Top 4 LionTree Interview Questions and Answers

While the TMT league tables are dominated by relative household names like Goldman Sachs TMT and Morgan Stanley M&C, there are a few much smaller firms that punch well above their weight.

One of these firms is LionTree, which has both a traditional banking (advisory) side and a merchant banking (investing) side. In many respects, LionTree is a bit of a throwback to the way most investment banks - that didn't have a retail banking component - were structured decades ago. 

For example, LionTree advised Apollo on its acquisition of Yahoo for $5b, but also invested alongside Apollo in the deal (we talk about this deal a bit in the Media Investment Banking Guide). This is a kind of transaction that - for a myriad of reasons - would simply never happen within an investment bank that still does merchant banking like Goldman (because it wouldn't be worth the reputational risk) or at a place like Evercore (because they don't do any merchant banking). 

Note: Talking about this deal in an interview would be a great idea as it's reasonably large and can implicitly show your understanding of the unique structure of LionTree (which many of those interviewing won't really be aware of).

LionTree is one of the strongest firms - from a deal exposure perspective - you can join in the TMT space. While they've traditionally been known a bit more their media deals, they're also strong across tech and telecom.

While LionTree doesn't have loads of name recognition - by virtue of its size - they're well known and very well regarded in high finance. So, if you're looking to stay in high finance or move to big tech after banking, then don't worry at all about having crimped exit opportunities. 

LionTree Interview Questions

Below are some examples of interview questions you could face at LionTree. As with all investment banking interviews, you'll face traditional accounting and valuation technicals. However, you'll also be asked some questions that are more specific to TMT as interviewers will want to see that you really have an interest in TMT.

1. Can you walk me through $100 in stock based compensation as it flows through the three statements?
2. Let's say a tech company just exited a fast growth stage where they racked up $300 in net operating losses (NOLs). They've finally turned the profitability corner and generated $100 in pre-tax income this year. Can you walk me through the three statements for this?
3. How would raising $100 in debt that pays a 5% coupon in year two affect the DCF valuation of a company?
4. Public markets tend to place a high multiple on businesses with recurring revenue. Is there a scenario you can imagine where this would not be the case?

Can you walk me through $100 in stock based compensation as it flows through the three statements?

As you no doubt already know, a very common way in which tech and media companies pay their employees is through a mix of cash and stock based compensation (SBC). This stands in contrast to most other industries - including investment banking - where only the most senior folks have a significant portion of their annual compensation in the form of stock.

Anyway, carrying forward with our example, SBC will hit the income statement as its tax deductible. So, on the income statement we'll be down $100 pre-tax. Assuming a 20% tax rate, we'll have net income down $80.

Note: SBC is often wrapped into SG&A, but sometimes (particularly for tech companies with a lot of SBC) it'll be broken out in a separate line item.

On the cash flow statement, we have net income at the top down $80. However, because SBC is a non-cash expense (obviously!) we'll add back $100 within cash flow from operations. Therefore, cash is up by $20 overall on the cash flow statement.

On the balance sheet, we have cash up by $20 on the asset side. However, within shareholders' equity we have $100 in SBC flowing into Additional Paid in Capital (APIC) and a decline of $80 in retained earnings (due to the net income decline). Therefore, we have balance.

Note: This isn't an overly difficult interview question, but many do overlook SBC questions in their preparation. A more advanced type of question would involve how to handle the tax benefits and excess tax benefits arising from SBC. These questions would be more common for lateral interviews, although at top groups they could crop up for summer analyst or associate interviews (we cover these questions in the Advanced Accounting Guide, if you're curious).

Let's say a tech company just exited a fast growth stage where they racked up $300 in net operating losses (NOLs). They've finally turned the profitability corner and generated $100 in pre-tax income this year. Can you walk me through the three statements for this?

This is a great question to ask because not only is this an incredibly common scenario to come across, but also because it's a slightly more difficult question that not everyone interviewing will be able to answer. 

So, on the income statement we're going to proceed as normal. We'll have $100 in pre-tax income and $80 of net income (assuming a 20% tax rate).

On the cash flow statement, we have $80 in net income flowing to the top. Since we have $300 in NOLs, we can conceptually use $100 of the NOLs to counterbalance the $100 in pre-tax income, leaving us with zero cash taxes. Practically, to reflect this realty we need to reduce our pre-existing deferred tax assets (DTAs) by $20 ($100 * 20% tax rate), which increases our cash flow by $20.

So, on the cash flow statement, we're up $100 due to the net income at the top and the DTA decreasing (remember that DTAs declining, since they're an asset, are a source of cash).

Moving to the balance sheet, we have cash up by $100. However, our existing bucket of DTAs (an asset, obviously) has declined by $20. Leaving us up $80 overall.

On the shareholders' equity side, we have retained earnings increasing by $80 from the net income on the income statement. So, we have balance.

How would raising $100 in debt that pays a 5% coupon in year two affect the DCF valuation of a company?

This is a bit of a tricky question because you need to think about all the ways in which additional debt could impact a DCF.

Remember that for the unlevered free cash flow calculations that underpin a DCF, there will be no impact from raising additional debt (as unlevered FCF is, by design, capital structure neutral).

With that being said, what you discount the unlevered FCFs by during the forecast period (along with the terminal value) would change as the capital structure is now more debt heavy. Assuming the cost of debt is lower than the cost of equity - which is almost certainly would be for any remotely healthy company - this additional debt would lower the WACC, and thus increase the present value of the FCFs and the terminal value.

Thus, raising additional debt would likely (very slightly) increase the enterprise value of the company.

Public markets tend to place a high multiple on businesses with recurring revenue. Is there a scenario you can imagine where this would not be the case?

Generally the market rewards companies that have recurring revenue with a higher multiple due to the predictability of their revenue. This is why over the past few years we've seen nearly every company - including tech giants like Adobe - move to a SaaS-style model of monthly or annual billing.

However, one could imagine a scenario in which a company with recurring revenue may not be rewarded with the eye-watering multiples many others have received. For example, think about a company that has $10m in annual recurring revenue (ARR), which is made up from having ten companies each paying $1m annually.

All of a sudden, for this company, customer retention is increasingly important. If the company is operating with a modest profit margin, just one customer canceling their contract / subscription will spell trouble.

This may seem like a far fetched example, because most companies that have recurring revenue (e.g., Netflix, Adobe, etc.) have hundreds of thousands or millions of customers paying a small amount per month. So, there's not really this kind of key client risk.

However, tech is an incredibly diverse industry which includes folks operating in the IT Services-as-a-Service (IT SaaS) space. We talk about this area a bit more in the Tech guide, but these companies are generally typified by having very few clients who pay large amounts on a reasonably predictable billing cycle.

Conclusion

LionTree is a prime example of a boutique investment bank that punches far above its weight. However, unlike Qatalyst that is very tech-focused, LionTree is strong across tech, media, and telecom.

Given LionTree's focus, interviewees will be expected to be able to demonstrate a general understanding of the breadth of tech, media, and telecom. While it's great to have an interest in the strategic machinations of the big tech companies, it's important in an interview to be able to show you understand some of the more niche sub-sectors as you will eventually work on deals in those areas. This is also a phenomenal way to stand out and set yourself apart from other interviewees. 

If you're currently preparing for interviews, we've compiled an even longer list of TMT investment banking interview questions along with a post dedicated to media investment banking. Of course, we also spent quite a bit of time and energy putting together the TMT Interview Guides specifically for those looking to get a more fulsome understanding of the space.