“Cash and Big Macs,” my sister said after brief consideration.
“I can’t tell if you’re fucking with me or not,” I responded.
“Tell me the right answer then, asshole,” she said.
“The two types of capital a company, like McDonald’s in this case, can raise are debt and equity. You can only eat Big Macs.” I enjoyed my weekly conversations with my sister during my two years at business school. While my fellow classmates, many of whom had worked in finance for a handful of years before business school, were insulted by the pace of our corporate finance class, I was learning new things every day and relished the opportunity to impart my newly acquired wisdom to my older sister in a manner equal parts informative and condescending.
A significant function of bulge-bracket banks, which have their own balance sheets,16 is to help companies raise debt and equity to help finance things like working capital, acquisitions, and other growth opportunities. The cost of debt is typically lower than the cost of equity, meaning that companies will prefer to seek debt financing rather than equity financing. Likewise, the premise behind leveraged buyouts, made famous by private equity companies, is to find businesses that generate steady cash flow from their operations, and use the cash to service debt (make interest payments). Using a significant amount of leverage (and little equity), the PE firm purchases the business, makes some sort of operational improvement, thus increasing margins, then sells the business in three to five years. The business can sustain the leverage, since it generates enough cash to make the interest payments on its debt. Additionally, if all goes to plan, the high leverage amplifies the equity returns that the private equity firm realizes after five years. Bored yet?
At its founding in 1870 in Berlin, Deutsche Bank’s statute laid out that its primary objective was to serve as a specialist bank, facilitating trade relations among Germany, other European countries, and overseas markets. Like any other corporation that survived both World Wars (including ties to Hitler) and depressions, Deutsche Bank’s role and credo evolved over the next century. The bank’s acquisition of UK-based Morgan, Grenfell & Co. in 1989 was its first major step toward building a global capital markets operation. Ten years later, Deutsche Bank purchased Bankers Trust (which itself had just acquired Alex. Brown & Sons to broaden its own investment banking platform) for $10 billion, the largest foreign takeover of an American bank, catapulting Deutsche Bank ahead of UBS and Citigroup as the world’s biggest bank by assets. With increasing competition in its European investment banking operations, Deutsche Bank had long been considering a transformational acquisition to firmly root itself in the United States. Bankers Trust had been a leader in underwriting high-yield junk bonds through the 1980s and 1990s, which fueled the leveraged-buyout boom. It was through these acquisitions that Deutsche Bank built its reputation as a “debt house” with expertise in debt financing, and thus the current nightmare model that will be igniting waves of panic through every fiber of my being.
* * *
“If you are the leader, please enter the required security passw—” says the automated voice into my headset before I cut it off by typing in the seven-digit code. I open the line three minutes before the conference call is scheduled to begin and catch up on the seven new emails in my inbox that arrived while I was refilling my water bottle on the other side of the floor. Then I revisit the staffing email I received a couple hours prior that outlines this new project.
Beep.
“Hi, who just joined?” I say.
“This is Arthur,” says an MD from the leveraged finance (lev fin) group.
“Hi, Arthur, it’s Bill from Industrials. You’re first to join.”
Beep.
“Hi, who just joined?” I say.
“You got Mason,” says a VP from lev fin.
“Hey Mase. You got Arthur on. No one from Industrials on the line yet,” says Arthur.
Beep.
“Who just joined?” I say.
“Brett’s on,” says a voice. I search the invite list for the call to identity Brett—a director in the financials sponsors group.
“You got Arthur and Mason on the line, Brett. No one from Industrials yet,” says Arthur.
A minute passes. On the line, I hear the light tapping of keyboards.
“Hey, Phil, can you resend the dial-in,” says Arthur.
“Will do,” I say, as I copy all the info from the previous dial-in into a new email and send it to the group.
Beep.
Beep.
Beep.
“Hi, who just—” I say.
“Ethan’s on.”
“You got Brad.”
“Boris is on.”
“Hey guys. Got Arthur here. Ethan, you’re only one on from Industrials, but think we have a quorum on our end, so why don’t we get started?”
“Thanks Arthur,” says Ethan. “Just got an inbound from TTZ—looking for commitments ASAP. Target is Ariavo, big distributor in specialty chems space. Look, this is a good business, okay. Mid-teens margins through the cycle, good management. Schulman is the comp here. Should be able to get aggressive with the leverage.”
