UBS Interview Questions and Answers (Graded A)

Why UBS? - ANSWER - One of the largest banks in the world - Strong european presence with a goal to work in Europe when I get older - Have heard great things about culture and everyone I have met thus far has been incr ...

Why UBS? - ANSWER - One of the largest banks in the world - Strong european presence with a goal to work in Europe when I get older - Have heard great things about culture and everyone I have met thus far has been incredibly helpful - Recent article shows UBS is turning their focus to earning more deals despite recent slip in IB performance - Want to be in an industry group specifically to become an expert in one area, especially one that will never go away like industrials. UBS considered one of the strongest industrials group UBS Deals - ANSWER API Group J2 Acquisiton Core Warbeg Pinkus Pregis Staples Dividend Recap Kushman & Wakefield UBS Advising J2 Acquisition LTD to acquire APi Group Inc for $2.9 Billion - ANSWER J2's goal is help APi grow by making larger acquisitions than it has done previously. APi has a leading position in the life safety market and security services (Fire protection). Valued at a multiple of 7.4x TTM earnings funded by a mix of cash, new debt, rollover equity and early warrant exchange. What makes you a good fit for this role? - ANSWER - Experience in banking, last summer and previously with Dinan - Incredibly hard worker, shown by being the president of OSUFC and my strong academic record dating back to high school - Want to take on a far bigger challenge than my current path is taking me on Industrial Specific Information - ANSWER - Includes machinery and large physical product production - usually corporations and governments - sensitive to economic conditions and macro factors - LBOs are commonly used due to many mature companies with stable cash flows Dinan Responsibilities - ANSWER - Worked through all aspects of deal process - Creating the teaser and CIM - Modeling using DCF and LBO valuations - Turning comments on pitch decks - Assisting PE groups with DD in data room. - Industry research using IBIS world - CapIQ to run comparable screens - CapIQ to identify precedent transactions Industrials commonly used multiples - ANSWER EV / EBITDA P / E EV / Revenue DCF Why might one company trade at a higher multiple than another? - ANSWER - Growth prospects, higher return on capital, stronger cash flows How do you value a company? - ANSWER - Intrinsic valuation: looking at the cash flows - Relative valuation: using comparable companies Difference between EV and Equity Value - ANSWER EV = Equity + net debt EV values the operations of the entire business while Equity is only valuing the portion of equity How many years would it take to double a $100K investment at a 9% annual return - ANSWER Rule of 72 72/9 = 8 years Assume a company has ROA of 10% and a 50/50 debt-to-equity capital structure. What is the ROE? - ANSWER Return on assets = net income/average assets, while return on equity = net income / average equity. Imagine a company with $100 in assets. An ROA of 10% implies $10 in net income. Since the debt/equity mix is 50/50, the return on equity is $10/$50 = 20%. What's the difference between the unlevered DCF and the levered DCF? - ANSWER Unlevered DCF arrives directly at EV and then adds any non-operating assets such as cash and then subtract debt to get equity value Levered DCF arrives at equity value directly. Forects and discount at cost of equity and then add debt for EV. Contrast the DCF approach to comps. - ANSWER DCF values based on forecasted cash flows - considered the most direct valuation method - Sensitive to assumptions Comps values a company by looking at how the market values similar businesses. - market isn't always correct - not that many truly comparable companies How do you calculate terminal value? - ANSWER - Growth in perpetuity (FCF) / (WACC - growth rate) - Exit multiples in the terminal year WACC vs IRR - ANSWER IRR is the discount rate on a stream of cash flows that leads to a NPV of 0 WACC is the minimum required IRR for both debt and equity IRR that exceeds the WACC is considered a positive project Weaknesses of Comps Approach - ANSWER Comparing apples to oranges Rare to find truly comparable companies Poorly traded stocks do not often reflect fundamental value What can a transaction comps analysis tell you that a trading comps analysis cannot? - ANSWER Transaction comps can provide insight into purchase premiums that buyers and sellers should expect when negotiating a transaction. Walk me through an LBO Model - ANSWER 1) Identifying Sources and Uses of Funds - how much oldco equity will be paid, oldco debt refinancing and any fees - sources of funds: how much and the type of debt capital that needs to be raised and the residual being funded from sponsor 2) Complete projected 3 statement model with LBO assumptions 3) Exit assumptions and IRR - What the EV / EBITDA multiple will be at presumed exit date - Calculate the IRR (aiming for 15%-25%) 4) Sensitivity Analysis What ratios or metrics would you want to figure out if a company is over-levered? - ANSWER - Analyze the capital structure and D/E of the company and compare across comparable industries and companies - Interest coverage ratio (EBIT/Interest Expense) - Leverage ratio How do financial sponsors "exit" their investments - ANSWER 1) Sale to a strategic acquirer 2) Sale to another financial buyer ("secondary buyout") 3) Take the company public through an IPO 4) A recapitalization where sponsors add more debt after already paid down a previous portion and use proceeds to fund a dividend Why is LBO analysis used as a floor valuation when analyzing company value using several valuation methodologies? - ANSWER - The hurdle rates required to proceed on an LBO need to be above 15% to be willing to take on the risks. - This rate is usually higher than the cost of equity without