Thursday, October 31, 2013

Goldman Sachs and Work-Life Balance

Goldman Sachs announced this week that it had instituted ways to improve the work experience of analysts (in its BA program) and reduce the number of hours they work each week. It's the lore of investment banking to hear stories of analysts and MBA associates, too, who work long hours that stretch through the weekend and through holidays and vacation time.

Goldman acknowledges that it is missing out on some top talent, when recruits have selected other finance jobs or industries because of work-life-balance issues. Talented BA's and MBA's will express an interest in corporate finance, will have the aptitude and drive to work on deals and with important clients, but, as Goldman sees it, they back out and accept offers elsewhere. And they may whisper to Goldman and other major banks that it wasn't about the compensation.  Thus, they choose pathways that take them to the shorter hours and better lifestyles offered by hedge funds, smaller boutique firms, and the finance or strategy departments of non-financial companies.

Goldman, for its part, will discourage analysts from working weekends.

Big banks have tried to address these issues over the past 13-15 years, going back to the times when banks risked losing talent to dot-com opportunities. But the slope is slippery. They implement programs and try to change the culture. They make promises to recruits and junior bankers.

Yet in the trenches, old managerial habits surface, and analysts and MBA associates are pushed to extremes to help in deals, to do extensive modeling and research and to participate in elaborate client pitches. No matter how hard banks try to tweak and twist the work culture, mid-level bankers face unbearable pressures to win deal mandates, generate revenues, manage risks and comply with new regulation--without regard to firm rules about working weekends or until midnight. For some middle and senior bankers, there is a little bit of "because I did it, they ought to, too."

Often the messages of improving work experiences, coming from senior managers far removed from deals and clients, are lost in execution or not enforced fairly or properly. The deal, the pitch and the demands of the client becomes the modus operandi.

Still, because this is Goldman, the industry will watch how this unfurls. Goldman has said that, if necessary, it will hire more analysts to compensate for work not getting done during weekends.

The reports, at least what has come out, don't address work-life issues for MBA associates. Therefore, although the firm likely wants to improve work experiences for the older group, it wasn't ready to say they (the associates) can have all weekends off, too.

Tracy Williams

See also:

CFN:  Delicate Balance:  Long Hours and Personal Lives, 2010
CFN:  Is I-Banking Still Hot? 2011
CFN:  Summer-Internship Experiences, 2010

Friday, October 18, 2013

MBA Recruiting: Working the Game Plan

Cornell's Johnson School: Ready, set, network, interview
When recruiting season rolls around, MBA students in finance (including Consortium students in finance around the country) toss the books on the shelves and roll out the details of a game plan to secure a job for the summer or for full-time employment after graduation.

Student sentiments always seem the same year after year.  They never realize how much time, energy, effort, focus, and discipline the process entails.  Often recruiting season is launched right in the middle of midterms and just before first-semester exam season.

MBA students rejoice in the chance to dream of the opportunities presented to them and the chance to drift smoothly into a wonderful job in an ideal industry, making substantial impact, having meaningful experiences, and accumulating their fair share of sums of money.  That's summer-time luxury.  When recruiting season starts, the real world smacks right in the face.  There is time, but the game plan must be in place.

By the time information interviewing, networking, and corporate presentations are in full swing, the MBA finance student needs to have started the process of narrowing choices.  For most, it's not easy. When November approaches, it would be naive for a student to proclaim interests in investment banking, equity research, community banking, and derivatives trading (all of the above) and then be prepared to handle the tough interview process of three or more different finance segments.

Most MBA finance students at top schools know and understand the game.  They are surrounded by peers and career counselors. They discuss timetables, networking events, opportunities and career choices every day, throughout the day, in between classes and at wine receptions in the evening.  Most are open to advice, hints, and help from school advisers, alumni and contacts at major firms and companies.

Most understand and appreciate the value of information interviews and networking.  Students listen and learn and decide on corporate cultures, compensation incentives, work-life balance, and self-fulfillment on the job.

Many, however, under-estimate the importance of keeping up with current markets, deals, transactions and business and economic trends.  Case studies, projects, and exams often get in the way of knowing and understanding what's going on in current markets: recent deals, recent trends, recent regulation, or important discussions of corporate strategy and growth expectations in industry segments.

