Tuesday, March 24, 2015

Credit Suisse Makes a Big Move

Credit Suisse decided Tidjane Thiam was the right leader at a pivotal time.
These haven't been the best of times at Credit Suisse. The Zurich-based global bank is not on the verge of collapse. It doesn't appear on European regulators' endangered lists, but regulators abroad have expressed concern about possible inadequate amounts of capital on the balance sheet, capital it would need to endure tough times, whenever they return.

Regulators have concluded that the balance sheet is crammed with risky assets. And the bank has had to manage through legal investigations of U.S. citizens with Credit Suisse accounts evading taxes. (It recently paid a billion-dollar-plus settlement to resolve that issue, at least for now and at least for this side of the Atlantic).

In 2014, the bank recorded profits hovering about or above $2 billion for the second straight year. But its board of directors huddled and decided that might be inadequate. Last year's profits result in an almost-embarrassing 4.5% ROE, while other big global peers, competing on the same stage and wrestling with the same issues, fared much better or continue to show improvement. (Its cross-town rival, UBS, has gone through its own restructurings, but bounced back last year with earnings above $3 billion and returns on capital above 6%.)

This month, it paved the way for its CEO Brady Dougan, known for much of his career for a beaming track record in investment banking, to step down. Credit Suisse didn't replace him with a like-minded senior banker and hired someone in the mode of a strong business manager who must make tough decisions as soon as he slides his CEO seat.  Tidjane Thiam, who is from Cameroon and has an INSEAD MBA, becomes one of the few CEO's or Chairs of African- or African-American descent to lead a global financial institution. (Kenneth Chennault continues as CEO of American Express.)

Credit Suisse's choice is interesting. Thiam may not have been on any public short list of those expected to take over the bank, now or in the years to come. However, it's not a shocking appointment after you examine Thiam's track record, one that is consistent, broad, and filled with operational accomplishments.  He will arrive at Credit Suisse after having led Prudential, the British insurance company, not the one based in New Jersey.

Credit Suisse has decided it has arrived at a junction where it must make important operational and strategic decisions about the bank. Thiam, therefore, might have been the best person to make these decisions on Day 1 and consider how the bank should change course.  With little background in banking, but significant relevant experience in risk management and global operations, Thiam was likely chosen for proven skills in business management, including skills picked up also from his years at McKinsey, the consulting firm, and in government service.

The bank, too, may have decided that after Dougan, the experienced deal-maker, it needed business leaders from the schools of Warren Buffet and Jamie Dimon. Dimon, JPMorgan Chase's CEO the past decade, is always first to say he leads his bank as a "business manager," not a "banker." (In fact, Dimon--at least internally--refers to JPMorgan as "the company," not necessarily "the bank" or "the institution.")

Bankers close deals, advise clients, finance corporate activities, comfort clients and bring in new ones. Business managers manage operations, invest in new businesses, shut down poor-performing units, cut costs and obsess over cost efficiencies, balance-sheet strength, and returns on capital.

Global bank management at the senior levels has evolved into just that.  Bank management these days implies running complex organizations with tentacles in all corners of the work.  Senior leaders must make excruciatingly tough decisions about capital allocation, cybersecurity, regulation, risk management, business investment, technology efficiencies, and cost control. This means they don't devote as much time to do deals, trades, investment management, and client-schmoozing.

Credit Suisse, like many of its peers, is trying to decide what it will be, where it will be, and for whom. And while at it, it must decide how to boost so-so returns, reduce the risks on its trillion-dollar balance sheet, and decide what business lines should it emphasize and which ones to reduce or withdraw from. Just like all other global banks, some would say.  Except some banks, like Credit Suisse, UBS, and RBS must decide sooner than later. Citi, many will agree, made these strategic, balance-sheeting-paring decisions a few years ago and is experiencing brighter days.

Thiam still has weeks before he joins, but rumors and reports abound that he plans to reduce the bank's emphasis on investment banking (eliminate 3,000 IB jobs?), address the abundance of risks on the balance sheet, decide how much more in capital and resources to re-deploy for private banking, and consider how global it should be.

If investment banking fades a little into the background, the bank will have retreated from its celebrated roots cultivated by First Boston, the once large, prestigious U.S. investment bank Credit Suisse acquired in the 1990's. (First Boston had a long-time historical alliance with Credit Suisse. After it ran into difficulties during a spate of excessive deal-making and bridge loans in the 1990's, it sold out to the Swiss bank.)

What will be Thiam's directive from the board? How much time will it give him? Corporate, regulatory and balance-sheet issues will be hurled at Thiam the first day he arrives.  European regulators will pressure him to improve capital ratios. Investors, capital markets, and trading counter-parties will press for details of his strategy.

Investors so far have approved the selection. Share prices (based on ADR's, dominated in dollars) had fallen last year from $32/share to $20/share, while the market watched the bank confront many of these issues.  Thiam's announcement pushed the price up 25%. Even before he has settled onto the banking battlefield, investors surmise he'll remold and define the bank in the way it should be. Let's see what happens. But let's give him at least a year.

Tracy Williams

See also:

CFN: UBS Throws in the IB Flag, 2012
CFN:  Why Was Citi's CEO Asked to Resign? 2012
CFN:  Wells Fargo:  Sticking to What It Does Best, 2014
CFN: Can Morgan Stanley Ever Please Analysts? 2012
CFN:  What About Corporate Banking? 2010

Tuesday, March 17, 2015

When Does a Bank Have Enough Capital?

Bank of America received an "incomplete" on the latest stress test by the Federal Reserve
Global banking these days often means tending to "matters requiring immediate attention" and putting out fires ignited by the concerns of investors, clients and markets. It means senior managers scrambling up and down elevators in haste to prepare responses for regulators.

For the top 50 or so banks, this month's issue of the moment is the formidable "stress test." The Federal Reserve presides over a bank test to measure whether large financial institutions can survive worst-case scenarios without threatening the financial system and jeopardizing required payouts to depositors, trading counterparties, and long-term investors.

The tests are hypothetical, but regulators treat them as if the scenarios will occur, in the way we observed worst-case scenarios of all kinds during last decade's financial crisis. The tests are required by Dodd-Frank regulation and formally fall under the banner "Comprehensive Capital Analysis and Review," or "CCAR."

After the crisis, regulators around the globe concluded bank capital at sufficent amounts is the primary safeguard to protect the system when the next crisis occurs.  In finance, investors often proclaim "cash is king."  In bank regulation, regulators (and risk managers, too) exclaim "capital (as in capital cushion) is king."

It's all about capital, capital as a balance-sheet cushion to ensure that a bank enduring hard times or struggling through a volatile market will have enough of a capital base to permit the bank to meet all obligations to depositors, creditors, and other counterparties.

Capital as a Cushion

The principle of having "sufficient or adequate capital" is that balance-sheet or operating losses will be absorbed by shareholders. Banks with significant amounts of capital can tolerate a certain amount of losses. In worst-case scenarios, losses might be inevitable, but the best-capitalized institutions will survive and continue as ongoing institutions. Stress-test losses include projected losses from misbehaving capital markets, from mismanged operations, and from unforeseen events (even losses attributed to "tail events").  Most of all, test-givers want the bank to absorb these losses without having to resort to or rely on (or count on) support from regulators or the government.

Let's present a simple example. A bank, say, tallies its balance sheet and capital and computes them to be $15 billion and $1 billion, respectively.  Is the $1 billion an adequate amount of capital for both ongoing operations and for a worst-case, stressed scenario? It assesses the risk of each item on the balance sheet and evaluates its overall operating activity. All activities (on and off the balance sheet) are "risk-adjusted." (In "risk adjustments," $1 million in cash or U.S. Treasury securities has much less risk than $1 million in loans to a BB-rated oil-drilling company.)

All activities (on and off the balance sheet) are then "stressed," based on market and economic scenarios presented by regulators: Unforeseen events occur, interest rates move sharply, equity and commodity markets become volatile, bank borrowers default, depositors flee, and banks have no access to new funding or new capital. When quantified precisely, what is the maximum of losses in this scenario? And what impact do they have on the capital base and the bank's ability to survive without difficulty?

In our example, suppose the bank (with regulators looking over the bank's shoulders) computes the maximum worst-case loss total to be $300 million. That leaves $700 million in post-stressed capital. The tests help decide whether that amount is still a sufficient to anchor a risk-adjusted balance sheet. Regulators determine:

(a) whether this remnant $700 million capital is satisfactory (and "passes the test"),

(b) whether it's satistfactory, but too borderline, or

(c) whether it's not satisfactory and the bank has failed the test.

