Thursday, January 20, 2011

CFN: Inbox Follow-up

The Consortium Finance Network has encountered or addressed several issues, topics and opportunities over the past two years. There have been events, webinars, conference calls, e-mail exchanges, blog postings, discussions, and guidebooks. Some topics deserve follow-up: What are next steps? What are implications of events or discussions from the past year? What is the aftermath of an issue, problem, or question CFN may have tried to manage? In other words, where is Part 2, 3 or 4?

Microfinance: Growing Pains

CFN hosted two webinars on microfinance in 2010 to introduce members and participants to the sector and to possible opportunities. The first webinar offered a primer and history. The second was a case study of a successful, growing microfinance project in the Philippines. (See links below to blog summaries of the webinars).

Since then, there has been widespread reporting of scandals and problems in selected areas in microfinance around the globe. Reports indicate activities where micro-lenders have over-charged on loans and where borrowers have defaulted in greater numbers than expected. Some have blamed the problems on new industry participants who seek to maximize profits before achieving developmental objectives. Some argue that microfinance reaches development goals best when non-profit institutions are the predominant lenders.

The isolated problems will not likely deter efforts from some established institutions who have seen progress and success. But there may be calls to regulate or oversee certain activities to protect borrowers or discourage those who participate solely to maximize financial interests. The current issues likely mean the global microfinance model needs some tweaking.

Volcker Rule: Step Two

CFN blogged about the impact of a possible Volcker Rule in mid-2010:

This is the rule that would prohibit banks from engaging in proprietary trading and would likely have significant impact on the profits, balance sheets, and roles of many familiar institutions (JPMorgan Chase, Citi, and Bank of Amercia; but also, Goldman Sachs and Morgan Stanley, now bank holding companies).

Banks will need to revamp their trading desks, refocus trading to client-driven activities exclusively, and risk losing talented traders and entire trading desks to hedge funds and trading and dealing firms.

Since then, the rule has now become law. But the roll-out will be slow. The law gives regulators ample time to rewrite rules and present new definitions of proprietary and client-driven trading. And as expected, regulators (or whoever will be the designated group to draft specific rules) have been deliberate and cautious. Banks now have time to (a) continue some forms of prop-trading until rules change, (b) wind down some activities without having to endure sell-offs, and (c) restructure trading departments in a way they can retain talent.

The CFA: To Pursue or Not to Pursue

CFN presided over lively debates over the value of the CFA--especially for MBAs in finance, who have already been exposed to many elements of the CFA (corporate finance, investment analysis, accounting, security analysis, etc.) in business school. To help CFN members, Consortium alumni and other MBAs decide for themselves what is right, CFN hosted a webinar on the pros, cons, costs, value and time of the CFA in Oct., 2010:

All sides of the argument have validity. In the end, it is a personal decision. Many Consortium students in finance (not necessarily influenced by the viewpoints or the webinar) continue to pursue the first levels of the CFA. Some current students have pursued Levels 1 and 2 with no intention of pursuing Level 3 or the complete designation. This group won't be able to add the full CFA onto a resume', but will be able to get what they want from the effort: polished knowledge in certain finance topics and a slightly enhanced resume' without the costs and time required to get through Level 3 and further.

Mentoring: Keeping the Relationship Alive

CFN the past two years has encouraged, embraced and facilitated mentor relationships between Consortium students and alumni. Mentorships open doors for students. Mentors guide students, boost morale, introduce them to other important contacts and even tutor them to get ready for technical interviews.


Thriving, long-term relationships, however, are few, scarce. Many mentor relationships start with energy and ambitions, but drift afterward. Students get busy, preoccupied with what needs to get done that day, and may not always see the value of long-term relationships. Mentors get busy, too, or may not have the interest to do what's necessary to keep the relationship alive. CFN has tried to address these phenomena and has often assessed the role the Consortium and CFN can play to keep mentor relationships going.

The long-term value of a student or young professional in having one or more mentor relationships is critical for Consortium members and makes all efforts to help students and mentors strengthen their ties worthwhile.

Delicate Balance: Long Hours at Work

One of CFN's most popular discussions or blog postings addressed the long, near-tortuous hours involved in certain jobs in finance:

MBAs in finance know the story. The hours are unending, the schedule is unpredictable. Senior managers are demanding, often unrealistic. Weekends are seized by more work, new projects, new demands and Sunday afternoons in the office. The pace is physically draining; emotions peak and ebb. Sometimes it's debilitating.

MBAs dig deep to figure out how to cope. Most scrutinize and weigh the advantages (compensation, responsibility and finance experience) with the costs (time away from family and friends and physical and emotional costs).

