Rothschild & Co Interview Prep)
Rothschild & Co employs 4,330 people in 45 different countries.
How many people are employed by the company, and in how many countries do they operate?
It is tax-deductable. Since taxes are a cash expense, depreciation affects cash by reducing the amount of taxes you pay.
If depreciation is a non-cash expense, why does it affect the cash balance?
1. No. 1 for transactions globally for 2022 2. Ranked #1 investment bank in Europe consistently for over 18 years 3. $1,100 Billion of M&A Deal Value in the last 5 years
Interesting facts from a global perspective
Cash Flows from Operations (From Cash Flow Statement) - Capital Expenditure = Levered Cash Flows + Tax Adjusted Interest Expense - Tax Adjusted Interest Income = FCF
Is there another alternative way to calculate Free Cash Flows?
What are some other possible valuation methodologies in addition to the main three valuation methods?
Leverage buyout (LBO) analysis - determining how much a PE firm could pay for a company to hit a "target" IRR, usually in the 20-25% range.Replacement value - Valuing a company based on the cost of replacing its assetsLiquidation value - valuing a company's assets, assuming they are sold off and then subtracting liabilities to determine how much capital, if any, equity investors receive
- Their CSR statement based on their 2021 CSR report was "We encourage a culture of responsible business and proactively take responsibility for the impact we have as a business on our people, our industry, our communities and our planet". - R&Co4Generations is Rothschild & Co's philanthropic group approach to supporting social and environmental causes, locally and globally. They also donate to various non-profits, social organizations/foundations, and religious associations.
Look for their Corporate Social Responsibility (CSR) page or statement on their website. What charities or social missions do they support?
They don't have a twitter account, but they do have an Instagram. They don't have a Facebook, Tik-Tok (there only on Instagram as far as I know). - Instagram looks very professional but also shows people that they care about their employees because it its very employee based. Many employees are featured on Instagram and even their website.
Look into social media accounts (not an interview question, just a reminder)
The mission statement on the company website is "We treat our clients' challenges with the same care and responsibility that we apply to our own business and money".
Mission statement on the company website
The most common multiples are EV/Revenue, EV/EBITDA, EV/EBIT, P/E (Share Price/ Earnings per Share), and Price/Book Value
What are the most common multiples used in Valuation?
There are two methods. Exit Multiples: Calculated terminal value based on multiple of its terminal year EBITDA or EBIT or FCF, with the multiple being based on comparable companies. Terminal Value = EBITDA * Exit Multiple Perpetuity Growth Method: Calculated terminal value based on the assumption of a constant growth into perpetuity. This growth is often either the GDP growth rate, inflation, industry growth rate or some other conservative estimate.Terminal Value = FCF * (1 + Growth Rate) / (Discount Rate - Growth Rate)
How do you calculate Terminal Value?
WACC = Cost of Equity(% Equity in Capital Structure) + Cost of Debt(1 - Tax Rate)*(% Debt in Capital Structure)
How do you calculate WACC?
Which method would a company prefer to use when acquiring another company - cash, stock, or debt?
Cash is "cheaper" and less risk than debt. Generally stock is most expensive
The mission statement located on the website is "We treat our clients' challenges with the same care and responsibility that we apply to our own business and money".
Company's mission statement (from website)
If the asset has a useful life of over 1 year, it is capitalized (put on the Balance Sheet rather than shown as an expense on the Income Statement). Then it is depreciated (tangible assets) or amortized (intangible assets) over a certain number of years.Purchases like factories, equipment and land all last longer than a year and therefore show up on the Balance Sheet. Employee salaries and the cost of manufacturing products (COGS) only cover a short period of operations and therefore show up on the Income Statement as normal expenses instead.
How do you decide when to capitalize rather than expense a purchase?
- There has been a recent announcement that there is a chance the bank goes private in the upcoming future (read more on this) - Rothschild & Co was in the top 5 for most M&A (mergers and acquisitions) deals in 2021.
Could you tell us what you know about the firm's new activities or elaborate on recent accomplishments you've read on with respect to our organization?
