Top 4 Morgan Stanley Tech Investment Banking Interview QuestionsPublished:
Morgan Stanley's technology investment banking practice is perennially near the top of the league tables and over the past few years they've advised on some of the largest and the most consequential transactions.
For example, if you've been following tech closely at all over the last two years you've likely heard of the $38.59bn deal between Nvidia and Arm. At the time of its announcement, it was the largest semiconductor deal in history (Morgan Stanley advised Nvidia on the transaction).
If you didn't hear about the deal when it was announced - in Q3 of 2020 - you've probably heard of it more recently because the deal is falling apart due largely to regulatory pressures. While no one cries for bankers when they lose out on fees, when Softbank bought Arm in 2016 they paid Mizuho $146.3m for their efforts.
On a happier note, Morgan Stanley did advise on AMD doing a $35b takeover of Xilinx; the take-private of Cloudera for $5.3b by Clayton, Dubilier & Rice and KKR; and the sale of Wind River Systems for $4.3b.
Note: China approved AMD's acquisition in early 2022 even though some were sceptical that they would.
If you spend quite a bit of time going through Morgan Stanley's tech deals, one thing you'll probably end up realizing is that they advise a lot of sponsor-backed companies (for example, Wind River Systems was owned by TPG).
While it doesn't matter to an analyst where the deal flow is coming from, one thing you will care about as an analyst is getting closed deals on your resume. So going to a place that has great sponsor relations - like MS tech does - is a surefire way to make sure you have lots to talk about when buyside recruiting comes around (which is seemingly getting earlier every year).
Morgan Stanley Technology Investment Banking Interview Questions
Below are a few of the questions you can expect at Morgan Stanley for tech banking interviews. Pay particular attention to the last one, which is emblematic of the more open-ended style of questions you can be asked.
- Let's say that a company owned by a sponsor (PE fund) does a $100 dividend recap. Can you walk me through the three statements?
- Stock-based compensation is a major expense for most tech companies. Should it be added back to FCF calculations?
- What would a beta of one mean? What kind of company or asset would have a beta of one?
- What is a trend in tech you're currently following?
Let's say that a company owned by a sponsor (PE fund) does a $100 dividend recap. Can you walk me through the three statements?
A dividend recap simply involves a company - owned by a sponsor - raising new debt with the main (or primary) rationale of providing a dividend back to the sponsor. The reason why this is done is because i) the company (PortCo) can handle more leverage (debt) and ii) form the sponsor's perspective, getting cash earlier rather than later - when they sell the PortCo - enhances their IRR (even though it doesn't affect, keeping everything else the same, their MOIC).
So the way in which you reflect this dividend recap on the three statements is pretty straightforward. First, on the income statement, nothing changes. Moving to the cash flow statement, within CFF you have a $100 increase from the raising of the new debt, but also a $100 decrease in the form of a dividend to the sponsor (also within CFF).
On the balance sheet you have debt going up by $100, but shareholders' equity goes down by $100 (there are no changes to the asset side).
Stock-based compensation is a major expense for most tech companies. Should it be added back to FCF calculations?
First of all, we haven't been told here whether we're dealing with levered or unlevered FCF. For levered FCF - which we'll use in LBO models for determining debt paydown, for example - it entirely makes sense to add back SBC as it's non-cash. If we don't add it back, it gives us a distorted view - for our purposes - on how much leverage (debt) the TargetCo we're looking at can reasonably sustain.
When it comes to unlevered FCF, arguments can be made both for and against. However, in practice it's usually not added back. Remember that unlevered FCF - by being a value that's applicable to both debt and equity holders - strips out the effect of the capital structure. So, if you're excluding SBC (adding it back) then you are benefiting companies that have made the discretionary decision - for whatever reason - to use SBC as part of their compensation scheme.
