Top 7 TMT Investment Banking Interview Questions and AnswersPublished:
Preparing for any kind of investment banking interview will require putting in some work. However, not all investment banking interviews are created equally.
Given that Tech, Media, and Telecom (TMT) is by far the most popular - and thus competitive - coverage group, there is a dual phenomenon that occurs whereby interviewees tend to be better prepared, and interviewers tend to ask much tougher questions in order to try to differentiate between interviewees.
The reason behind TMT's ever rising popularity is pretty obvious. Over the past decade TMT has had by far the most deal flow of any coverage group and that shows no sign of slowing down.
In fact, in 2021 TMT M&A transactions will comfortably top one trillion for the first time, which is something few would have believed even just three or four years ago.
Practically speaking, as an analyst or associate when you join a group that has high deal flow you'll get put on more deals, have more deals close, and have better exit opportunities. These better exit opportunities are due to having more deal experience on your resume than other junior bankers and due to having developed somewhat of an expertise in a highly coveted area.
How to Prepare for TMT Banking Interviews
As already mentioned, TMT banking interviews tend to be a bit tougher than interviews for other coverage groups given how competitive it is.
This has only been exacerbated over the past few years. With so many people clamoring to get into TMT - who all have somewhat similar resumes on paper - there needs to be a way to differentiate between candidates.
Of course, you still need to know all the traditional behavioral and technical questions. But today there are two other types of questions that will largely be used to separate out interviewees.
- More advanced accounting and valuation questions that are largely outside of the traditional IB prep guides;
- TMT-specific questions to try to see if interviewees truly understand what TMT actually covers.
Ultimately, the entire purpose behind the creation of this site has been to try to help candidates be able to answer these two types of questions.
Because when both of us went through our summer analyst interviews a few years ago, we felt that there were no practical resources out there to really help us quickly get up to speed on what TMT M&A involved.
Luckily we were able to finagle our way through the process. But interviews have only become more difficult over the past few years.
So, we spent months in our (very limited) spare time creating the TMT Interview Bundle. Our singular goal with the TMT Interview Bundle - and this site more broadly - is to hopefully help make you stand out in your interviews and really impress your interviewer.
Note: Ultimately, we've put together everything on this site just for fun and because we've enjoyed doing it -- so don't worry about there being some outrageous price tag associated with the bundle.
In this post we'll be covering the two types of questions mentioned above: advanced technicals and TMT-specific interview questions. If you've enjoyed these questions - and are looking for 300+ more just like them - then you can check out the TMT Interview Bundle or continue poking around the site.
Let's get started...
TMT Investment Banking Interview Questions
The answers to the following questions are quite long since we want to make sure you can really get a feel for how we're arriving at the right answer. So, if you want to go directly to any of the interview questions on this page, simply click the links below:
- Let's say you bought $100 of manufacturing equipment that has a useful life of ten years. After three years, you catch a lucky break: this used equipment is now selling for $130. Assume depreciation has been accounted for in all three years thus far. Walk me through how the sale of the asset for $130 flows through the three statements?
- Let's say a company has free cash flow of $500 in the last year that a DCF is projected, a WACC of 10%, and a terminal value (found via the multiples method) of $7,000. What's the implied perpetuity growth rate?
- Let's say that you raise $100 in debt and use the cash raised ($100) to buy a piece of equipment. How does that impact enterprise value?
- Let's say a company (ParentCo) has $1,000 in assets and $800 in liabilities. TargetCo has $100 in assets and $50 in liabilities. ParentCo acquires TargetCo for $400 using a 50/50 mix of cash and debt consideration (assume a stock sale transaction). Further, ParentCo writes-up the assets of TargetCo to $300 on its books. Can you walk me through the pro-forma balance sheet?
- What is one unique add-back to EBITDA for some media companies?
- Within tech banking, what do we mean by vertical software companies?
- What has been the most common form of asset divestiture in the telecom space over the past few years?
Let's say you bought $100 of manufacturing equipment that has a useful life of ten years. After three years, you catch a lucky break: this used equipment is now selling for $130. Assume depreciation has been accounted for in all three years thus far. Walk me through how the sale of the asset for $130 flows through the three statements?
This is a great example of the kind of more advanced technical questions you'll face in TMT interviews. It doesn't involve fundamentally new concepts from what you've likely seen in the traditional banking prep guides, but it combines them into a slightly more complicated structure.
Whenever you're answering these kinds of questions you should take a step back and ask yourself if you've really been given all the information that you need.
For example, is there any salvage value here? Should we be depreciating the $100 initial purchase price fully over the ten years? Should we be doing straight line depreciation?
In an interview, you can either ask clarifying questions or you can just tell your interviewer what assumptions you'll be making in order to answer the question. Either is fine to do, but the main thing is to verbalize the fact that you realize you haven't been given all the information in the question.
So, let's assume that this equipment has a salvage value of zero and we use straight line depreciation.