Global Advisory, Wealth Management, Asset Management, Merchant Banking
Divisions within Rothschild & Co
Cost of Equity = (Dividend per Share / Share Price) + Growth Rate of Dividends
How can we calculate Cost of Equity without CAPM?
Net Income from the Income Statement flows into Shareholder Equity on Balance Sheet, and is also the first line of the Cash Flow Statement.Changes to Balance Sheet appear as working capital changes on Cash Flow Statement, and Investing and Financing activities affect Balance Sheet items such as PPE, Debt and Shareholder Equity. Cash also serves as a plug from the Balance Sheet matching the last line of the Cash Flow Statement.
How do the three statements link together?
To calculate Cost of Equity you often use CAPM Cost of Equity = Risk Free Rate + Beta * Equity Risk Premium - Depending on the company you might also add a "Size Premium", and an "Industry Premium"
How do you calculate Cost of Equity?
FCF = EBIT - Taxes + Depreciation - CapEx - Net Working Capital
How do you calculate FCF
- Industry classifications - Financial criteria (Revenue, EBITDA, etc.) - Geography For Precedent Transactions you often limit the set based on the date and only look at transactions within the short term such as the last 1-2 years.
How do you select Comparable Companies/Precedent Transactions?
How would you judge a company's credit worthiness?
Risk 1. Cash flows 2. Assets (ability to get money back) 3. Type of Investment (new business, extension of business) 4. Type of loan (what is it for)
Revenue- COGS (Including Depreciation) - Operating Expenses (SG&A)= EBIT * (1 - Tax Rate) = EBIAT + Depreciation - Capital Expenditure (CapEx) - Change in NWC = FCF This leads you to unlevered cash flows because we used EBIT instead of EBT which would have led us to levered cash flows.
Walk me through how you get from Revenue to Free Cash Flows?
P/E depends on the company's capital structure where EV/EBIT and EV/EBITDA are capital structure-neutral.Therefore, you use P/E for banks, financial institutions and other companies where interest payments/expenses are critical.EV/EBIT includes Depreciation where EV/EBITDA excludes it - you're more likely to use EV/EBIT in industries where D&A is large and where capital expenditures and fixed assets are important (like manufacturing), and EV/EBITDA in industries where fixed assets are less important and where D&A is comparatively smaller (like Internet companies)
The EV/EBIT, EV/EBITDA, and P/E multiples all measure a company's profitability. What's the difference between them, and when do you use each one?
A Discounted Cash Flows valuation gives an intrinsic value for a company based on the idea that the value of a company can be derived from the present value of its Free Cash Flows (FCF).Steps:1. Project the company's financials2. Calculate FCF for each year (usually 5 years)3. Calculate its discount rate (WACC)4. Determine the company's Terminal Value (Exit Multiples Method or the Perpetuity Growth Method)5. Discount both the FCF and the Terminal value and sum them to arrive at Enterprise Value6. Calculate Equity Value and implied value per share.
Walk me through a DCF?
1. Project out the company's earnings, down to EPS2. Assume a dividend payment ratio, which is the percent of EPS that actually gets paid out to shareholders in dividends.3. Calculate dividends over the next 5-10 years4. Calculate Cost of Equity for your discount rate5. Calculate Terminal value based on P/E ratio and EPS in the final year4. Discount each dividends and your terminal value6. Sum the present value of the terminal value and dividends to get the net present per-share value
Walk me through a Dividend Discount Model?
Comparable Companies, Precedent Transactions, and Discounted Cash Flows
What are the 3 major valuation methodologies?
• Strategic buyers - Companies that are acquiring because they believe it would help their overall business. Perhaps they believe the two businesses are complimentary or that there will be significant synergies • Financial buyers - Private Equity or Venture Capital firms that are purchasing a business that they believe is undervalued and that they could help turn around and make a profit on by reselling or taking the company public (Often times they expect 20% returns on their investment, they are also more likely to purchase a company through an Leveraged Buyout)
What are the two types of buyers in M&A transactions?
Corporate Finance, capital markets, and investments for private clients. Mostly underwriting debt and equity, helping raise capital for businesses, facilitate M&A or private placements, and advising to corporations.
What do Investment Banks do?
