The management consulting business has established numerous blocks of activity that involve financial and economic concepts. One involves projects of a strategic nature, particularly mergers, and acquisitions, in which the valuation of a corporation is critical. A successful consultant needs to see the larger economic setting in which a company is embedded, assess a company's industry and its position within the industry, perceive the company's strategic options, and understand which projects or acquisition targets best serve its broad strategic goals. In addition, the consultant must translate those broad insights into judgments about relative valuation of particular opportunities.
A second block of management consulting serves financial institutions as clients. The entire financial industry is going through a period of rapid change, which creates important opportunities for consultants to add value. Technology and deregulation are permitting old functions to be performed in completely new ways. Most of the large consulting firms have important departments servicing banks and securities firms, and some consulting firms are specialized entirely in the strategic and operational issues of the financial industry.
Effectiveness in consulting requires not only a high level of general education and exposure, but also a detailed understanding of finance and economics. The capacity to perform in-depth studies, in which the micro-detail can be related to the macro-problem, is the key attribute of a successful consultant.
Corporate finance means the handling of a corporation's financing needs, either within the corporation's treasury or within a bank or securities firm. It also includes advisory work bearing on financial issues. Corporate finance also involves problem solving. People who excel in this area are those who can see the big picture, then dig into particular problems with considerable depth.
The critical work done within corporate treasury, where projects are analyzed and financing alternatives considered, is sometimes overlooked. The intellectual job content is very similar to that of the bankers who serve the corporation; indeed, the treasurer and his or her staff are the primary clients for most corporate financial services. In choosing between the corporate world and Wall Street, students should know that the primary difference is one of lifestyle. The treasurer is the client and so is typically called on by the bankers; he or she does not have to travel nearly as much as bankers do, or feel the intense pressure of serving a number of clients simultaneously or the pressure to keep generating and closing transactions. Relatively few corporations recruit at business schools as aggressively as banks do, so those interested in corporate work may have to seek out their own opportunities. A benefit of this is far less competition from other students.
Most banking firms have a group of corporate finance generalists, who are defined by their list of clients and the reputations they develop as trusted financial advisers. They are relationship managers and often specialize by industry, particularly when an industry, such as airlines or utilities, has specialized financing techniques or instruments. They must have the capacity to ferret out opportunities, to get their clients to disclose their true problems and concerns. To do this well requires a large investment in understanding the client and the client's world. A good corporate finance generalist never calls on a client unprepared but goes to a meeting having done the homework and able to at least guess what problems the client may be worrying about and suggest a range of ways to approach them. Even if the guess is not 100 percent accurate, the client will appreciate the initiative and the desire to see the world through his or her eyes. Relationship management requires skill with people and situations as well as substantial technical knowledge.
Mergers and Acquisitions
This special domain in corporate finance needs to be singled out because it is pursued not at the treasury level but at the CEO level. In banking firms it is typically done by a specialized group, sometimes further broken down by industry. This job is one of the most intense in finance because so much is at stake. Mergers and acquisitions people are on call at all hours of every day and must be prepared to sacrifice their personal lives repeatedly in the interest of transactions that cannot wait. Rewards for success and punishments for failure are both very high. Ethical issues are close to the surface. One must know how to handle confidential information and how to recognize conflict of interest. Industry knowledge is very useful, since most acquisitions are within the same industry and are driven by strategic considerations. A skillful mergers and acquisitions professional comes up with creative acquisition ideas and can work through a tangle of legal, accounting, and tax issues. He or she must also have the self-confidence and personal presence to deal effectively with CEOs. This is not an area for the timid.
In an earlier era on Wall Street, all equity underwriting was handled by the generalists. In some firms today, equity underwriting has become the domain of specialized teams, particularly when it is viewed as a major source of new business. These teams develop opportunities for both initial public offerings (IPOs) and for new issues of seasoned equities. The transaction process involves writing, under SEC guidelines, a detailed prospectus describing a company's history, opportunities, and risks. It also involves underwriting through a syndicate of securities firms. Important equity issues involve taking the corporate management to selected cities to make presentations to institutional investors. Effective professionals in the equity area are well versed in accounting, tax, and securities law and are generally associated with strong distribution networks. Above all, they have a close feel for the stock market and watch it constantly.
Securities firms, including those associated with some banks, offer commercial paper services to corporations as a less expensive alternative to bank borrowing for short-term corporate needs. This is a relationship business, often with daily conversations about market conditions and corporate needs. Commercial paper itself is a simple instrument, so the skills are not those of structuring so much as those of knowing markets intimately. This brings commercial paper services very close to the world of sales and trading.
The SEC registration requirements for debt underwriting were dramatically simplified in the 1980s, so that new debt issues usually can be bid for and bought by single firms or small groups of firms without the complex mechanics of an underwriting syndicate. Consequently, winning new debt issues from corporate clients involves up-to-the-minute market information and a sense of sudden market opportunities. Capital market professionals, who are most often to be found on trading floors, specialize in knowing which corporations are inclined to issue what forms of new debt. This area is also akin to trading in that it lives on a substantial volume of transactions. Because debt underwriting has also been globalized, effective professionals in this area must understand opportunities in debt markets the world over. They must have a keen understanding of the mathematics of fixed-income securities and an intuitive sense of markets.
