Investment Banking Institute Financial Modeling and Valuation

Training for Finance Careers

The Comprehensive Guide to Interview Preparation and Resume Revision

IBI COMPREHENSIVE GUIDE TO INTERVIEW PREPARATION AND RESUME REVISION

HOW TO DRAFT THE PERFECT RESUME AND ACE THE MOST CHALLENGING INTERVIEWS

www.ibtraining.com

INCLUDES COMPREHENSIVE TECHNICAL FINANCE AND ACCOUNTING QUESTIONS AND ANSWERS

BY ASHISH KOHLI Investment Banker and Professor, IBI - MBA, Kellogg Graduate School of

Management; Chartered Accountant

This publication contains the opinions and ideas of its author. Neither the author nor the publisher can guarantee the accuracy of the information contained herein. The author and publisher specifically disclaim any responsibility for any liability, loss, or risk, professional or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this book.

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Author’s foreword Early in my career, I spent the night before an important interview nervously preparing for the following day. I ended up having a disastrous interview for a job that I really wanted due to insufficient and last minute preparation. I wished that I had known someone who could have given me not only great, but also practical advice. I decided there and then that I would speak to lots of people…get lots of advice …and never make the same mistake again… This book is meant to prepare you for not only jobs in the finance industry but also for the important interviews in your life. I want to share my personal experience of an investment banker with some of the leading banks globally and actively leading the recruiting efforts for these banks at some of the most prestigious schools in U.S., Europe and Asia. I believe that this book will serve as an excellent resource for undergraduate and graduate students as well as experienced professionals looking for jobs in finance. I suspect you may be reading this book for many different purposes – perhaps you are reading this because you’ve been scheduled to interview with a firm of your dreams. You are excited about the job and what it might mean for your career. You want to shine but you are nervous that you might mess up. You may also be reading this book if you are applying for undergraduate or graduate school and need to make a resume and have an interview scheduled with the school or alumni. This book will help you prepare for your interview…and prepare you for life. Throughout our lives we are constantly interviewing to sell ourselves and our ideas. The interview process includes applying to undergraduate school, first jobs, graduate schools and jobs thereafter. I strongly urge you to find your passion and use this book to market yourself and find the job that you will enjoy the most. “In the modern world of business, it is useless to be a creative, original thinker unless you can also sell what you create”

- David Ogilvy, Founder of Ogilvy & Mather

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TABLE OF CONTENTS

1. Creating a perfect resume………………………………………….. Pg 5

• Top 10 resume rules…………………………………………… Pg 6 • Detailed tips for creating your resume………………………… Pg 7 • Example resume formats……………………………………… Pg 9 • IBI bullet point information………………………………….. Pg 11

2. Composing concise cover letters………………………………….. Pg 13 3. Networking for the interview……………………………………... Pg 16

4. Acing the interview…………………………………………………Pg 20

• Top 10 rules for interview success……………………………Pg 21 • Select expected interview questions…………………………. Pg 23

5. Sending thank you letters and following up on interviews………Pg 25

APPENDICES

A. What are the different jobs in Finance?......................................... Pg 28 B. Comprehensive Finance interview questions……………………. Pg 35 C. Recommended reading material………………………………….. Pg 51 D. Resume of author………………………………………………….. Pg 54 E. Action words for resumes…………………………………………. Pg 57 F. Interesting articles………………………………………………….Pg 60

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1. CREATE YOUR PERFECT RESUME

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THE 10 MOST IMPORTANT RESUME RULES Resume is the most important one page of our life. It is the “Story” of our professional

and personal achievements

1. Limit your resume to one page

• If you cannot summarize your skills and experience effectively on one page, it's probably too wordy and your resume will not make the desired impact on the reader

2. Ensure that your resume is achievement oriented

• Start your resume preparation by listing your top 10 achievements and skills from your job, school and extra curricular activities. Then use your list as a basis for writing the resume

3. Should ideally include 3 sections

• Experience, Education and Additional Information o Experience should be the first section unless you are currently in school, then

Education should be first

4. Present information in bullet point form • Ensure a clean, uncluttered layout with plenty of white space. Goal is to create a

document that is easy to read and is visually appealing

5. Start sentences with power words • Power Words include “Managed”, “Performed”, “Led” • Appendix 2 has a list of action words for your reference

6. Distinguish yourself from others

• What sets you apart from other students with similar coursework / backgrounds and GPAs?

• If you were the recruiter, why would you choose your resume out of the hundreds of others?

7. Tailor your resume to your audience

• Help the reader answer the question “Why will this candidate be an asset to my firm?”

8. Review your resume over and over again for typos and discrepancies • Have at least one or a few other people give the resume a close read • Resume should be technically and grammatically perfect • Review with professional resume writer, friends, school career services

9. Emphasize use of parallel construction

• Example “performed the analysis and presented results”, not “performed analysis and results presenting”

10. Never lie on your resume • It takes 20 years to build a reputation and five minutes to lose it

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DETAILED TIPS FOR CREATING PERFECT RESUMES HEADING SECTION - Name, contact address and phone number, email EXPERIENCE SECTION • Should provide details of your career to date, summarizing the companies you have

worked for, in reverse chronological order, together with the principal responsibilities and achievements within your various roles

o Include the company name and a line describing what the company does, unless it's a household name that needs no introduction

o Indicate your job title(s) providing more information on the more recent roles than the earlier ones

• Be sure to include significant achievements in this section. Wherever you can, use numbers to quantify the direct results of your efforts. Examples include:

o “Promoted 2 times in 3 years, six months ahead of peer group for outstanding performance”

o Think: what was the issue/challenge? What action did I take? What were the results (quantified if possible)?

o Choose specifics not generalizations, “I” not “we” but beware of sounding like you are not a team player

• Don't go into detail on the jobs early in your career; focus on the most recent and relevant jobs

• Target vs. General resumes o You will have one general resume which you will need to customize when

applying for different jobs o Make sure you target the resume for the job highlighting more of the skills

needed for that job EDUCATION SECTION • Provide detail of your educational qualifications in reverse chronological order,

including any professional certifications you have completed o Include Investment Banking Training program bullets under Education

• Highlight major distinctions and awards you have won o “Graduated top 5% of class”

• If you are still in college or just recently graduated, focus also on leadership positions and memberships

• Focus on specific leadership positions held rather than membership in numerous clubs

o For example, “Formed investment banking club, comprising of over 100 active members”

o Membership in clubs - focus on your role and how you contributed ADDITIONAL INFORMATION SECTION / OTHER DATA SECTION This section is very important as it provides an opportunity for you to advertise distinctive skills, give the interviewer a sense of your personality and demonstrate that you are well rounded, competitive and a team player. This should not necessarily be a list of all your sports and interests. Instead focus on two of three diverse examples to stimulate conversation and illustrate personality. Examples include:

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• Sports

o Competitive sports – demonstrates to reader that you can handle pressure and discipline

o Good conversation topic o Corporate sports including golf, lacrosse, tennis o Team sports demonstrate that you can communicate and work well with

others • Highlight skills

o Proficient in Microsoft Word, Excel and Power point Basic skills is assumed for applicants for finance jobs Highlight distinctive skills within these software (e.g., Visual

Basic) o Ability to use research databases like Bloomberg

• Languages o Be careful as Hindi is not generally the language of business in India o Mandarin and Cantonese are important for working in Shanghai and Hong

Kong o For each language listed, state skill level – “Beginner, Proficient, Fluent”

• Other interests o Including international travel, art

• Include publications and articles you have written • Community leadership programs or volunteer work • Professional Affiliations

o Focus on current affiliations that are impressive and relevant

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RESUME FORMAT I XXXX St., Apt. XX

New York, NY 10003

Telephone: 212.555.5555

FIRST AND LAST NAME xxx@gmail.com

EXPERIENCE

Company Name August 2003 – May 2006

Associate, Investment Banking, Communications and Electronics Group San Francisco, CA

Focused on sell-side mergers and acquisitions advisory for high-growth technology companies

Notable active engagements include:

─

Company Name July 2001 – July 2003

Analyst, Investment Banking New York, NY

Supported all transaction stages in various product groups including (i) financial restructuring, (ii)

mergers and acquisitions and (iii) financial advisory (business valuations, fairness opinions and

solvency opinions)

Notable closed engagements include:

─

─

EDUCATION

University Name May 2001

Bachelor of Science: Finance and Information Systems New York, NY

ADDITIONAL INFORMATION

- Extensive experience in Excel, Word, PowerPoint, Bloomberg, FactSet, Capital IQ, SDC

- Played squash for UK national team

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RESUME FORMAT II

FIRST AND LAST NAME

ADDRESS

TELEPHONE

EMAIL

EXPERIENCE

2007-2008 COMPANY NAME New York, NY

Director, Investment Banking – Corporate Finance, Alternative Energy Group

•

•

2005-2007 COMPANY NAME New York, NY & London, UK

Vice President, Investment Banking – U.S. Advisory Group

•

•

•

2001-2004 COMPANY NAME New York, NY

Senior Associate, Investment Banking – Generalist Group, Media and Telecom Group

•

EDUCATION

1997-1999 UNIVERSITY NAME Evanston, IL

Master in Business Administration, June 1999

• Majors in finance and accounting. Deans List.

1992-1995 INSTITUTE NAME New Delhi, India

Chartered Accountant, August 1995 (Equivalent to U.S. CPA)

1989-1992 UNIVERSITY NAME New Delhi, India

Bachelor of Commerce (Honors), May 1992

• Major in accounting and finance.