the LBO risks Where do financial sponsors typically get their money? - ANSWER PE raise capital from insurance companies, pension funds, endowments, high net worth individuals and fin inst What is a management buyout? - ANSWER LBO where a major portion of the newco equity comes from oldco management. What are some reasons that a company might acquire another company? - ANSWER 1) Accelerate time to market with new products and channels 2) Remove competition 3) Achieve supply chain efficiencies Vertical vs Horizontal integration Most common balance sheet adjustments in an M&A model - ANSWER 1) Goodwill - Eliminate pre-deal target goodwill and create new goodwill from the deal 2) PP&E and Intangible Assets - Assets to market value 3) Target equity - Eliminate target equity from consolidation 4) Debt 5) Equity 6) Cash Pros of Precedent Transactions - ANSWER 1) Based on publicly available information 2) Multiples reflect actual payments for real-life deals 3) Provide guidance on potential value Cons of Precedent Transactions - ANSWER 1) Data based on past transactions that may not be indicative of current market conditions 2) Rarely perfectly comparable 3) Control premium How to find control premium? - ANSWER Difference between the share price prior to announcement and the offer price How do you calculate beta for a private company? - ANSWER Take public comparables beta and unlever them. Average the unlevered betas. Relever to target capital structure. What is the appropriate numerator for a revenue multiple? - ANSWER EV Biggest weakness - ANSWER Delegation (club soccer) Siem Tool Deal - ANSWER - Siem Tool acquired by The Jordan Company - Siem Tool is a manufacturer of customized solid carbide drills, reamers, thread mills and form tools - Created a proprietary carbide technical application to synergize with ARCH's business. - Started by working on the CIM and valuation for around 6 interested parties - Running capIQ screens to identify comparable companies and precedent transactions - Further along the line, worked with the analyst to provide information to the shared data room. How do the 3 statements link together? - ANSWER The income statement is directly connected to the balance sheet through retained earnings. Specifically, net income (the bottom line in the income statement) flows through retained earnings as an increase each period less dividends issued during the period. The offsetting balance sheet adjustments to the increase in retained earnings impacts a variety of line items on the balance sheet, including cash, working capital and fixed assets. The cash flow statement is connected to the income statement through net income as well, which is the starting line of the cash flow statement. Lastly, the cash flow statement is connected to the balance sheet because the cash impact of changes in balance sheet line items like working capital, PP&E (through capex), debt, equity and treasury stock are all reflected in the cash flow statement. In addition, the final calculation in the cash flow statement - net change in cash - is directly connected to balance sheet, as it grows the beginning of the period cash balance to arrive at the end of period cash balance on the balance sheet. Key Assumptions in an LBO - ANSWER 1) EBITDA at Exit 2) EV / LTM EBITDA (or other) multiple at exit 3) Debt on BS 4) Cash on BS What makes a good LBO? - ANSWER 1) Steady cash flows with little cyclicality 2) Minimal ongoing capital expenditures and working capital needs 3) sub optimal capital structure - Not enough debt 4) Deemed undervalued in the market 5) strong management unchained from public demands Tax Savings in an LBO - ANSWER The higher the leverage, the tax rate, and the interest rate, the more pronounced is this benefit Common E/D ratios in an LBO - ANSWER 40% / 60% Average oldco mgmt rollover - ANSWER 2% - 5% Amount of debt that can be raised in an LBO depends on what factors? - ANSWER Size / stability of cash flows Preference for defensive firms Reputation of sponsor and lending environment Key DEBT LBO ratios - ANSWER Debt as a % of enterprise value LBO leverage (Debt/EBITDA) 6x LBO EBITDA / Cash Interest Main debt financing of LBOs - ANSWER Leveraged loans: revolver & term loans A/B/C/D - main form of financing - often both a revolver and term loan Bonds: High-yield bonds Mezzanine finance Differences between HY bond from Term Loans - ANSWER Term loans - secured - floating rate (LIBOR + Spread) - shorter maturity - more restrictive (but much more lenient than a tight cycle) - Free of SEC LBO Covenants - ANSWER Part of a loan - Debt / EBITDA < 6x - EBITDA / Interest > 3x - Spent limits - Forced call in the event of a downgrade Maintenance Covenants - ANSWER Required compliance with covenants every quarter, no matter what - found in Senior debt Incurrence covenants - ANSWER Required compliance with covenants only when taking a specified action - bonds only include these - covenant-lite only includes these (75% of new loan issuances) Dry powder - ANSWER PE firms and other investors have a lot of cash waiting to be deployed Whole fund vs deal-by-deal distribution model - ANSWER Whole fund: manager doesn't get carry until investors get capital and preferred return Deal-by-deal: Distributions calculated on a deal by deal basis, which means carry can precede full investor capital return Clawbacks provision - ANSWER Ensure investors reclaim carry when aggregate distributions are insufficient for capital & preferred returns. Usually apply to carry but not mgmt fees. LBO Initial Valuation Approaches - ANSWER Explicit EBITDA Multiple - total offer value is calculated first Explicit offer/share - price per share is calculated first How to calculate diluted shares? - ANSWER 1) Basic shares outstanding 2) Evaluate options outstanding 3) net dilutive options Components of Sources of Funds - ANSWER - Defines the desired sources of funds and their values compared to EBITDA turns