From Big 4 Restructuring to Investment Banking: How to Make the Leap
“Help! I hate my accounting job and want to move into banking, what do I do?”
“What group should I transfer to if I want to get into finance?”
“My Big 4 salary doesn’t give me enough cash for bottles!”
If you’re at a Big 4 firm right now, you’ve had one of the thoughts above before – maybe multiple times.
We covered how to move from accounting to investment banking before, but this time around there’s a different twist – an interview with a reader who moved from a Big 4 restructuring group to investment banking.
Here’s how he made the leap, and how you can do the same:
Background & Culture
Q: Let’s start with your background – how’d you end up at the Big 4 firm, and what did you do before that?
A: Sure. I actually started out as an athlete, and played at the college level for a few years before I got a serious injury that ended my career.
Then, I transferred to a smaller and lesser-known school in the Midwest, and got more interested in finance once I knew that being a professional athlete was no longer an option.
The investment banking industry is smaller in the Midwest, but there are still a few local banks there and they were doing a lot of distressed M&A deals for the auto industry, so I started contacting them and asking about internships each week.
After a ton of networking, one bank finally caved in and decided that they needed an intern – so I joined and got to help out with a few live deals there.
As graduation approached, I continued networking and found a few guys who used to work at a very well-known PE firm.
They had just started a lower middle-market fund just for family/small-business investments, and they needed some analysis done on Project Finance-type investments (power plants and such). I volunteered to do the modeling for that, and they were impressed with my work and turned it into a full-time internship.
Since I had so much experience in restructuring, I went to a restructuring group at a Big 4 firm after my internship at the middle-market PE fund. I stayed there for around a year, and then recently moved to a bulge bracket bank.
Q: That’s a great story – before we jump into it in more detail, I think a lot of readers might wonder what it’s like working at a Big 4 firm in their restructuring group.
We’ve covered the work and culture in IB and PE before, so how would you say the Big 4 firm compared to those?
A: There was definitely a skill set overlap – we did lots of cash flow modeling, presentations to lenders, and distressed M&A deals where we advised the company on selling, restructuring, or bankruptcy options. We also worked with the big auto companies, so you got good exposure to their finance teams.
The financial modeling and deal skills were similar, but there was a big cultural difference because we only worked on 1-2 projects at once and the hours were very, very tame. I only worked on one weekend, and a “late night” was staying to 8 or 9 PM.
Q: Why do you think there’s that cultural difference? Deals are still deals, so I don’t understand how you could “choose” to be less busy if you’re working with Fortune 500 clients all the time.
A: It’s mostly because financial advisory services were a very small part of what the firm did. At an M&A boutique bank, 100% of revenue comes from advisory, but at this Big 4 firm advisory accounted for maybe 2% of revenue.
Their focus was accounting/audit and consulting – they had investment banking and restructuring services, but they were an afterthought next to everything else there.
Q: OK, so it sounds like they consciously chose not to take on as much business as they could have since it wasn’t their core focus.
Obviously you did well moving into banking from restructuring, but what other groups would be good if you wanted to make the Big 4 to IB move?
A: As you’ve mentioned before, Transaction Advisory Services (TAS) can be good since you get exposed to bankers in some scenarios.
But I don’t think it’s necessarily the best group all the time because many TAS groups focus on accounting and due diligence, and you may not get exposed to valuation, financial modeling, or other aspects of the deal. They may also spend a lot of time on tasks that bankers don’t care about, such as making sure that working capital requirements are met when a deal closes.
So I would recommend looking at the internal middle-market banks that all Big 4 firms have – they do mostly sell-side advisory, and while it’s not comparable to the experience you’d get at a real bank, it’s closer than most other groups at the Big 4. Here are links to each firm’s internal bank:
- Deloitte – Corporate Finance
- KPMG – Corporate Finance
- PricewaterhouseCoopers – Corporate Finance & Investment Banking Services
- Ernst & Young – Transactions
And then anything transaction-related – like the restructuring group I was in – could work as well.