OTHER DATA

• Languages

• Interest/Hobbies

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IBI Bullet point information to be incorporated into resume: Investment Banking Institute, [Location] [Month & Year]

Abridged version I: Intensive 4-week financial modeling and valuation training program

• Performed company valuations utilizing (i) comparable public company analysis, (ii) precedent transactions analysis and (iii) discounted cash flow (DCF) analysis

• Built fully-integrated financial statements projection model, LBO model,

accretion/dilution merger models, including ability to run operational and capital structure sensitivities within models and data tables for sensitivity analysis

Abridged version II: • Completed a four week intensive course on financial analysis, valuation

methodologies and advanced financial modeling

• Performed company valuations utilizing (i) comparable public company analysis, (ii) precedent transactions analysis and (iii) discounted cash flow (DCF) analysis

• Built fully-integrated financial statements projection model, LBO model,

accretion/dilution merger models, including ability to run operational and capital structure sensitivities within models and data tables for sensitivity analysis

Long Version: • Participated in a one-month intensive Investment Banking Seminar focused on (i)

financial statement analysis, (ii) valuation methodologies and (iii) financial modeling

• "Normalized" and "Spread" historical and projected financial statements,

including in depth analyses of operational and leverage ratios

• Performed company valuations utilizing (i) comparable public company analysis, (ii) precedent transactions analysis and (iii) discounted cash flow (DCF) analysis

• Built a fully integrated cash flow model, including 5-year projections, debt and

interest schedules, revolver modeling and sensitivity tables

• Modeled leveraged buy-out (LBO) and merger scenarios, with emphasis on sources and uses, pro forma financial statements, purchase price considerations, synergies, accretion/dilution and ratio analyses, among other concepts

• General investment banking processes such as pitching, debt and equity financing

and sell-side M&A

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Distressed Case Study/Course Bullet Point:

• Pursued a case study for a leading US consumer company regarding its $600 mm recapitalization transaction, including a $106 mm new equity investment by private equity investors

IBI One Day Investment Banking and Finance Boot Camp at Universities:

Investment Banking Institute, [Location] [Month & Year]

Financial modeling and valuation training program

• Normalized" and "Spread" historical and projected financial statements, including analyses of operational and leverage ratios

• Overview of company valuations utilizing (i) comparable public company analysis, (ii) precedent transactions analysis and (iii) discounted cash flow (DCF) analysis and built fully-integrated financial statements projection model

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2. CONCISE COVER LETTERS

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CONCISE COVER LETTERS The cover letter should be kept short and to the point. The cover letter should enable you to tell the recruiter what you can do, should attract attention of the interviewer towards you and focus on follow up action in terms of scheduling a job interview or meeting someone for a cup of coffee. The following should be highlighted in the cover letter:

IMPORTANT POINTS FOR COVER LETTER Keep the length to 2 to 3 short paragraphs

• First paragraph o Focus on why you are writing the cover letter and clearly specify the

position you are seeking If a mutual friend referred you for the job, it might be a good idea

to put the name upfront as it grabs the readers attention

• Second paragraph o Focus on why you are qualified for the job (how you fill a need) –

research the company and the specifics of the job so you can tailor the letter to the needs of the organization

Avoid obvious general phrases e.g. “leverage my analytical skills” o Accomplishment and skills oriented and directed at qualifications needed

for the job o Cite specific examples from your earlier jobs but do not reiterate language

from the resume word for word o Try not to overuse “I”. This should be about what you can do for the

company o Insert a statement that illustrates you have done your research and

differentiates you from others

• Third paragraph o Refer to the enclosed resume o Thank the reader for his time and consideration o Request an interview o If there is no specific job posting, request an opportunity to meet the

reader for an informal interview or a cup of coffee For networking letters: perhaps finish the letter with a question to

stimulate a response and/or state that you will follow up with a call, otherwise you give up power to the recipient

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SAMPLE COVER LETTER

December 1, 2008

Ms. Kimberly Clark Director of Finance XYZ Company Inc. 453 Park Avenue New York, NY 10018

Dear Ms. Clark,

I am writing this letter to apply for the Financial Analyst position for your New York Office. Joe Desmond, CFO of ABC Company, Inc. who I believe you know mentioned that I reach out to you regarding the particular position. I have three years experience as a financial analyst with ABC Company and was promoted to financial analyst within two years for outstanding performance, which was one year ahead of time.

I am extremely excited at the opportunity to be part of your growth company and strongly believe that my prior experience and skills will enable me to be a valuable contributor to the finance team.

Please consider my application for this position. I look forward to meeting with you to discuss my experience and qualification. Please contact me at 917682xxxx or through email joshharris@hotmail.com. I will also call you next week to follow up on this opportunity.

Thank you for your consideration.

Sincerely,

Josh Harris

Enclosure Resume

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3. NETWORKING FOR THE INTERVIEW

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NETWORKING FOR THE INTERVIEW

Networking is a very important and continuous process in our life. As you network always remember the importance of reciprocity (i.e. what can you offer the person helping you). Reciprocity creates a strong basis for a networking conversation

STUDENTS CURRENTLY IN SCHOOL

• Most companies have focused “ target school” teams for recruiting o Comprises of HR professionals and employees from the particular division

• Companies come to campus for presentations and interviews at scheduled dates o Make sure you attend the presentations

Learn more about the companies and the job Network with the people who come for these presentations as

generally they are alumni from the school

• Organize informational interviews with people in the firm o Realize that these employees are busy so the informational interviews

should be focused If you can have a group of interested students, organize for that

group to meet the firm at a particular date • Generally good for the company as they can market to a

larger group of people • For one-on-one informational interview make sure you

have done your homework and have focused questions, or else these interviews can go against you rather than being helpful

• Your goal is to be selected by the recruiter or person in-charge of reviewing

resumes at these firms and get an opportunity to interview with the firm • If the Company does not come to your school, make sure you reach out to people

at the Company to conduct informational interviews o Alumni are generally the best source a student has to access a particular

company Your school should be able to provide you names of alumni at the

targeted companies, generally through an online database

EXPERIENCED PROFESSIONALS

• Alumni o Alumni are the best source to network for the job o Education is a lifelong investment and your school’s alumni network can

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be helpful for your entire life. Alumni tend to be receptive when approached because they have gone through similar situations before and are generally receptive to conversation since they have affinity for their alma mater

o Remember to be courteous and respectful to all and do not expect every alumni to reply to you

o Approach Alumni and request an informational interview (rather than explicitly asking for a job). Individuals tend to like to talk about their experiences, what they know about the industry, and who might be hiring

o Focus on bonding with the individual. The more the person likes you the more likely they are to help you with your search

o Always ask for referrals / other individuals to talk to. The chances are the alum will have a number of contacts in the industry

o Do not forget that every conversation you have is an interview. Be prepared and ask good, specific questions

• Headhunters

o Establish relationships with headhunters Initiating a relationship with a headhunter is best when you are not

looking for a job o Make sure you know the right headhunters to approach o Know the difference between retained and non retained search firms o Some headhunters are domestically focused and other internationally

focused o Headhunters specialize in particular industries, and in particular areas of

finance and accounting

• Friends and Acquaintances o Network with friends and acquaintances you know and you might even be

able to utilize their contacts

• Use Professional Online Social Networks o e.g., Linked In www.linkedin.com

• Professional Associations o Taking an active part in professional associations and it is a great way to

meet people from different walks of life who could have contacts at the places you want your job

• Cold Call

o If your alumni network is not that strong and headhunters and friends have not been able to get you the interview you want, cold calling and sending your resume to HR and people at the Company is an option

Less chances of conversion but it is better to have said that I tried than to have said I did not give it my best shot in life

The Company’s website will usually have HR contact information or ways to apply for a position

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IMPORTANT POINTS TO CONSIDER

• Have goals both short-term and long-term o Our goals can only be reached through a vehicle of a plan, in which we

must fervently believe, and upon which we must vigorously act. There is no other route to success”

-Pablo Picasso, Artist

o “Give me a stock clerk with a goal and I’ll give you a man who will make history. Give me a man with no goals and I’ll give you a stock clerk”

-CEO of JC Penny

• Be persistent o “Sticking to it is the genius! Any other bright-minded fellow can

accomplish just as much as I did if he will stick like hell and remember nothing that’s anything works by itself. You got to make the damn thing work. I’ll never give up, for I may have a streak of luck before I die”

-Thomas Edison, Inventor

• Be confident but not overly aggressive o History will be kind to me, for I intend to write it.