If regulators determine it's (b) or (c), then remedial action will be recommended or must be taken. That usually means the bank must reduce dividends or shareholder payouts (to ensure capital won't decline) or it must raise new equity over a defined timeframe.

Recent Stress Tests

The stress tests are exercises, but regulators take them seriously and publish the results widely. Therefore, stock markets, investors, and banks collectively take this seriously.  Markets react, investors might express concern by selling shares without thought, and banks pour resouces by the hundreds of millions to ensure they pass these tests and appear at the top of industry lists of the best-capitalized banks and the banks best prepared for a crisis. (Citi's CEO Michael Corbat last year even promised to resign if Citi failed a stress test in 2015. It passed; he won't have to resign, and it was reported Citi's trading floors applauded wildly.)

In the most recent test (Mar., 2015),  results show 28 of 31 banks passed the test, but not all in a blaze of glory.  The U.S. operating entities of Deustche Bank and Santander failed.  Bank of America received an "incomplete" grade, partly because regulators want more time to review the bank's plans to reduce capital with dividend payouts and share repurchases.

On most industry scorecards or league lists, Goldman Sachs roams near the top (the top of the most profitable banks, near the top of mergers-acquisition and equity-underwriting lists, etc.). For this round of stress tests, it appears in the bottom half (although with a passing assessment), despite its prowess in just about all banking activities it engages in. But its lukewarm stress-test outcome was enough to push down its stock price a notch or two in the past week.

Markets react because there are perceptions that banks (Goldman included) have more embedded risks than previously acknowledged, that banks are vulnerable and susceptible to sharp losses at any time, and that banks won't be able to pay the same attractive dividends many investors are accustomed to.

Banks, whether they are Bank of America or Citi, aren't shy with regulators and will challenge the test results, line by line, asset category by asset category. Banks don't want outsiders to meddle with their efforts to please shareholders with predictable dividend payouts. Regulators, nonetheless, usually have the last word. In the end, the test results (and trends in how banks perform on these tests) have enormous impact, not only on how markets and investors perceive banks, but in determining banks' long-term strategies and who they want and can be.

The Impact on Returns: Inside the CFO's Office

While regulators are obsessed with capital as a cushion, banks are obsessed and anxious about whether capital is allocated properly for various operations, businesses and balance sheets.  Capital must be abundant and in excess, but it must be assigned to bank operations precisely and aptly--more than just enough, but not too much.

If a bank's business requires too much capital (in the eyes of regulators), then banks won't be able to achieve high returns or won't be able to justify the risks that imply more capital. Some won't be able to raise the capital they need or will be restricted from paying dividends in order to reach optimal capital levels.

Peek inside a bank CFO's office, and watch the staff hold heated, vibrant discussions of bank capital, not just capital related to regulatory requirements, but capital related to risks, operations, funding strategies, and economics. They debate, analyze and compute: Do we have enough? How do we allocate? How do we meet regulatory requirements with ample excess? There are capital requirements defined by Basel III regulation, defined by Dodd-Frank, defined by European regulators, and defined by Federal Reserve edicts applicable to the largest banks.

CFO offices, along with colleagues in Risk Management, must also resolve the following:

a) How do we perform the complex calculations regulators require to determine whether we have enough and do so before deadlines? (Many big banks, like Citi, hire experienced senior financial managers to perform calculations and to ensure capital is adequate everyday, not just quarterly or for stress tests.) Do we cut dividends (and by how much)?

b) Do we cancel stock repurchases to improve capital ratios and present better test results?

c) Because of limited capital, how do we decide which businesses deserve it?

d) Should we "de-leverage" the balance sheet, sell off risky assets and trading positions, and shut down designated business lines and branches to improve our capital showing?

e) And perhaps most important: With all these capital requirements and the challenge to allocate precisely, how do we generate the returns investors expect (over 10%?) on this capital?

Some regulators, academics and others argue that capital requirements and capital stress tests at banks aren't strict enough and that banks have much leeway and too much time to comply. They seem to agree that if there had been tough capital requirements and other restrictions in the mid-2000's, Bear Stearns and Lehman might have survived. (They would have survived because with more capital and capital rising to prudent amounts, they would have been able absorb eventual losses or, with the same levels of capital, they would have not beeen able to take risks and assume leverage for the capital they had.)

What Do These Tests Involve?

The tests are complex, because bank balance sheets are complex, piled with trading assets, loans of all kinds, exotic derivatives and financial instruments fluctuating in value on the ledgers of subsidiaries around the world . The tests involve many definitions or "tiers" of capital and have spawned financing structures where some liabilities can turn into capital under certain conditions or behave or appear to be capital-like (e.g., convertible debt, subordinated debt).

The principles of a stress test are straightforward, as shown in the example above. The Federal Reserve examines the consolidated bank, while other regulators may examine the specific regulated bank entity.  The consolidated balance sheet of total assets is buttressed by a current amount capital. As described, those assets are "risk-adjusted"  (based on regulatory guidelines that are influenced by historical trends and internal bank calculations and interpretations of risk).

A "stress" scenario is summarized and quantified. "Stress" implies a nightmarish market or economic scenario similar to what we observed in crises past.  Tests try, also, to project distress that isn't projected, known or accounted for. "Stress," in these tests, implies losses--sudden losses and sustained losses over a time period. A stress scenario might entail a collapse in capital markets and increased probabilities of default in bank loans (including corporate loans, credit cards, and mortgages).

Specific ratios and standards determine whether capital as a percentage of total risk-adjusted assets is sufficient or inadequate. If tests indicate capital is borderline, then regulators will insist the bank adopt a capital strategy devised by regulators.  That strategy could prevent banks from paying dividends or repurchasing stock until capital levels reach more comfortable levels (accounting also for earnings and new injections).  Regulators, now more than ever, want to ensure banks have not just for rainy days, but for storms and the unknowable lightning strike.

Dividend restrictions frustrate bank managers and boards. Historically, banks like to please shareholders with dividends and occasional share buybacks. Investors in financial institutions buy these shares after they observe multi-year practices of stable (and sometimes increasing) dividend payouts and intermittent share repurchases.  And there emerges friction, when regulators present analysis that shows banks don't have enough capital, and banks respond with a financial argument to prove they are so well-capitalized they should have discretion to pay something to shareholders each quarter.

What Are the Long-term Implications?

The rules, the tests and the occasional confrontations between bankers and regulators have long-term impact:

1) Banks have become more precise and careful in computing capital requirements.

Just a decade or two ago, capital computations might have been done by a small team with files of spreadsheets. Capital computation and managing requirements now rely on technology systems, data feeds, and armies of bank professionals to monitor where a bank stands everyday. Computation is complex, too, because big banks measure assets in amounts that hover about a trillion, not in the billions of days gone by.

2)  For banks, capital-ratio computation and risk allocation have evolved into a science relying on data management, data quality and technology, as they attempt to use capital wisely and prudently (and profitably).

They ask difficult questions with no easy answers: How do we allocate and invest capital in such a way that

(a) operating needs are fulfilled (Capital acts as cushion, but it still must fund assets and bank activity),

(b) risks are managed,

(c) regulators are pleased, while

(d) investors get the return they wanted?

And how do we allocate and invest in a way such that there is still some excess to keep regulators satisfied and assured the bank can thrive in the toughest of times?

Banks look for precise answers and avoid estimates. The stakes are too high in Washington and on Wall Street.

3)  Banks won't hesitate to exit high-risk business lines that require too much capital, because of the detrimental impact on regulatory ratios and because of the near impossibility of achieving reasonable returns (ROE) (because of high capital requirements). 

Over the past five years, banks have withdrawn from businesses partly because of  new rules (e.g., Volcker rules that bar proprietary trading), but also because a business might require too much added capital for the same level of earnings.  For this reason, banks have shut down trading desks, withdrawn from some activities, pared back in areas that use too much balance sheet, avoided risks that can't be offset by reasonable rewards, and canceled privileges it once offered clients (e.g., overdraft lines).

Banks will continue to evaluate business sectors on this basis. In assessing business activity, the earnings and projected revenue growth might exist. But if risk calculations imply capital requirements could be too onerous, the bank will avoid expansion or might even withdraw altogether.

4) Bank finance managers must always have a long-term capital plan.

Many will say they have had capital plans for decades. Yet now the capital plan will be scrutinized and opined by regulators. Banks will, too, always need a realistic, detailed strategy for how to increase the capital base when it needs to, when it can increase dividiends, and when it is appropriate to conduct stock repurchases.

