acquisitions 5. Leveraged Buyouts Each part will aim to give a brief overview of the core concepts: enough to bet- ter your knowledge for investment banking interviews or just a refresher. After each overview, chapters will contain interview questions and answers in increasing difficulty. These questions and answers do not capture every single possible topic, but will cover the most common. The most important thing to remember is you will never know exactly what will be asked in an interview, or how a particular question or scenario will be posed; but if you have the proper conceptual understanding of the core topics, you will be able to handle a multitude of questions asked on each topic. ix k k Trim Size: 7in x 10in Pignataro fpref.tex V1 - 01/05/2017 12:13pm Page x x PREFACE If you need a stronger technical understanding or an actual modeling overview of each topic, I would recommend reading my other books, which dive deeper into each topic and provide steps for building a model from scratch: Financial Modeling—Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity Valuation—Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity Mergers and Acquisitions—Mergers, Acquisitions, Divestitures, and Restructurings: A Practical Guide to Investment Banking and Private Equity Leveraged Buyouts—Leveraged Buyouts: A Practical Guide to Investment Banking and Private Equity k k k k Trim Size: 7in x 10in Pignataro flast.tex V1 - 01/05/2017 12:14pm Page xi Introduction n investment bank is large, complex, and has many facets. In order to best understand Athe investment banking interview process, it is important to first give an overview of the major investment banking departments operating within an investment bank and the major roles within each department. This will help a job seeker identify and better understand the roles sought after in an investment bank and the most popular areas of interest for job applicants. Note this is just a high-level overview; you will always find more departments as you dig deeper, and each bank may slightly vary. It is first important to highlight the difference between an investment bank and acom- mercial bank. An investment bank underwrites securities and performs advisory services while a commercial bank accepts and manages deposits for businesses and individuals. In 1933 the United States issued the Glass-Steagall Act that prohibited banks from performing both “investment banking” and “commercial banking.” This act was set up in response to the Stock Market Crash of 1929 in order to prevent banks from betting on the market at the expense of depositors. This act was repealed, however, in 1999. k k OVERVIEW OF MAJOR DIVISIONS The following chart highlights the major banking divisions I will explore. Again this is not meant to be a complete overview, but just the key areas. These descriptions are meant to be a very brief overview just to give you enough of an idea to differentiate between divisions for interview purposes.