Many come into banking thinking that everything is formula driven. While no one would ever claim that the job of an analyst is tantamount to rocket science, the reality is there is some level of discretion involved occasionally around EBITDA add-backs, enterprise value calculations, etc.
What this question is really probing is whether or not you can intuit the different purposes behind levered and unlevered FCF. For example, with unlevered FCF you're often using it to compare companies to each other (directly or indirectly). So, you want things to be reasonably apples-to-apples. However, if you're adding back SBC you're benefiting those who have just happened to make the decision to pay more with stock than cash.
Often interviewees have no trouble running through how to unlevered and relever beta, but when it comes to more conceptual questions around what we even mean when we're talking about beta things tend to fall apart.
Remember that all beta represents is a relative measure of how volatile some kind of asset (normally the equity of a company) is relative to a given market. Practically speaking, most often you'll hear beta in the context of a company's equity relative to a broader market index.
A beta of one would refer to a hypothetical company that is purely in sync with the underlying volatility and directionality of some broader market. While no traditional company would have a beta of one for any prolonged period of time - given that this would require the company to mimic the volatility of a much larger index - by definition index funds should aim to have a beta of one relative to the underlying market they're tracking (perhaps being slightly higher or lower given the need to constantly readjust the index fund, etc). For example, if you pull up the Vanguard S&P 500 ETF it has a beta of 1.00 relative to the broader S&P 500 index.
Over the past few years interviews have not only become more technically difficult, but broader questions that don't have objective right or wrong answers are becoming increasingly popular. This is particularly true of places like Qatalyst, but it's also true of places like Goldman TMT.
Of course, at any given moment within tech there are a myriad of potential trends to talk about. In fact, we've already briefly covered one of them, which is the rise of semiconductor deals being blocked largely on the grounds of national security concerns (which we also wrote about in the TMT guides). As the geopolitic sphere appears to becoming even more contentious this year, this will likely only exacerbate the issue of doing cross-border deals.
Another trend that everyone on the sell-side loves talking about is the rise of large tech hedge funds, like Tiger Global, Coatue, and Viking that are essentially creating quasi-index funds of large-cap private tech companies. This is reflected in how notoriously quick they do due diligence, as ultimately what they prize above all else is participation in many large funding rounds not picking just a handful of the best rounds to participate in.
So, for example, if you're asked about a trend moving forward in tech M&A you may say that with the rise of these kinds of hedge funds a consequence could be that acquiring late-stage private companies may be a bit tougher for several reasons.
First, because founders with lots of capital and controlling shares - who also feel like they can go raise more capital in the future when needed - probably won't be keen on selling in general.
Second, because the paper valuations of these late-stage private tech companies no longer align with where they should be given how much multiples have compressed in public markets. This makes it tough to come to an agreed upon price as the acquirer in today's environment probably is going to want to pay multiples that are roughly inline with public comps.
A hot topic of conversation is whether or not these hedge funds are fundamentally distorting the private market -- creating ballooning valuations that don't have an obvious mechanism for correction (until they need to go raise new capital or go public, of course). Further, because sponsors have become increasingly integral to tech M&A deal flow - but obviously have constraints around the upper bound of what they can reasonably pay - private deals could dry up for a few years despite many of the most notable tech companies still being private.
As we've stressed in other posts, if you're interviewing specifically for tech banking at a top shop interviews will look slightly different. You'll still get all the classic technicals (although they'll be a bit tougher than normal), but your interviewers will really want to see whether you have a true interest in tech.
The way they try to suss out that interest is by asking somewhat broader questions around what areas of tech interest you; what some themes are in tech generally, or tech M&A specifically; and by, of course, walking through a recent deal. Also, if you're going to end up in the Menlo Park office, you may also get a question on if that's the kind of place you want to spend your analyst or associate years.
Hopefully these questions have been helpful. If you're looking for more questions, we put together a longer list of TMT interview questions, some technology investment banking interview questions, and a (very) lengthy TMT investment banking primer.
Good luck in recruiting!