Bank of America TMT: Overview and Interview QuestionsPublished:
While overall M&A activity has slowed thus far in 2022 - including across tech given the valuation readjustment we've seen - Bank of America has started off the year strong and is fourth in the overall league tables based on total transaction value.
Similar to most other bulge brackets, Bank of America has spread its TMT group across both East Coast and West Coast offices. The Palo Alto office handles most tech deals, while the New York office handles a mix of tech, telecom, and media deals. However, you should keep in mind that historically the Palo Alto office hires summer analysts and associates directly.
While Bank of America TMT may not have the same cachet as Goldman Sachs TMT or Qatalyst among college juniors, they've been on some large deals over the past year (it always helps when a bank has a massive balance sheet to swing around, because then it can help make sure deals gets done).
For example, BofA advised Vista on acquiring Citrix at a ~$13b equity valuation, advised an Investor Group on acquiring McAfee at a $12b equity valuation, and has been involved in a series of SPAC-related deals like Foley Trasimene Acquisition merging with Alight Solutions, which was done at a $7.3b valuation.
While it's never a great idea to generalize too much, you'll often find BofA advising sponsors while you'll more frequently see boutiques like Qatalyst dealing with strategics or those being acquired. For example, on the Vista-Citrix transaction, BofA was advising Vista - one of the most prominent tech-focused private equity funds - while Qatalyst was exclusively advising Citrix.
Bank of America TMT Interview Questions
In other posts we've covered traditional TMT interview questions, including slightly harder than normal technical questions. Here we'll cover some questions you could get either interviewing directly with BofA in Palo Alto, or through the group selection interviews for BofA TMT in New York.
- Do you think there will be a sharp slowdown in tech M&A given the recent equity market turmoil?
- What kinds of tech companies would fare best in a rising rates environment?
- Can you roughly rank the things that will improve a sponsor's IRR the most?
- Imagine that we have an asset write-up stemming from an M&A transaction of $100. Let's assume we use straight line depreciation for this asset and that it has a useful life of five years. How does this increased depreciation flow through the three statements during year one?
This is one of those types of questions that can really allow you to differentiate yourself from other interviewees. Further, this is definitely the type of open-ended question that can come up during an interview-style networking call, group selection interview, or even a traditional interview.
As of this writing there's been quite a heavy selloff across public equity markets and in particular across tech names. Further, we've already seen a bit of a slowdown in tech M&A activity thus far in 2022 (although this is compared to the record-breaking pace of tech M&A seen in 2021).
However, with many tech names down by over 50% year-over-year you may think that this would cause everyone to take a step back and put their M&A plans on hold. But that's not what we're seeing -- at least not yet.
As we tried to focus on extensively in the TMT guides, sponsors have become an increasingly important part of the tech M&A ecosystem. While a decade ago most deals were done by strategics (e.g., Facebook buying Instagram), today nearly every private equity fund will at least kick the tires within certain sub-segments of the tech industry (in particular, software).
So while recent equity market turmoil matched with a rising rates environment may lead to a slowdown in tech M&A activity relative to where we were a year ago, what you're already beginning to see are sponsors - who are absolutely flush with cash right now - coming in and taking advantage of the situation.
Another way this can all be said is that while strategics may be more reluctant to engage in M&A activity (especially if they're public themselves and have had their own market cap decline significantly over the past few months) you are likely going to see sponsors come in and start picking up the slack. So while there will likely be a slowdown in tech M&A relative to a year ago, it likely won't be a sharp slowdown given that sponsors will begin hunting for deals.
As you no doubt already know, when rates decline that disproportionately helps growth stocks. This is because growth stocks derive the vast majority of their value from projected FCFs far into the future. So when rates decline, your discount rate will as well, which ultimately leads to the value of those same future free cash flows being worth more today.
Likewise, when rates rise that tends to have a disproportionately negative effect on growth stocks as those future FCFs far into the future are now being discounted back to the present at a higher rate.
However, not all tech-centric growth stocks are the same. Given that the hawkish pivot by the Fed is being driven by inflationary concerns, the companies that can insulate themselves best from rising rates are those that have significant pricing power. In other words, companies that will be able to pass on higher costs to their consumers or clients.
What you're likely going to see over the next year is even more tech M&A surrounding B2B tech companies. As these are the types of companies that will have a client base with more inelastic demand and that are, generally speaking, less price sensitive than traditional consumers are.
The first thing would be just having a lower entry multiple or having a higher exit multiple
The second thing would be adding more leverage to the transaction and thus needing to place a smaller equity piece. However, the caveat here is that placing more leverage will make equity returns more volatile (as there's less of an equity cushion). So, it's not invariably the case that placing a smaller equity piece will enhance returns, but it certainly will if the company performs as projected.
The third thing would be making general income statement or cash flow statement improvements. For example, increasing revenue growth, being able to expand EBITDA margins, lowering annual capex expense, etc.
Tip: It would be impressive in an interview to mention that a sponsor generally cares most about things that are definitive (like lowering the entry multiple or adding more leverage), not operational things that it projects can happen in the future with a high probability (like enhancing revenue growth, expanding out margins, etc.).
Imagine that we have an asset write-up stemming from an M&A transaction of $100. Let's assume we use straight line depreciation for this asset and that it has a useful life of five years. How does this increased depreciation flow through the three statements during year one?
This is an example of a slightly more complicated technical question that you could be asked in an interview.
The first thing we need to do is briefly note two things that happen immediately after the asset write-up occurs. First, a deferred tax liability (DTL) will be created. If we assume a 20% tax rate, this will just be $100 * 20% = $20. Second, this DTL will be offset on the balance sheet by having goodwill go up by $20.
With that out of the way, we can move on to answering what happens in year one. On the income statement we're going to have a $20 increase in depreciation (the $100 asset write-up divided by the five years of useful life). So, assuming a 20% tax rate, we're going to have net income down by $16.
On the cash flow statement, we're going to have -$16 flowing from net income at the top. But then we'll need to add back the $20 in depreciation since it's non-cash, which will leave us up by $4.
However, remember that this asset write-up created a DTL of $20. So, in year one we're going to have that DTL decline by $4 ($20 / 5), which is a use of cash. So, we're actually flat on the cash flow statement.
On the balance sheet, we'll have no cash change at the top. However, the asset that has been written up will decline by $20 due to the impact of depreciation. On the liabilities side, we'll have our DTL decline by $4 and within retained earnings we'll have a decline of $16 flowing from net income on the income statement. Therefore, everything is in balance.
Ultimately, because of the balance sheet capacity of BofA, they're always going to be touching quite a few deals within the TMT space.
Hopefully these questions have helped flesh things out a little bit for you. Just keep in mind that while your first priority when doing interview prep should be on classic banking technicals, if you're applying directly to tech in Palo Alto, or going through group selection interviews in New York, you're probably going to get some more open-ended questions as we've touched on above.
As a result, it's a great idea to keep track of what TMT deals have occurred recently, what's happening in the market more broadly, and show that you have a real rationale for wanting to join the group. To that end, the TMT investment banking and media investment banking posts might be helpful to read as well.