Networking & Interviews
Q: Can you talk about the networking you did to get the bulge bracket offer? What was the best source for finding contacts and meeting bankers?
A: Keep in mind that I had been networking all along, ever since I got my original internship via aggressive cold-calling.
So it was just continuing what I had already started – I took the Big 4 offer knowing that I still wanted to move into banking and would have to continue networking.
It was difficult to find bankers at first because few alumni worked in finance, I didn’t have co-workers I could reliably ask, and headhunters were useless unless you had at least some full-time work experience.
Q: So where did you find bankers if not through the usual sources like your alumni database?
A: A couple ways:
- High School Contacts – Even though my university had few alumni in finance, there were quite a lot from my high school who worked in the industry.
- Random Online Contact – I would just go through LinkedIn and look up bankers in the Midwest and start reaching out them like that.
- Cold-Calling/Emailing – This is how I got my first internship. It’s time-consuming and has a low hit rate, but it does work.
- Upscale Gyms – I joined a few higher-end gyms in my area and ran into a bunch of financiers there. I met a few bankers, people in private wealth management, management and turnaround consultants, and even a PE Partner like that.
All of that helped, but the most helpful thing for me was always asking, “I’m interviewing with this group / interested in this area – do you know anyone else I could speak with?”
I got tons of referrals with that line at the end of each call or meeting. It sounds very simple, but you’d be surprised at how many people are too afraid to make simple requests in a conversation.
Q: I really like the tip about upscale gyms; it reminds me of Gordon Gekko playing racquetball.
So it sounds like your networking was pretty similar to what we’ve covered here before with getting names and contact information, setting up informational interviews, and then following up aggressively.
How did you spin your resume when you were applying, since the Big 4 firm was your only full-time experience?
A: I actually downplayed the Big 4 experience, because I felt my banking internship and my work at the middle-market PE fund were both more relevant. So I focused on those and described my transaction experience using the template you’ve suggested before.
For my Big 4 experience, I focused on the valuation and modeling work and left out anything that was closer to accounting/audit.
Even though I had worked in restructuring there, I was interested in moving to industry or M&A groups in investment banking, so I didn’t want to make myself look too specialized by writing 100% about restructuring or distressed deals.
Q: That makes sense, and it’s great advice for anyone who has worked in a more specialized group and wants to move elsewhere.
What about the interviews themselves? Were they mostly technical or deal experience-focused?
A: They focused a lot on my deal experience – and more my experience at the bank and PE firm rather than in my restructuring group.
There were technical questions, but they were more curious about why certain deals happened, potential complications, and what I thought of the valuation and the process for different companies.
For some of the industry groups, a key question was “Why this industry?” They get a lot of people who don’t know why they want to work with financial institutions or industrial companies or whatever they cover.
Q: We covered a few possible answers to that one before, but what did you say?
A: In my final year of university I had completed a finance course where we valued companies in different industries, so I used that as my “spark” to show them how I got interested at first.
It didn’t work for every industry group, but by using that I could at least talk about my interest in the more common ones, like energy, financial institutions, and industrials.
I also used a few of your industry-specific modeling courses to demonstrate my interest and they were really impressed with that, since hardly anyone else had gone to the effort of completing entire case studies on these companies.
Q: I’m surprised by that one, because we generally tell customers that the industry-specific courses are more helpful once you’re already working – but you found them useful for interviews as well?
And these were lateral interviews at the top bulge bracket banks – even there most other interviewees still hadn’t done as much as preparation as you might expect.
Q: Well, glad to hear the courses were helpful!
It seems like the interview process was straightforward for you, but I’m sure bankers had at least a few “objections” to your background. What were the key issues, and how did you overcome them?
A: Their main concern was that my academic experience looked very spotty.
I had taken a year off after I got my injury back in college, and then had to enroll in another school and ended up missing another semester, so it looked like I had taken forever to graduate and had been to school twice.