-Winston Churchill, Former Prime Minister of Great Britain

• Be enthusiastic o “Enthusiasm is one of the most powerful engines of success. When you do

a thing, do it with all your might. Put your whole soul into it. Stamp it with your personality. Be active, energetic, be enthusiastic and faithful, and you will accomplish your objective. Nothing great was ever achieved without enthusiasm”

-Ralph Waldo Emerson, Poet and Philosopher

• Setbacks will happen but how you handle them is important o “Success is the ability to go from failure to failure without losing your

enthusiasm” -Winston Churchill, Former Prime Minister of Great Britain

• Invest in yourself

o Keep developing your professional skills o Education is a continuous process and keep doing courses or seminars

which enhance your resume and separate you from other candidates

• Choose a job you will enjoy going to work everyday o “I’d rather be failure at something I enjoy rather than be a success at

something I hate” -George Burns, actor and comedian

• And finally, there is no substitute for hard work o “Some people dream of success while others wake up and work hard at it”

- Anonymous

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4. ACING THE INTERVIEW

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TOP 10 RULES FOR SUCCESSFUL INTERVIEWING

1. First impressions are very important • Dress conservatively and professionally for the job

o Good very dark suit • Shine your shoes

o Black lace-up shoes • Impressive briefcase or a folder

o Do not have a lot of stuff or bags with you • Stand tall, shake hands firmly • Be positive

o Appropriate expression of emotions including smile, enthusiasm and affirmative body language and outlook

• Make eye contact and speak with confidence • Remember name of the interviewer

2. Be on time for the interview

• Arrive at least 15 minutes early for the interview so you are relaxed and can collect your thoughts before the interview

3. Know every detail in your resume

• For internships or work you have done make sure you can talk about your role on a particular transaction you have highlighted

o “Your” role and what you did on the team is important

4. Research the Company before the interview • Look at the company's website and annual report • Search the Internet for any news about the company • Remember that there is no excuse for not knowing the ins and outs of the company,

especially since information is easily accessible on the Internet

5. Research the job and the person interviewing you in case you know prior to the interview • Make sure you are familiar about the requirement of the job • Search the Internet for the background of the interviewer if you know who the person

is o Linked In and other social networking sites have a lot of information

6. Be prepared to answer questions you do not know

• Qualify what you know and what you do not • You are not expected to know every possible question to get the job but how you

handle questions you do not know is very important o Do not be alarmed or nervous. How you handle pressure situations is

important for the interviewer. Think for a few moments and calmly admit you don’t know the answer “I will have to get back to you”

7. Make sure you have done enough mock interviews with people who would provide you

critical feedback • Make sure you have practiced expected questions in the interview and hopefully

written answers to these questions before the interview

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• Practice, Practice and Practice o Just like in competitive sports, hard work and practice will make you perfect

8. Make sure you listen to the questions and answers of the interviewer carefully

• Confirm what you have heard if you are not sure – “I just want to be sure that I heard you correctly”, “Could you please repeat that”

o If you give an answer and the interviewer mentions that it is not the right answer do not mention at that point that you had not heard him/her correctly

• Discuss and not argue with the interviewer • Do not interrupt the interviewer – let the interviewer complete their thoughts while all

the time really listening to what they are saying before offering your own • Pause for a second before answering the question

o Signals that you have listened to the other person

9. Create a list of questions for the interviewer • There will likely be time at the end of the interview for your questions • Be sure to have a list of questions that spark the interviewers interest and are not

easily answered by going to the Company website

10. Send a thank you note within 24 hours of the interview • Email is fine as some decisions are made quickly but it is usually better to follow up

with note in mail • Address any questions you couldn’t answer during interview or any open issues

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SELECT EXPECTED INTERVIEW QUESTIONS

An interview for finance jobs generally lasts 30 minutes

• Expect some questions addressed below in a finance interview • I strongly encourage you to develop answers preferably in writing to the questions

below before your interview. This will help you in current and future interviews • Finance interviews are generally a mix of “fit” and technical questions • The last 5-10 minutes of the interview is generally reserved for you to ask the

interviewer questions about the job and the firm

Below is a list of questions you should expect to be asked in a finance interview. I highly recommend that you WRITE THE ANSWERS TO THESE QUESTIONS as you will be using these throughout all your life

• Tell me about yourself or Walk me through your resume?

o Interviewer has not had the chance to review the resume in advance of the meeting and

also gives him an opportunity to hear “your” story o In approximately 2 minutes (keep it short and to the point) walk the interviewer through

your resume starting with your education and then your work experience o Highlight key points/achievements and focus on why you made those decisions o End with why you are interested in the job you are interviewing for o Have a flow in the story - show natural progression in jobs you have had or why you

made the decisions including companies you worked for and positions o First impressions are very important – some people say that they have made up their

mind about the candidate in the first five minutes of the interview o Focus on more recent experiences, and ones that are relevant to the position you are

seeking o Two minutes is a good time for this question, but if you see that the interviewer is

engaged you can spend an additional minute or so o Do not read from your resume “you should have practiced this question before – look at

the interviewer while answering this question”

• Why investment banking?

o Highlight how you became interested in investment banking, For example, you met investment bankers while working alongside them if you are an auditor or a lawyer and was really interested in the work they do

o Like working on transactions o Show qualities important to investment banking - attention to detail, ability to work long

hours/the willingness to sacrifice personal life, analytical abilities o Steep learning curve o How it is different from other areas like consulting – transactions are shorter than

consulting projects and you see results right away o Answers like “I want to make a lot of money” should be avoided – Money is something

which will come in the long term

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• Why Goldman Sachs or Citigroup or the Company you want to work for?

o Make sure you understand the differences between the various investment banks Bulge bracket, mid-market, commercial banks with investment banking divisions

and boutique banks o Culture of these banks o Transactions they have done

Make sure you know about the recent deals the bank has done o Type of clients they have o Core strengths of these banks in terms of products whether M&A or leveraged finance o Speak to people you know at those banks and mention that these are the things you found

from those people to the interviewer o If you would like international experience or work in a particular country make sure that

the bank is strong in that area

• Two questions to ask the interviewer at the end of the interview?

o Make sure you know the title of the interviewer – different question for a managing director vs. analyst

o Prepare these questions in advance o Specific questions regarding the qualities required for the ideal candidate for the position o Do not be negative about the Company in the questions you ask

• In your work experience describe the 2 main projects/deals you have done?

o Focus on your role in the transaction or project

Interviewer wants to see what your role is even if the deal is too big or small and if it succeeded or not

Make sure you prepare and write this down – again, this is something you will use time after time

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5. SENDING YOUR THANK YOU LETTERS AND FOLLOW UP ON YOUR INTERVIEW

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THANK YOU LETTERS

• Keep the length brief to 2 to 3 short paragraphs • Personalize the letter. Do not use a generic letter for every employee you meet • Group correspondence can be sent if you met several people at the Company.

However, individual thank you notes are preferred • Does a thank you letter make or break chances of getting a job?

o May not get you the job but demonstrates that you have interest in the job and always good to thank people for their time and consideration

• E-emailed thank you note or sent by post? o Companies make their hiring decisions quickly so email may be

appropriate o It is always good to send a hard-copy version via mail

• Proofread: Sloppy, poorly written thank-you letters, riddled with typos, misspellings, and grammatical errors could cost you the job

FOLLOW UP ON YOUR INTERVIEW AND JOB OFFER

• If you have got the job, make sure you thank all the people who helped you achieve your goal

o Alumni, headhunters, friends and all other people who helped you A number of people forget to do this as they deem it is no longer

important – you do not know when you may need them again or where you meet them again in your life

• Thank people even after an informational interview or if you had a chance to meet them for coffee

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SAMPLE THANK YOU LETTER January 2, 2009 Mr. Patrick Larsen Director, Investment Banking ABC Company Inc. 345 Park Avenue New York, NY 10128 Dear Mr. Larsen, I want to thank you very much for interviewing me today for the investment banking associate position at your firm. I enjoyed meeting you and learning more about the mergers and acquisitions group at ABC Company Inc. The interview strengthened my enthusiasm for the position and interest in working for ABC Company. I believe my education and prior experience at XYZ fit nicely with the job requirements, and I'm certain I will make a significant contribution to the firm. I would like to reiterate my strong interest in the position. Please feel free to call me at the telephone number listed above if I can provide you with any additional information. Again, thank you for the interview and for your consideration. Sincerely, John Harris

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APPENDICES

A. WHAT ARE THE DIFFERENT JOBS IN FINANCE?

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WHAT ARE THE DIFFERENT JOBS IN FINANCE?

1. Investment Banking

The main functions of an investment bank are Capital Raising (Equity and Debt Financing) and Merger and Acquisitions and other advisory work. Investment banks can be grouped into three main categories: • Bulge Bracket Banks

o Largest global investment bank dealing with almost all types of products and operating in all types of sectors or industries catering to both large capitalization and mid cap and small cap clients

• Mid-market Banks and Commercial Banks with investment banking capabilities

o Mid market banks focused on mid cap and small cap companies (generally companies with market capitalization under $10 billion)

o Commercial banks with investment banking capabilities focus on providing investment banking capabilities to their corporate clients

• Boutique Banks

o Focused on mergers and acquisitions and advisory work and private equity and debt financing

Bulge Bracket Banks Commercial Banks with Investment

Banking Banc of America/Merrill Lynch Barclays BNP Paribas Citigroup Dresdner Kleinwort Credit Suisse HSBC Deutsche Bank AG Macquarie Group Goldman Sachs Mitsubishi UFJ Financial Group JP Morgan RBC Capital Markets Lazard (Strong M&A advisor) Royal Bank of Scotland Morgan Stanley Scotia Waterous Rothschild (Strong M&A advisor) Societe Generale UBS TD Securities Inc. Middle Market Banks Boutique Banks Cantor Fitzerald Alvarez and Marsal Cowen & Company Duff & Phelps Friedman Billings Ramsey GMP Securities Jefferies & Company, Inc. Rodman and Renshaw Piper Jaffray & Co. Saegent Advisors

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• Bulge Bracket Investment Banks generally have industry and product groups. o Industry groups represent almost all industries including consumer products,

healthcare, financial institutions, technology, media and telecom, energy group o Product groups include mergers and acquisitions, restructuring, leveraged finance,

debt capital markets and equity capital markets

• The typical structure of investment bank is: o Analyst – Typically join after undergraduate and some outstanding analysts are

promoted to associated in approximately three years o Associate – Join after MBA or other graduate programs or are analysts which are

promoted to associates. Sometimes, banks hire associates with industry experience

o Vice Presidents – Associates are promoted to Vice President in three to four years o Senior Vice President or Directors – Vice Presidents are promoted to Senior Vice