Swaps and Options
The business of creating and using swaps and options is intimately connected with debt underwriting. Most swaps are written to match a debt instrument and convert it, in effect, to a different type of debt instrument--one currency to another, fixed rate to floating and so forth. Options, too, are often embedded in capital market instruments--alternative repayment currencies, for example. Capital market professionals specializing in derivatives need a highly creative and quantitative turn of mind to spot market anomalies and turn them into combinations of debt and derivative instruments that can be sold. This is a great domain for computer gurus and math experts, but it also requires a practical sense of markets.
Real Estate and Mortgage Finance
As a capital-intensive industry, real estate has historically been tightly tied to the capital markets, yet current trends are radically restructuring past relationships. Real estate finance is being revolutionized by securitization--on both the debt and equity sides of the market. The pooling of mortgages and the creation of various claims against the pool have created new classes of fixed-income securities out of both residential and commercial mortgages. On the equity side, the rapid growth of publicly traded real estate securities has created significant investment opportunities and stimulated widespread business consolidation. Both career arenas are full of potential. The behavior of mortgage-based securities, particularly the more exotic ones, is still not fully understood, but the utility of creating derivative securities from mortgage pools is very high. Real estate markets are still relatively inefficient where the potential for value-creating transactions remains high. Skillful professionals in the mortgage-securitization field combine a thorough grasp of debt markets, derivatives, mortgage origination, and government programs. Finance professionals focused on real estate investment banking and mergers and acquisitions combine sophisticated knowledge of real estate fundamentals, corporate finance, financial accounting, and business strategy. Both groups can use quantitative tools with ease.
Risk Management and Funding
Every financial institution must attend not only to the funding of its clients but to its own funding as well. Furthermore, it must understand the risks it is taking, for businesses such as derivatives involve a firm's own balance sheet in a complex way. Such functions are among the most cerebral in any financial institution and attract people with exceptional ability to see the whole portfolio of assets, liabilities, and offbalance sheet commitments as a complex of interacting quantitative risks. The tools of risk management, which are still evolving, are taught in several advanced courses. Many consulting firms specialize in risk management tools and systems, a field that is changing rapidly.
Sales and Trading
Traders buy and sell stocks, bonds or foreign exchange for a firm's own account. A great deal of money can be made or lost based on a single trader's decisions. Trading skill is somehow intuitive--almost like an athletic ability--and you don't really know if you have it until you try. Good traders sense the market's direction and quickly get in front of the momentum. They need not be charming and people oriented--they just have to be right more often than not. They keep a lot of quantitative information in their heads at all times, and their time horizon is very short. Trading somewhat resembles a gambling game, but it is not random. It takes steady nerves, concentration and good intuition, plus a comprehensive knowledge of markets.
In contrast to traders, salespeople need to be people oriented. They meet the needs of institutional investors, including corporate treasurers, by finding the right securities at the right prices. They must gain the confidence of their customers and often negotiate with traders in their own firms to obtain the best prices for important customers. There is also an element of socializing with the customers, to be more than a voice at the end of a telephone and to learn more broadly the customers' needs and preferences. Effective institutional salespeople know their customers well and often bring them new investment ideas.
Most financial institutions also have a sales force catering to wealthy private individuals. This work resembles institutional sales but is more individualistic and idiosyncratic. A private-client specialist is a kind of stockbroker, in that he or she lives solely or primarily on commissions and must constantly bring new ideas to clients. Strong social skills are necessary here as well, and the best private-client professionals develop a franchise of individuals who trust them and give them business.
The mutual fund industry has grown explosively and has attracted individuals from many backgrounds. The ultimate skill of a first-class fund manager is to articulate and implement a particular portfolio strategy that shows some promise of delivering above-average performance. Typical strategies are value based, contrarian or momentum based. Some celebrated fund managers have simply had a knack for finding lesser-known companies and understanding which of them were destined to succeed. This is the area of finance in which advanced theory, as taught not only in the MBA program but also in the PhD program, has its greatest application. Fund management is less cyclical than many other financial careers and is often less frenzied than the sell-side jobs.
An important career opportunity often overlooked by students is equity research. Analysis is done both on the sell side for brokerage firms and on the buy side for mutual fund managers and other investment managers. Sell-side analysis involves writing up stock purchase ideas that can be used by salespeople with their customers; it usually has an optimistic slant. Buy-side analysis is somewhat more detached and is used by fund managers in their investment decisions. A good analyst needs to be diligent and scrupulous about accurate details and must enjoy spreadsheets and careful comparisons.
This specialized form of investment management provides funds to companies at early stages in their development, typically before their initial public offering of stock. It has enormous appeal to business school students but is difficult to enter. Many venture capital firms specialize in certain emerging technologies, and they most want to hire individuals with operating backgrounds in those technologies. Students with such backgrounds have a natural advantage in competing for venture capital opportunities. Without such a technical background, it is difficult to enter the venture capital business straight out of business school.
Many financial institutions and private partnerships pursue leveraged buyout equity investment. This involves buying entire companies, whether private or public, with relatively modest equity investment. This has become an important business for all types of banks, some of which use the misleading phrase "merchant banking." Individuals selected for this area often have experience in such other arenas as mergers and acquisitions. They must combine negotiating skills with an astute sense of what makes an operating business successful. This, too, is a difficult area to enter straight out of business school. Most private equity funds bring on people with substantial transaction experience.