It becomes almost impossible to juggle preparing for a finance midterm with finding time to learn about Yahoo's latest earnings results, comprehend the interest-rate leanings of the Federal Reserve, or figure out why there were swings and dips in equity options markets.  But corporate interviewers and committee members who make selections tend to weigh heavily around the topics, transactions and activities they are involved with or familiar with.

Opportunities in finance are broad, and the hopelessness, fears and anxiety coming out of the crisis have receded. Finance students today have a buffet of choices.  Still, they must have a game plan ready, a fierce resolve and determination to go through the process, a refined idea of what they want to be and do and an in-depth awareness of what's going on in the financial headlines.

Tracy Williams

See also:
CFN:  First-year MBAs and Recruiting, 2011
CFN:  Gearing Up for Summer Internships, 2012
CFN:  MBA Job Hunting:  No Need to Panic Yet, 2012 

Apple, With All That Cash: Revisited

Billions and billions in cash, still
In corporate-finance circles,  Apple presented a delightful dilemma in much of 2012.  What should it do with its billions of cash, sitting on the balance sheet, earning paltry returns in safe markets, causing restlessness among shareholders who felt entitled to special dividends to get access to it? Should it use cash to repurchase some stock, a few shareholders pressed?

Shareholder activists clamored for cash pay-outs and even devised ingenious financial maneuverings and new equity instruments to get to it.  The current generation of Apple managers, with Tim Cook at the helm as CEO, grew up with Steve Jobs' abhorrence of debt markets and his clinging to a security blanket of hoarded cash if only to endure tough times.

Apple has often countered--in carefully worded ways--that much of the cash it maintains appears in foreign subsidiaries, cash that couldn't be efficiently repatriated back to the U.S. into the hands of shareholders without the company paying onerous taxes on it. This argument may make sense to corporate-finance managers, but wouldn't sit well in the public media.

After shareholders fussed enough in the past year, Apple decided to tap debt markets and borrowed $17 billion to use some funds to give shareholders a gift (via dividends and share repurchases). Apple wasn't desperate for new funding, but appeased shareholders while taking advantage of low rates in the marketplace.

Often at established companies, new-debt funding is channeled into new investments, new acquisitions, or aggressive expansion or into replacing old, more expensive debt.  Apple's borrowing helped quiet teeming shareholders and proved to capital markets it could get comfortable with the process of taking on new loans and issuing corporate bonds, if it ever needed to.

With the debt now in place, what is the flavor and look of Apple's balance sheet today?

1.  Cash reserves.  Funds from the new borrowings might have been a gift to shareholders, but Apple continues to be a formidable cash-generating machine in its global operations.  By late summer, Apple's cash accounts (including some liquid short-term investments and excluding much of what's held abroad) had almost doubled over the past year to amounts above $42 billion.

With debt proceeds, it provided gifts to shareholders, but cash will continue to climb as the company continues to be profitable. The company is operating at a pace of generating about $7 billion in new cash every quarter.

2.   Debt on the balance sheet.  For once, there is long-term debt on its balance sheet, $17 billion. But it's still insignificant.  The closely watched debt-to-equity ratio is still so low (0.13) that it would hardly cause a blip on the analytical screens of ratings agencies and investors. Every bit of that debt could be paid down within days with cash on hand, if it chose to do so.  No need to wait for cash generated from operations.

3.  Debt capacity.  Is there any room for more debt (to help increase ROE, if not fund new projects), now that it has gotten a first bite of it? With cash flow of that magnitude, the company has lots of room to borrow more if it needed to or wanted to.  Interest expense on the new debt each quarter will total less than $200 million--having no burden on a company generating $6-7 billion in new cash quarter after quarter and already with over $40 billion more sitting aside with little agenda.

The company could arguably borrow another $50 billion before investors and ratings agencies might start fidgeting. This assumes Apple will continue at a modest growth pace and the whole globe is at least somewhat infatuated with its product offerings.

These transactions in 2013 were all about tests and gifts for Apple--a test to see if it can become accustomed to debt markets and a gift to get shareholders off its backs. It passed the debt test. Shareholders, however, will become spoiled and will continue to look for more dividends and repurchases, as Apple piles on $5 billion or more of new cash quarter after quarter.

