Top 5 Technology Investment Banking Interview Questions

It's no secret that over the past decade the most popular banking coverage group to join has been technology (which is sometimes its own group, and sometimes lumped in along with media and telecom).

It's hard to say this popularity has been unwarranted. Over the past decade not only have tech companies ballooned in valuation, but the largest tech companies have turned into FCF-generating machines.

And, in an effort to try to protect themselves from being disrupted, these tech giants have used the ballooning levels of cash on their balance sheets to be incredibly acquisitive. 

Just take a look at the number of acquisitions large tech companies have been doing over the last few years:

But what has really supercharged tech M&A deal activity over the past few years hasn't just been strategics -- it's been sponsors (private equity funds). 

As discussed in our long post on TMT investment banking, few sponsors were interested in acquiring true tech companies until just a few years ago (with notable exceptions, like Vista).

The reason why sponsors weren't too keen on tech companies is quite obvious: what sponsors value most are reliable, predictable free cash flows. Not only so that they can pay down the debt they've placed onto the company, but more importantly so that they can make sure they get a strong exit multiple when they go to sell the company after their holding period.

However, over the past few years there's been a marked attitude shift among sponsors. Now nearly every sponsor is willing to look at doing buyouts of certain types of tech companies, which is really a reflection of the maturation that has occurred in the sector along with the rise of MRR / ARR billing as a standard in the software space (which is where most buyouts in tech occur).

Anyway, the point here is that the rise in deal flow we've seen over the past decade in tech can be boiled down to two primary things:

1. Mature tech companies having lots of cash (and high share prices!), which has given them lots of ammunition with which to do acquisitions.
2. The rise of sponsors in the tech space (who were previously quite reluctant to do buyouts in what used to be perceived as a volatile and risky sector). 

With this little preamble out of the way, let's get into some of the questions you should be prepared for in a tech banking interview (if you're looking for even more questions, feel free to check out the TMT guides). 

Technology Investment Banking Interview Questions

Given the popularity of tech banking among candidates, the accounting and valuation technicals you'll get will be on the harder end of things. Further, you should expect some questions that are specifically about tech banking (i.e., sub-sectors of tech, deal trends in tech, the way a certain sub-sector roughly works, etc.).

1. Why tech banking?
2. Let's say that your company (ParentCo) owns a 25% stake in another company (SubCo). SubCo dividends out $100. Can you walk me through how we reflect this in ParentCo's financial statements?
3. What sub-sectors exist in technology investment banking?
4. Can you walk through how $200 in stock-based compensation flows through the three statements?
5. Imagine that TechCo1 acquired TechCo2 and the goodwill attributed to the transaction was $200. However, after a year we've reevaluated and believe there should be a goodwill impairment of $100. Can you walk me through the three statements for this?

Why tech banking?

Not only are you going to get this question in first-rounds and superdays, you're also going to get it almost whenever you're on networking calls with those in tech banking (especially at tech-focused shops like Qatalyst and Allen & Co, or tech-focused groups like GS TMT).

The reason why this always comes up is that folks want to make sure that you're actually interested in tech banking for the right reasons (not just because it's incredibly popular, or because it reliably produces great exit opportunities at most groups).

It's always a good idea to take of a bit contrarian angle with this answer. Saying that you grew up spending lots of time on Instagram and Snapchat, which spurred your interest in their economics and how they financially work, is something everyone has heard before. 

Instead, you should try to find a different approach. For example, you could talk about how you're fascinated with the economics of SaaS businesses and why they went from being shunned by private equity investors, to now being one of the hottest types of companies to acquire (with multiples that reflect that).

Alternatively, you could talk about the fact that while you're interested in traditional tech companies - like the big tech megacaps - you're really interested in some of the lesser known sub-sectors of tech like semiconductors.

What you should strive for in your answer to this question is uniqueness -- telling something to your interviewer that reveals you know more about tech banking than most do (i.e., by talking about different acquirer strategies, as in our first example, or more niche areas of tech banking as in our second example). 