While a few of the junior lev-fin guys jump in to corroborate Ethan’s assessment, I scroll back through the staffing email, but it sheds little to no light on what exactly the project is.
“We’ve seen trades in the five to five-and-a-half range for distributors,” says Arthur.
“This is a six-times business—churns out cash flow, good contracts with some of the biggest players in the industry—nice little business. This is a six- to six-and-a-half times business,” says Ethan. “We can sit here and debate this and that, but the reality is, this trade is happening at six, six-and-a-half times, whether we’re in it or not.”
“Alright,” says Arthur. “What juniors from lev fin are on?”
“Boris is on,” says an associate from lev fin who’s in my class.
“Team needs to put on our thinking caps. Boris, let’s pull together the cap comps. Take a look through all distribution folders, not just chems, and see what sort of leverage we got to historically. We can discuss specifics offline. Regardless, we need to sharpen our pencils here and will have to get creative to get this through internally above five-and-a-quarter.”
“Will do,” says Boris.
“We’ll need to get this to cap com in next thirty-six hours. Who’s holding pen on the model?” says Arthur.
The line falls silent.
“Industrials can take model,” says Ethan. “Got a little math to do today.” My throat constricts as my mouth suddenly dries up.
“Great. Phil, touch base with Boris if you need anything,” says Arthur.
“Will do,” I say.
“Let’s run this up the flagpole and jump on the phone tomorrow first thing to see how we’re looking,” says Ethan. “I can do seven-thirty. Have another call at eight.”
“Let’s do seven-fifteen,” says Arthur. “I have a breakfast in Midtown at seven-forty-five.”
“Let’s just do seven o’clock,” says Ethan. “Someone send out a planner.”
“On it,” says Boris. Seconds later, an invite pops up in my inbox for a 7:00 a.m. phone call.
“Let’s chop some wood here,” says Ethan.
“Thanks, guys,” says Arthur, followed by a series of beeps as people hang up.
William Keenan: Yo
Boris Popov: What up, Phil haha
William Keenan: Hysterical, this is an LBO, right?
Boris Popov: holy s**t. U serious?
William Keenan: dead serious
Boris Popov: yeah, LBO. Do you understand how private equity firms work?
William Keenan: are you able to help with the model? I’ve never done one of these and not sure what to do
Boris Popov: dude this project is 7th on my priority list. Have your analyst figure it out
William Keenan: he’s MIA
Boris Popov: that sucks, I’ll send you template, but don’t have time to help
“What they got you cranking on?” says a voice, as a head, then an upper body, slowly emerge from behind the cubicle divider diagonally from me. Bart, another senior associate in the group, raises a DB coffee mug to his mouth and takes a sip. He’s thin in an unhealthy way and has a face that tells the story of countless sleepless nights on the forty-fourth floor.
“LBO for chems distributor,” I say, now rifling through files in the chemicals drive and trying to find something, anything, that will provide some guidance on how to do this model.
“Lev fin punting all the work to Industrials?” he says, running his hand through his thinning dark-brown hair, accented by specs of gray on the sides.
“All the hard shit,” I say.
Bart pushes his glasses up so they rest on his forehead. I can feel his eyes on me as I scroll through the endless folders, searching for something, but I’m not even certain what. He reaches down onto his desk, then extends his arm across the cube divider, a bottle of tropical-fruit-flavored Tums in his hand. He shakes the bottle. “Yellow is my favorite,” he says. Three tablets fall into my right hand.
“Thanks,” I say as I stand up. On Bart’s desk, I spot a few unmarked prescription bottles.
A towering MD slams a nearby printer with his meaty hand, then walks to Bart’s desk, holding out a black stapler. “Reload this,” he says to Bart. “And throw this out.” He hands Bart the stapler and a crumpled piece of paper. Bart does as he’s told before returning the stapler to the MD, who walks back to the printer.
“Call IT,” barks the MD to Bart. “This goddamn printer doesn’t work.”
Bart walks to the printer before following the power plug from the back of the large device to the ground, where it has been partially unplugged. Bart plugs the power cord back in. “Should work now,” says Bart.
“Smells like a sulfur deposit over here,” says the MD as he scrunches his face.
“Put your shoes back on, Bart,” says Ted.
The MD retrieves his freshly printed stack of papers from the printer and returns to his office.
