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🏦 M&A Between Two Big Banks

🏦 M&A Between Two Big Banks

Tell me about yourself...

March 31, 2024

⏱ Reading Time: 2 Minutes 29 Seconds

Happy Sunday, future bankers!

Hope everyone is doing well! Today we’re covering terminal value growth rates, responding to one of the most common interview questions, and a large M&A deal between two big banks.

🚀 Let’s get into it.

🔢 Technical Question

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When calculating a company’s terminal value as part of a DCF, what is an appropriate growth rate to use?

When calculating a company’s terminal value as part of a Discounted Cash Flow (DCF) analysis, an appropriate growth rate to use is often the long-term growth rate of the economy or the industry in which the company operates.

This growth rate, also known as the “perpetuity growth rate” or “gordon growth rate”, is used to estimate the company’s cash flows beyond the forecast period. It’s typically a small, positive number, such as 2% to 3%, and should not exceed the long-term growth rate of the economy to ensure that the company doesn’t unrealistically grow faster than the economy indefinitely.

It’s important to note that the chosen growth rate can significantly impact the terminal value, and thus the valuation of the company. Therefore, it should be chosen carefully, considering factors such as the company’s competitive position, the growth prospects of the industry, and macroeconomic conditions.

In some cases, a zero growth rate might be used, especially if the company is in a slow-growing or declining industry. Conversely, a negative growth rate might be used if the company is expected to shrink over time.

Remember, the terminal value often constitutes a large portion of the total enterprise value in a DCF analysis, so the growth rate assumption is crucial and should be justified based on solid reasoning.

🗣 Behavioral Question

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Tell me about yourself.

Here are some best practices to follow when responding to this classic interview question:

Start with a Brief Introduction: Begin by stating your current status, such as your year of study and major.
Highlight Relevant Experiences: Discuss any past experiences that are relevant to investment banking. This could include internships, academic projects, or leadership roles in finance or business clubs. Be sure to highlight what you learned from these experiences and how they’ve prepared you for an investment banking role.
Discuss Your Skills: Highlight the skills you’ve developed that would be valuable in an investment banking role. These might include analytical skills, problem-solving abilities, or proficiency in financial modeling.
Express Your Interest: Explain why you’re interested in investment banking and, more specifically, why you’re interested in the firm you’re interviewing with. This shows that you’ve done your research and are serious about the role.
End with Future Goals: Conclude by briefly discussing your career goals and how the internship aligns with those goals.

Remember, this question is often the interviewer’s first impression of you, so it’s important to start off on a strong note.

🗞 Industry News

🏦 M&A Between Two Big Banks

HSBC has wrapped up the sale of its Canadian unit, HSBC Bank Canada, to Royal Bank of Canada (RBC) for a cool C$13.5 billion ($9.96 billion USD). This deal, a big win for RBC, is set to boost its domestic business and global standing, merging Canada’s largest and seventh-largest lenders. Come Monday, April 1, HSBC Canada’s branches will be sporting RBC’s logo. Despite some pushback from environmental, anti-monopoly groups, and conservatives concerned about industry concentration and potential consumer fee hikes, the merger, RBC’s largest to date, has successfully crossed the finish line. It’s a throwback to the early '90s, when such large-scale banking deals were last attempted in Canada.