Presidents in two to four years o Managing Directors – Directors are promoted to Managing Director within two to

four years

2. Venture Capital

• Venture Capitalist typically raise money from institutional investors to form a fund for a period of time generally 10 years, using it to invest in start up high-growth potential private companies. They hope to generate a return or profit later when the start-ups go public via IPOs or are sold Venture capital firms include: - 3i Group - Benchmark Capital - Draper Fisher Jurvetson - Kleiner Perkins, Caufield and Byers - New Enterprise Associates - Sequoia Capital

3. Private Equity - Leveraged Buyouts

• Leveraged Buyouts involve making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage

• Companies selected for these transactions are typically more mature than those invested

by venture capital funds and tend to generate predictable operating cash flows to service the debt loads - Blackstone Group - Kohlberg, Kravis Roberts - Bain Capital - Carlyle Group - Apollo Group - Apax Partners - Candover

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4. Sales and Trading

• Sales and Trading could involve working in Equity, Debt, Commodities, Emerging Markets or Currencies product group

• Sales and Trading is offered by almost all the investment banks who receive commissions and fees for performing those services

o In Sales, you help maintain relationships with institutional investors, and match the banks services and products to their needs

o You work with the Trading and Research teams to provide comprehensive client coverage, including fulfilling client requests for market updates, executing client orders and providing institutional clients with information about specific securities

You may also provide marketing ideas and help initiate transactions o In Trading, you help senior traders cover institutional accounts and make markets

in your group's particular range of products. You will assist the senior traders in managing risk, liquidity and exposure and you may support all aspects of the trading desk: pre-trade analysis, research on index constituent changes, inbound and outbound trade processing and the design of optimal strategies for large trades

o Proprietary Sales and Trading is when the bank uses its own balance sheet to trade. Goldman Sachs made an enormous amount of its profits through proprietary sales and trading

5. Equity and Fixed Income Research

• “Sell Side” Equity analysts research stocks and write reports on public companies with their views on the particular company’s stock price – generally buy, sell or hold o Securities analysts are usually further subdivided by industry specialization or

sectors o Among the industries with the most analyst coverage are biotechnology, financial

services, energy, and computer hardware, software and services Fixed income analysts research bond issuers. Fixed income analysts are

also often subdivided by asset class. Among the fixed income asset classes with the most analyst coverage are convertible bonds, high yield bonds and distressed bonds

6. Hedge Funds

• A hedge fund is a private investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of activities than other investment funds and also pays a performance fee to its investment manager

• A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk

• The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions

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Some of the leading hedge funds are:

- SAC Capital - Atticus European Fund - RAB Capital. London - Appaloosa Management - Citadel

7. Accounting Firms

• Accounting Firms have corporate finance groups which perform mergers and acquisitions and private capital raising work and also transaction advisory groups which specialize in financial and other due diligence work

• Accounting firms also have audit and tax groups which would also allow you to obtain your chartered accountancy or CPA professional certification. Some of the leading accounting firms are:

- PricewaterhouseCoopers LLP - Deloitte & Touche LLP - Ernest & Young LLP - KPMG LLP - Grant Thornton LLP - BDO Seidman LLP - McGladrey & Pullen LLP

8. Investment Management

• Investment management is the professional management of various securities (shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors

• Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds)

• The term asset management is often used to refer to the investment management of collective investments, whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors

• The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Some of the leading investment management firms include

- BlackRock - PIMCO - D.E. Shaw & Co. - Wellington Capital Management - JP Morgan Asset Management

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- T. Rowe Price - ING Investment Management

9. Commercial or Corporate Banking

• A corporate or commercial bank is a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public. Commercial banking is also known as business banking

• They also provide other services including providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures and currency exchanges

Some of the leading commercial banks are:

- HSBC - Bank of America - JP Morgan - Wells Fargo - Barclays

10. Private Wealth Management

• Private Wealth Management is the term generally used to describe highly customized and sophisticated investment management and financial planning services delivered to high net worth investors

• Generally, this includes advice on the use of trusts and other estate planning vehicles, business succession or stock option planning, and the use of hedging derivatives for large blocks of stock

Some of the leading firms include:

- Morgan Stanley Private Wealth Management - Bank of America - Raymond James - Piper Jaffray - Goldman Sachs - UBS - Credit Suisse

11. Corporate Finance Jobs at Companies

• All leading corporations have corporate finance and mergers and acquisitions groups which work with investment bankers to identify and execute transactions

• Further, these companies often offer analyst and associate positions which include intensive financial modeling. Some of the leading firms include:

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- Pepsi - Coke - BP plc - Pfizer

12. Management and Strategy Consulting

• Management and Strategy consulting jobs involve working to improve the performance of companies by evaluating all aspects including Strategy, Finance, Operations and Marketing and Sales. Managing and Strategy consulting jobs value financial modeling experience

Some of the leading firms include:

- McKinsey & Company - The Boston Consulting Group - Bain & Company - Monitor Group

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B. COMPREHENSIVE FINANCE INTERVIEW QUESTIONS

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QUALITATIVE INTERVIEW QUESTIONS Finance job interviews generally will involve a mix of “fit” and “technical” questions. Some other qualitative questions besides the ones highlighted earlier in the document you might be asked are:

Some of the Fit Questions are

• What are your strengths? o Analytical and quantitative skills o Communication skills o Attention to detail o Multi tasking projects o Ability to work long hours and work “smart” o Provide examples

• What are your weaknesses? o Weakness should be genuine, but that you recognize it and have taken steps to

address it o Some people say that I expect too much from my colleagues in terms of high

standards Interviewers will see through obvious self-serving “weaknesses” like “I

work too hard”

• What other banks are you interviewing with? o Make sure the other banks you highlight are similar to the bank you are

interviewing with for example Compare a bulge bracket bank to another bulge bracket bank in case you

highlight you want to work for a large global bank Show that you understand what the bank does are if you show keen

interest, you are interviewing with other banks having similar capabilities

• What other areas are you interviewing for – consulting, corporate etc? o Show focus in your job search

You are competing in an industry where your peers want this job badly Consulting and banking are different in terms of style of interviews

• Consulting interviews are more case based where you would be given a case and the interviewer will ask your thoughts on that case

• Finance interviews have a more conversation style • Generally, people who interview across the board end up not

getting the job they want o Reason is a lot of work goes in networking and trying

to get an interview and preparing for those interviews

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TECHNICAL INTERVIEW QUESTIONS

ACCOUNTING QUESTIONS

Some of the questions are more relevant to the undergraduates while some may be more relevant to graduates and experienced professionals who are currently in the industry. I have divided the sections into basic questions and advanced questions. Generally, advanced questions will be applicable to people interviewing who currently are working in finance and accounting or for candidates who have taken finance and accounting classes in school.

“You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to put in the effort to learn accounting – how to read and interpret financial statements-you really shouldn’t select stocks yourself” -Warren Buffet

BASIC QUESTIONS

What is a balance sheet, income statement and the cash flow statement?

• Balance Sheet o Tells us the company’s assets, liabilities and shareholders equity or a

company’s financial status at a specific point in time

• Income Statement o Tells us how much money has the company earned or represents a firm’s

operating results during a set period of time i.e. a fiscal year or quarter Answers the question – How much profit has the company made

for the 3 month or 12 month period?

• Cash Flow Statement o Tells us how much cash the company has flowed in and out of the

business for the period o Cash flow statement is derived from the income and balance sheet i.e. if

you have the income statement and balance sheet, you can make the company’s cash flow statement

o Answers the question - Why is it that the Company has $1,000 Net Income which we will see from income statement but $2,000 in cash?

o Cash is not the same as Net Income

What is EBITDA?

• EBITDA or Earnings before Interest, Taxes, Depreciation, and Amortization is an indicator of a company's financial performance and cash flow, which is calculated as follows:

o EBITDA = Revenue - Expenses (excluding tax, interest, depreciation, and amortization) or EBIT which is operating income plus depreciation and amortization

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• EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing decisions

• EBITDA is widely used as a measure of cash flow for a company and as a popular leverage covenant – Total Debt to EBITDA and EBITDA to Interest Expense

• It is a non-GAAP measure o You will not see EBITDA on the Company’s income statement but will

have to calculate it • Though EBITDA is widely used by the investment community, it has several

drawbacks o EBITDA leaves out the cash required to replace old equipment, which can

be significant Assumes that fixed assets don’t require capital replenishment,

which may be challenging for fast growing firms Not a good tool for companies whose assets have shorter lives

o EBITDA ignores a company’s tax obligation, which is a cash-absorbing expense

o Some companies may reclassify operating expenses as extraordinary charges to enhance EBITDA

o It overlooks the working capital requirements for more investing and accounts receivable to support growing sales

What is working capital?

• Working Capital can be used as a measure of both a company's efficiency and its short-term financial health

• Working capital is calculated as: o Working Capital = Current Assets - Current Liabilities

• Positive working capital means that the company is able to fund its short-term liabilities with its short term assets. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets including accounts receivable and inventory

• If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term

ADVANCED QUESTIONS

If you add $100 of depreciation expense in the income statement with a 40% tax rate, how does that affect the income statement and how does the balance sheet balance?

