IBD

IBD

While a few weeks ago I accepted a job as an investment banker, just one year ago I couldn’t have told you anything about an investment banker’s day-to-day activities. However, I did know that the profession is filled with critical thinkers who are confident and communicate clearly; this is what caused me to be interested in the field. I am excited about working with professional people who get things done. Because my major is Food Science, and not finance, a key part of my preparation for the job recruiting process was focusing on how I could perform well for the subjective parts of the interview. I have come to understand that in the investment banking interview process, communication skills are more important than knowing how to construct a discounted cash flow model or which financial ratios are best to use when comparing precedent transactions in the market.

Now that I’ve interviewed and put in some time getting to know the job, I want to share some history of Investment Banking, and why certain kinds of communication are crucial to success in this field. I hope this information will be useful to you as you contemplate a job in investment banking and start to prepare for interviews.

HISTORY

Investment Bankers, who, as you might suspect, work at investment banks, act as either brokers or advisors to companies as they decide to go public, raise capital, make an acquisition, or be acquired. Investment bankers provide the necessary skill and expertise to help companies navigate these important inflection points in their life cycle. The best investment banks are recognized for their abilities and expertise and are able to charge enormous fees for their services.

While the term “investment banking” was not used anciently, professionals performed a similar function in various periods of antiquity. For example, in Ancient Rome, dating from the 3rd century

BC, a type of multi-owner firm known as "Societas publicanorum" existed. (1) These organizations are some of the first formal "companies" or "corporations" to be recorded. Shares of ownership in these companies were bought and sold by "publicans" or investors. These corporations would complete government projects and receive compensations in return. Special publicans helped facilitate transactions related to these primitive corporations. In so doing, they were essentially performing the role of an investment banker.

Today’s investment bankers need to know how to communicate about who owns how much of a company, why one firm should or should not acquire another, why various stocks are performing in certain ways, and how they should be compensated for their services. To show you some examples of exactly how critical thinking and rhetoric might be applied in investment banking, I've compiled three cases. The first looks at the importance of critical thinking in the context of an acquisition, the second, clear communication in the context of stock ratings, and the third at confidence in the context of requesting compensation.

CASE 1: Critical thinking in acquisition. 

When one company (the client) wants to acquire another company, it will approach an investment bank for assistance. The investment bankers and analysts will do a lot of research to find out what type of company will be a good fit for the client. This process requires a lot of critical thinking about why and how a certain firm would make a profitable and synergistic acquisition. Once the investment bank is ready to recommend a particular company to the client, the bankers need to meet with the client and communicate persuasively about the recommendation. The bankers can use rhetorical techniques such as describing the circumstances of the client’s industry, comparing the recommended company to the client company, and presenting documents derived from an analysis of the financial health of the two firms. Each of these methods of communication will help establish the credibility of the bankers. 

The banker could approach the meeting with the client as follows: “We have analyzed the potential

for economies of scale, consolidation of resources, and increased profit margin that would result from your acquisition of this company. You can review that data in the pitch book we have put together for you, where our projections show that the deal would allow you to have increased revenues and profitability. We are excited for this opportunity for you to expand your business and we will be with you every step of the way to make sure that you get to acquire the best fitting company for your growth strategy. Our entire team is happy to be working with you and will be available to answer any questions you may have about the process at any time.”

This investment banker referred to documents, and used very positive delivery to help the client feel comfortable with having these investment bankers from this bank help with their deal.

CASE 2: Clear Communication of stock ratings.

Institutional investors look to investment banks for their “buy,” “sell,” “hold,” or “outperform” ratings on stocks. These ratings come from reports generated by investment banking analysts. Analysts need to clearly explain their analysis of the past performance of the stock, and then their projections for the market and industry conditions that will make this stock good or unworthy, or advantageous or disadvantageous. This recommendation must be unbiased, and consider both positive and negative aspects of the stock.

A stock rating for Yum Brands Inc. looks like the following: “Bulls Say: Average unit sales of $1.3

million in China exceed most restaurant chains in the region. Little Sheep and East Dawning add diversity to Yum's China leadership, which already includes almost 6,100 KFC and Pizza Hut locations. Bears Say: We continue to believe Yum is in the early stages of a compelling consumption story in China (aided by government-mandated wage rate increases), but concerns about a slowing economy or negative publicity over food quality scares could weigh on the stock.” (2)

Note how this analyst was able to consider both positive and negative aspects of the stock’s environment to present an unbiased report.

CASE 3: Confidence in requesting compensation. 

Unfortunately, investment banking firms do not always reward their employees fairly. In the case of a perceived injustice, a banker will need to communicate confidently in order to appeal to the ethos, or sensitivity to what is right or wrong, of her boss. If a team member is upset about the year-end bonus awarded her, she will need to tactfully communicate about the issue in order to resolve it. A typical persuasion scenario for an investment banker is when she attempts to persuade her boss that she deserves a larger bonus. Here is a fictional case study to illustrate. Let's say year-end bonuses are distributed and a female team member finds out that she has received less of a bonus than the male team member at her same level.

 The female team member could approach her boss and say something like the following: "I am

grateful to be a part of this team, I know that we have accomplished amazing deals this past year and we have all contributed a lot to that. You and the other VPs have done a great job setting up deals for us analysts to work on, and all the analysts, even me and Joe, the first year analysts, have enjoyed working together. The Associates can attest to my timeliness and quality contributions to the deal work. I want to ask for an explanation for the amount of my bonus. I understand that Joe received a larger bonus than I did. Joe and I started working here at the same time and received the same signing bonuses and first-year base salaries. We have both worked hard and contributed, taking the same number of vacation days and time off. Therefore, we should both receive the same amount for our year-end bonuses.”

This investment banker emphasized the structure of the office team, highlighting the whole/parts aspect of the topic of division. She also referred to witnesses as part of her testimony, and finished her thoughts on the circumstance by referring to the past fact of her and Joe's equality, and the future fact that said equality should be the foundation for compensation distribution. It would be much harder for a boss to say no to this request than to someone less confident and prepared.

These examples should give you an idea of not only the types of communication skills necessary as an investment banker, but also some of what you might encounter on a day-to-day basis. Investment banking is a competitive and fast-paced industry where confident communication is required every day. I can’t wait to get started.

WORKS CITED

1. Păcală, Anca. "The Evolution Of The Company-Idea As A Distinct Form Of Separation An Protection For Business In Antiquity." Journal Of Electrical & Electronics Engineering 4.2 (2011): 77-82. Academic Search Premier. Web. 10 Dec. 2014.
2. Hottovy, R.J. "Morningstar Investment Research Center." Morningstar Investment Research Center. 12 Dec. 2014. Web. 15 Dec. 2014. <http://library.morningstar.com/stock/analyst-report?Country=USA&t=YUM>.