“So who’s your analyst on this deal?” Bart says to me as he pops two Tums tablets in his own mouth.
“Leighton,” I say. Bart smirks then sits down in his cube.
“Good luck,” he says. As I return to my chair, I notice the steam rising from the humidifier in Bart’s cube.
“Any idea where Leighton is?” I ask.
“Probably the gym,” says Bart. “Believe he does legs and back on Wednesdays. I’m sure he’ll tell you all about it.”
“The key to working with Leighton,” says Ted as he removes an earbud from his right ear and spins his chair in my direction, “is to pose your problem not as a question, but rather as an academic issue. He’ll go cross-eyed and talk himself into a coma.”
Bart pushes out his lower lip and nods as if in sudden recognition of the validity of Ted’s point.
“Bottom line is that fuckin’ kid eats, sleeps, breathes, and shits finance—has to be one of the best third-year analysts on the Street. There’s a reason he comes and goes when he pleases.”
“Show Keenan the backups,” says Bart to Ted, who then slides back up to his keyboard and begins typing.
“Check out the folder I just sent you,” says Ted. “Go into the Excel backup—get in there, snoop around.”
I open the file, slowly scanning each of the sheets. There’s a ton of data on the company, though the flow of the document is difficult to follow: financials are spread between multiple sheets; the discounted cash-flow model has references flowing from other files; in the input tab, the data on comparable companies is littered with various font styles, colors, and sizes.
“That file was created in an era I like to term ‘B.L.’” says Ted. “Before Leighton. Now please go ahead and check out the Excel backup—same company, mind you—but created for a project done about a year after that, in the ‘A.L.’ era.” Ted types away and sends through another email with a link to a new file.
“Good God,” I say, opening the file. The uniformity, organization, and detail of each sheet in the Excel document are astounding. It’s like being in a museum—I almost don’t want to click around for fear of disturbing the integrity of the file. The input tab is formatted with meticulous care, and each comp has its own color (all of which are on the DB palette). The financial information is contained in a single sheet, and each of the three financial statements is laid out and labeled clearly, with dates italicized, all items in bold, and numerical figures in normal font.
“He reconfigured the template we use in all backups now,” says Ted. “And no one ever staffed him on this. First weekend on the job, he was distraught because he didn’t get to build any models yet, so he came in Saturday morning and redid the backup for a book he was working on. Then he created some macro, or some bullshit, that made it so the file was easily transferable to all subsequent books.”
“You meet him during your internship?” says Bart.
“Think I saw him briefly once…was talking about a recapitalization or something,” I say.
“He foams at the mouth talking about dividend recaps and mezzanine financing,” says Ted.
“And don’t get him started on the implications of Trump’s economic reforms on companies’ cash-flow statements,” adds Bart.
“Any idea when he’ll show up?” I say.
Ted taps his iPhone. “Probably’ll see him power walk in here by dusk.”
* * *
“If you read the literature, the training theory with the most scientific merit for building mass is hypertrophy-specific training. Empirical research has unequivocally demonstrated that overloading a single muscle group with sufficient stimulus will ensure protein synthesis occurs in said muscle group, and hormone levels will return to normal states within forty-eight hours. Now, does much of this depend on the central nervous systems of a given body and the rate at which an individual’s endocrine system can produce hormones? Absolutely. I’m simply speaking in general terms.” Leighton stands above me as I sit in my cube. A blood-red tie with a wide knot hangs from his neck against a skin-tight, white Oxford shirt with a spread collar. His dark-blue suit looks like it was tailored for him about fifteen chest-and-legs days ago. His headphones, now hooked behind his ears, are wired through the back of his shirt as if he’s in the secret service. “So to answer your question,” he continues, “I would never work out legs and back in a single session—that’s asinine. The fallacy of the push-day, pull-day concept gained traction through unsubstantiated case studies. Today, I hit my quadriceps, hamstrings, and gluteus, both maximus and medius.”
“Got it,” I say. “So just to circle back to the Ariavo model…do you—”
“Let me drop my galoshes and bag at my desk. Pull up the model lev fin sent you. Be back in three minutes.” Leighton disappears into the bullpen, where, as the most senior analyst in the group, he occupies the most enviable spot—opposite Joel. Leighton’s computer monitor isn’t visible to passersby, and it’s almost impossible to even see if Leighton is at his desk, given that the seat is tucked into the front corner cube.