A long-term plan guides the bank on when dividends should be decreased, when it must issue new shares, borrow more in long-term debt markets, or sell large stakes to institutional investors (or Warren Buffet, who purchased his large stake in Goldman Sachs during the crisis).  In its waning days, without the benefit of a plan beforehand, Bear Stearns and Lehman rushed to find new investors to inject life and capital onto wiltering balance sheets. They looked abroad, they looked for advice, and they pleaded with their counterparties and creditors to be patient. These were the days before the U.S. Treasury decided to inject billions into banks once the crisis ballooned.

Bank CEO's and CFO's continue to have arduous tasks before them.  They set objectives to promise returns on investment to shareholders in the 10-12% range. Yet the denominator in this ROE ratio is elusive and spiraling upward. Just as they implement a strategy to boost revenues and earnings (the numerator), often accompanied by new risks, they must boost the capital cushion. The ROE returns, it seems, can't seem to budge upward.

Tracy Williams

See also:

CFN:  Basel III Becoming Real, 2013
CFN:  Keeping Up:  Basel III, 2013
CFN:  Big Banks and Dreadful Downgrades, 2012
CFN:  Wells Fargo:  Sticking to What It Does Best, 2014
CFN:  Why Did Citi's CEO Resign? 2012
CFN:  This Fall's Big-Bank Thorn:  FX, 2014
CFN:  JPMorgan's Refined Regulatory Strategy, 2014

Sunday, February 22, 2015

The Survey Says

GMAC shared the results this month of a global survey of MBA graduates 
GMAC is best known to MBA students and graduates for administering the GMAT, often a formidable hurdle when applicants decide to take two years off to immerse themselves in business school.  But the organization is more than a mere exam-process vehicle.  It is engaged, for example, in in-depth research in business education.

This month, it published the results of an extensive global survey to share what business-school graduates from around the world say they obtained from having earned an MBA degree.  What did they gain in terms of compensation, productive work experiences, and promotion paths toward the top? What were the most important skills they used in business experiences? What specific skills were important at various points in a long career?

Over 12,000 respondents replied to survey questions last fall.  They included MBA alumni from over 70 schools all over the globe, most of whom attended U.S. business schools, many in familiar two-year, full-time programs. Graduates from 1959-2014 were represented. Graduates in age from 25-75 were included. GMAC asked questions that encompass a multi-decade career and asked questions relevant to those just a year away from campus. It probed to determine whether business-school knowledge was more relevant in latter career stages than in the beginning. And it asked graduates whether or not certain courses are more important in senior corporate positions than in entry roles. 

Respondents attended a wide spectrum of business schools (which means a range of MBA experiences and curricula).  They included graduates of MBA executive programs, one-year programs, regional schools, and those brand-name elite schools with 3-5 times more applicants than spots for students (including Consortium schools).  The survey, hence, drew conclusions based on the input from, say, a septugenarian MBA graduate from a local business school in the 1960's, from 1990's graduates of prominent schools in Europe or from those who just stepped from the halls of, say, Dartmouth-Tuck or UCLA-Anderson a year or two ago.

But praise the organization's comprehensive efforts.  While the MBA evolves and adapts to the times, there is common ground for most MBA graduates. There are common experiences in school, common core courses, and a common immersion into factors (markets, finance, economics) that affect business performance.  The survey results suggest, for MBA's, there is long-term value. 

Survey Shortcomings?

Like all surveys, there are flaws or short-comings, even in the GMAC survey.  Graduates who are doing well professionally or have done well over many decades may be more eager to take the time to complete a long list of questions and share their stories of promise and good fortune and report their upward-sloping compensation ranges.  As well, measurements of "success," "accomplishment" or "senior management" benchmarks are often a function of personal experiences, values and objectives.

Furthermore, the good or bad fortune of graduates is influenced by other matters besides hard work, preparation, and business-school knowledge.  Notably, an indefinite number of factors unrelated to the MBA can explain "success," including the economy, an industry's product timeline, market timing and plain ole good luck, being in the right place at right time (or being at the right place, but in the wrong time, as many 2008-10 MBA graduates would attest). And even in 2015, bias, nepotism and old-school fraternal ties might come into play. 

Summarizing the Results

Yet like many surveys, there are some intriguing trends and worthwhile messages.  Some of them are highlighted here:

1.  The more senior they rise within an organization, the more likely MBA graduates will admit they use knowledge and skills obtained from business school. 

This suggests a notion many have stated all along--that MBA learning focuses on senior leadership, senior management, and global businesses. Business schools are often praised for teaching students to become sector leaders, business heads and chiefs of finance and marketing. 

But the same schools are often chastised for not reminding new graduates that the road toward the top will be long and hard, and years of dues-paying grunt work will likely precede end-of-career success at the top of the organization chart. 

Survey results show that as business-school graduates become more accomplished over time, they more readily acknowledged that the analytical and management skills they were exposed to as MBA students helped prepare them for current, senior roles.  A public-policy, real-estate or operations-research course might seem irrelevant to a first-year associate, but the head of Asia operations will more likely say exposure to those courses long ago helped. A second-year brand manager at a major consumer-products company may not appreciate her intermediate accounting course until she becomes a business-unit head responsible for a substantial balance sheet and bottom line. 

2.  Recent MBA graduates (more than older graduates), the survey suggests, say professional and alumni networks have helped propel their careers (win coveted job offers or get early promotions). 

Such sentiments might suggest the difficulties MBA graduates of the last decade have confronted, when financial crises, recessions, and massive restructuring across many industries meant graduates had to push beyond MBA credentials to find the best opportunities. Meanwhile, more experienced MBA alumni, established in their roles, may not need to rely as much on networks and contacts.

3.  The survey concludes that more experienced MBA graduates, especially those who have advanced to the highest rungs in organizations, are more likely to feel comfortable with taking risks in their careers.

They are more willing to embrace innovation and change, more willing to be pro-active in business strategy and more tolerant regarding risks of all kinds (financial risks, market risks, business risks and social risks). 

Many inferences can be drawn from the results, although not necessarily conclusively. Some will argue it's easier to take risks early in a career, when reputations have not yet been molded and when graduates have fewer family constraints and can start, stop and transition elsewhere without significant responsibility.  

But these survey results may imply: 

(a) Those who are the types who embrace and gravitate toward risk-taking, business execution, challenge and change are more likely to advance high in their industries, firms or companies. (They advanced because they were risk-taking.)

(b) Those who have reached those highest rungs also have the experience, confidence and financial resources to be able to take risks they may not have been able to when they were strivers still seeking to show competence. (The are risk-taking now because they have advanced.)

4.  For most of those who work in conventional corporate settings, there are few timeline short cuts to "C-suite" positions (CEO, CFO, chief marketing officer, chief information officer, chief risk officer, etc.). 

Survey results say it takes about 17 years of related work experience to reach the top of an organization, business unit or sector. The average age is 48, and the survey tells us something we already know well--that the officer in their C-suite slot is likely to be male.  

5.  Large numbers of MBA graduates today don't work for mega-corporations. They (about 12% of those surveyed) are entrepreneurs or are self-employed.  MBA entrepreneurs tended to be those in technology or products.  Those self-employed tended to be consultants. Vast amounts of the survey might have been irrelevant to them. The survey, nonetheless, allowed them to opine and reflect on their MBA degrees, as well.  

Many in this group describe themselves as being slightly less risk-taking than those in C-suite positions. 

That contrasts from popular notions that entrepreneurs and owners of their companies are those with unlimited courage, willing to tackle business and financial risks boldly.  Like others, they attribute parts of their success stories to business-school learning. They take risks, they acknowledged, but they are measured, calculated risks, especially because they are singularly responsible for employees and accountable to demanding lenders and investors (venture capitalists, banks, and funding backers who want a five-year payout).

6.  About 17% of survey respondents work in finance.

They survey shows that the oldest MBA alumni worked more prominently in finance (about 20% for graduates before 1990).  For later graduates, the global MBA workforce in finance has remained flat, notwithstanding the financial debacle of the late 2000's.

MBA graduates in greater numbers are  marching into technology and consulting (17% and 12%, respectively, over the last five years).  The most notable decline is the significant decrease in recent alumni (over the past five years) choosing government and non-profit positions. 

Those in finance, as expected, are working in financial centers around the world:  Singapore, Japan, New York, and London, e.g. 

7.  As alumni, what do MBA graduates want from their alma maters?  The survey shows they don't want to be harrassed too much about how much they aren't donating to their business schools.