Tracy Williams

Sunday, October 13, 2013

The Verizon Deal: Big Numbers, Big Debt

When the deal was announced, some surely gasped.  The fact that Verizon Communications decided to purchase all of Vodafone's stake in Verizon Wireless was not a surprise.  Vodafone had decided to sell its stake and units in mobile phones.  What likely caused market observers and headline writers to turn their heads in wonder was the size of the deal, the big numbers. They were huge.

Deals and big numbers excite investment bankers and can spur them to pant and salivate. In the Verizon case, they certainly will, once Verizon gets around to handing out advisory and underwriting checks for fees. Deals and big numbers tend also to cause hiccups and coughs among some investors, research analysts and bank risk managers.

This deal is big, one of the largest ever. Perhaps it sends too many hopeful signals that an era of super-size deal-making has returned.  Verizon Communications announced it will pay a whopping $130 billion for Vodafone's stake. To raise $130 billion to pay Vodafone, it will issue about $60 billion in new stock and tap various other accounts and reserves for billions in cash. It will borrow another mind-boggling $49 billion in bank and debt markets in one of the largest debt deals ever.

While some industry experts applauded this announcement, the stock market gulped, trying to figure out the true impact of Verizon digesting all this new debt onto its balance sheet. Verizon's stock value fell 3% on the day of the announcement.

The deal will probably be approved by regulators, will likely be executed, and will just as likely work--meaning, shareholders will gain value because of it and debt-holders, while crossing their fingers, will receive the regular cash interest payments due to them each quarter.

But some flags emerge. They send signals to investors and credit-risk managers that the deal is not a no-brainer.  It must be assessed carefully.

1.  Verizon already has over $40 billion in long-term debt.  Now add $49 billion in more debt, and that sums up to over $90 billion in total debt.  To manage this mountain of debt, Verizon must generate over $3 billion of year in cash flow to handle just the interest expense.

Is the company capable of handling this burden?  The company operates at a pace today of generating about $10-12 billion/year that can be used to handle debt obligations.

That translates roughly into a Debt/EBITDA ratio equal to about 9.0. MBA finance students know well how this ratio can be used to compute a back-of-the-napkin analysis of whether debt levels are manageable.  It suggests that for Verizon, while the debt is manageable, there may be little wiggle room if cash flows from Verizon businesses fluctuate, as they easily can.

Routine business operations must generate the flow of cash to manage this extraordinary debt load. But there may be periods when something else must take a back seat:  Shareholders, for example, in one quarter may not get all of their entitled dividends, something they've grown accustomed to.  And when substantial new investments are necessary, they will likely be funded by issuing new stock.  The existing financial framework couldn't bear more debt--at least for now.

2.  Verizon's balance sheet spurs a few questions, too.  This is a capital-intensive business, so its nearly $90 billion in plant and equipment is no surprise.  This is also a technology business, so its nearly $100 billion in intangibles and goodwill (from acquisitions, copyrights, patents and more) is not a surprise.  But those assets are supported by "only" $34 billion in equity capital.

After the Vodafone deal, equity capital will increase substantially, but so will the amount of intangibles and goodwill---legitimate assets in the eyes of accountants, but assets that can't be touched and felt, in the eyes of investors and debt-holders (assets that also don't generate a steady flow of cash flow from quarter to quarter).

When analyzing a company, analysts prefer to subtract out intangibles/goodwill when computing the book value of a company (equity account). At Verizon, net tangible equity is computed to be a negative amount before the deal and after the deal. That often implies that debt funds all activities on the balance sheet, and there is little room for error, if the company runs into economic headwinds, and earnings (and cash flow) start to bounce around.

3.  Unlike other large companies with significant cash reserves,  Verizon may not have a comfortable stash of cash to meet unexpected cash shortfalls or required investments.  It would rely on external markets, sometimes in times when external markets wouldn't be kind.

What do ratings agencies think? They are in the ballpark.  Moody's and S&P currently rate the company Baa1 and BBB+, respectively--about what you would expect when there is already a significant debt burden and if bad times could jeopardize paying what's due on debt. With "stable" outlooks, the ratings agencies also observe that Verizon will be able to make investors happy.

Why would investors buy the debt? It's all about the interest-rate returns that investors can't get in other fixed-income investments. One tranche or segment of the new debt will yield 5.22% to investors over 10 years, a return that's not easy to obtain in a low-interest-rate era (even with recent interest-rate volatility and spikes, given uncertainty in Washington). That yield is enticing, and in the eyes of some, worth the risks described above.