• This is an excellent and one of my favorite interview question which shows how the three financial statements – income statement, balance sheet and cash flow statements are related to each other

• Income Statement o Depreciation is an expense so operating income or EBIT declines by

$100. Assuming a tax rate of 40%, net income declines by $60 • Cash flow statement

o Net income decreased by $60 so cash flow which starts with Net Income will decrease by $60

o Depreciation increased by $100 as it is added back in the cash flow statement so cash flow from operations increased by $40

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o The ending cash balance increases by $40 as a result of cash flow from operations increasing by $40 which goes to the balance sheet

• Balance Sheet o The $60 reduction of net income causes retained earnings to decrease

by $60 o Cumulative depreciation increases by $100 so Net PP&E decreases by

$100 o PPE will decrease by $100 and cash goes up by $40. $40 cash change

shows how the 3 statements are linked to each other

A company buys a car for $1,000 dollars on Jan 1, 2008. How will the income statement, cash flow and balance sheet be affected for the period Jan 1, 2008 to December 31, 2008?

• Let us assume that the depreciation method used for the car is straight-line method over 5 years and a 40% tax rate is assumed

o Income Statement • The depreciation expense for the period Jan 1, 2008 to December

31, 2008 will be $1,000/5 which is $200 • Net Income will be reduced by $120 as you would get tax benefit

of $80 o Cash Flow Statement

• $1,000 was spent to buy the car so Capex will increase by $1,000 so there will be a $1,000 use of cash in cash flow from investing activities so a use of cash of $1,000

• Cash flow statement starts with net income which comes down by $120 in the cash flow statement

• Depreciation expense is added back in cash flow statement so $200 is added back

• So net change in cash is -1000-120+200= -$920 o Balance Sheet

• Cash is down by $920 from the cash flow statement • Gross PP&E goes up by $1,000 • Accumulated depreciation increases by $200 • Net PP&E goes up by $800 ($1,000-$200) • Net Income reduced by $120 which makes shareholders equity

reduce by $120 • Therefore, assets came down by $120 (-$920+$800) and

shareholders equity came down by $120 so assets = liabilities + shareholders equity and the balance sheet balances

What is goodwill and how is it calculated?

• Goodwill is calculated by: o Equity purchase price paid for the Company - Target’s fair market value

of equity • Book value of equity is book value of assets – book value of liabilities =

shareholders equity on the balance sheet (Assets – Liabilities = Equity) o Financial statements are historical

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Numbers on the balance sheet in the annual reports or 10-Ks and 10-Q’s are also book assets and book liabilities

• What is Fair Market Value of Equity = Fair Market Value of Equity is book value of assets and liabilities revalued to fair market value for example land which is generally shown on books at cost and is not depreciated may have a significant adjustment

• Market Value of Equity paid is the fully diluted shares outstanding * share price (including premium if any) for a public company

• Accounting rules state that goodwill no longer should be amortized each period, but must be tested once per year for impairment

o Absent impairment, goodwill can remain on a company’s balance sheet indefinitely

Valuation Questions

BASIC QUESTIONS

What are the common valuation methodologies used to determine the value of the Company?

• Total Enterprise Value or Public Market Valuation • Comparable Company Analysis • Comparable Transaction Analysis • Discounted Cash Flow Analysis • Leveraged Buyout Analysis • Other methods could include:

o Sum of the Parts Analysis o Liquidation Analysis which is generally used in bankruptcy and not part of

the standard investment banking methods

What is Enterprise Value and how is it difference from Equity Value?

• Total Enterprise Value is Equity Value + Debt + Preferred Stock + Minority Interest – Cash

o Enterprise Value represents the value of the operations of a company attributable to all providers of capital – equity, debt and preferred

o Enterprise Value means the value of the company as it is trading in the market today

• Equity Value or Market Capitalization is Fully Diluted Shares outstanding multiplied by price per share

What are the common valuation metrics?

• Enterprise Value (EV) / EBITDA, EV/Revenues, EV/EBIT, Price Earnings Ratio are the most commonly used valuation metrics

o LTM data and one or two year forward data is generally analyzed o Some industries have different metrics for examples Financial institutions

use Price/Book ratio

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ADVANCED QUESTIONS

Explain fully diluted market capitalization?

• A company’s fully diluted market capitalization equals its share price multiplied by the number of fully diluted shares outstanding

• Basic shares represent the number of common shares that are outstanding today or as of the reporting date of the company

o Basic shares outstanding should be found in the front page of the Company’s most recent 10K or 10Q or annual report for UK companies

• Fully diluted shares equals basic shares plus the potentially dilutive effect from any outstanding stock options, warrants, convertible preferred stock or convertible debt

• To calculate the dilutive effect of stock options we typically use the Treasury Stock Method. The options information can be found in the company’s latest 10K or annual reports for UK companies

o Options information is not broken out in the 10Q or other filings of the Company

• If the company has other potentially dilutive securities e.g. convertible preferred stock or convertible debt we may need to account for those as well in our fully diluted share count

o We need to make sure that we either account for convertible debt as debt or as equity else we will be counting it twice

o Generally, if the security is in the money we should treat it as equity

Explain a Discounted Cash Flow (”DCF”) analysis? “To properly value a business, you should ideally take all the flows of money that will be distributed between now and judgment day and discount them at the appropriate discount rate. That’s what valuing businesses is all about. Part of the equation is how confident you can be about these cash flows occurring. Some businesses are easier to predict than others. We try to look at businesses that are predictable” -Warren Buffet “I look for businesses in which I can predict what they’re going to look like in ten to fifteen year’s time. Take Wrigley’s chewing gum, I don’t think the Internet is going to change how people chew gum” -Warren Buffet The “Discounted” Cash Flow (DCF) analysis values a company or business based on the “Net Present Value” (NPV) of the company’s future cash flows

• In order to do a DCF analysis, the following steps need to be completed o Project free cash flow for a period of time

Generally 5 years or 10 years Depends on how much of the cash flows you can predict For growth companies it might be better to stretch the cash flow

for 10 years

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Free cash flow equals o EBIT less taxes plus D&A less capital expenditures less the change in

working capital We start from EBIT and not Net Income because we want the

unlevered free cash flow Does not include interest expense and so is independent of debt

and capital structure The value we will get will be the Enterprise Value of the company

as the numerator is the unlevered free cash flow of the company and the denominator is the weighted average cost of capital

• Next step is to calculate Terminal Value o Terminal Value is the value of the Company from year 6 or 11 to infinity

depending upon if we projected our cash flows for 5 or 10 years at the end of year 5 or year 10

• Next step is to present value the projected free cash flows and terminal value, at the appropriate discount rate, also known as weighted average cost of capital (WACC)

• Adding the present value of the projected cash flows and the present value of the terminal value gives us the DCF value of the Company

How do you calculate Terminal Value of the company?

• There are two methods for calculating terminal value

o Gordon Growth method or o Terminal Multiple method

• To use the Gordon Growth method, we choose an appropriate rate by which the company can grow forever after we have projected the company’s cash flow for 5 or 10 years

o Growth rate should be modest, for example, average long-term expected GDP growth or inflation

Try growing a company which has $100 mm of cash flow at 20% for 300 years let alone infinity

• Difficult to see what number it is as it is a huge number – companies cannot grow forever at 20% rate or even 15% rate

o To calculate terminal value we multiply the last year’s free cash flow, year 5 or year 10 by 1 plus the chosen growth rate, and then divide by the discount rate less growth rate

o Terminal Value = (Ending Cashflow x (1 + Growth Rate)) / (Discount Rate - Growth Rate)

• The second method, the Terminal Multiple method, is the one that is more often used in investment banking

o We need to take an operating metric for the last projected period which could be year 5 or year 10 and multiply it by an appropriate valuation multiple

Most common metric to use is EBITDA • We typically select the appropriate EBITDA multiple by

taking what we concluded for our comparable company analysis on a last twelve months (LTM) basis

o Big assumption made is that the EBITDA multiple

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used in year 5 or 10 is the LTM multiple or that the multiple does not change in 5 years

o This is the reason why we do a sensitivity analysis for the EBITDA multiple

Explain Weighted Average Cost of Capital (WAAC)?

• Weighted Average Cost of Capital or WAAC is a weighted average of the required rates of return for each of the different sources of capital – equity, preferred and debt

• WAAC is the discount rate used in a DCF analysis to present value projected free cash flows and terminal value

• WACC reflects the cost of each type of capital – Debt, Equity and Preferred weighted by the respective percentage of each type of capital assumed for the company’s optimal capital structure

• WACC = [Ke x (E/(E+D+P)] + [Kp x (P/(E+D+P)] + [(Kd x (D/(E+D)) x (1-T)] o Ke = cost of equity o Kd = cost of debt o Kp = cost of preferred o E = MVE of subject company o D = FMV of debt (same as face value unless distressed) of subject

company o P = Value of Preferred of company o T = tax rate

• See (1-T) for Debt in the WAAC formula – reason is interest expense is tax deductible hence the effective cost of debt is Kd(1-t)

• To estimate the cost of equity, we will typically use the Capital Asset Pricing Model (CAPM)

• To estimate the cost of debt, we can analyze the interest rates or yields on debt issued by similar companies

• To estimate the cost of preferred we can analyze the dividend yields on preferred stock issued by similar companies

How do you calculate the cost of equity?