Meanwhile, they prefer their schools offer alumni seminars in business strategy, business analysis, and data science.  They also want continuing access to career-development offices, alumni networking events, and more contact with professors on campus. 

Of the 12,000 graduates participating in the survey, about 70% graduated within the past 15 years and 70% are from the U.S.  About 69% were male, reflecting a surprisingly woeful lack of gender balance at the MBA level (and contributing to a scarcity of women who enter the pipeline from MBA associate to sector head).

Expanding the Survey?

The GMAC survey omitted many questions and topics it could have (or should have?) covered.  No doubt it needed to present a polished, easy-to-check-the-box list of questions, one for which there are discrete answers and which would not be time-consuming for survey-challenged executives. For the sake of efficiency, it avoided topics where responses are ambivalent or deserving far more than a multiple-choice selection.

The survey, for example, didn't provide breakdowns among some segments of alumni--women and under-represented minorities, for example, although there was ample categorization based on geographies and industries.

It would have been informative, for example, to review trends and signs of success among Latino graduates or to review the MBA skills women in senior roles saw as affording them a big advantage in pushing their careers. It could have provided hard data about trends among African-Americans in corporate hierarchies and compensation. And it could have confirmed whether the pipeline to senior leadership is dwindling or promising. 

The survey, too, didn't give alumni a chance to opine on the future of MBA education:  What should business schools focus on? How should courses be taught and in what format and timeline?  What should be in a first-year student's core? How much emphasis should schools put in online offerings, international experiences, operations and management topics, ethics, politics, and psychology?

GMAC is already doing research and sharing its finding on many of these topics.  The 2014 effort was likely about getting maximum participation from the largest number of respondents possible, from all over the world and from all ages and letting the data alone speak.

Wednesday, February 11, 2015

Radio Shack's Doomsday: No Surprise

Radio Shack filed for Chapter 11, and few were surprised.
RadioShack Corp. announced its bankruptcy in Feb., 2015.  And many investors and market analysts might have responded with a collective ho-hum or quietly sighed, "So what else is new?" "Could've told you so."

The company's stores are everywhere. The brand is familiar and known. And consumers, most of whom wouldn't admit it, may have visited the store once or twice in the past year, if only to purchase batteries or spare headphones or perhaps take a peek to see what the store possibly sells nowadays.

RadioShack may have had some store traffic. Not much. It ultimately failed because it was no longer a go-to, must-stop destination.

What ultimately happened and why? Was it a wayward, flawed strategy? Did it not keep pace with modern consumer electronics marketing? Was it too slow to embrace online commerce? Was it an organization flummoxed by confusing strategies, different looks and logos and faux-hip name changes (Recall the effort to promote the company as "the Shack").

Do the financials of the company over the past decade show a predestined path to bankruptcy?

Just three years ago, the company was profitable.  Sales had topped $4 billion, and the company reported $126 million in earnings (sufficient for a fairly good 17% return on equity), admirable numbers for a company, like all its peers in the industry, emerging from a financial crisis. The company still thought it was stable enough to pay a dividend.

Then it began to hit rock bottom quickly. By late 2014, a company capable of eclipsing $100 million in annual income was headed toward losses exceeding $400 million last year.

Blame it on Apple, the iPhone, Microsoft, Google, Android, Amazon and other technical companies that created a stream of cool products and sold them in their own stores or sold them briskly online.  Radio Shack, despite renovations and redesigns, couldn't offer the same dramatic store experience you get when you enter into the kingdom of Apple.

After 2011, revenues plunged quickly, and it couldn't push down costs as quickly while consumers stopped visiting its stores and buying product off its shelves--no matter how much it continued to promote its brand and encourage loyalty.  The large branch-store network (numbering over 4,000 sites) explains why costs couldn't decline as rapidly as sales. Fixed costs. The lights still had to be turned on, whether or not stores were selling radios, smart phones, TV's, RCA connectors, or batteries. Meanwhile inventory stockpiled.

In a sense, the company bled to its eventual demise. Three years ago, if an analyst weren't familiar with its product or brand (and the immense competition it faced), he might have regarded the company's financial numbers satisfactory:  Fair profit margins, a satisfactory return for investors, token dividend payments, and a balance sheet not mired with too much debt or inadequate levels of cash.

But once the downward trend in revenues snowballed, it was a matter of time. After 2011, revenues began a 5-10% decline steadily from quarter to quarter, like a pebble tumbling down a hill. Meanwhile, costs remained about the same. Decreased demand for product explains some of the sales downturn. But some of the decline in sales is also likely due to discounts on products that weren't offset by new store traffic. One employee told Bloomberg BusinessWeek that he felt customers entered a RadioShack store only after exhausted efforts in not being able to the same product at Best Buy.

Declining revenues meant losses. Losses meant declining cash flow and eventually cash deficits.  In 2010-11, the company had reasonable cash reserves (about $500-600 million), enough for emergencies, dividends and possible reinvestments.

When the losses piled up, it had to tap the cash box to meet expenses and pay vendors and suppliers and soothe lenders and debt investors.  Cash has now dwindled to less than $50 million. There is no book equity. Meanwhile, it hasn't been able to make a dent on what had years ago been a tolerable debt load. Debt-equity ratios of about 1-to-1 climbed to an unbearable 8-to-1, entirely because the losses wiped out what was once a solid equity base.

With the company running out of cash, with debt now becoming an onerous burden, with no confidence that revenue levels will ever top $4 billion again (arguably not even $3 billion), and with companies like Apple or Best Buy (which has had its own share of difficulties) expressing no interest in buying the operation, bankruptcy was the way it had to go.

Sometimes private-equity investors have stepped into situations like this, if they reasoned they could force massive restructuring, pare down the operations, sell stores, and squeeze positive cash flow from the enterprise for a few years. But even they shied away from this ailing company.

Some investors or operating companies saw value in RadioShack in its stores network, either in the store structures themselves or the real estate.  But they remained in the background until after the bankruptcy announcement. Sprint has expressed interest in buying over 1,500 of its stores, while the company in Chapter 11 will figure out what to do with more than 1,000 other stores (after it has shut the doors of several hundred others). Others have interested in the store fronts, and franchisees will be permitted to retain stores and use the brand.

But the 94-year-old company may not disappear into retailing history.  While creditors and bankruptcy trustees mull over the financial mess, some may see continuing value in the brand. Somebody might figure out a way for it to recapture old electronics glory or deduce there is small-time niche in selling.  Franchisees, especially those abroad, could keep the brand name alive. Whatever remains could be a small niche continuing to sell batteries, trinkets, and accessories to a loyal core customer base in selected pockets.

Or with companies like Apple and Microsoft offering "amazing" products and an elaborate, theatrical in-store experience that RadioShack will never replicate, should it just liquidate and close doors forever?

Equity investors, at least the old ones, will likely be wiped out. (The stock still trades, but no longer on the New York Stock Exchange and now over the counter.) If investors, lenders and trustees permit an orderly sell of assets, those who hold debt might have an opportunity to get satisfactory payouts, something better than nothing.

Blame it on bad management, bad strategy, or the misguided courage it had to dare to compete with the bigger boys. Some will say let's applaud RadioShack for lasting as long as it did.

Tracy Williams

See also:
CFN:  Who's Betting on Blackberry? 2013
CFN:  What Happened at JCPenney? 2013
CFN:  MFGlobal:  Too Small to Save, 2011
CFN:  Dark Days at Knight Capital, 2012

Thursday, January 29, 2015

Is Shake Shack Worth a Half-Billion?

Long lines are commonplace at Shake Shack
Those who argue passionately about their burgers say it's an East Coast-West Coast thing.

Californians and others west of the Rockies boast about their In-n-Out burgers, small bundles of beef sold at reasonable prices with locations darted up and down the Pacific line.  New Yorkers along the I-95 corridor (and others in far-away places like Dubai) brag about Shake Shack, an expensive treat that most say is worth every bite, even if every morsel is worth about a dollar. (Somewhere in between are Five Guys and Smashburger fans, those who argue these burgers offer Shack quality at about three-quarters the price.)

Shake Shack, the growing burger chain started by successful restaurant entrepreneur Danny Meyer in New York, is about to go public.  The company is owned in part by Meyer's restaurant holding company and by private-equity investors. For much of its 13-year history, Meyer insisted the company would expand in a slow, disciplined way.  And Shake Shack did.  For years, Shake Shack burgers were known among an in-the-know crowd ready and willing to pay more for quality, familiar with the actual address of those few locations that sold the meal-time treat.