Tighten up your belts.  This is a corporate-finance deal that can work, but there could be some bumpy moments along the way.

Tracy Williams 

See also:

CFN:  Libor in Crisis, 2012
CFN:  Why Is Dell Going Private, 2013
CFN:  Merger Mania, Boom Times Ahead, 2013

Friday, October 4, 2013

Now It's Twitter's Turn

Now it's Twitter's turn. It hesitated for the past year or so. This week (Oct., 2013) it bravely stepped into IPO waters, taking the first big step by sharing publicly its SEC filing and letting the financial world see its bottom line.

Twitter's hesitation, like all companies contemplating issuing stock to the public for the first time, results from trying to determine the optimal moment to sell stock in equity markets. That's often tied to market interest in the stock issue, supply and demand for the stock, and general equity-market trends.

Its hesitation may have also resulted from other factors: (a) its being shy about letting the world pore through its true financial performance and (b) its desires to avoid the IPO debacle Facebook experienced last year at Nasdaq with Morgan Stanley as the lead underwriter.

Twitter through the years has had to wrestle, too, with management and organizational issues. Some of those problems have been resolved, and the company has moved on to capitalize on its soaring popularity around the world.  In the filing, Twitter reports 218 million users on average each month this year, up 44% from a year ago.  Not quite Facebook numbers, but sufficient growth to get prospective investors interested and excited. Twitter might argue that the value or meaningfulness of ongoing usage is different than account activity in, say, Facebook or Linkedin. Hence, it's not how many use the site, it could argue as it sells new stock, but who uses it and how it's used. 

Because of the planned IPO, Evan Williams and Jack Dorsey, Twitter founders, can now calculate more accurately their fortunes (over $400 million each). A handful of venture investors will have a nice payday, as well.

Twitter in the filing divulged what many thought was the case. It continues to have losses with no signs those losses will turn into profits in the short term.  Investors in its stock, therefore, will bet that the company will continue to experience stellar growth in users, will find even more effective ways to generate advertising revenues, and will eventually turn losses into steady, growing profits by keeping costs under control.

The company will raise $1 billion in the IPO offering.  Investment bankers advising Twitter have suggested the company today has an implied market value of about $10 billion. How then does the company have such value, the corporate-finance novice asks, when the company reports losses with no expectations of profit in the short term?  SEC documents indicate the company lost $79 million last year and $69 million in 2013 to date.

Investors who will buy the stock are assuming profits are on the horizon. They will come because there are still vast opportunities to grow the number of users, grab more advertising dollars, and, therefore, increase total revenues substantially. They will buy the stock based on expectations, not based on history.

For now, investors and those who assess the value of the firm will value the company based on a reasonable estimate of growth prospects and based on refined projections of users and revenues. Revenues for the six months, 2013, doubled from the previous year, Twitter reports, while number of users continues to grow.

Investors and advising banks have Facebook and Linkedin as convenient benchmarks:  They study and compare current market values of those companies' stocks, their numbers of users, the activity in the millions of accounts and the level of sales and sales growth.  Investors will, too, assume the company, now under the guidance of CEO Dick Costolo, will invest in whatever technology is necessary from year to year to keep the engines going.

Twitter has few competitor threats. No other social network is about to topple it in doing what it does best in those 140 characters. But Twitter, along with Google, Facebook, and Linkedin, all chase after the same pool of advertising dollars. Companies seeking to advertise digitally must decide where they can get the biggest Internet bang without particular regard to the specific roles social networks play.

Goldman Sachs, winners of the investment-banking shoving match, will be the lead underwriter and will be assisted on the front lines by Morgan Stanley and JPMorgan.  The challenge they have as advisers, besides setting precisely the price of a single share, is to form a view of markets in the face of October's U.S. Government shut-down and recent equity-market uncertainty. But that's why they will be paid tens of millions of fees. They must step up and make such decisions and, especially after last year's rough launch, avoid a 2012 Facebook near-catastrophe.

Tracy Williams

See also:

CFN:  Facebook:  The Lucky Underwriters, 2012
CFN: Facebook Stock:  What's Going Wrong? 2012
CFN:  Did Goldman Overpay for its Facebook Stake? 2011