Some bankers just focused on that for 100% of the interview – they asked about all my gaps in education and why I had gone to schools they never heard of.
I answered those questions by explaining that for my first 2 years in university, I was practicing constantly, still doing well in school, and working 1-2 part-time jobs at the same time. So I spun a negative into a positive, and pointed out that I was working crazy hours a good portion of the time and could therefore handle the hours of a bulge bracket bank.
And then I also had my previous IB and PE internships, so they weren’t too concerned by the end.
What If? And the Future
Q: Since you had those internships, you had 100% relevant experience when applying to larger banks.
But what advice would you give someone who’s at a Big 4 firm in some other role, like audit? What should they do if they have no transaction experience and want to get into IB?
A: First, get out of audit immediately. Do something – anything – more stimulating.
People make fun of investment banking for being mindless work, but in my opinion audit is even worse because it’s so mundane.
At least with deals, you witness drama as different buyers and sellers express interest, back out, make different proposals, and negotiate. In audit you’re staring at numbers all day unless you happen to uncover the next Enron.
Most Big 4 firms are fine with internal transfers – it’s often easier than it is at a bank. Sometimes the Partner you’re working for may take it personally, but that depends on your group.
You should reach out to the other group you’re interested in first, contact people there, and make sure they know what you’re interested in doing before you even run the idea by your current boss.
The Big 4 firms all have lots of events and internal mixers where professionals in different areas can meet each other, so it’s easier to get to know other groups than it would be in IB – most people don’t work more than 50-60 hours per week, so they have the time to help you.
You really have no excuse not to move to a group that’s more closely related to banking – I would recommend restructuring, valuation, internal M&A, and TAS as your best options.
Q: It’s interesting to hear that the internal transfer may be easier at Big 4 firms, but I guess the culture is just more relaxed across the board.
So now that you’ve won this bulge bracket offer, what’s next for you? Will you stay at your new bank for some time, or are you thinking about moving to the buy-side?
A: Unlike most other bankers, I’m actually interested in staying in IB for the long-term.
Back when I was interviewing for this role, a number of distressed investment funds also approached me, but I wasn’t interested in PE back then and I’m not interested now, either.
My key issue is that you must put your own money to work to progress in PE.
It’s not just Partners investing the fund’s capital – they also put in their own funds, so a poor investment could wipe out a good chunk of your personal savings.
Yes, the pay ceiling is higher and you could make mind-boggling money – but let’s be honest, at the MD/Partner-level, the average is about the same in both industries. The outliers in PE make far more, but for me the risk isn’t worth it.
The other issue is that private equity is much less of a team environment than banking, and coming from an athletic background I enjoy working in teams more than the solo work that you see in PE.
Q: That makes a lot of sense, and that point you raised about putting your own money to work is a great one that often goes overlooked. Thanks again for taking the time out to chat, I learned a lot!
A: You’re welcome, it was my pleasure.
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So, What Should You Do at Investment Banking Summer Training Besides Getting Wasted Each Night?
You’ve just been through a warzone to get your offer: 53 interviews, 3 weekend trips to New York, and so much time spent staring at Excel that you’ve developed a monitor tan.
But things worked out, you accepted your offer, and you’re about to start work in 2 weeks.
You just need to make it through the training program first.
But that should be the easiest part of the entire process, right? Right?
Does This Really Matter?
When I first got questions about training programs, I was confused: it seemed like a topic that didn’t warrant much advice.
“It would be about as stimulating as all those suggestions over the years to create a recommended reading list,” I thought.
But then I sat down to think about it in more detail and started asking around, and realized that there might be some important and not-so-obvious points to make.
Why Training Programs?
They’re a combination of marketing and education: banks pride themselves on offering “the best investment banking training” – even though banks use the same companies to train you – and they want to get people from non-finance backgrounds up to speed quickly.