Now the Shack has opted to go public, issue new shares on the NYSE and raise about $100 million in its offering.  Meyer's team has a 20%-plus ownership, and like many entrepreneurs of our time, has endorsed the company issuing separate voting shares (Class B stock) that will permit him to maintain a controlling interest (in the way Mark Zuckerberg continues to call the shots as a minority shareholder at Facebook). Investment bankers from Morgan Stanley and JPMorgan are valuing the company between $570-670 million.

Financial analysts who follow the food industry like to categorize Shake Shack into the "fast-casual" or "better burger (expensive burger)" sector.  Many say Shake Shack competes in affluent markets, vying for customers willing to spend more than $20/person for a fast-food experience. Chipotle is mentioned often as a competitor.

Some conclude Shake Shack doesn't compete with McDonald's or Burger King, although they all peddle similar menus (burgers, fries, shakes, etc.). Shack fans contend simple menus and stellar food quality attract them to Shack sites. (McDonald's, meanwhile, must grapple with its own problems. The company just announced deplorable 2014 results, continues to tinker with menus and prices, and replaced its CEO Don Thompson in a sudden, late-January announcement.)

Many questions pop up; some will be answered in the weeks to come, as the shares storm out the market gates in late January and start trading actively in the first quarter, 2015.

1.  Why would the company change course, launch a more aggressive expansion plan, and decide to plant its brand in locations around the country and world?

Meyer and his private-equity owners are likely pushing for sustained growth, encouraged by the accelerating popularity of the product and brand. They might have concluded that now is the time to take advantage of such momentum.

With emphasis on quality, with little emphasis on price, the company established a cult-like following in and around Manhattan.  New Yorkers are familiar with Shake Shack's long, snaking lines that  extend outside a store onto the streets, around corners. Impatient New Yorkers have been patient about standing in cold weather to pay double-digits for burgers. In early years, some were known to have driven 40 miles or more to buy the burgers in Westport, Conn.  There are now seven Shacks in New York, including locations in Grand Central Terminal and at Citifield.

Meyer was prudent, careful, proceeding cautiously, as the market and demand for product grew.  The company's board may have concluded that overall growth will not necessarily come from same-store sales, but from the rapid increase in the number of stores.

The company has 63 sites, 34 in the U.S., and a presence in nine countries. Total sales in 2014, when audits are done, will likely reach $100 million--a 21 percent increase. 

The industry assesses food chains by a concept, "AUV," average unit volume per store.  In the New York area, its stores are generating $7 million in sales/year. Non-New York stores are generating sales less than half that. Management believes (and the industry agrees) that same-store sales will likely flatten out (or sag or even decline in some regions). Hence, to increase earnings, the company must add new stores. To add new stores, the company must (a) raise more in private capital (not something current investor-owners will want to accept), (b) raise more debt, (c) increase the number of franchisees (something it hasn't done willingly), or (d) raise funds by going public. It chose (d).

In its IPO, the company will raise about $90-100 million, sufficient enough to build new restaurants in strategic locations.  Industry experts are comfortable Shake Shack will take care not to build new sites too close to others to avoid restaurant cannibalization. To achieve the kind of sales growth it has experienced the past few years, the company can rely on new sales from new sites and assume old sites will maintain the same level of activity.

It could also increase prices, but even with its loyal, well-to-do consumer base, the company can't risk daring to sell a $10 hamburger at prices $12-15, at least not yet. Microeconomics will alert company managers that price increases could cause some customers to run away, even if some analysts say Shake Shack's customer base is not price sensitive ("inelastic demand," professors would say).

Some say the IPO is rationalized in part by Meyer's objective to cash out, boost or "monetize" his holdings. If all goes right, some reports say his stake will top $100 million after the IPO. But he could have "monetized" his holdings, as a private company, just as easily by selling his stake in private markets.

2.  Is now the right time to go public?

Its investment-bank advisers have coached the company's board.  Once Shake Shack made the strategic decision to go public, banks counseled the company on price, timing and execution.  Last year the new-issue market was bustling, as equity markets continued to ride a post-crisis momentum. There have been rollicking, upsetting interludes every other month in stocks, such as the one we are enduring this month.  That would discourage many IPO debuts or sideline them until markets breathe fresh air again.

If the current volatility can be pinpointed by other factors (political uncertainty abroad, a few sluggish corporate earnings announcements, the impact of oil prices on big players in the energy industry, etc.) then bankers and the company's board will likely proceed with confidence.

3.  Is the company worth more than a half-billion?

That's the looming question of the moment.  The company and its bank advisers decided what amount to raise, decided to issue equity (instead of debt), and decided to go public.  Then it needed to determine the market value of the company, a value it will tweak, recalculate and reassess right until the shares are issued.

Market value is based on many factors--revenue and earnings growth, actual cash flow, re-investments to support planned growth, risks and uncertainties of all kinds, and investors' expectations of a return on equity.

Value is also based, in part, on supply and demand for new shares.  Bank syndication units will have already canvassed the market, investors, traders, and favorite client accounts.  Sometimes extraordinary demand may prop up the value, boost it higher than it deserves to be, based on investor perceptions.

Preliminary assessments indicate the company could be valued as high as $670 million. (The stock will launch in the $14-19/share range with some expected "pop" in value in the first week; it will then likely settle into a more realistic range thereafter.) What does that imply for a company with $100 million revenues and reported operating-profit margins of about 20-30%.

Let's assume these numbers imply the company will generate cash from current operations (before taxes and re-investments) of about $20 million in 2015.  Financial wizards can deploy models to infer what growth rates lead to a $600 million-plus valuation.  Rough calculations could show that the current valuation assumes the company will grow cash from operations at a rate of about 8-10%/year indefinitely.

Shake Shack exceeded such growth rates the past few years, as popularity took off, along with consumers' willingness to pay more for a quality burger.  Its track record suggests the company has had a strategy of modest, careful expansion and will achieve growth at least at 8-10% levels over the next few years. This also assumes the company will be able to manage costs efficiently, including, for example, the cost of beef.  (One less-than-confident financial analyst thinks the company is too vulnerable to rising beef costs, because it relies on too few suppliers.)

But what about long-term growth--especially if there is a perceived limit to how high it can price its burgers, a realistic limit to how much in sales one site can generate, and a plausible limit to how many Shake Shack locations the world can digest?

A midtown Manhattan store, already generating volume of about $7 million/year with lines that spill onto the avenues, couldn't possibly increase revenues unless the store expands (not likely) or increases prices (too much of a risk, when there is a Five Guys two blocks away).

But the current valuation implies growth will continue at a 10%-plus/year pace far beyond the next five years. Some analytical reports suggest the company might be aiming for as many as 450 sites in the long term to ensure such growth.

4.  Is the stock a good buy, once the IPO attention wears down?

That will depend on an investor's horizon--short term, medium-term or long term. It will also depend on the analyst or investor's understanding of markets, trends, fads, and competition.

Like Facebook's IPO launch, Shake Shack's opening days could be characterized by some intermittent stumbling out the gates (not  due to technical glitches, but perhaps by some investors lumping its performance with the same struggles of McDonald's or with the way Burger King has bounced from owner to owner). But once it settles into a groove, the stock could be a good 1-2-year buy, capitalizing on growth momentum of the past two years. But long-term questions will loom.

5.   Will the phenomenon (or fad?) dwindle away? Will consumers move on to something else or flee to the next new burger thing? 

Consumer behavior is always fleeting, often unpredictable. But consumers can be loyal to a brand or taste, in this case. If company strategy sticks to prudent expansion and avoids tampering with what has worked well in its restaurants, then there may still be long lines winding around its store corners 10 years from now.

By most corporate-finance standards, the Shake Shack IPO is not gigantic. A modest deal, small by many standards, but one that will garner some attention.  We aren't talking about a Facebook-size offering (billions and billions).

It comes at a pivotal point in Shake Shack's timeline.  The IPO and the periods thereafter could determine whether the company will have expanded too quickly for its market niche or whether the company will have begun to knock down burger-market boundaries and become a quality-burger brand name on both Coasts.

Tracy Williams

See also:

CFN: Facebook IPO: What Went Wrong? 2012
CFN:  Twitter Takes Its Turn with an IPO, 2013
CFN:  Alibaba's IPO in U.S. Territory, 2014
CFN:  Merger Mania, 2013

Sunday, January 18, 2015

On Campus: Always Adapting

Emory Dean Erika James
Business schools evolve and adjust to a rapidly changing business environment.  They adapt and overhaul to prepare another generation of managers, leaders, entrepreneurs, investors, advisers, consultants, teachers and bankers.

