Top 5 Allen & Co. Interview QuestionsPublished:
Allen & Company LLC (Allen & Co.) in many ways epitomizes what all boutique investment banks used to be like. Because Allen & Co. is discrete, secretive, and almost exclusively focuses on servicing the TMT sector.
As you perhaps have already figured out, Allen & Co. has no website and rarely gives any comments to the press. However, those who closely follow the TMT space know that Allen & Co. is a heavy hitter within TMT despite its relatively small size. In fact, almost every year you'll see Allen & Co. within the top ten of the telecom and media league tables.
Many of those looking to break into investment banking get a bit skittish about joining a place like Allen & Co., LionTree, Qatalyst, etc. due to their smaller size and more narrow industry focus. This is a perfectly rational thing to feel.
It's true that many outside of high finance won't have heard of Allen & Co., but will have heard of Goldman Sachs, JPMorgan, etc. However, it's important to understand that if you're interested in TMT - and want to stay within high finance or do corp dev at a large company within the TMT space - then joining Allen & Company will not be an impediment whatsoever.
As a secondary consideration, while boutique investment banks don't have the general name-brand of larger bulge brackets, they do come along with much less bureaucratic nonsense to deal with and as a general rule teams tend to be more tight knit. So, that's an added bonus to keep in mind.
Note: Many have heard of Allen & Co. because they have put together the exclusive annual Sun Valley Conference for decades (which is always held in the idyllic setting of Sun Valley, Idaho). This conference is a way to bring together leaders in high finance and the TMT space, along with a smattering of influential politicians and the occasional celebrity. From Allen & Co's perspective, the conference provides an opportunity to continue to solidify relationships with past and future clients.
Allen & Co. Interview Questions
In order to prepare for an interview at Allen & Co., you should focus on both classic investment banking technicals and some TMT-specific questions. Like with all leading TMT investment banks, Allen & Co. is highly selective. They also tend to place a bit more emphasis on fit than other banks (in particular, bulge brackets) as many more analysts choose to stick around to the associate level.
- Imagine ParentCo owns 70% of a company called SubCo. SubCo generates $100 in pre-tax income this year. Can you walk me through how this income would flow through the three statements of ParentCo?
- Imagine a company raises $200 in new debt, what happens to enterprise value?
- Imagine a company sells $100 of inventory for $200. Then it buys $100 more of inventory during the same period. Can you walk me through the three statements?
- What's a fast way to get a feel for if a company is spending on R&D and capex wisely?
- What are some deals that Allen & Co. has advised on?
Imagine ParentCo owns 70% of a company called SubCo. SubCo generates $100 in pre-tax income this year. Can you walk me through how this income would flow through the three statements of ParentCo?
So, as you likely already know, when you own over 50% (but less than 100%) of a company, you need to consolidate the financials. However, to properly reflect economic reality you also need to somehow show the income of this company that doesn't belong to you.
Practically speaking, the major changes that need to occur involve creating a line item within shareholders' equity called "Noncontrolling interest" and a line item on the income statement called "Net income attributable to Noncontrolling Interests".
So, on our income statement we're going to start with pre-tax income of $100 and have $80 leftover assuming a 20% tax rate. But then we need to subtract $24 under "Net income attributable to Noncontrolling Interests", leaving us with a "true" net income for ParentCo of $46 (this is often referred to as "Net income attributable to the parent", although different companies will use different labels).
Laying things out this way on the income statement illustrates to those looking at ParentCo's financial statements that while ParentCo has economic control of SubCo - and thus has consolidated financials - ParentCo doesn't have a claim on all the economic benefits stemming from SubCo (as 30% of SubCo belongs to third-parties).
Moving on to the cashflow statement, we're up $46, but then we add back the $24 from "Net income attributable to Noncontrolling Interests" to reflect the fact that the $24 of income did come into ParentCo and wasn't magically distributed out automatically to those third-parties who own 30% of SubCo.
Finally, on the balance sheet, cash is up $70 from the cashflow statement. Within shareholders' equity, we have retained earnings up $46 and we have the separate line item (also contained within shareholders' equity) called "Noncontrolling Interest" that is up by $24 to reflect the income that belongs to the third-parties that own 30% of SubCo. Thus, we have balance.
So, all we're really doing in this question is classifying the income of SubCo between those that own 70% (ParentCo) and those that own 30% (the third-parties). Because if this weren't done, it'd lead to an overstatement of the amount of net income that belongs to ParentCo, which would mislead those looking at ParentCo's financial statements.
Sometimes the seemingly simplest questions can be those that trip you up. When asked a question like this, just think back to the enterprise value formula and what will go up and down as a result of raising new debt.