The cost of equity is calculated using the capital asset pricing model (CAPM)

CAPM = Rf + Beta x (RM – Rf)

• Rf = risk-free rate • RM = market rate (Expected return on the market portfolio) • RM – Rf = market risk premium (return above the risk-free rate)

o Calculated by taking an average of data points over many years in order to incorporate a large sample of events

o Amount the stocks, generally the S&P 500 for U.S. companies, have outperformed the risk free rate over a long period of time

o Most banks get this rate from data providers like Ibbotson Associates Generally 5-6% recently

• The risk free rate for a U.S. company is generally considered to be the yield on a 10 or 20 year U.S. Treasury Bond

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• Beta should be levered beta and we can get it from Bloomberg

When using the CAPM for purposes of calculating WACC, why do you have to unlever and then relever Beta?

• Beta is the measure of volatility, or systematic risk, of a security compared to the market as a whole

• Beta of 1 signals that 1% rise in the market translates into 1% rise in the stock • Beta of -1 signals that 1% rise in the market translates into 1% decline in the stock • Betas outside of a range of 0.5 to 2.5 should be reviewed for reasonableness • In order to use the CAPM to calculate our cost of equity for a private company,

we need to estimate the Beta • Beta is a function of risk affected by leverage • In order to make an “apples to apples” comparison among company returns,

leverage needs to be removed from beta • We typically get the Beta from comparable companies, often the mean or median

Beta • However before we can use the comparable company Beta we must first unlever

the Beta of each of our comps o Sources like Bloomberg will be a levered Beta so we need to unlever it

• After un-levering the Betas, we can now use the appropriate comparable company Beta i.e the mean of the comparable company unlevered Betas and relever it for the appropriate capital structure of the company being valued which could be the target capital structure of the company we are valuing. After relevering, we can use the levered Beta in the CAPM formula to calculate cost of equity.

• BL = Bu x [1 + D/E x (1-T)] • Bu = BL / [1 + D/E x (1-T)]

o BL = Levered Beta o Bu = Unlevered Beta o T = Tax Rate o D = Market Value of Debt o E = Market Value of Equity

MERGERS AND ACQUISITIONS

BASIC QUESTIONS

Why do companies do mergers and acquisitions? • Companies merge with other companies to gain access into new product markets

or broaden the spectrum of their product line • Companies merge to enter new geographical markets • Enhance brand recognition • Consolidate operations to lower costs by achieving the economies of scale. They

also consolidate to gain market share • Defensive merger: Buy their way in to prevent competition from entering the

industry • Buy technology or research and development capabilities • Acquirer views the Target as undervalued • Acquirers own organic growth is slow and it needs to grow via acquisitions

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ADVANCED QUESTIONS

What is an accretion/dilution analysis and why is it important?

• A EPS Accretion / (Dilution) analysis is primarily used by public companies to analyze the impact on the acquirer’s earnings per share (EPS) of the acquisition of another company

o If the acquirer’s EPS increases after the acquisition compared to the EPS before the acquisition, it is considered accretive

o If the acquirer’s EPS decreases after the acquisition compared to the EPS before the acquisition, it is considered dilutive

• Companies are concerned with accretion dilution before making their acquisition decision as it affects the acquirer’s stock price

o Generally companies will like to make accretive acquisitions as accretive transactions assume that the company’s stock price should increase

• As many public companies trade on P/E multiples, any dilution to EPS could result in a subsequent drop in the stock price and vice versa

o Example: Let us assume the current share price of the acquirer is $10 and EPS of $1 therefore its P/E ratio is 10.0x or the company trades at 10x earnings

o If a 20% EPS accretion occurs (EPS increases to $1.20, the market assumes that the P/E ratio of the acquirer remains the same as before if the acquisition is of a company related to the acquirer

o Therefore if the P/E ratio remains at 10.0x, the stock price would increase to $12

In reality the stock price does not go up always because market may not like the acquisition for a number of reasons

• One of the reasons could be that the market does not believe that the combined company will be able to achieve the synergies highlighted by the acquisition

How do you do an accretion/dilution analysis?

• For accretion/dilution analysis, we need to project the combined company’s net income or proforma net income and the combined company’s new shares outstanding

• Proforma net income will be the sum of the buyer’s and target’s projected net income plus/minus certain transaction adjustments which are on a post-tax basis since we are adjusting net income

o First adjustment is that we include synergies both cost and revenue synergies

o Second adjustment is the additional interest expense which comprises of two parts

Increased interest expense if debt is used to finance the purchase and adding

Decreased interest income as a result of using the available cash on the balance sheet if cash is used to finance the purchase

o Third adjustment is any new intangible asset amortization resulting from the transaction.

• Proforma shares outstanding reflects the acquirer’s share outstanding before the

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acquisition plus the number of shares issued by the acquirer to finance the purchase of the target in a stock deal

o Proforma EPS is calculated by dividing proforma net income by proforma shares outstanding

o We compare Proforma EPS to the EPS of the acquirer before the acquisition to ascertain if the acquisition is accretive or dilutive

What causes dilution in the acquirer’s stock price?

• If the target has a higher P/E multiple than the acquirer, dilution will occur assuming the acquirer issues mostly new stock for the acquisition, as opposed to using cash

• If the acquirer borrows the cash to fund a cash purchase of the stock, the increase in interest expense from the new debt may cause dilution

• If there is a large amount of new amortizable intangibles that arise from the transaction, the increase in amortization expense on the income statement can cause dilution

• Low or negative synergies as a result of the acquisition • If the acquirer overpays for the target company • Target company has negative net income

Will the deal be accretive if a company with a high P/E firm buys a company with a low P?E in an all stock transaction?

• Generally, if the Price to Earnings ratio (P/E) of the acquiring company is lower than the P/E of the target, then the deal will be accretive to the acquirer’s Earnings Per Share (EPS)

o The acquirer has to pay less for each dollar of earnings than the market is valuing its own earnings

o Acquirer will have to issue proportionally less shares in the transaction o Proforma earnings, which equals the acquirer’s earnings plus the target’s

earnings (the numerator in EPS) will increase more than the proforma share outstanding (the denominator), causing EPS to increase

What is synergy in an M&A transaction?

• Synergies means when the sum of the value of the Acquirer and the Target as a combined company is greater than the two companies valued apart

• Most mergers and large acquisitions are justified by the amount of projected synergies

• There are two types of synergies o Cost synergies - Ability to cut costs of the combined companies due to the

consolidation of operations including closing one corporate headquarters, closing stores that overlap, reducing back office and information technology expenses, economies of scale in terms of buying products, laying off people in the management team and reducing advertising expenses of the combined company

o Revenue synergies - Ability to sell more products and/or services or raise prices due to the acquisition or merger. For example, increasing sales due to cross-marketing of products or expanding in a new area where only one

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company existed prior to the acquisition Generally, cost synergies are easier to predict than revenue

synergies • Many mergers and acquisitions do not work and a big part of the failure is not

able to realize the synergies the acquiring company had predicted it would be able to achieve prior to the acquisition

LEVERAGED BUYOUT ANALYSIS

BASIC QUESTIONS

What is a leveraged buyout?

• A LBO or leveraged buyout is the acquisition of another company, private or public using a significant amount of borrowed capital to meet the cost of the acquisition

• The acquired company is taken private and the typical exit strategy in a leveraged buyout is for the private equity firm to sell the company or take it public again in 3-5 years

• Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company

• In an LBO, there is usually a ratio of 80% debt to 20% equity o Ratio is dependent on the company’s cash flow and the industry the

company is in and the debt markets o Because of this high debt/equity ratio, private equity companies need to

issue bonds which usually are not investment grade and are referred to as junk bonds in order to meet their required IRRs

ADVANCED QUESTIONS What are the uses of an LBO model?

• While the private equity firm’s IRR is usually the most important piece of information that comes out of an LBO analysis, the analysis also has other uses.

• A Leveraged Buy-Out analysis is used by private equity firms / financial sponsors to evaluate a potential acquisition

o By assuming the PE firm’s required IRR amongst other things, we can back into a purchase price for the company, thus using the analysis for valuation purposes

• The goal of an LBO is to acquire a company by financing the purchase with as much debt as the cash flows of the business and the debt markets will support

• The more debt a financial sponsor is able to obtain to finance an acquisition, the less of an equity investment the financial sponsor has to make

• The higher the leverage levels, the higher the expected Internal Rate of Return (“IRR”) is for the financial sponsor / private equity firm

• The goal of an LBO model is to establish expected internal rates of return (“IRR”) for the acquisition using a financial model that reflects the following

o Assumptions and the necessary cash needed to finance the acquisition (uses of cash)

o Capitalization assumptions: leverage (amount of debt), different debt

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tranches, equity investment amounts (sources of cash) o Base case financial projections for the income statement, balance sheet

and cash flow based upon the purchase price and capitalization assumptions

• The LBO model should be built with the ability to run sensitivities for a range of purchase prices, capitalization structures and operating assumptions

• In addition, we can utilize the LBO model to analyze the trend of credit statistics such as the leverage ratio and interest coverage ratio which is especially important from a lender’s perspective

• Finally, the leverage buyout analysis is an important valuation methodology which tells us how much the private equity firm will be able to pay to acquire the Company and at the same time generate the IRR it requires. In 2006 and first half of 2007, because debt was cheap and readily available private equity firms were able to win against the strategic acquirers whereas things are quite different in 2008 where most of the major M&A transactions have involved strategic acquirers.

Explain the steps involved in an LBO analysis?