Therefore, after three years this equipment will have a book value of $70, and we'll be selling it for $130. This represents a gain of $60 that we need to reflect on the income statement. So, assuming a 20% tax rate, we'll have net income on the income statement up by $48.
Moving to the cash flow statement, we'll start up by $48 from net income within cash flow from operations (CFO). But then we'll take out the full pre-tax gain of $60 as we're going to reclassify the full sale elsewhere. So, CFO is down by $12.
Then, within cash flow from investing (CFI) we'll add the full sale value of $130, which leaves our total cash on the cash flow statement up by $118.
On the balance sheet we have cash up by $118 and our asset (the remaining book value of the manufacturing equipment) will decline by $70. Leaving us up on the asset side by $48.
Within shareholders' equity we are up $48 due to the net income from the income statement flowing into retained earnings. Therefore, we're in balance.
Let's say a company has free cash flow of $500 in the last year that a DCF is projected, a WACC of 10%, and a terminal value (found via the multiples method) of $7,000. What's the implied perpetuity growth rate?
So, let's back up a bit. What's the point of asking this question?
As you likely already know, you can use the multiples method or the perpetuity growth method to find your terminal value when doing a DCF. However, in practice you'll almost always be using the multiples method.
But, what you'll also almost always do is create a sensitivity table showing what the implied perpetuity growth rate would be under various exit multiples and WACCs. In other words, what this table will show is the perpetuity growth rate you would have had to use to get to the same terminal value as what you found via the multiples method.
You should think of this as being like a little check. If you end up finding that the exit multiple and WACC you used has led to an implied perpetuity growth rate of 4% or more, then you're probably using an exit multiple or WACC that is far too aggressive and should change them to get to a lower implied perpetuity growth rate.
In most DCFs - across every industry - reasonable implied perpetuity growth rates are anywhere from 1.5-3%. Anything above 3% raises some eyebrows, and anything above 4% is likely too aggressive.
Here's an example of the kind of sensitivity table you'd create:
Alright, so with all of that explained, let's get into how to actually solve this question. Unfortunately, it'll require you memorizing the following formula:
Implied Growth = (Terminal Value Before Being Discounted * WACC - FCFn) / (Terminal Value Before Being Discounted + FCFn), where n is the last year that you've forecasted in the DCF.
So, in this example we'd have: (7,000*10%-500) / (7,000 + 500), which gives us 2.66%. This implied perpetuity growth rate wouldn't raise too many eyebrows as it's just a bit higher than long-term average GDP growth.
Note: No one is expecting you in an interview to give an exact percentage answer, of course. You can just do the quick math to get down to 200/7500 or 2/75.
Note: In practice the formula used is actually slightly more complicated, but don't worry about needing to know that for interview purposes.
Let's say that you raise $100 in debt and use the cash raised ($100) to buy a piece of equipment. How does that impact enterprise value?
For many, this is a bit of a tricky question to get your head around despite the fact that it looks so simple.
Before you think about what's going up and down in the EV equation, take a step back and think about it logically.
If a company raises $100 in debt to buy a piece of equipment that's worth $100, how much should the cost to hypothetically acquire the company (EV) go up by? The answer is probably $100, right? It wouldn't make sense for the company to become less expensive to acquire, right?
Let's go through this question sequentially. We initially raise $100 in debt, which means we have debt going up by $100 and cash going up by $100. This means that the EV doesn't actually change from the debt raise itself. Because the debt increase, which adds to the value of EV, is equally offset by the cash increase, which subtracts from the value of EV.
However, once the company has the $100 in cash it puts it to use by buying a piece of equipment. So, cash goes down by $100, which means that our EV goes up by $100.
So, the answer is that the EV is up by $100.
Let's say a company (ParentCo) has $1,000 in assets and $800 in liabilities. TargetCo has $100 in assets and $50 in liabilities. ParentCo acquires TargetCo for $400 using a 50/50 mix of cash and debt consideration (assume a stock sale transaction). Further, ParentCo writes-up the assets of TargetCo to $300 on its books. Can you walk me through the pro-forma balance sheet?
This is another good example of a somewhat traditional looking question that's just a bit more advanced given that we're rolling asset write-ups into it.
So, first let's note the equity of ParentCo is $200 (in an interview you could also note that the shareholders' equity of TargetCo is $50, but obviously it'll be extinguished in the transaction).
We'll then start by combining the asset and liabilities of the two companies. So, we'll have assets of $1,100 and liabilities of $850.
We're funding the acquisition with 50/50 cash and debt. So, cash will be reduced by $200 thus reducing our assets down to $900, and the liabilities will grow (from the new debt) to $1,050.
We also have written up the book value of the assets of TargetCo to $300, which is a $200 write-up in total. Therefore, this asset write-up boosts the asset side of the balance sheet up from $900 to $1,100.
However, we also need to take into account that this asset write-up creates deferred tax liabilities (DTLs). To calculate the DTLs created, just multiply the asset write-up by the prevailing take rate, which would give us $200*20% or $40. So, now liabilities are $1,090.