Obviously, we have the debt itself ($200), which would make enterprise value go up by $200. But we haven't specified that the cash that's been raised will be used for any purpose, so we have to assume that the cash just resides on the company's balance sheet (which would decrease your enterprise value by $200).
Therefore, there's no change to enterprise value as a result of just raising debt itself.
Imagine a company sells $100 of inventory for $200. Then it buys $100 more of inventory during the same period. Can you walk me through the three statements?
This is typical of the kinds of questions you'll get in 2022. It's not overly difficult conceptually, but it does have a bit more going on in it than technicals did three or four years ago.
The first thing you should recognize is that the existing inventory (because it's being sold) will affect our income statement, but the new inventory (because it hasn't yet been sold) will not.
So, on the income statement we have revenue of $200 from selling $100 in inventory (COGS), leaving us with $100 in pre-tax income. Applying a 20% tax rate, we'll have $80 in net income.
Moving to the cashflow statement, at the top we have net income up by $80. Then we've sold $100 of inventory, so this decline in inventory is a source of cash leaving us up by $180 within cashflow from operations. But, remember that we've also bought $100 in new inventory, which is a use of cash. Therefore, our inventory changes cancel each other out and we're just left, on the cashflow statement, up by $80.
Finally, on the balance sheet we have cash at the top up by $80 (we have no change in inventory as $100 is going both in and out). Then within retained earnings we have $80 flowing from net income on the income statement. So, we're in balance.
In any capital intensive industry you need to pay careful attention to return on invested capital (ROIC).
One way that you can quickly judge the efficiency of a company is by looking at their WACC and seeing whether it is substantially higher (or lower) than their ROIC (ideally ROIC will beat WACC by at least three or four percent).
You'll routinely see ROIC being compared to WACC within the TMT space. In particular, you'll see this for large media companies, semiconductor companies, and nearly every company within the telecom space.
Of course, in any interview you should have one or two deals prepared to talk about. As always, you should pick deals that you find interesting and keep your answers to two or three minutes at most.
Some interviewers like talking about deals in an interview and will probe a bit into whichever deal you bring up. However, other interviewers treat this question as more of a formality to make sure you've actually done your homework, but care much more about your ability to answer technicals.
Anyway, Allen & Co. has advised on a long list of deals over the past few years. When trying to find deals they've been mandated on, make sure to use their full name - Allen & Company LLC - as a number of financial services firms exist with very similar names, which can muddle the search results.
The most notable media M&A deal of 2021 was the spinoff of WarnerMedia from AT&T and its merger with Discovery in a deal valued at $43b (Allen & Co. advised Discovery on the transaction). Not only is this a very large deal, but it also ties in the biggest themes within media; the rise of streaming, the rise of cord cutting, and the need for large incumbents to think deeply about their vulnerability to being disrupted.
Within the Media Investment Banking Guide, we do a deeper dive into this merger because it provides one of the best ways to get a true pulse of the media investment banking landscape. It's also a notable deal because of how much more AT&T paid for Time Warner just a few years before, and how the sands shifted under the feet of AT&T so quickly.
Other interesting Allen & Co. deals over the past year or so include:
- Zendesk acquiring Momentive Global for $4b, although Zendesk shareholders look like they may reject the deal (Allen & Co. advised Momentive)
- II-VI acquired Coherent for $6.88b (Allen & Co. advised II-VI on the acquisition)
- 23andMe acquired Lemonaid, a telehealth company, for $400m (Allen & Co. advised 23andMe)
Of course, there are many more deals you can pick from (including IPO advisory mandates and SPAC mergers). However, for interview purposes it's generally always better to talk about straight M&A transactions (as you can then cleverly sidestep getting into more technical nuances on transaction structure).
One of the ironies of Allen & Co. is that while it deals with some of the most innovative and high-growth companies in tech, media, and telecom, it hasn't changed itself much over the decades. It's still very small, very discrete, and has no ambitions of growing into a more sprawling boutique like Evercore or Moelis.
But make no mistake, Allen & Co. is a great place to begin your career if you want to work exclusively in the TMT space. While the average person will not be familiar with it, everyone within TMT is because they have consistently been on some of the biggest deals within TMT for decades.
Further, we also put a lot of time and effort into creating the TMT investment banking guides. These are Q&A-style primers on tech, media, and telecom along with over a hundred more advanced technicals (that you'll likely face at more selective firms like Allen & Co). We created these guides because we recognized how little many interviewees knew about what TMT banking actually involves, and how competitive the interview process has become.
Good luck in your recruiting!