Some schools turn themselves inside out to make themselves relevant to the complexities of business today. Most align with other programs (medicine, journalism, engineering and law, e.g.) and consider altering the structure and timetable of degree offerings. Many now require overseas study (usually in the student's second year) and combine courses like finance, marketing and operations to show prospective employers that MBA graduates have depth across disciplines and functions. Sure, they continue to have required content. Students cannot avoid a core curriculum of economics, statistics, marketing, accounting, operations, policy, and finance.

Yet today's MBA students must squeeze in coursework in ethics, entrepreneurship, digital advertising, risk management, social media, derivatives markets, private equity, crisis management and global politics. Business schools offer courses in these areas, but must support scholarship and academic research in the same by hiring the right professors and organizing rigorous curricula.

It's all inevitable. It's normal for business schools to introduce new disciplines, programs and initiatives every year to keep up and stay relevant.  The sample below tells what's going on at many Consortium schools in early 2015.

David Thomas, dean of the Consortium's newest school Georgetown-McDonough, told an audience at a special forum led by Washington, D.C.-area business schools last fall that MBA students today are not going to school to select employers. This post-crisis period is characterized by electronic commerce, digital communications, and innovation.  New industries, products and start-ups emerge every week.

Students, too, still haven't forgotten about how the predictable, safe careers paths of their elders were derailed in the late 2000's. MBA graduates, Thomas said, are choosing "meaning and purpose" in what they want to do. Sometimes what they want to do is not doing what they can to secure a spot at Morgan Stanley or McKinsey.

Last fall, the school hosted a case competition for students to find business solutions for non-profit 
organizations.  Students made presentations on behalf of a foundation that supports families in Nicaragua and made recommendations for improvements in health care and education.

Like many top schools, Georgetown encourages and helps arrange international experience.  It sponsors a "Global Business Experience" program, where students are assigned to a company in a foreign "client" country and recommend solutions in finance, operations and organization structure. 

Students at Dartmouth-Tuck late last year formed a consulting team that worked with the U.S. Olympics Committee to assist in Boston's bid to be chosen as the site of the 2024 Olympic Games. Their project wasn't an academic exercise; it was a real business case, requiring analysis, study, recommendations, implementation and presentation. Boston is still in the running, and the Tuck team's contribution could make a long-term difference. 

The entrepreneurial bug has bitten everywhere, not just among venture capitalists on the West Coast. Major business schools have had programs and courses in entrepreneurship for decades now. For years, they offered a handful of courses, and there were always related student clubs and forums that invited prominent entrepreneurs.

Today, entrepreneurship (via academic study, special institutes, coursework, and student groups) is a major concentration at most schools. They offer a long slate of courses and invite successful alumni  regularly to explain their start-up stories to eager students. Students devote time to start-up ideas or legitimate business plans, and schools arrange for venture funding, sponsor competitions, and organize alumni networks to help students take signficant steps to execute their plans.

USC-Marshall now offers a master's degree in entrepreneurship and innovation. Cornell-Johnson sponsors its version of the "Shark Tank" television program, where students present their ideas and detailed plans to panels of professionals.  (A "Shark Tank" on its campus is scheduled for Feb. 15.)

At the senior levels and in diversity, business schools have begun to walk the walk, while talking the talk.  Some Consortium schools have appointed deans who are women or from under-represented minority groups. The dean at Georgetown (Thomas), for example, is African-American. Emory-Goizueta's dean, Erika James, who starts her second year in 2015, is an African-American woman. 

James, for many years, held senior positions at another Consortium school, Virginia-Darden, before Emory offered her the deanship.  She also has a Ph.D. in organization psychology at yet another Consortium school, Michigan-Ross.

En route to Emory, she and others have done interesting research on women as CEO's of major companies.  They examined what happens to the stock price of a public company when it announces it has appointed a woman CEO.  Research shows that in many cases (all other factors being controlled or acknowledged), the stock price declines.  They tried to explain the cause. Often, the decline might be caused by the market's lack of confidence in the selection or by a perception that investors force women heads to prove themselves before share prices catch up. 

James arrived in Atlanta just in time to help shepherd Emory to the top of a list of schools with the highest rates of offers among MBA graduates last year. Both Emory and Consortium school Dartmouth-Tuck reported offering rates of 98% (through August, for a recent graduating class), along with graduates of Chicago and Penn-Wharton.  Offering rates, the statistics themselves, imply many factors could be in play:  

(a) The schools are doing exceptional jobs in helping graduates find employment by attracting major recruiters and preparing students for the process.

(b) The schools are in regions or have relationships with companies, sponsors, or firms where there are historic pipelines to financially stable employers. (General Motors and General Mills, for example, will consistently turn to Michigan-Ross when it needs to hire financial-management MBA's. Coca-Cola will likely approach Emory year after year to recruit MBA's in marketing and international management, especially since vast contributions of Coca-Cola stock explain much of the university's high endowment.)

(c) Yet offering rates at some schools will be affected by a portion of students who are pursuing non-traditional careers or are contemplating start-ups or small companies, where offers are not timely or formal or offers don't exist. A few graduating students withdraw from the process, while exploring a different kind of opportunity.

Michigan-Ross, in the past year or so, has introduced new research studies called "Positive Business" and "Open-book Finance," based on recent work from some professors.  Open-book finance would aligns the finance function with business-unit management and human resources.  It encourages companies to share details of corporate performance (revenues, costs, profits, profit objectives, growth goals, etc.) with all employees, not just business-unit managers or those working in finance.

Researchers indicate employees are more productive and more committed to job functions when they understand their impact on bottom-line performance and understand what the company must do to reach revenue-profit goals. 

Last month, an opening of relations between the U.S. and Cuba was proclaimed in headlines everywhere. Now even business schools are following the coattails of the major news story. Virginia-Darden didn't wait to find a way for MBA students to have a business experience in the country . This month, 26 second-year students spent a week in Havana studying the culture, politics and history, monitoring a training center for entrepreneurs and visiting other small businesses.

Financial engineering and quantitative finance are disciplines not far removed from the MBA core. In most cases, they are divisions within a business school, an attachment to or an advanced offering in the finance discipline.  Students can take related courses or earn a master's degree in quantitative finance.  Some MBA graduates in years past have specialized in quantitative finance or earned separate degrees. 

Carnegie Mellon-Tepper is widely known to have one of the best programs in quantitative finance. At the business school, students can earn a master's in computational finance. Many of them are preparing for careers in asset management, hedge funds, capital markets and financial products, or academic careers in finance. 

At Tepper, students take familiar business-school courses in accounting and economics, but veer immediately into coursework that will include options pricing, derivatives, risk management, arbitrage, data analytics, asset pricing, and advanced statistics. Tepper likes to distinguish itself from other schools with this special offering and permits MBA students with some interest in these courses to pursue them, if they wish.

Yale School Management ("SOM") moved into its sparkling new quarters, Evans Hall, a year ago, after vowing to follow other schools in building architecturally appealing, state-of-the-art facilities. Yale's large glass structure with blue hues and adorable courtyards is already a popular destination for other schools on campus by hosting events, symposia and conferences. You won't hear anymore a Yale SOM student disparage about having to scamper from old building to old building to attend classes or participate in case-study groups.

In the past year, Yale MBA students launched a group, "RevYale," that encourages MBA students to act as mentors to undergraduate students, particularly those that lead student groups and those interested in starting organizations on campus.  More experienced MBA students act as partners and mentors to undergraduates, whether they are interested in art, music, politics, sciences, or business.

The Yale MBA students provide guidance in leadership, finance, and organization management, based on their experiences and studies. The undergraduates get to have an MBA "big brother or sister" in their midst and learn something about the value of graduate business education. Yale SOM gets to steer smart minds toward an eventual Yale MBA.

Tracy Williams

Tuesday, January 6, 2015

MBA's in Finance: 2015 Opportunities

Now that we've eased into 2015 and had a chance to review 2014 in finance, what opportunities lie ahead for finance professionals, particularly MBA students in finance or recent graduates?

For a moment, at least, let's disregard the uncertainty and apparent confusion running rampant in capital markets in the early days of January.  The outlook is still not as bleak as it sometimes feels.

These aren't tumultuous times, and few, if anybody, will describe 2014 as a bookend to a crisis period.  We still have those sporadic of bouts of upsetting volatility, marked by swoons of uncertainty and inexplicable "corrections."  And nobody dares say we are experiencing the b-word:  "boom."  For professionals in finance, the industry is undergoing a decade-long transformation, a constant re-engineering in some ways with the 2008-10 recession a plaguing memory. Financial institutions proceed on course to execute a daunting, complex game plan in the aftermath. 