• Step 1 is to determine what the purchase price will be o The determination of the purchase price is complicated and typically

involves a full-scale valuation (DCF, public company multiples and transaction multiples) as well as extensive due diligence including on Company’s operations, financial condition, management team, customers, suppliers and assets

o If the Company has publicly traded equity, then typically a purchase price would be calculated much as TEV is calculated

(Offer price per share * fully diluted shares) + debt + minority interest + preferred interest – cash

o If we assume that we are buying the Company as a multiple of EBITDA we can calculate the TEV required to purchase the Company

• Step 2 is how will the deal be financed and for that we create a Sources and Uses table where Sources equals Uses of funds

o Uses reflect the amount of money required to complete the transaction Usually equals the purchase price plus transaction fees and any

other cash payment required as part of the transaction o Sources part of the table highlights where the money is coming from,

including the new different types of debt, any existing cash that will be used, as well as the equity contributed by the private equity firm

o Amount of debt is assumed based on the state of the debt capital markets and the cash flows and the industry where the company is in and the amount of equity required by the private equity firm is the difference between the Uses (total funding required) and all of the other sources of funding

Private equity firms would like to put minimum amount of equity so that they can maximize their IRRs

• Step 3 is to create a proforma balance sheet of the company as of the transaction date by changing the existing balance sheet of the company to reflect the

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transaction and the new capital structure o Intangible assets such as goodwill and capitalized financing fees will

likely be created

• Step 4 is to create an integrated cashflow model for the company o This requires projecting the company’s income statement, balance sheet

and cashflow statement for a period of time which could be 5 or 10 years

• Step 5 is to make assumptions about the private equity firm’s exit from its investment

o Typical assumption is that the company is sold or taken public in 3-5 years o An important assumption made is that the company is sold at the same

multiple it was bought for example if the company was bought at 8x LTM EBITDA, the assumption is that the company will be sold for 8x EBITDA in 5 years

Enables private equity firm to see the IRR’s as a result of capital structure changes without multiple being increased or cost cutting and other operational initiatives

• Step 6 is to calculate the IRRs for the private equity firms o Projecting a sale value for the company allows us to also calculate the

value of the private equity firm’s equity stake which we can then use to analyze its internal rate of return (IRR)

• Step 7 is to look at the credit ratios of the company for the next 5 years and see if the company can support the debt used to finance the transaction

o Debt/EBITDA and EBITDA/Interest Expense are two important ratios analyzed besides the other ratios we look at

What are some characteristics of a company that is a good LBO candidate?

• Characteristics of a good LBO target include o Steady cashflows which are important to pay interest and principal

payments on debt o Limited need for ongoing capital expenditure or working capital

investment o Opportunity for cost reductions o A high asset base to use as collateral for debt

OTHER QUESTIONS

Why might a company choose to issue debt vs. equity?

• Why Equity o Does not require interest payments o If the company has weak or cyclical cash flow to make interest and

principal payments o Currency for acquisitions

• Why not Equity o Dilution

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o More expensive than debt • Interest on debt is tax deductible • When a company has sufficient earning to utilize the tax shield over the life of the

debt, the company will typically choose to issue debt • When a company's debt level is still relatively low, they will issue more debt to

increase the ratio of debt/equity. Companies have to be careful as the amount of debt increase because a higher debt level also increases the probability of bankruptcy. This threat will eventually out weigh the tax advantage if they cross their debt/equity threshold and the company's value will fall with the increase in debt

• Companies with predominantly tangible assets are more likely to issue more debt than companies with predominantly intangible assets because of the lower bankruptcy cost

• Earning per share (EPS) is a good measure when choosing between debt and equity financing. Although debt financing saves money from taxes, this newly created interest expense also reduces net income. For equity financing there is no interest expense, but there is a possible dividend expense. More importantly, due to the increase in total number of shares outstanding, equity financing has a dilution effect on earnings

• Debt is less expensive for two main reasons. First, interest on debt is tax deductible (i.e. the tax shield). Second, debt is senior to equity in a firm’s capital structure. That is, in a liquidation or bankruptcy, the debt holders get paid first before the equity holders receive anything. Note, debt being less expensive capital is the equivalent to saying the cost of debt is lower than the cost of equity

What could a company do with excess cash on the balance sheet?

• Invest in capital expenditures and/or research and development • Invest in the stock and bond market or keep in money market and other interest

bearing accounts • Identify acquisition targets • Share repurchases • Dividends

What is LIBOR?

• London Interbank Offered Rate is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market

• LIBOR is fixed on a daily basis by the British Bankers' Association • LIBOR is the world's most widely used benchmark for short-term interest rates.

It's important because it is the rate at which the world's most preferred borrowers are able to borrow money

• It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus a few points

• Countries that rely on the LIBOR for a reference rate include the US, Canada, Switzerland, and the U.K.

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C. RECOMMENDED READING MATERIAL

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RECOMMENDED READING

Accounting and Financial Statement Analysis

Warren Buffet and the Interpretation of Financial Statements Mary Buffet & David Clark

Financial Statement Analysis and Security Valuation Stephen H. Penman

Business Analysis and Valuation Using Financial Statements Krishna Palepu, Paul Healy, and Vic Bernard

Financial Reporting and Analysis Lawrence Revsine, Daniel Collins, and W. Bruce Johnson

Valuation and Corporate Finance

The Practitioner’s Guide to Investment Banking, Mergers & Acquisitions, Corporate Finance Jerilyn J. Castillo, Peter J. McAniff Valuation: Measuring and Managing the Value of Companies (Fourth Edition)

McKinsey & Company Inc., Tim Koller, Marc Goedhart, David Wessels Valuation for Mergers, Buyouts and Restructuring Enrique Arzac

Principles of Corporate Finance Richard Brealey, Stewart Myers, and Franklin Allen

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Interesting Books on Wall Street

The Accidental Investment Banker: Inside the Decade that Transformed Wall Street Jonathan A. Knee Barbarians at the Gate: The Fall of RJR Nabisco Bryan Burrough and John Helyar Liar's Poker: Rising Through the Wreckage on Wall Street Michael Lewis

Monkey Business: Swinging Through the Wall Street Jungle John Rolfe and Peter Troob

Den of Thieves James B. Stewart The Bonfire of the Vanities Tom Wolfe

The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the Junkbond Raiders Connie Bruck

Movies

Wall Street Date of Movie: 1987 Director: Oliver Stone Cast: Michael Douglas, Charlie Sheen

Boiler Room Date of Movie: 2000 Director: Ben Younger Cast: Giovanni Ribisi

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D. RESUME OF THE AUTHOR

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AUTHOR’S BIO

Ashish Kohli is a seasoned investment banker and private equity professional with over 15 years of transaction experience across product groups of investment banking and private equity including mergers and acquisitions, leveraged buyouts, private placements, IPOs and secondary offerings, high yield debt and restructuring. Ashish has extensive teaching experience and has led training seminars globally in North America, Europe, Middle East and Asia. He also led Investment Banking Training programs in the firms where he worked including leading the global analyst and associate training program at HSBC in NY and London. In the second half of 2008, Ashish conducted over 100 days of training across U.S., Europe and Asia including training programs at Cambridge University and London School of Economics in the U.K. in December 2008. Ashish started his investment banking career as an Associate in the Investment Banking Division of Credit Suisse/Donaldson, Lufkin & Jenrette in NY where he worked in the M&A, Generalist and Technology Industry Groups (the largest technology investment banking franchise on Wall Street), advising and raising capital for companies across a number of different sectors. He also worked with DLJ's private equity group, one of the leading private equity groups on Wall Street. After Credit Suisse, Ashish worked for the Investment Banking Division of Jefferies & Company Inc. in NY as a Generalist and in the Technology and Media Group where he focused on restructuring and recapitalizations, M&A advisory and capital raisings. He advised Samsonite Corporation on its recapitalization and the deal was awarded the 2003 U.S. Middle Market Deal of the Year by Mergers and Acquisitions Advisor. After Jefferies, Ashish joined the Investment Banking Execution Group (M&A and capital raising) for HSBC Securities (USA) Inc. in NY and London where he executed M&A and capital raising transactions in industries such as consumer & retail, real estate, technology and oil and gas. Ashish then joined ThinkPanmure in NY and UK as a Principal/Director for the Investment Banking and Private Equity Division leading transactions across all industries including Alternative Energy. Ashish is currently a Partner and Senior Banker for the Investment Banking Institute based in New York, a global financial training firm with training facilities in New York,

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Atlanta, Boston, Chicago, Washington DC, Dallas, Houston, Denver, San Francisco, Los Angeles, Toronto, London, and Dubai, providing instructor-led training and e-learning services to people from leading financial institutions, Fortune 100 companies and academic institutions. Prior to business school, Ashish worked for Arthur Andersen in their business advisory, audit and tax groups. Ashish earned an MBA from the Kellogg Graduate School of Management (Deans List) and a Bachelor of Commerce (Honors) from University of Delhi. He is also a Chartered Accountant.