The crisis of 2007-08, nonetheless, led to much soul searching for just about anybody who survived the events. It encouraged people to address the delicate work-life balance more carefully--especially if the end result from all the hours was the collapse of an employer, a job loss, or a dip in compensation.

For many, the costs exceeded the advantages, and they fled to other sectors or fields that at least permit a handsome, tolerable balance. Others didn't have a say and were victims of staff reductions. Many were in transition, and while in transition had the opportunity to decide (away from the pressures and not influenced by lucrative compensation) objectively if they wanted to return to a similar environment.

Some Consortium MBAs know the score, bear down and manage the grueling pace as well as possible--especially if they feel the experience will lead to a greater goal.

Other Consortium MBAs--in a new, post-crisis era--have courageously stepped up to put work-life balance as a top priority and have pursued opportunities that permit such. That means a few have actually rejected high-paying New York finance jobs for satisfying positions (with slightly less compensation) in other regions. And they feel good about it.

Which Way to Go? Investment Banking or Private Banking

CFN in Sept., 2009, offered advice to many Consortium students and other MBA alumni in transition on how to decide between investment banking and private banking, when presented with opportunities. The two areas offer different career paths, although activities and functions overlap in some ways. Many agree, too, that the cultures of the two differ.

Most MBAs in finance have skills and aptitude to go in either direction. But they struggle to decide which way to go. Some simply go where there is opportunity. Some of CFN's advice is summarized in

MBAs often"feel guilty" when they forego opportunities related to the relative high-paying world of investment banking. In recent years, many Consortium MBAs have comfortably decided to go the private-banking route. Part of the reason is due to the more professional, organized approach to recruiting MBAs in recent years. Private-banking units, which used to recruit MBAs on a one-off basis or in an unstructured way, now seek out MBAs in the aggressive, focused way investment banks do.

Another reason is that MBAs like the greater client responsibility that comes with many entry-level roles in private-banking. The so-called "apprenticeship" period is shorter. They get to have bottom-line accountability as soon as they are ready. Some who have opted for private banking know what they are talking about; they are former investment bankers.

Tracy Williams

Tuesday, January 11, 2011

Did Goldman Overpay for Its Facebook Stake?

It's the spring final exam in an advanced corporate-finance class on the campus at Darden. Or Tuck. Or Stern, Texas, or Emory. The professor distributes the exam. The students wince and are befuddled, because the exam has only a few questions with several parts. There are no numbers, equations, spreadsheets, models, or formulas. Just questions that require thought, analysis and maybe follow-up. How would you handle them below?

1. What is the true value of Facebook? How would you value it? What is its value today? Is the true value above or below the reported $50 billion?

What would be its value in two years? In five years?

2. Did Goldman Sachs overpay for its recent $450 million stake? How did Goldman reach its implied $50 billion value--from expectations about cash flow and earnings? From comparing Facebook to current market values of Google and Microsoft? From examining the acquisition values of other Internet companies in recent years (if there were any of note)?

Or from its willingness to pay a premium above a real value in order to gain an inside track to the heart of the company?

3. What really is the primary purpose of Goldman's investment?

If it were a ploy to race to the front of bankers' efforts to win the mandate to lead Facebook's possible IPO and become its primary investment bank, is the investment worth the risk for Goldman?

4. Why was Goldman willing to tread close to legal boundaries governing investments in private companies by setting up a separate special-purpose vehicle to permit some of its private clients to invest as much as $1 billion or more in total in Facebook?

5. Why would its affiliate Goldman Sachs Capital Partners, a private-equity fund managed by a different Goldman unit, reject the opportunity to invest in Facebook? Why would the view of the value and opportunity in Facebook differ in two different parts of the same firm?

Are there potential conflicts when one side of an investment bank says yes and another says no to the same investment opportunity?

6. What impact would the recent $50 billion valuation of Facebook have on the current implied values of other private social-network sites such as Linkedin and Twitter?
7. What are reasons Facebook agreed to accept new cash capital (new funds)? Was there a short-term cash need?
Did it require funding to support long-term assets, investments or possible acquisitions? Is it adding to infrastructure to be able to accommodate over 1 billion in users?

Perhaps most important (and perhaps beyond the purview of a finance exam): With a growing number of investors at the board table, is the vision of Facebook fashioned by its CEO Mark Zuckerberg at risk of being undermined in a way that makes him and his fellow visionaries uncomfortable?