Beyond just teaching you about accounting, valuation, and finance, lots of banks bring in speakers from different groups and use them to introduce you to their culture and how things work.
For some inexplicable reason, a few banks really like to tout their training programs and use them as a selling point when interviewing candidates, which might just be the strangest recruiting tactic ever.
No one joins Goldman Sachs because their training program is so great – they join because of the name “Goldman Sachs.” Their training program could disappear tomorrow and it wouldn’t matter.
The “education” from these programs is most helpful if you’re not from a finance background.
You will indeed have a tough time at first if you know little about accounting, valuation, and finance – but then it would also be difficult to get an offer these days without knowing those topics to begin with.
Even if you are completely new to finance, training programs are still not that helpful because different groups have different standards and it can be hard to focus when everyone is talking to each other and chatting online.
So don’t stress too much over all the content – there are more pressing concerns during training, beyond just getting enough bottles every night.
What is a “Training Program”?
Right before you start working, the bank will fly you and all the other incoming analysts and associates to New York or London (or wherever your bank is based) and spend 1-2 months “training” you.
Translation: You get to spend each weekday in a crowded room learning all about Excel, accounting, valuation, and finance from outside training firms and occasionally internal speakers from the bank.
You follow along on your screen as they instruct you, and you keep Facebook and Gmail open so you can chat with everyone else about how bored you are and how the instructor has a receding hairline.
You may also get tests and case studies to complete, and group exercises similar to what you find at assessment centers. And then there are those fun standardized tests you have to pass – the Series 7 and 63 back in the day, and the Series 79 in recent times.
You’re not working banking hours during this time – weekends are mostly free and you rarely stay late at night, which is the first and last time that will happen as long as you work in the industry.
If you’re going into an internship rather than a full-time job, you’ll get just a week-long crash-course rather than the 1-2 months that full-timers get.
Many boutique banks don’t offer training programs at all because it’s beyond their budget – you’re also not likely to go through training at private equity firms or hedge funds, because they’re small and they expect you to know everything you need once you start working.
If you’re going into sales & trading or another non-IB area at a bank, you’ll probably have some type of training as well but the material will be different and it might be shorter.
As you’ve probably guessed by now, the 2 most important words in everything I’ve written above are “crowded room.”
If you’re not meeting other people and networking during training, you’re wasting your time.
So How Do You Approach Training?
Ask most bankers about what to do during your training program, and you’ll get 1 of 2 responses:
- “Just get drunk every night! Party! It’s the best part of the analyst/associate program.”
- “Study hard and take all the homework assignments and case studies seriously! Oh, and if you don’t pass those exams, you’re screwed.” (This one usually comes from students who aren’t even in the industry yet)
Neither one of these is quite right.
On #1, yes, you should go out and have fun since this will be one of your last chances to do so in the next few years.
But you need to be strategic about how you do it and also make sure you meet the right people in the process.
On #2, despite rumors to the contrary, most of the work they give you does not matter that much. Just do reasonably well and pass what you need to pass – it’s almost irrelevant next to your deal experience in your first year.
But I Heard This Person Got Kicked Out for Slacking Off!!!
Most of these rumors are greatly exaggerated. Yes, if you do something incredibly stupid – kidnap the Managing Director’s son, start drinking at work, etc. – you might be removed from training, but that hardly ever happens.
If you already have your group placement, homework assignments and tests during training aren’t important – the senior bankers at your office don’t have time to read the details of what you did and then change your group based on that.
If you’re really concerned about not knowing enough or being disadvantaged next to everyone else there, learn some material before training starts.
If you’re reading this site you’re probably a Type-A overachiever anyway, so you’ve already signed up for modeling courses before you even got interviews.
Just dust those off and start going through all the material and you can doze off during training and still do well.
What About the Series 7, 63, and 79 Exams?
These are actually important to pass because some banks won’t let you start working for real until you’ve cleared the exams.
