How to Turn Into an Investment Banking Pro

By Matt Krantz, Robert R. Johnson

Investment banking is one of those disciplines that you can delve into for decades and still not master. There are corners of investment banking that go well beyond the understanding of the capital markets and even the mechanics of gathering information about companies and their needs for investment to continue to grow.

If you’re willing to put in the time and effort, you can discover very profound ways to understand companies, how they’re valued, and the ways they use financial engineering and investment banking products to maximize their returns.

Put the discounted cash flow analysis to work

When it comes to the top skills that serious investment bankers must hone, the discounted cash flow analysis is certainly high on the list. The discounted cash flow is a culmination of many of the tools beginning investment bankers have to create in-depth and comprehensive models of what companies are worth.

The concept of a discounted cash flow may be something you can learn in school. But it’s the assumptions and the quality of the inputs embedded in the analysis that make this technique essential to the investment banker. In many ways, investment bankers can show off everything they know when they create a detailed discounted cash flow analysis.

See how leverage becomes a force in investment banking

Light a stick of dynamite, and you pretty much know what’s going to happen. Bang! But sometimes that explosive power can be used to build as well as to destroy. Explosive power can be used to clear mountains to make way for freeways or tunnels. But dynamite can have some predictable negative uses, too.

In many ways, the use of debt, in a process called leverage, can be much like dynamite. When used prudently, leverage can be a creative force that gives companies the power to grow and create wealth faster than they would have otherwise.

But at the same time, leverage can be abused and lead to great destruction of wealth, jobs, and enterprise. The graveyard of companies is littered with examples of businesses that lit the leverage bomb and didn’t know how to harness the power.

Investment bankers can prudently apply leverage to deals as a way to get very positive results. Success with leverage requires extreme caution, knowledge, and discipline.

Pinpoint buyout targets

Investment bankers often find themselves playing the role of a corporate matchmaker. A big part of the job description is finding new ways to raise money and help companies restructure themselves in a way that makes them more profitable for their owners.

There are many tools companies can use to boost profits, one of which is pushing along M&A deals. Sometimes investment bankers are contacted by a company eager to sell themselves by looking for so-called strategic alternatives. Other times, the investment bankers are called on by big companies with money to burn looking for a deal. The big companies in the hunt call investment bankers to help identify and court targets.

Investment bankers, in large part, are hired due to their contacts in the business community and their ability to use financial modeling analysis to find deals that make economic sense.