Morgan Stanley Media and Communications: Overview and Interview Questions

The world of media and telecom banking is mostly defined by a few blockbuster deals occurring each year alongside a smattering of smaller deals. This stands in contrast to tech banking where there's not only (much) greater deal volume, but (much) more diversity in individual deal size.

Morgan Stanley's media and communications group is one of the strongest players in the space and has been for years. But given how few large deals occur each year, there's a lot of volatility in league tables as a large deal occurring (i.e., Microsoft acquiring Activision) will heavily sway who's at the top of the league tables in a given year.

Note: In case you're curious, Goldman advised Microsoft and Allen & Company advised Activision, but the FTC is currently trying to block the deal.

Anyway, regardless of the fluctuations that occur year-to-year, the media and communications group is one of the strongest coverage groups at MS with historically great exit ops (partly due to the modeling exposure you'll get, as unlike other coverage groups it's not all handled by the M&A group). 

Morgan Stanley Media and Communications Interview Questions

Below are a mix of traditional technical questions and some more media and telecom focused questions. When trying to get into any specific coverage group - especially one that's more competitive - it's imperative that you should a general understanding of what makes the group unique. 

While no one expects you to be an expert, if you aren't quite sure what telecom even is, then it's going to be hard to stand out (that's part of the reason why I put together the telecom guide to just give you a general lay of the land). 

• What are some large names (companies) in the media and telecom space?
• What are some potential headwinds facing companies in the media and telecom space?
• Let's say you bought $100 in equipment that has a useful life of ten years. After three years, you catch a lucky break: the equipment is now selling for $120. Assuming that depreciation has been accounted for over the past three years, can you walk me through how the asset sale flows through the three statements?
• If doing a DCF, how would an increase in capex of $100 in year three impact the enterprise value found?

What are some large names (companies) in the media and telecom space?

When interviewing for any coverage group - whether directly or through group placement - it's always a good idea to know at least four or five of the larger names that are covered.

You don't need to pull up any of their financials (if public) and know much of anything about them. You just need to be able to rattle off a few names because if you say you want to work in media and telecom, but draw a blank on what companies are in the telecom space, then that obviously isn't impressive.

Below is a listing of the equity research coverage for media and telecom, respectively. Some big media names include Cinemark, Electronic Arts, Take-Two Interactive, Live Nation, and Activision (for now -- depending on whether the acquisition ends up closing!). 

Some big telecom names include Comcast, AT&T, Charter, Verizon, and American Tower.

Needless to say, there are sub-sectors within both media and telecom (as we get into in the guides) because there is a fundamental difference in the business models of American Tower and AT&T. Which, obviously, translates into valuation differences along with the kinds of companies they'd be looking to acquire.

What are some potential headwinds facing companies in the media and telecom space?

This is a classic example of one of the more open-ended questions you could get where there's per se no single correct answer. Rather, there are a myriad of potentially right answers, and all your interviewer wants is to see that you can highlight one or two of them. 

Put more simply: you'll be judged less on your exact answer here and more on if you can just come up with a few plausible ideas (as many wouldn't be able to).

So, for example, given the weaker economic environment right now - with a recession being forecast now by most investment banks - media companies are already seeing ad market weakness. This is particularly concerning for those DTC streaming services that are now mixing in advertising-video-on-demand as part of some of their offerings.

Further, if we were to see meaningful economic contraction occur - along with the associated pull back in consumer spending - than you'd anticipate that there'd be less proclivity for many consumers to have so many streaming services (in other words, if they previously had five they may pair it back to three).

For telecoms, they tend to weather negative economic headwinds better than media companies - given the largely less discretionary aspect of what they offer - but there are a few possible headwinds you could highlight (among many others) that both revolve around being in a higher rates environment.

First, with home sales precipitously declining - given the rapid increase in rates - the large increase in new residential broadband hookups will likely abate (as a recent JPM sell-side note touched on regarding some broadcast providers).

Second, relative to tech and media companies, telecom companies tend to have quite heavy capital structures. This is true not only of more traditional names like AT&T and Verizon but also of infrastructure telecom names like American Tower. With such heavy capital structures, any new debt - including the refi of old debt - will be coming along with a higher cash interest expense. Further, if these companies have unhedged floating rate debt (i.e., term loans) then they are currently, and will in the future, see their cash interest expense rise as well.