They’re horribly boring and you’ll forget everything you learned in about 2 days, but you need to pass them anyway.
I’m never going to produce a course on these because they’re too boring even for me – but I’ve heard that the Knopman materials are good.
Do not underestimate these exams because they are more difficult than you initially think.
There’s a lot of rote memorization (certain questions will give you choices of 5 days, 10 days, 15 days, or 20 days and you just have to know which one is correct), and it’s hard to cram and learn everything in a few days.
So yeah, make sure you pass these – but don’t spend every waking moment studying at the expense of networking.
OK, So Then What About Networking – What Do You Mean by “Make Sure You Meet the Right People”?
Going out and getting bottles every night is almost a good idea, but there are a few problems:
- You won’t have much money yet since you just started and may not even get a paycheck until training ends.
- It’s more helpful to know people in different offices and different groups instead of always hanging out with the same crowd.
If you don’t know anyone there, you’d be screwed – yes, you could just email the entire office and ask for someone to help you, but everyone is busy with their own fire drills and deadlines so they may ignore you.
But if someone sees your name and recognizes you from training, you’re in much better shape and you might actually get the answer you need.
It’s almost impossible to get to know people from every group and every office, so focus on 5-10 analysts/associates.
Get some geographic diversity (if you’re in the US, know people in a few different cities and also a few in Europe and Asia) and industry diversity (if you’re in an M&A group, get to know people in industry groups and also ECM and DCM).
Doing this is not difficult and I would feel silly writing a “guide.”
Each day there are plenty of breaks, and most banks throw lots of events and parties during training – take advantage of these and go up to meet new people there.
Just think of it as a big information session, only without seasoned bankers. And it’s even easier than information sessions because you have an enforced time limit and everyone else is new and wants to meet others.
Does It Really Help?
The main problem is the high turnover rate in finance – by the end of your first year, at least 50% of your incoming analysts/associates will be gone.
So it won’t help you forever, but it doesn’t matter too much because your first year is the most critical anyway – do well at first and you’ll get better work and better exit opportunities, and do poorly at first and you’ll get the MDs laughing at you and bottom-tier bonus.
During training, I made the mistake of constantly going out with the same group of people and not getting to know others.
Things still turned out OK (see: this site), but there were quite a few times when it would have been helpful to know people in different groups.
It’s not a question of life-or-death, but it will save you some headaches and possibly let you get 6 hours of sleep rather than 4 hours – at least on some nights.
So do what you need to pass everything and learn the material, but don’t take any of it too seriously at the expense of meeting other people.
If you’re concerned about not knowing enough when you start working, start preparing beforehand and learn as much as possible from classes or training programs.
And make sure you find out about your office and who makes decisions there before you start working as well.
Get to know 5-10 people well so you have contacts in other groups and other geographies when you need something and no one else in your office can help.
It’s tempting to befriend only the incoming bankers in your own office or your own group, but that defeats the purpose of training: you want to spread your net wide and meet people from all over.
And if you’re already doing all this and you know accounting, valuation, and finance like the back of your hand, have some fun and try to show up for training every day without passing out on your desk – they might actually notice that, especially if you’re in the front row.
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Investment Banking Fairness Opinions: Profitable and Prestigious, or Glamorless Gruntwork?
“Morgan Stanley is acting as financial advisor to the buyer and Credit Suisse is acting as financial advisor to the seller, with the fairness opinion provided by Houlihan Lokey.”
So we’ve been over this “financial advisor to the buyer and seller” stuff before, but what about that fairness opinion bit?
You always see sentences like the one above at the bottom of deal announcement press releases – so what is this mysterious “fairness opinion,” why does it matter, and what should you do when your VP calls you at 2 AM and asks you to help out with one?
What are Fairness Opinions and Why Do Banks “Provide” Them?
A “Fairness Opinion” is just a detailed valuation of a company that’s being sold (if you’re representing the seller) or a valuation of the company that your client is buying.