Three minutes pass. Then five. Then ten. I get up and stride into the bullpen, where I hear him before I see him. “…My point, Joel, is that if you look at the fundamentals behind the two, investor sentiment is essentially the same thing as the market-risk premium.” Leighton sits in his chair with his back to his own desk and faces Joel’s desk, which is only a few feet away. Meanwhile, Joel’s working at his computer, his back to Leighton. Undeterred, Leighton continues. “What are the components of the market-risk premium? Namely, the capital-asset pricing model, which describes the relationship between systematic risk and expected return for assets. Investor sentiment directly correlates to this idea, given that systematic risk is, in essence, the inherent day-to-day fluctuation—”
“You love CAPM, Leighton. If you could, you would marry it and have the beta of the S&P be your best man,” says Joel, still not looking at Leighton.
“And you know who wouldn’t be invited to my wedding?” says Leighton.
“Can I ask you a question?” asks Joel.
“No,” responds Leighton.
“I’m looking at the ten-day forecast on Weather.com, and there is zero percent precipitation across the board. How do you explain the galoshes?” says Joel.
Leighton shakes his head, then spots me in the bullpen.
“Joel, get the hell out of the Kraton backup,” yells a voice from a nearby cube.
“Joel’s the king of sitting in backups,” says Leighton.
“I am a king, and you’re my queen,” says Joel.
“I have to go do some actual work, Joel, and help the bank generate revenue,” says Leighton as he follows me to my desk where the Excel model is already maximized on my right monitor.
“You drive,” says Leighton as he motions for me to sit in my chair, while he props himself up on the desk just to the right of my computer monitors.
“I updated the financials since last process—” I begin.
“Why are your gridlines on?” says Leighton.
“What?” I say.
“Gridlines in Excel. Why are they on?”
“Just how the spreadsheet was when I received it.”
“Alt W V G,” says Leighton. I fumble to execute the shortcut, turning off the gridlines.
“From what I understood—” I continue.
“Why are the historical financials and projected numbers on the same sheet?” he asks.
“I updated the projected financials with new equity research, but wasn’t sure—”
“Okay, that’s fine for now, but we’re going to want a single sheet with strictly historical figures, no projections,” he says.
“Okay, I can change that later.”
“Are auto colors on?” he asks. “So you can see which cells are hardcoded, formulas, references.” In the cube next to me, I hear a quiet chuckle from Ted. Then Bart stands up from his chair and shoots me a quick smile as he walks to the small kitchen on the floor to refill the water in his humidifier.
“Auto colors? Not sure. Don’t think so though,” I say.
“Ctrl Alt E,” Leighton says. “And both rows showing margins should be italicized, with percent sign, and best practice is to not take it out to a decimal. Shift, space bar, Ctrl I, Alt Shift %, Ctrl +, Ctrl C, arrow down to the other row showing margins, then Alt H V S T.”
This is a catastrophe—I highlight the row in bright pink, turn the figures into date format, then finish off by completely deleting the entire row. I then put my right hand on the mouse. Leighton looks at me like I committed an act of mass genocide. Moments later, he gathers himself.
“May I?” he asks.
“Please,” I say.
Still propped on my desk, using only his right hand, Leighton quickly restores the deleted row. Then, in a split second—using a series of keyboard shortcuts—he formats the rows as he verbally outlined before. Watching his fingers dance across the keys is like watching a concert pianist perform a Liszt étude.
He then uses the Alt and Tab keys to quickly scan through the open documents on my computer. “You’re using Internet Explorer?” He says with an air of astonishment as he comes across an Internet-browser window that is displaying the LBO page on Investopedia.
“Yeah. Is that bad?” I say.
“Download Vivaldi browser tonight,” he instructs. “Where’d you get this keyboard?”
I lift the keyboard up and inspect it. “Was just the one that was here when I started. Think it’s same as everyone.”
“Yeah, the Genuine HP KU-0316,” says Leighton. “I’m not saying it’s a bad keyboard. What I recommend, however, is that if your intention is to utilize this keyboard going forward, you should pop out your F1 key. Now if you want to upgrade to a keyboard with quicker response time and better functionality, that’s a different story. For me, keyboard integrity is paramount and I have a board that fits my style of modeling, formatting, and so on. But if your plan is to use this one, you should pop out your F1 key.”