Select Transaction Experience

• Advised Samsonite Corporation on its $600 million recapitalization transaction including $106 million new equity investment by Bain Capital, Ontario Teachers Pension Fund, and Ares Capital. Deal was awarded the 2003 U.S. Middle Market Deal of the Year by Mergers and Acquisitions Advisor

• Managed a $2.1 billion IPO for Genuity • Managed a $1.2 billion high yield financing for PSINet • Managed a $825 million convertible stock offering for PSINet • Managed the $750 million AIM listing of Hirco real estate fund in the UK

(Hirco is one of India’s leading real estate development companies) • Advised William Grant & Sons on its potential $400 million acquisition of

Svedka vodka in the U.S. • Represented the ad hoc committee of $380.5 million 13% Senior Notes of

Mpower Holding Corporation in its successful restructuring • Managed a $200 million AIM listing of a close-ended fund focused on renewable

energy and environmental services in Asia • Advised PSINet on its $720 mm acquisition of Transaction Network Services • Advised PSINet on its $1.9 billion acquisition of Metamor Worldwide • Managed a $160 million SPAC offering for a company focused on acquisition of

consumer and business service companies in the U.S. • Advised PlayCore on its $200 million sale to Chartwell Investments • Managed a $160 million high yield offering for IMAX Corp • Managed a $132.5 million IPO and a $110.7 million secondary offering for

ManTech International Corporation • Managed a $97.8 million IPO for MTC Technologies • Managed a $223.0 million secondary offering for Anteon International Corp. • Managed a $232.5 million secondary offering for Endo Pharmaceutical Ltd. • Managed a $61.7 mm secondary offering for Modem Media • Advised GE on its entry strategy to India including advisor on the joint venture

between GE Plastics and IPCL in India, the largest joint venture with a public sector company at that time

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E. RESUME ACTION WORDS

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A

accelerated, accomplished, achieved, acquired, addressed, adapted, adopted, advanced, advised, advocated,

affected, allocated, altered, amended, analyzed, appraised, approached, approved, arranged, ascertained,

assigned, assumed, assisted, attracted, audited, augmented, authored, awarded

B balanced, bargained, bought, budgeted, built

C calculated, capitalized, captured, challenged, chaired, changed, channeled, chose, classified, cleared, closed, co-authored, cold called, collaborated, collected, combined, commissioned, committed, communicated, compared, compiled, complied, completed, computed, conceived, conceptualized, concluded, condensed, conducted, consolidated, constructed, consulted, contracted, contrasted, contributed, controlled, converted, convinced, coordinated, corrected, corresponded, counseled, created, critiqued, cultivated

D decentralized, decreased, deferred, defined, delegated, delivered, demonstrated, described, designated, designed, determined, developed, devised, devoted, directed, disclosed, discovered, dispatched, displayed, dissembled, distinguished, distributed, diversified, divested, documented, doubled, drafted

E earned, eased, edited, effected, elected, eliminated, employed, enabled, encouraged, endorsed, enforced, engaged, engineered, enhanced, enlarged, enriched, entered, entertained, established, estimated, evaluated, examined, exceeded, exchanged, executed, exempted, exercised, expanded, expedited, explained, exposed, extended, extracted, extrapolated

F facilitated, familiarized, fashioned, fielded, figured, financed, fit, focused, forecasted, formalized, formed, formulated, fortified, found, founded, framed, fulfilled, functioned, furnished G gained, gathered, gauged, gave, generated, governed, graded, granted, greeted, grouped, guided H handled, headed, hired, hosted

I identified, illustrated, illuminated, implemented, improved, improvised, inaugurated, indoctrinated, increased, incurred, induced, influenced, informed, initiated, innovated, inquired, inspected, inspired, installed, instigated, instilled, instituted, instructed, insured, interfaced, interpreted, interviewed, introduced, invented, inventoried, invested, investigated, invited, involved, isolated, issued

J joined, judged L launched, lectured, led, lightened, liquidated, litigated, lobbied, localized, located M maintained, managed, mapped, marketed, maximized, measured, mediated, merchandised, merged, met, minimized, modeled, moderated, modernized, modified, monitored, motivated, moved, multiplied

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N named, narrated, negotiated, noticed, nurtured O observed, obtained, offered, offset, opened, operated, orchestrated, ordered, organized, oriented, originated, overhauled, oversaw

P paid, participated, passed, patterned, penalized, perceived, performed, permitted, persuaded, phased, out, pinpointed, pioneered, placed, planned, polled, prepared, presented, preserved, presided, prevented, priced, printed, prioritized, probed, processed, procured, produced, profiled, programmed, projected, promoted, prompted, proposed, proved, provided, publicized, published, purchased, pursued

Q quantified, quoted R raised, ranked, rated, reacted, read, received, recommended, reconciled, recorded, recovered, recruited, rectified, redesigned, reduced, referred, refined, regained, regulated, rehabilitated, reinforced, reinstated, rejected, related, remedied, remodeled, renegotiated, reorganized, replaced, repaired, reported, represented, requested, researched, resolved, responded, restored, restructured, resulted, retained, retrieved, revamped, revealed, reversed, reviewed, revised, revitalized, rewarded, routed

S safeguarded, salvaged, saved, scheduled, screened, secured, segmented, selected, sent, separated, served, serviced, settled, shaped, shortened, showed, shrank, signed, simplified, sold, solved, spearheaded, specified, speculated, spoke, spread, stabilized, staffed, staged, standardized, steered, stimulated, strategized, streamlined, strengthened, stressed, structured, studied, submitted, substantiated, substituted, suggested, summarized, superseded, supervised, supplied, supported, surpassed, surveyed, synchronized, synthesized, systematized

T tabulated, tailored, targeted, taught, terminated, tested, testified, tightened, traced, traded, trained, transacted, transferred, transformed, translated, transported, traveled, treated U uncovered, undertook, unified, united, updated, upgraded, used, utilized V validated, valued, verified, viewed, visited W weighed, welcomed, witnessed, won, worked, wrote

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F. INTERESTING NEWS ARTICLES

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INTERESTING NEWS ARTICLES Be careful on what you have on your resume. Lying on your resume can come back to haunt you -- sometimes even many years down the road. Don't fall into that trap

MGM Mirage CEO to resign on questions on MBA November 14, 2008 Wall Street Journal

One of the gambling industry’s most powerful figures, MGM Mirage Chairman and CEO J. Terrence Lanni, said that he will step down from his executive posts, according to The Wall Street Journal.

Lanni is leaving on November 30, citing personal reasons. With recent scrutiny over inflated credentials on the resumes of top executives, Lanni found himself in a dispute with his alma mater about the accuracy of his academic credentials after questions were raised by the WSJ. Lanni said he is leaving due to matters of lifestyle, citing the facts that his family lives in Pasadena, Calif., and he is turning 66 in March.

The WSJ originally contacted officials at the University of Southern California, saying that it had no record that Lanni had earned a master’s degree in business administration from the school. However, MGM Mirage’s website says that Lanni holds an MBA in finance from USC. Lanni has joined boards and spoken at the school multiple times over the years and is currently a member of the Board of Overseers of USC’s Keck School of Medicine.

Barry Minkow, a private fraud investigator in San Diego, found the discrepancy. "No [MBA] degree was conferred," said James Grant, a USC spokesperson, adding the school had completed a rigorous search of its records in response to the WSJ's queries.

Dean of Admissions at M.I.T. Resigns April 26, 2007 New York Times

Marilee Jones, the dean of admissions at the Massachusetts Institute of Technology, became famous for urging stressed-out students competing for elite colleges to calm down and stop trying to be perfect. But today she admitted that she had fabricated her own academic educational credentials, and resigned after nearly three decades at the university.

"I misrepresented my academic degrees when I first applied to M.I.T. 28 years ago and did not have the courage to correct my résumé when I applied for my current job or at any time since,” Ms. Jones said in a statement posted on the university’s Web site today.

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"I am deeply sorry for this and for disappointing so many in the M.I.T. community and beyond who supported me, believed in me and who have given me extraordinary opportunities.

Ms. Jones on various occasions had represented herself as having degrees from Albany Medical College, Union College and Rensselaer Polytechnic Institute, but she had no degrees from any of those places, said Phillip L. Clay, the chancellor of M.I.T.

RadioShack Chief Resigns After Lying February 21, 2006, New York Times

David J. Edmondson resigned as the chief executive of RadioShack yesterday, only days after he told investors that he intended to stay on despite the revelation that he had lied to the company about his education by claiming two college degrees when he had none.

David Edmondson joined RadioShack in 1994 as a vice president. Leonard H. Roberts, the executive chairman of the company, who had chosen Mr. Edmondson to be his successor as chief executive, announced the departure, which he said was a mutual decision between the board and Mr. Edmondson.

Mr. Edmondson, 46, had apologized to the company and investors on Friday both for "the embarrassment" that had been caused by the revelation that he had lied about his past, and for the company's poor financial results, which were announced that day. He announced a turnaround plan and said he looked forward to carrying it out over the next 18 to 36 months.

Mr. Edmondson, in an interview with The Star-Telegram on Feb. 10, had conceded he did not have two degrees, and that the degree he said he did have was not a bachelor's degree, as he had claimed in the résumé he gave RadioShack when he was hired in 1994. But he insisted he had one degree, a Th.G., a theology degree that the college, now known as the Heartland Baptist Bible College, awards after three years of study. The newspaper said the college said its records showed he had attended for two semesters, but did not graduate.

But last Wednesday, the company issued a statement from Mr. Edmondson admitting, "I clearly misstated my academic record and the responsibility for these misstatements is mine alone." The board then announced an investigation, which was canceled yesterday after he resigned.

Last week, the stock fell 12 percent, to $19.08, trading at a three-year low, in reaction to the poor performance and the disclosures regarding Mr. Edmondson.

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The Author would like to thank the following individuals who have made contributions to this book.

Name of Individual School Attended Work Experience USA Indranil Ghosh Phd. MIT

BA, Cambridge University Bridgewater Associates

Brian Linné BA, St. Olaf College Deloitte Consulting LLP Grace Wang BA, Carnegie Mellon University Merrill Lynch Payal Gandhi MBA, Wharton Business School

BA, Northwestern University Starwood

CANADA Jeffrey Coles MBA, Rotman School of

Management BSc, University of Waterloo

Manulife Financial

UK Robert Storm MBA, Harvard Business School

BA, Cambridge University BP Plc