Right before a deal is announced, the bank that prepares the Opinion presents it to the Board of Directors and concludes whether or not the deal is “fair” based on the purchase price and deal structure.
As you might guess, banks never say a deal is “unfair” – the Opinion is just a rubber stamp to justify the deal to investors.
While they’re not technically required by law, Fairness Opinions almost always get issued for deals that involve the sale of public companies due to lawsuits: no matter how much a company sells for, someone is bound to sue them.
Even if the company is worth $100 million and it gets sold for $1 billion, some random shareholder with too much time on his hands will argue that it should have been sold for $10 billion and will start a class-action lawsuit.
The bank’s Fairness Opinion is filed along with all the other documents related to the transaction (the definitive agreement that includes the terms of the acquisition, for example), and serves as evidence when lawsuits start arriving.
Why Should You Care About This Legal Nonsense?
Bankers have no love for lawyers, but you need to know what Fairness Opinions are and how they work because:
- The deals you work on determine your exit opportunities, your ranking and bonus, and how much you learn.
- You will be asked to work on or help out with Fairness Opinions from time to time, so you need to know whether to say “yes” or to claim you have other urgent deadlines.
- Some banks and groups do more Fairness Opinion work than others – you need to understand this upfront because it affects which bank and group you select.
When Do Companies Request Fairness Opinions?
99% of the time they get issued when there’s a public company being sold – you do not do Fairness Opinions for equity or debt deals, so if you’re in an ECM, DCM, or Leveraged Finance group you won’t deal with them.
If you work with mostly private companies, you also won’t see Fairness Opinions because private companies have far fewer shareholders (well, except for Facebook and its clever skirting around the rules) and are often closely held by the founders or VC/PE investors.
Fairness Opinions might also be issued when:
- There’s a management buyout or take-private (a PE firm acquires the company via a leveraged buyout and turns it private).
- A public company divests one of its divisions.
- There’s a bankruptcy, liquidation, restructuring scenario (less common).
- There’s a hostile takeover – in this case it would be called an “inadequacy opinion” instead and would be used to defend the target by claiming that the offer is not fair.
In short: whenever there’s a high chance of getting sued, companies request these Opinions and use them to defend themselves in lawsuits.
Outside the US, Fairness Opinions are common in some countries (Western Europe) and not common in other places (emerging markets). Whether or not they’re required depends on the legal system in the country, but you almost always see them for public company transactions in developed markets.
How to Issue a Fairness Opinion, Part 1: Before the Deal Comes Together
M&A deals come together in different ways: sometimes the company itself wants to sell, other times investors are getting impatient and force them to sell (Zappos), and sometimes a buyer jumps in with an attractive offer and starts a bidding war (YouTube).
If it’s the last case, where a buyer swoops in with an offer to buy the company, no one thinks about the Fairness Opinion until that point.
But if it’s one of the other scenarios, then the seller may hire an investment bank to find a buyer. If they do this, in the initial contract they might also give the bank the right to issue a Fairness Opinion in addition to advising on the deal process.
You see that sometimes, but many times the “financial advisor” bank and the “Fairness Opinion” bank are different.
The same bank advising a company on its sale and also saying whether or not the deal they get is “fair” is hardly objective – so executives and regulators believe that having a different bank issue the Opinion is more “impartial.”
If a different bank is providing the Fairness Opinion, they are not notified until the deal is about to be announced – doing so any sooner than that would create unnecessary work because M&A deals often fall apart in the early stages.
How to Issue a Fairness Opinion, Part 2: Just Before the Deal is Announced
Now comes the fun part. A couple factors make the actual construction of the Fairness Opinion especially painful:
- You are under extreme time pressure – you get a few days, and sometimes up to a week or a bit longer. This happens because the process is last-minute and occurs only when everyone is 99% sure the deal is going through.