The "exam" above probably couldn't be tackled in two hours. That wouldn't be fair to students. It might entail an entire course on its own in a semester. In many instances, there are no right or wrong answers. There likely isn't even a right or wrong value of the firm at this point. It would be better if the professor from Darden (or Marshall, Tepper, or Haas) presided over a lively, probing discussion of the "value of the firm" instead of requiring students to compute an exact figure--although the real world of finance forces investors, traders and market-watchers to determine a precise number every moment markets are open.
There are challenges in determining that precise figure. The first is the lack of data and the lack of reliable financial information about past and expected performance--given the current infrastructure, funding needs and expected growth.

The second is the complexity of valuing new organizations, especially Internet companies with little earnings record, with novel business models and with a reliance on clicks and eyeballs to generate advertising revenue. Is "value" achieved from expectations of cash flow five years from now? Is "value" achieved from the aggregation of hundreds of millions users? Or will "value" be achieved if and when the company is acquired by another firm and integrated into a larger, complementary business (Google? Microsoft? Viacom?)?

The third challenge might be the pitfalls of valuing "hot" companies based on a swoon of widespread popularity and buzz and the possibility that the hot fad will dim or be canceled out by next year's new model, fad or Internet wonder. (Whatever happened to buzz and popularity of

Goldman and team, of course, had access to real data. More data have been seeping out in recent days, as Goldman prepares its offering of investments in Facebook for its client base (via the special-purpose vehicle).

By now, many who watch Facebook's every step are aware the company now has over 500 million "members" or "accounts," generates over $2 billion in revenues and probably has annual earnings in the $200-$500 million range (depending on who's estimating, who's modeling, or whose accounting methods). While Facebook's market value is being reported at or near $50 billion, its "book value" is probably significantly lower--perhaps much less than $2 billion, if anywhere near that.
With plans to continue accelerating momentum, grow and create more uses for users (more reasons for people to spend more time on the site), Facebook probably needs Goldman's cash investment (including the $1 billion-plus from private clients). The infrastructure needs to be supported; new servers must be added, and employees must be paid, as the current flow of revenues might not always keep up with expansion (at least for now).

So why would Goldman and team pay over 100x current earnings for its stake?
If the valuation has an implied growth rate, is this growth realistic? Does the implied growth rate require Facebook to reach over 2 billion accounts in five years? Does it imply the company will successfully expand into countries where it hasn't penetrated yet (Japan, China)? Does it imply the company will continue to unveil new purposes for Facebook and will summarily resolve all issues or concerns related to privacy?

In Goldman-like fashion, as it sought a new long-term client, it determined it needed to do whatever possible (by taking reasonable risks, not absurd risks) to be the first big bank inside and to do so by being all things at once--investor, financial adviser, broker, strategic adviser, and (and when those times come) lender, private-client adviser, block trader and underwriter. If that is its goal (and not neccessarily doubling its $450 million investment), then the investment will likely be worth the risks and will reap long-term rewards more than what a potential over-priced investment could.

There are non-financial risks, nonetheless: (a) the risks that it will encounter legal issues from a new interpretation of the rules that govern the maximum number of investors in a private enterprise; (b) the risks of perception that one unit of Goldman rejected an investment opportunity that another embraced; (c) the risks of perception that Goldman is facilitating lucrative, home-run investment opportunities for the "super rich," those who qualify to invest in the $1 billion SPV fund. In Goldman fashion, these kinds of risks were probably vetted thoroughly, if not resolved.

Meanwhile, Zuckerberg and team, however, must now contend with how to stay true, steadfast and stubborn to the original vision. Will the Facebook we see in 3-5 years reflect what its creators envision today? Will it be a product shaped by the intents and objectives of institutional investors seeking a 15% return on equity every quarter? Will Google, Microsoft, and/or Goldman be calling the shots? (Or will Facebook be calling Google's shots?)
Or will the next new thing have come along and the world flees to that?
Tracy Williams

Friday, January 7, 2011

CFN Schedules Industry Event

Save the date! February 24 in New York City.

The Consortium Finance Network will present its 2011 industry symposium and networking event at Citi in New York next month, Feb. 24 at 5:30-8 pm.

This year's event will focus on updates, outlook and perspectives in finance and financial services. It will outline and discuss opportunities after the financial crisis and on the industry's road to recovery.

CFN encourages CFN members, Consortium alumni and others to attend the reception, to participate in the discussion and meet others.

A short panel discussion will address specific topics on financial reform, trends in banking and finance, diversity agenda across the industry, and specific opportunities in certain sectors (investment and corporate banking, trading, investment management, private banking, and other financial services).

Join CFN and the other sponsors, Citi and Management Leadership for Tomorrow (MLT), for the evening. Invitations and more details will follow.

Tuesday, January 4, 2011

On Campus: What's Up? What's New?