One of the most interesting things that they have said in an interview is their 12-step checklist for hiring an employee. They have emphasized the type of employee's they look to bring into their "family" and the values they wish to instill in possible candidates and future employees. It also shows that they place value on developing a positive company culture which is something that I would consider when choosing a place to work at.
What inspires you about the leadership (CEO's) at Rothschild & Co?
Enterprise Value = Equity Value + Debt + Non-controlling Interest + Preferred Stock - Cash
What is Enterprise Value?
GDP Growth rate, Inflation, Industry Growth rate, or something similarly conservative.
What is an appropriate growth rate to use in your Terminal Value calculation?
Equity Value = Price per Share*Fully Diluted Share
What is equity value?
There is always a buyer in M&A transactions. So the difference is mostly in terminology. In a merger the companies are close to the same size, whereas in an acquisition the buyer is significantly larger
What is the difference between a merger and an acquisition?
More debt means the company is more risky, so its levered Beta will be higher. Thus, all else equal, additional debt being added would raise the Cost of Equity.
What is the relationship between debt and Cost of Equity?
Cash left after operating expenses, Taxes, CapEx, and Working Capital changes.
What is unlevered FCF
Rothschild is a multinational investment bank and financial services company, primarily based out of England but also in New York City.
What products or services do they make or offer? State what you like about the type of product or service they provide.
This is most common in bankruptcy scenarios and is used to see whether equity shareholders will receive any capital after the company's debts have been paid off. It is often used to advise struggling businesses on whether it's better to sell off assets separately or to try and sell the entire company.
When would you use a Liquidation Valuation?
Your competitors include companies such as Houlihan Lokey, Pictet, Western Securities and Fengate. You primarily compete with other investment banking firms.
Who are our competitors?
As an investment bank, your target audience is corporations, pension funds, other financial institutions, governments, and hedge funds.
Who are our customers?
Rothschild has two CEOs Oliver Pecoux and Nigel Higgins
Who is the CEO of the company?
Free Cash Flows represent the cash that a company is able to generate after spending the money required to maintain or expand its asset base. Essentially the money it could use to create more value for shareholders. We look at those specifically because potential buyers will see your company as a stream of future cash flows It also is important because Earnings can often be adjusted by various accounting practices, but it's tougher to fake free cash flow
Why do we look at Free Cash Flows?
Enterprise Value represents the value for the company that is attributable to all investors. Whereas Equity Value is the portion available only to shareholders (equity investors).You look at both because Equity value is the number the public sees, while Enterprise value is the complete firm value.
Why do we look at both Enterprise Value and Equity Value?
5 or 10 years is as far as you can reasonably predict into the future. However, the more the industry and company's growth, projections, and cash flows are predictable the longer you can make the projection.
Why do you use 5 or 10 years for DCF projections?
I want to work in investment banking because I understand it has a steep learning curve. It will allow me to establish a strong foundation for valuation, Excel modeling skills, and an understanding of the private sector. I know the hours will be long, but the time spent understanding and learning about M&A will allow me to remain in finance over the longer term.
Why investment banking?
I know that Rothschild and Co is an elite boutique bank which will offer me the opportunity to work on some of the world largest deals, while also allowing giving me the opportunity to be trained in a more exclusive environment. I've researched a lot about the firm's mentorship program and believe that individualized training is superior: and you are one of the few banks to offer this to incoming analysts. I also am very impressed with the culture and connections that your firm will provide, which I might not be able to receive at BB where employees are simply a number.
Why us?
An acquisition is dilutive if the additional amount of Net Income the seller contributes is not enough to offset the buyer's foregone interest on cash, additional interest paid on debt, and the effects of issuing additional shares. Acquisition effects - such as amortization of intangibles - can also make an acquisition dilutive.
Why would an acquisition be dilutive?
Technically it could go either way, but in most cases the LBO will give you a lower valuation.This happens because with an LBO, you do not get any value from the cash flow of a company between Year 1 and the final year. You are only valuing based on the Terminal Value, so values tend to be higher. Note: Unlike a DCF, a LBO model does not give a specific valuation. Rather you set a particular IRR and figure out how much you would pay based on that return.
Would an LBO or DCF give a higher valuation?