- You must be excruciatingly precise – this is where bankers’ reputation for “attention to detail” comes from. This valuation could be used as evidence in lawsuits, so if you’ve added back the incorrect amortization amount when calculating EBITDA, you might be thrown into a snake pit.
Normally when you value a company you don’t have to be super-precise: bankers ask for quick valuations all the time, and if you spent hours going through a company’s SEC filings (or equivalent government organization abroad) you would never get anything done.
So you pull a lot of information automatically using tools like Capital IQ and Factset and rely on their numbers.
But when you’re working on a Fairness Opinion you can’t do that – rather than just pulling the LTM (Last Twelve Months) EBITDA from Capital IQ, for example, you have to look at a company’s income statements and cash flow statements (for the correct non-cash charge numbers) to calculate it.
And then you would have to look through the Notes to the Financial Statements and the MD&A to find all the non-recurring charges and other accounting shenanigans that you need to remove.
Another analyst will also check your numbers, your associate will check them, and even the VP may get involved depending on the deal.
To make things even more fun, this entire process will be a last-minute effort that requires all-nighters over the few days you get to complete it.
Oh yeah, and then the deal announcement itself is often delayed – so you need to monitor the seller and all the other companies you’ve used in your analysis and update the numbers when someone announces earnings, issues debt or equity, or does anything else that affects its numbers.
When you finish the Opinion and everyone has checked it over 52 times, you then present it to the Fairness Opinion Committee at your bank and explain all the numbers to them – if they see something they don’t like, you get to re-do that part.
And then when you finally get their approval, the senior bankers working on the deal will present it to the Board of Directors of the company and sign off on the decision.
Sometimes they actually present it to the company’s Special Committee – if one was formed for the deal – but usually it’s to the Board.
Internationally the entire process may be a little less painful, but it depends on your group and the country you’re in – in London, for example, there’s no difference and you will still spend hours poring over filings and adjusting for capitalized leases, pensions, and other trickery.
Why Do Banks Provide This Service?
Simple: it’s easy money and easy prestige for banks, especially for the senior bankers that don’t have to suffer through ultra-precision.
Fees paid to banks in a sell-side M&A deal are a percentage of the sale price (the equity value of the deal, not the enterprise value), and that percentage scales down as the size of the deal increases.
For a $500 million deal, the bank might negotiate a 1% fee and therefore earn $5 million if the deal closes. For a $5 billion deal, it might be 0.2% or 0.3%, for $10-$15 million. For deals in the $50 billion range – very rare – the fee might be around $50 million (0.1%).
With a Fairness Opinion a bank earns a much lower fee – it might be in the hundreds of thousands for smaller deals up to the low millions for larger deals – but it earns that fee with far less time and effort.
Let’s say that a bank is advising a company on a $50 billion deal – something that large would take years to put together (unless we’re in the late 90’s and it’s happening all the time), and they might earn a $50 million fee on the actual advisory work if the deal closes.
The bank that issues the Fairness Opinion might earn a few million – let’s call it $5 million – but it earns that fee with 1/100th the amount of time and effort that the financial advisor put in.
The other, really important point is that the bank earns that fee even if the deal gets announced but does not close – it’s not like M&A advisory fees where they only get paid out when the deal closes.
So a bank could make tens of millions of dollars by issuing Fairness Opinions for deals that never close.
The thinking here is that paying banks upon completion of the Opinion rather than when the deal closes makes them “less biased,” but it had the unintended consequence of making FOs extremely lucrative for risk-averse bankers as well.
In addition, the bank receives league table credit for issuing a Fairness Opinion – so a bank that issues 50 Fairness Opinions but doesn’t advise on any deals would look as good as a bank that has advised on 50 real deals, at least according to a table that ranks banks by # of deals.
If you look at a table that ranks banks by fees earned instead, the Fairness Opinion-centric bank won’t look as good – but you can bet they won’t be showing that version of the table in their pitch books.
Often Fairness Opinions are given to banks as “favors” for work done in the past.