Business schools in these times are always reinventing themselves. They change, morph, and transform to keep up with the times. They revamp courses and curriculum and innovate by sometimes changing the experience 180 degrees. They assess a past crisis and project what's to come. They are sensitive to and try to be responsive to their multiple stakeholders--faculty, students, university leaders and corporations.

And for the most part, it's all for the good. You see steady changes, adaptations and an obsession with making themselves continually relevant on campus--even at or especially at Consortium schools. Take a look at what has been going on on campus the past month or so. Note what students, dean and professors are working on, doing, analyzing, forecasting, or studying--whether it's financial reform, regulation, leadership, accounting principles, or entrepreneurship. Or whether it's the business setting in the Midwest, in China, in India, or Indonesia.

At Yale, second-year Consortium finance student Corey Harrison is currently featured on the school's website in a video discussing progress on the school's transforming approach to teaching business. Yale SOM students don't necessarily study the conventional core courses of marketing, accounting and finance. They study under an integrated curriculum that focuses on the primary stakeholders and participants in business activity--e.g., the customer, the company, the market, the competitor, the investor, and the employee. To hear Harrison's impressions on his Yale experience, go to

Washington University's Olin School sponsors "talent summits" for students and alumni around the country. They are specially planned networking sessions, opportunities for students and alumni to learn and update each other on affairs off campus and activities on campus, in the marketplace, in certain companies and in institutions everywhere. A special attraction? Corporate recruiters are invited. January is a big month for its "summits," which are scheduled for the 6th, 11th and 13th in New York, San Francisco, and Chicago, respectively.

Many remember Shirley Sherrod, who made news in 2010 when she was fired from U.S. Agriculture Department post for remarks taken out of context in a speech she made. Emory's Goizueta Business School invited her to speak at a forum on diversity in management last fall. The event was co-sponsored by the American Institute for Managing Diversity ( and allowed students, professors and others at Emory to discuss diversity topics in corporations.

Even as the holidays approached last month, dozens of students from Virginia's Darden School made the annual Week-on-Wall-Street trek to New York (Dec. 13-17) for sessions with top banks, firms and funds. Other schools, including Dartmouth and Michigan, sponsor similar experiences, typically earlier in the fall.

The week of meetings, conferences, networking, informational interviews and a few evening receptions provide fast-track preparation for internships and the latest in Wall Street careers, roles, and jobs. Students also hustle to make contacts that will help during the January interview process or at least help them earn spots on A-list interview sheets.

Darden students, including a few Consortium students, visited JPMorgan, Credit Suisse, Wells Fargo, Stifel Nicolaus, and Nomura.

Many MBA students continue to have interest in private equity, although some feel the doors of many top firms are impenetrable. Many firms don't have formal recruiting and first-year programs; they, however, hire MBAs to fill critical first-year associate posts, often through alumni referrals. In November, Dartmouth's Tuck School invited Carlyle Group's David Marchick, a managing director, to speak to students who want to pursue private-equity careers and to report on opportunities in the area.

Marchick discussed recent trends, including globalization, emerging markets, and the impact of financial reform.

At NYU's Stern, 40 professors contributed to a new book describing a new Wall Street after the crisis, after financial-reform legislation, and with new regulation to come. The book, "Regulating Wall Street," ( follows a similar collaboration Stern professors published in 2009 related to the causes of the financial crisis.

Many of the professors argue there are flaws in the Dodd-Frank Act, enough to warrant concern that such flaws might trigger another crisis. Many, in fact, protest that the Act is not strong enough.

Fortunately the book isn't a laborious list of complaints. The professors provide solutions and explain them. They also address common concerns such as lingering systemic risks in finance, the shadow banking system, the too-big-to-fail concept, and the flaws of Government guarantees of bank liabilities.

At Michigan's Ross School (and perhaps at Consortium schools everywhere), second-year students speak of fascination and enlightenment in their second-year courses after a tough year of first-year, core-course treading. As they see the finish line, they get to take courses in innovation, leadership, entrepreneurship, and change or explore in depth particular interests in real estate, venture capital, and start-up funding. Many second-year students will acknowledge that the second-year experience (including also opportunities to study abroad) makes business worth the two-year sacrifice.

If it's January at Carnegie Mellon's Tepper School, it's the season for "Meet and Greet." Tepper supports and encourages sessions planned around the world where current students talk to prospective students and interested alumni about their Tepper experiences. This month, the informal social sessions are planned for Venezuela, Baltimore and Colorado. Sessions have been or are being planned for India, Peru and New York. Students discuss experiences, courses, professors, and career planning in an informal, unstructured setting--without deans, recruiters or senior professors peering in.

It may be winter break or the calmer days after a tumultuous 2008-09. On the campus of many Consortium schools, however, nobody's sitting still.

Tracy Williams