Back in the early-mid 2000's, an MBA graduate in finance charting a career (especially an MBA from a "brand" school, one that is popular among big-institution recruiters) might have tapped the default button and headed into investment banking, ready to embark on a career in corporate finance, merger advice or trading an assortment of exotic financial instruments. 

A decade later, an MBA graduate in finance is less likely to tap a default button. A default button may not even exist. Those interested in finance are more apt to evaluate multiple offers across industry lines and weigh options carefully.

Compensation, location, prestige and functional titles might have ruled years ago. Today, MBA graduates will likely have realistic, reasonable criteria.  Compensation and location still count for much, but lifestyle, job flexibility, job function, job growth, career horizon, diversity, and company culture count for a lot, too.  It's easier now for graduates from top schools to turn down offers from Goldman Sachs or Morgan Stanley, if an offer from a smaller, lesser-known organization matches the criteria much better. 

Investment Banking

Opportunities in investment banking depend on the business environment and macro-economics, but they also depend on the financial institution, the bank that is determined to devote resources, times and talent or the bank that is willing to devote capital (to fund lending and investing) to support an all-out effort.

UBS, for example, announced a year ago it was scaling back in investment banking in the U.S. It decided it couldn't compete against other bulge-bracket firms or reasoned it could never generate appropriate revenues and returns or rise to the top of league tables.  It scaled back, but the bank hasn't disappeared from the deal table. It still appears in top-15 rankings in banking fees or deals done.

Opportunities also depend on capital markets or client industries. Banking activity (including equity and debt underwriting and corporate lending) continues to flourish in banking sectors in health care, financial institutions, media and telecommunications.

Across the board, IPO activity is up; improved equity markets kept equity bankers busy in 2014 with new and add-on offerings.  Debt lending and underwriting hasn't sagged, as low interest rates encourage new debt and debt refinancings.

As experienced bankers know too well, when lulls in activity occur, banks tend to shut down, shrink or withdraw from certain industry sectors quickly and often without much warning.

The deal announcements, deal statistics and backlog suggest these might be bustling times in investment banking, although they don't hearken back to explosive periods of the mid-2000's or late 1990's. For the moment, banks worry more these days about attracting top-notch talent (at all levels) than they might about deal flow and demand for services.

Boutique Investment Banking

"Boutique" banking is fashionable now, as it has been intermittently for the past 25 years.  In the early 1990's, names such as Alex Brown, Hambrecht & Quist, and Montgomery Secruities were fashionable names in boutique banking, which is often described as niche banking for niche industries or for start-up and new companies.  Those names disappeared when they were devoured by bigger commercial banks, which wanted to grab the boutiques' expertise, their client lists and top bankers.

Today, Moelis, Weinberg & Perella, and Evercore are top boutique banks. They tend to hire experienced professionals and won't be seen on most MBA campuses. They are thriving and have become legitimate threats to the big banks (in certain specialties and with certain clients). Unless they find ways to survive in the long term (like Lazard, Jefferies, or Greenhill), they are always candidates to be absorbed by large banks trying to fill gaps in talent.

One pattern continues from the 1980's (when Wasserstein Perella was founded by bankers from what was then First Boston).  There will always be groups of top bankers ("star" bankers, the media call them) at large firms who decide they can function better and earn more by going out on their own, by starting their own boutiques.  Hence, it's not unusual, whether it's 1989 or 2014, for a prominent industry banker at, say, Morgan Stanley or Goldman Sachs to decide to leave the industry, only to re-emerge months or a year later with an announcement forming his or her own boutique with others promising to move over eventually. 

Corporate Finance (Non-financial Institutions)

When large corporations do well or are confident that revenues and profits will rise in the periods to come, their finance and treasury units must hustle to support growing balance sheets, business expansion and capital needs.  Many, of course, hire investment bankers for some strategic advice and market intelligence, but most have in-house finance professionals who coordinate related activity and who must manage the specific funding needs and funding costs of business units.

Larger, more established companies will prefer to ponder financial and corporate strategy and make finance decisions themselves, long before they hire investment bankers to manage the mechanics of a prospective transaction (debt offering, e.g.).

Large companies still growing and expanding and still performing well will always have internal corporate-finance opportunities.  

Corporate Banking

Banks, especially the large ones, the ones that have been labeled "systemically important" enough to impose risk on the financial system if they falter, are stifled by growing capital requirements and limited opportunities to make money from lucrative trading.  Many are resorting (or retreating?) to bread-and-butter banking activities:  corporate lending, cash management, custody, securities process, e.g.  Wells Fargo is a prominent example.

Others like JPMorgan Chase and Citi haven't shredded investment banking prowess, but they have a greater appreciation for the value of corporate banking. Corporate banking often results in more stable revenue streams and more consistent returns on equity. A senior-management team at a major bank may conclude that generating 12% returns on capital year after year with the same reliable corporate clients is a realistic, reachable goal. Generating 10% returns in trading might be impossible, given the current regulatory climate. Over the past four or five years, these banks and others (Wells Fargo and Bank of America, etc.) have re-emphasized their corporate-banking roots and heritage.

Opportunities exist, and MBA graduates will be expected to hit the road to cultivate client activity right away.  Many banks, however, have faltered in communicating the story (and important role) of corporate banking well on cmpus or haven't aggressively recruited the best graduates. 

Mergers and Acquisitions

M&A is hot right now.  Last year was one of the best years (with over $3 trillion in deals recorded globally) since 2007.  The leading investment banks were the familiar names:  Goldman Sachs, JPMorgan Chase, Bank of America-Merrill, and Morgan Stanley (with significant, notable activity from boutiques).  Banks advised on big deals among pharmaceuticals, financial institutions, oil and gas companies, and health-care companies.

Activist shareholders are swarming around companies, preaching to board members about the values of their prospective deals.  Large companies, swamped with cash generated from a few years of earnings but too tentative and afraid to make new investments, have once again gained confidence to consider growth and expansion (via acquisitions).

Banks are swamped with deal flow and need a stream of analysts and associates to devote their lives to get deals done within tight deadlines or to help senior bankers present their ideas to company CFO's and CEO's for deals on the table or in concept.

But M&A activity and trends have always fluctuated in frightening ways.  Deal flow can reach extraordinary peaks and then, just a quarter later, can fall into an abyss with an eye blink.  Banks gear up, ramp up for peak flow and then suddenly shrink, often at the expense of junior professionals.

The best banks always maintain a core of expert bankers, even in the toughest times, always ready to pitch the next transaction or convince a company CEO that the best way out of a rut is a corporate combination or a sale of an important subsidiary.

Private Wealth Management and Asset Management

With strenuous (and stressful?) capital requirements, banks will continue to emphasize businesses that generate smooth income streams and that don't require capital support based on calculations of risk. For strong performance, private banking and asset management depend almost entirely on client activity, client demand for services and investment products, and a bank's ability to attract and hold onto client assets ("stickiness," some call it).  If they achieve all of the above for most of the time, banks figure they can generate 12-15% returns.

Such an attractive proposition means banks (from Goldman Sachs to UBS) want to keep the expansion going in these areas (domestically and abroad) and have implemented formal recruiting programs to attract top talent and MBA graduates from brand-name schools.

These areas offer a different kind of experience in banking. But even new bankers will be pressured to attract new clients and more client assets--year after year.  

Financial Regulation

Financial regulation and the enormous reams of new laws and new rules mean enormous amounts of information-gathering, reporting, compliance, and follow-up.  Banks, broker/dealers and even funds and insurance companies (including those like AIG designated as "systemically important") don't want to be perceived or seen as shrugging off rules.  It's a new day, and while banks complain (and even work to roll back rules changes in the way some did in late 2014 with Dodd-Frank and derivatives regulation), they all take compliance seriously now.

They now boast about the vigorous commitment they have made to comply with rules and reporting deadlines. (Steven A. Cohen's newly organized hedge fund, Point72, the descendant of SAC Capital, boasts of having hired former SEC officials to ensure the new fund, Third Point all hints of insider trading.)

This also means significant opportunities in regulatory compliance at financial institutions, which face internal challenges of trying to boost the reputation and attractiveness of what had been one of the least glamorous (and sometimes one of the most under-paid) roles.

Few, if any, financial institutions appear on the campuses of top business schools to recruit hard for roles in compliance. They don't bother and often prefer to recruit lawyers, accountants, or those who've worked in similar positions at other banks.  But the door is wide open for those raise their hands and for those who want to use the experience as a platform to understand the many activities of a bank.