A company might go with a bulge bracket bank for the M&A advisory work for political reasons, but the CEO might know a senior banker at a boutique and might have worked with them in the past – in this scenario the company might give the Fairness Opinion assignment to that boutique as a favor for their past relationship.
The boutique will still feel as if its toes have been stepped on, but the pain won’t be quite as acute if they can make at least some money off the deal anyway.
What Banks and Groups are Known for Fairness Opinions?
No, I’m still never going to rank the banks, so please go away right now if you’re expecting that.
But some banks and groups – for better or worse – are known for Fairness Opinions.
Houlihan Lokey is consistently ranked #1 in Fairness Opinion market share, beating even the bulge bracket banks and elite boutiques.
At HLHZ, the Financial Advisory Services (FAS) group does all the Fairness Opinion work and the other groups don’t touch them. And yes, the FAS group provides other services like solvency opinions, purchase price allocations, and more technical accounting-esque work as well.
Other banks – from bulge bracket to elite boutique (Perella Weinberg is also well-known for FOs) to middle-market – also do Fairness Opinions but no one else dominates the space as HLHZ does.
Groups such as ECM, DCM, and Leveraged Finance do not work on Fairness Opinions because they’re not required for debt or equity deals – so you only have to worry about them if you’re in an M&A, Restructuring, or industry group.
Of those, industry groups are the most likely to work on Fairness Opinions, although you may get asked to help out even if you’re in another group.
Outside of investment banks, some Big 4 firms also do Fairness Opinion work and dedicated valuation boutiques also issue Opinions from time to time.
Take Me to the Examples
Finding actual Fairness Opinions is not the easiest thing in the world, so here are links to good examples. Some of these are quite old, but corporate valuation barely changes over time so they are equally valid today:
- Credit Suisse – Fairness Opinion for LBO of SunGard Data Systems
- JP Morgan – Fairness Opinion for Merck / Schering-Plough Merger (Note the P/E, EBIT, and EBITDA multiples – see, nothing special for healthcare…)
- Perella Weinberg – Fairness Opinion for TPG’s $3B Buyout of J.Crew
You’ll see the usual valuation analyses there: public company comparables, precedent transactions, premiums, DCF, future share price, and so on.
Even if you have no interest in Fairness Opinions, I strongly recommend looking at those examples because they show you exactly how banks value companies in the real world, common multiples, and other questions you’ll get in interviews.
Sometimes Fairness Opinions also include mergers models and LBO models – merger models are more common on deals where it’s more of a merger as opposed to a behemoth acquiring a much smaller company, while LBO models are more common for LBO deals.
You do not include a detailed 3-statement model for the seller, nor do you show all the supporting work that went into the numbers – only the output matters.
If you want to find more examples yourself, you can search for S-4 or DEF 14A (proxy) forms on the SEC EDGAR site; for countries outside the US you will have to go to the company’s website directly and hope they have it there, or go through whatever online database has securities filings in your country.
So, Should You Work On Fairness Opinions?
I am not a huge fan of Fairness Opinions because they represent the worst parts of banking – last-minute all-nighters and combing through filings to make small tweaks to numbers that don’t make a difference in the final analysis.
It’s good to get exposed to a Fairness Opinion at least once, but similar to climbing Mt. Fuji or going ice swimming, you don’t want to get exposed repeatedly – especially at the expense of real deals.
Yes, it’s good to learn how to find all the hidden charges and shady tactics a company is using but 99% of the time they don’t make a difference in your final analysis – and on the buy-side you rarely go into such detail unless you’re about to close an investment and you’re in the final stages of due diligence.
So if your VP or staffer waltzes in and asks if you have any “bandwidth” to help out with a Fairness Opinion, cite an urgent deadline and say that you might be able to check some of it, but can’t do it all yourself because of [Important Client-Related Item] that’s due in 2 days.
And if you’re out of excuses, suck it up and do it – but make sure that you hand it off to the 1st years or interns next time around.
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