Note: If you're interviewing at a bank that lumps together tech, media, and telecom we dedicated an entire post to answering the "Why TMT?" interview question. If you do want to land in a TMT group, definitely don't just talk about tech banking.

Let's say that your company (ParentCo) owns a 25% stake in another company (SubCo). SubCo dividends out $100. Can you walk me through how we reflect this in ParentCo's financial statements?

The reality is that with technology investment banking being such a popular area, you can only differentiate between candidates based on interest so much. Sometimes you just need to ask slightly more complicated or rare technicals to differentiate between candidates.

Note: Remember that when a company owns roughly between 20% and 50% of another company, we'll utilize the equity method. This is important to keep in mind so that we use the right line item terminology when answering this question.

On the income statement there will be no impact from the dividend. On the cash flow statement, within cash flow from operations, you'll have a $25 increase in cash (we're placing this within CFO because it's considered an operational inflow given the non-trivial, even if non-controlling, level of control ParentCo has over SubCo given that ParentCo owns 25% of it). So, overall the cash flow statement is up by $25.

Moving to the balance sheet, cash at the top is up by $25 and the "equity investments" line item (different companies will use slightly different terminology) is decreased by $25. Therefore, we're in balance. 

What sub-sectors exist in technology investment banking?

As we've talked about many times, there is an incredible amount of diversity within TMT investment banking (which is part of the reason why joining a group that lumps tech, media, and telecom together provides such a great learning opportunity). 

Within tech banking, there are five primary sub-sectors:

1. IT Services
2. Software
3. Internet
4. Hardware
5. Semiconductors

We put together a more detailed description of these sub-sectors - along with those within media and telecom - in the big TMT investment banking post you can check out.

Can you walk through how $200 in stock-based compensation flows through the three statements?

Obviously part of what has made joining tech so lucrative over the past number of years is the structure of compensation, which includes both cash and stock.

Remember that stock-based compensation (SBC) is tax deductible. So, on the income statement when $200 in SBC is incurred you'll have pre-tax income down by $200, and thus net income down by $160 (assuming a 20% tax rate).

On the cash flow statement, you'll have the -$160 flow to the top. But since this SBC is a non-cash expense, you'll end up with +$40 within cash flow from operations.

On the balance sheet, we have cash up by $40. However, within shareholders' equity you have the $200 in SBC flowing into Additional Paid in Capital (APIC) along with retained earnings being down by $160 (from the decline in net income). Therefore, we have balance. 

Note: Obviously one of the benefits of using SBC to pay employees are the tax benefits. More advanced interview questions - that would be quite rare - revolve around Tax Benefits and Excess Tax Benefits arising from SBC (what you need to know is briefly covered in the TMT guides). 

Imagine that TechCo1 acquired TechCo2 and the goodwill attributed to the transaction was $200. However, after a year we've reevaluated and believe there should be a goodwill impairment of $100. Can you walk me through the three statements for this?

Just as SBC is more common in tech than in other industries, so too are goodwill impairments (partly because many tech acquisitions involve buying more nascent companies at high valuations, or those operating in more nascent industries). 

So on the income statement we'll have an impairment charge of $100. Assuming a 20% tax rate, this will reduce net income by $80. On the cash flow statement, we are initially down $80 at the top. But then we need to add back the $100 impairment charge as it's a non-cash. So, overall we're up by $20.

Moving over to the balance sheet, we have cash at the top up by $20. But goodwill - which is obviously an asset - will be down by $100. Leaving us down on the asset side of the balance sheet by $80. Within shareholders' equity, we have retained earnings down by $80 too. Therefore, we have balance. 

Summary

Hopefully this helps to give you a feel for what types of questions to expect. Technology investment banking interviews are a bit distinct relative to other coverage groups like industrials or consumers. You should definitely be prepared for questions that are relatively group-specific (although you'll also get your fair share of general accounting and valuation technicals).

If you're currently gearing up for interviews, be sure to check out the longer list of TMT interview questions we put together (or, if you're still figuring out what coverage group is best for you, you may want to read our overview of media investment banking too).