I slowly put my left index finger on the F1 key, but don’t press it.
“F1 has no utility,” says Leighton. “Go to cell D 44.” He points to the cell on my monitor. “Show me the formula.” I hit the F2 key to show cell formulas. “Now quickly go across and show me formulas of every cell in that row. There’ll be times when formulas aren’t dragged over properly, and you need to check all cells.”
You have to hit the ESC key each time after hitting the F2 key to move to the next cell. As I speed up my process of checking the row, my left index finger accidentally hits the one key separating the ESC and F2 keys—the F1 key, which when tapped brings up a help window, throwing a wrench into the rhythm of my checking and forcing me to use the mouse to close the window.
“Allow me,” says Leighton. He retrieves a set of keys from his inside jacket pocket, picks one and lowers it to the right side of the F1 key, and in a quick motion, pops F1 of the keyboard. It somersaults six inches above the board, falling somewhere on the floor.
“V up.” Leighton says.
This one I know—periodically, you should save up a version of the file you’re working in whether it’s Excel, PowerPoint, or Word. So if you’re working in FileName_v3, you’ll “save up” to FileName_v4. Prior versions are then filed away in an archive folder so should anything happen to the current file, you have access to all prior ones.
“Alt F A,” I say, just loud enough to ensure Leighton hears. Before I contort my left index finger to hit the Alt button—
“F12,” says Leighton. “It’s quicker.” The distinct ding of a new email gets Leighton’s attention before he can become any more annoyed with me. He reaches into his pants pocket, pulls out his BlackBerry, and reads the message. “You have to be fuckin’ kidding me,” he says, slowly scrolling through the email.
“Everything okay?” I ask as I finish saving the new version of the model.
“My sell-side blew up. Client just sent new financials with different segments…Fuck!”
“Should we circle back up on this model in a little?” I say.
“Gonna be a fire drill on this.” Leighton stands, glances at his phone, then back at me. “I’m going to need you to run point on the model.” He taps my shoulder lightly, but hard enough that it makes me want to crumble and disappear. As he beelines it into the bullpen, I see Leighton insert both earbuds into his ears and enter his own world.
“Yo,” says Ted, as he wheels his chair into my cube. “First time running a model on live process?”
I nod slowly, still looking at the Excel model, which somehow is now completely “reffed out,” meaning that nearly every cell in the sheet displays the #REF error instead of a numerical figure. “What the fuck happened here?” I say. Ted leans over and quickly restores the model with a few taps on my keyboard.
“The key is to stay calm,” says Ted. “There’s a ton of noise in these things, but only a few important inputs. The tabs with inputs—like control tab, sensitivities tab, shit like that—are your home bases—only mess with the cells in blue, the hard codes. The template, if it’s running properly, should have all the formulas flowing through to the output. And when in doubt about what’s driving shit, go to the output cell and hit control, shift, left bracket. That’ll trace all precedent cells so you can see what inputs are driving that output.”
“Alright,” I say, exhaling slowly and focusing on my breathing—the same tactic I used prior to hockey games when the nerves kicked in. “Only the cells in blue…control, shift, left bracket,” I repeat.
“Sorry about leaving you and Joel out to dry on that Weston book,” says Ted. “Had some stuff come up with my fiancée’s parents—had to go up to Albany.”
“No problem—it was fine. Joel was a big help,” I say.
“I know it was probably a nightmare—fuck, speak of the devil,” says Ted.
Ethan emerges from his corner office, flying down the hall as he throws his suit jacket over his shoulder. “Kirk Cousins, baby,” says a grinning Ethan in our direction as he makes a few football-throwing pumps with his right arm. “If we can get the receivers to run a post pattern correctly, I like their odds this Sunday. Panthers are for shit.”
“How’d that meeting go?” says Ted as Ethan approaches our cubes.
“I’ve had six meetings in the last four days. Need to be more specific,” says Ethan.
“Weston meeting last Monday—the one me, Joel, and Bill were on,” says Ted. Ethan pauses, resting his arms over my cube divider, and flicks a head nod at me.
“It was the first pitch I got staffed on,” I say as if Ethan cares.
“Weston, yeah. That got cancelled Sunday. CFO is a real dick,” says Ethan sliding his jacket on as he disappears down the hall.