Most agree, however, that no matter how important the role is and no matter how much a bank is willing to support the role and pay handsome compensation, it's often hard to transfer from compliance roles into the trenches of real business activity (banking, investing, lending, trading and research). 

Venture Capital

There actually was a time when major financial institutions like JPMorgan and Morgan Stanley invested some of their capital in new ventures.  Related risks, new regulation and capital requirements discourage that.

Venture capital, while just as lucrative and prominent as ever, is a closed business activity. We know who the leading firms are, know where they reside, and know the deals they do. But there's no easy way to be recruited.  In recent years, many of the large and influential firms in venture capital were started by entrepreneurs themselves who retired from starting and running businesses after they amassed extraordinary wealth. Venture-capital firms have sprouted in Silicon Valley and even in areas a red-eye jet ride from San Francisco (New York, e.g.).

Many of the founders and leaders of venture firms are MBA graduates themselves (from such schools as Stanford, Wharton and Columbia and Consortium schools such as NYU-Stern, Dartmouth-Tuck and others). Venture-capital firms don't broadcast employment opportunities widely and loudly. Their approach is hush-hush, often a tap on the shoulder. Theirs is a stealth, network-oriented form of recruiting.

The firms are flush with capital, ready to fund new companies, as angel investors or in rounds two, three or four.  They need analytical and research support, not to mention senior, experienced professionals with relationships and keen understanding of new products and markets.  How to ferret and unearth any opportunity to get through the door of Kleiner Perkins or some of the other new firms (Andreessen Horowitz, e.g.) has always been a daunting challenge for business-school graduates who want to work in this sector. 

Private Equity

Private equity is not experiencing a boom.  Many firms are digging out from debilitating investments from the recession years, which means restructuring portfolio companies is taking longer than expected and taking them away from hunting down new investments.

Other firms are preparing for better times ahead with improved prospects in the economy. The industry is much about value investing--finding opportunities (established companies that are under-valued or are under-appreciated or require management overhaul) and turning them into growth stories over a 5-7-year period.

Private-equity firms exist in niches, cover most industries, and are big and small.  Many hire MBA graduates, but not as formally and predictably as large financial institutions.  While some of these firms are mired in solving problems in the past, many are hopeful about the years to come and will likely reach out for professional support in certain pockets.

Hedge Funds

All is sour with hedge funds. Yes, some like Cohen's new (family) fund reports healthy returns in 2014, at least from the bits and pieces of information that trickle out about its performance. Activist funds, the funds that chase down corporate boards and shareholders to force them to revamp business strategy or restructure their balance sheets, did well. In aggregate, however, the track record for investing in hedge funds the past couple of years is dismal (2-3% gains when overall equity markets have done much better).

It's not that funds are losing money; it's the scorn they receive (and deserve?) for requiring investors to pay fees on top of fees (management fees, performance-sharing fees, etc.) for mediocre results. While many funds have shut down in 2013-14, opportunities will exist at the best-performing funds and at long-established funds.

Hedge funds and private-equity firms in the past decade have resorted to a round-about way of recruiting.  They tend to permit bulge-bracket banks to dominate campus recruiting and hire and train some of the best graduates.  After those recruits (working as analysts or MBA associates) have gone through training and have mastered spreadsheets, financial analysis, and market analysis (about 2-3 years), they sweep through surreptitiously and pluck analysts and associates from Barclays, UBS, Goldman Sachs, RBC Capital, Morgan Stanley, etc. On Wall Street, it's a rite of passage for analysts to get that first call from a head-hunter representing a fund, less than a year on the job.

They usually promise a swifter rise up the promotion ladder, better compensation, a different kind of experience, and sometimes a more sane lifestyle. 

Fixed-income Trading, Investing, and Research

For those interested in bond trading (whether at banks, dealers or funds), these might be the worst of times.  A number of factors are to blame.  First, banks haven't made money from fixed-income activities for the past year or two for several reasons (low activity, lack of the right kind of interest-rate volatility, regulatory restrictions on trading, and the threat of low margins from the oncoming onslaught of electronic dealing).

Second, banks and the entire investing populace had been preparing for an upsurge of interest rates, which hasn't occurred yet, but which was supposed to cause a nightmare of losses for those who dared to hold substantial fixed-income securities on the balance sheet.

Third, experts and experienced traders know fixed-income markets are transitioning into electronic trading in the way equity trading has led the way the past decade.  For traders, high margins from arranging client trades will disappear; for banks, unless the bond is exotic, complex or unexplainable, they won't need to populate trading desks with armies of humans (brokers and traders).  If the bonds are exotic and unexplainable and if the institution is regulated, regulators will frown on the activity and impose tough capital requirements. And the public will declare banks are using deposits to finance the trading of those unexplainable assets.

MBA graduates interested in fixed-income sectors should be forewarned.

Risk Management

Financial institutions large and small have expanded their risk-management units steadily in the past five years. Risk management has marched to the front row of importance at major financial institutions.

It now encompasses far more than it used to. Decades ago, risk management was mostly about corporate-lending and trading risks. Today, risk management is enmeshed in every activity in the financial institution and now encompasses regulation, reputation, compliance and financial management.

Most banks are still tweaking the risk-management model (how to structure the risk organization, where to put personnel, how to define roles and authorities, and how to capture all forms of risk from credit risk to market risk, liquidity risk, documentaition risk and operations risk, etc.).

While they mold the right model, many banks struggle with determining how to attract competent people into risk-management roles, how to recruit talented entry-level professionals, and how to design a promising career path.

When financial-institution recruiters promote themselves in lavish ways on campus, they are groping to figure out how to sell an MBA student in finance on an exciting, challenging role in risk management. Some banks won't try to recruit at top business schools.  Other banks recruit for risk management internally. Most banks try to convince strong performers on the business lines to transfer into risk management (and many do).

Notwithstanding recruiting issues and challenges, its visibility and importance grow year after year; for recent MBA graduates, it could be the best way to crack the front doors at some prominent institutions without having to settle for an under-cover position far from the front lines.

Electronic Dealers, Exchanges

Capital markets in all asset classes (equities, corporate bonds, government bonds, municipal bonds, commodities, options, derivatives, swaps and currencies) are headed in the direction of  electronic markets. Trades are executed where computers communicate with each other while humans preside on the sidelines. They observe to make sure algorithms run correctly, instructions are input without error, and all market scenarios are covered or hedged.

Many argue there is room for humans on the trading floor (for odd-lot activity, for non-standard trades, for new products, and even for clients who stubbornly prefer to interact with a human voice). But the numbers won't stack up.

The guiding hand of humans won't disappear.  Professionals with keen understanding of markets, regulation, trading rules, and risks need to be present to operate (and implement software for) electronic markets, electronic exchanges, electronic trading schemes, and electronic match-making systems. (These include, for example, such firms as Markit, ICE, Nasdaq, TradeWeb, Knight Capital, and Liquidnet.)

Therein lie opportunities for recent graduates who understand markets and financial products and who understand what can happen when markets collapse, markets become inactive, markets are crushed by pressures from participants, and market pricing spirals out of control.  Opportunities exist for those who will know what to do in these scenarios.


The diversity picture is better than it was immediately after the crisis, when diversity initiatives were shelved while banks struggled to survive, literally. Financial institutions, across the board, have renewed commitments to hire under-represented minorities and women. Even venture-capital and private-equity firms, which have had atrocious track records, have promised they will do better.

However, some of the same issues continue to plague most of them. Banks and investment firms recruit, attract and hire minorities and women and pave a way for them to work in high-profile, challenging tracks.

But they can't keep them (in significant numbers).  Many opt out, and many become discouraged by the suffocating dog-eat-dog culture. Others are disappointed that financial institutions fail to fulfill promises related to development and work-life balance (issues that all younger employees, not just minorities and women, have with big banks).

Many don't see mentors (senior managers) like themselves or can't find sponsors who can help them get to the next steps.  Some cling and thrive. Others depart and go where they'll be more comfortable.

Meanwhile, banks and institutions worry there is no pipeline to ensure the ranks are diverse among senior traders and bankers and sector heads. So they continue recruiting efforts to "maintain the numbers" and replenish the desks and cubicles vacated by others.

Transformation, regulation, electronic trading and waiting for interest rates to turn upward (after markets ponder the meaning of sinking oil prices). That defines the opening days of 2015. Somewhere around and in between, there really are scattered opportunities.

Tracy Williams