So, all told it's not anyone's anticipation that we're going to see blistering growth in any media and telecom names this year. But both categories are (reasonably) resilient relative to others and just because earnings growth may be sluggish (or negative) doesn't mean that there won't be activity as large strategics and sponsors are always looking for good deals.

Let's say you bought $100 in equipment that has a useful life of ten years. After three years, you catch a lucky break: the equipment is now selling for $120. Assuming that depreciation has been accounted for over the past three years, can you walk me through how the asset sale flows through the three statements?

Whenever you get a longer technical question like this, it's important to take a step back and ask yourself if you have all the information that you need (as it's not always a given that your interviewer will have told you everything you need to know).

For example, in this question we've been told we have a piece of equipment that has a useful life of ten years and that we've had it for three years now. But this isn't enough information to start working through the three statements as we haven't been told what the salvage value is (which is necessary for determining what the actual level of depreciation each year should be).

If you're asked a technical where you aren't given all the information you need you can either ask your interviewer for the information or, preferably, just tell them the assumptions you're making along the way.

So, in this example, we'll just assume straight-line depreciation and a salvage value of zero. Given that we've been told depreciation has been accounted for over three years, we now know that the book value of this equipment will be $70. 

Therefore, if we're selling the equipment for $120, there's a $50 gain that we need to reflect on the income statement. As a result, we can say that on the income statement, pre-tax we'll be up $50 and after-tax (assuming a 20% rate) our income will be up $40.

Moving to the cash flow statement, we start with $40 on the top but then we'll take out the pre-tax gain (within CFO) as we'll be reclassifying it. Therefore, CFO is down by $10. Within CFI we'll add the full value of the sale (i.e., the cash we're getting from the sale) of $120. Leaving the cash flow statement, overall, up $110.

Finally, on the balance sheet, we start with cash up by $110 but then we'll have an asset (that we just sold) down by $70. Leaving the asset side of the balance sheet up $40. Within retained earnings, we'll be up by $40 due to the income flowing from the income statement. So, our balance sheet is in balance. 

If doing a DCF, how would an increase in capex of $100 in year three impact the enterprise value found?

As mentioned in the prior question, it's always worthwhile to not jump straight into your answer but take a few seconds to mull it over.

Remember that when you're figuring out the unlevered FCF over your projection period in a DCF that capex will come after taxes. So an increase of $100 in capex would lead to a reduction of $100 in unlevered FCF for that year. 

However, also remember that this won't equate to a reduction of $100 in the enterprise value found via our DCF. Given that this reduction in cash flow is occurring in year three, we need to discount it back to the present. 

So, assuming we're using mid-year convention, then the answer here would be: ($100 / (1 + WACC) ^ 2.5)). Assuming a WACC of 8%, then our enterprise value would decrease by $82.50 from an increase in capex of $100 in year three. 

Note: In an actual interview, you'd never be expected to come up with the precise answer here. You'd just need to show the formula and say that because we need to discount the capex increase, it'll be some number quite a bit less than $100.

The real "trick" with this question is that many will reflexively say that EV would drop by $100 as a result of capex rising in year three. So as long as you explain things as I did above, you'll be more than fine.  

Conclusion

The media and communications group at MS is incredibly strong and, if you're interested in the space, will give you great exposure along with a recognizable brand name (something that smaller boutiques won't as much). 

As I wrote about when discussing Goldman TMT, one of the benefits of joining a bulge bracket is you never have to worry about deal flow quite as much. Sure, it'll ebb year-to-year depending on the overall market. But when you're at a BB the institutional framework of the bank does a lot of the heavy lifting in bringing in deals.

If you're interested particularly in the media space, I put together a little primer specifically on media investing banking. I also put together a little primer on TMT investment banking as well where I broke down the major sub-sectors across tech, media, and telecom.

Finally, if you're currently getting ready for interviews, you'll almost certainly enjoy the TMT Banking Guides which were put together to give you a comprehensive, yet digestible, understanding of TMT banking (plus, there are two separate guides covering more advanced accounting and valuation questions that frequently crop up in interviews).