We also need to remember that we haven't got rid of ParentCo's equity of $200. So the liabilities and shareholders' equity side of the pro-forma balance sheet is $1,290. The asset side is $1,100. So, the goodwill plug needed (within assets) will be $190 in order to get us into balance.
As a quick refresher, every company will list their GAAP EBITDA along with a non-GAAP adjusted EBITDA that they feel better reflects the economic reality of their company.
Note: As you'd expect, this adjusted EBITDA is invariably higher than the non-GAAP EBITDA, as the company is trying to paint itself in the best possible life to current and potential shareholders and creditors.
There are some classic EBITDA adjustments that are applicable to companies in every industry that you've likely heard of before. For example, impairment of goodwill, share-based compensation, restructuring charges, etc.
However, for some media companies you'll have "programming charges". These charges refer to when programming investments are either abandoned before completion or written down because the project is deemed to no longer be viable (meaning the project is no longer deemed as being able to create future revenue).
You'll see many large media companies add these costs back since they want to get the highest Adj. EBITDA possible. In reality, you have to look at what the company's core business is and whether or not programming charges are a common occurrence. Because, of course, a great deal of programming does end up failing in the media world so you could think of programming charges as just being the cost of doing business (thus they should not be excluded, meaning they should not be added back).
Take a look at this from ViacomCBS. They add back programming charges to all their non-GAAP numbers because, well, they want to make those numbers as large and impressive as possible!
Note: In the TMT Interview Bundle we get into SBC and restructuring charge nuances as it relates to EBITDA add-backs.
When it comes to the software sub-sector of tech, you can think about categorizing companies in a number of different ways. The most general way you can categorize all software companies is by saying that they're either horizontal or vertical software companies.
Vertical software is any software that is aimed solely at addressing one industry's needs. So, this could be software specifically designed for use in real estate, retail, etc. The only qualification needed is that the software is aimed squarely at addressing one industry as opposed to being able to be utilized across distinct industries.
For example, one of the most notable buyouts in 2020 was Thoma Bravo taking RealPage private for $10.2b. This would be a vertical software deal as RealPage is a real estate software company, focusing primarily on providing property management tools and data analytics for rentals.
Vertical software companies are particularly popular for sponsors (e.g., Thoma Bravo, Vista, etc.) to acquire given that they tend to have quite stable recurring cashflows, address large markets, and have large monthly or annual fees (as most are B2B companies).
While most vertical software companies aren't household names - due to being specific to one industry - the public vertical software space has grown tremendously over the past decade:
What has been the most common form of asset divestiture in the telecom space over the past few years?
Many traditional telcos have suffered from lukewarm multiples over the past decade as they've reached a saturation point with new customers, and are facing disruption from new technology.
However, most traditional telcos have one type of asset that has become increasingly valuable over the past five years: infrastructure. In particular, tower assets that fetch 20-35x multiples due to their steady cashflows and the low ongoing operating expenses associated with them.
As a result, many telcos who are looking to make large investments into their core business have contemplated divesting these valuable assets that are currently so sought after.
There are two forms of asset divestitures that occur when it comes to telco infrastructure assets. First, a traditional asset divestiture where you sell off a piece of infrastructure entirely to the acquirer (which usually will require the telco then needing to lease back part of the asset from the acquirer). Second, a partial asset divestiture where the seller sells a non-controlling stake in the infrastructure asset(s). The rationale behind a telco doing a partial asset divestiture is that the telco can bring in cash while also retaining control over how the infrastructure asset can (and cannot) be used in the future.
An example of a partial asset divestiture would be Altice in France. They sold 49.99% of one of their infrastructure assets to bring cash in the door while still keeping majority control over how the asset will be used in the future. In other words, Altice has ensured that they will always be able to use these assets in the future if they wish.
With infrastructure valuations for both fiber and towers at all-time highs, partial divestitures can give telcos struggling for growth a windfall of cash as they pursue their next strategic iteration.
The questions above are the exact style of questions you should expect to be asked in a TMT banking interview.
Of course, the accounting and valuation technicals we went through above are industry agnostic, so they could be asked in any investment banking interview.
If you weren't quite sure how to answer these questions before seeing the answers, don't get too worried. Remember that these represent the more advanced questions that are used to differentiate between interviewees. So, most of the questions you'll get asked in an interview are the more basic technicals you've likely already studied and that are contained in the traditional banking guides.
Hopefully you enjoyed going through these questions. If you did and want 300 more just like it, be sure to check out the TMT Interview Bundle. While we put it together for those specifically looking to break into TMT, we've heard from many who have got it just to learn more about TMT or for the 130+ advanced accounting and valuation questions we put together.
At the end of the day, there is no more diverse coverage group than TMT. But part of what that diversity leads to is the ability for nearly everyone to find one niche area of TMT that they truly love.
If you're currently going through recruiting, we wish you the best of luck in your interviews.