Goldman Sachs and the $580M Black Hole (2012)
nytimes.com
nytimes.com
Here's his response to "What is your worst memory as an entrepreneur": https://www.quora.com/What-is-your-worst-memory-as-an-entrep...
And here's one where he explains that he's financially ok, despite the Dragon fiasco, because he saved enough for retirement: https://www.quora.com/How-did-James-Baker-lose-several-hundr...
Most of his answers are really good.
> The technology has progressed less in the last fifteen years than it did every two or three years under Dragon Systems.
I suspect he is biased, but it's hard to not agree with the sentiment. It's a shame that someone with such enormous personal motivation in the specific technology space lost the ability and the will to be part of it. And as such, that technology space has suffered. It's a matter of belief since we cannot know how things would have played out differently, but I agree with the sentiment.
I guess what I'm trying to say, is that taking the technology and making it ubiquitous on a mass market is no small fry, either.
In the old days when people actually saved up to buy a house, the average house would cost something like 4 times the average person's annual salary. Today, we're looking at 10 to 20 times.
Mortgages allow people who would otherwise not have been able to afford a house to buy it outright - This increases the demand for housing and thus drives prices up. In the old days, people worked hard to achieve the American dream (it was an optimistic pursuit). Today, people work hard to avoid bankruptcy (we have become a fear-driven society).
As for 'investing in companies' - Big firms like Goldman Sachs mostly invest in big corporations which enslave people for profit. People in finance are more interested in helping big companies create and maintain strategic monopolies than allowing new companies to improve people's lives. Monopolies are profitable and don't require any R&D investment.
As for savings accounts, well they're not so bad, but what is the point of having a savings account if you have no money to put in it? Also, with all the new automated payment features offered, people are encouraged to spend all their little money on things that they don't need. That means everything significant has to be purchased using credit.
What's worse is that all of these evils leverage off of each other to make things even worse overall. For example, the rise of corporations means that people are forced to move to big cities to find jobs (since jobs are harder to find in smaller towns - Because small businesses there are being crushed by corporations), this drives city apartment prices up, which increases the amount of mortgage people have to take to buy a house, which increases peoples' dependence on their jobs and reduces their ability to negotiate better salaries and prevents them from improving their conditions of living.
As corporations take a hold on agriculture, the nutritional quality of food keeps going down (see http://calmscience.net/2015/12/11/tale-of-tasteless-tomatoes...) and the standard of living of the working class keeps dropping lower and lower.
You can buy a unit in a trailer park on a year or two of low salary. Why do you think people aren't doing that?
If you eliminate mortgages, it only forces people to rent which is a massive waste of money that concentrates wealth into those who are privileged enough to own homes.
WRT wall street, if they were only interested in supporting monopolies, they wouldn't be involved in the IPOs of any company that has a competitor ever. It's not even optimally greedy to only support monopolies because the best returns come from investments in companies that disrupt competition. So you're whole rant against wall street is a bit dumb because it doesn't even line up with the behavior of purely sociopathic greedy actors like you seem to think they all are. Keep ripping down those strawmen.
Additionally, with student loans there is essentially no due diligence on the lender's behalf because the loans are not dischargeable in bankruptcy. So students are paying a hundred+ thousand dollars for a masters in art history that will have no return (other than intellectual). Compare that to a house, where a bank won't give you a loan if they don't agree that the house is worth that.
The lessons from this story are two, basically: never cut all-stock deals and never deal with the likes of Goldman if you are not a billion-size business.
Then you weren't the target audience. I got it for my grandfather, whose hand tremors made typing all but impossible.
I have no idea how well current speech-to-text programs keep up with 150–200 wpm speech though.
(Short answer = that depends...and software like Dragon has many other advantages/drawbacks that factor in.)
"For myself, let’s compare typing vs dictating, given the above information and a 1,000 word email.
Straight typing: 90 wpm = 11.11 minutes, no proofreading allowance, correcting errors as typed.
Dictating with Dragon: 140 wpm dictating (7.14 minutes) + 300 wpm proofreading (3.33 minutes) + correcting 10 errors @ 10 seconds each (1.67 minutes) = 12.14 minutes.
For an average professional, typing speed is rated at 50 wpm. A 1,000 word email would take approximately 20 minutes to type.
For an average professional, their dictation with Dragon stats would approximate my own (12 minutes) — they are not unreasonable."
When dictating, you also hit the classical problem of your thoughts not forming fast enough to be able to formulate yourself in writing in real time, leading to a lot of breaks as you dictate. The guideline "think, then speak" of radio communication also holds for dictation, in my experience.
*more keystrokes but same time spoken, as the natural speech cadence is faster. Can't remember source right now.
source: grew up in the 90's in Silicon Valley
So either you speak really slowly or perhaps you should challenge the world record. I've been touch typing for more than 25 years (though not in Silicon Valley, so maybe I'm lacking some magical force as a result) and can comfortably sustain 60 wpm, bursting up to about 100 wpm. There's no way I can even come close to the rate at which I'm able to speak in a sustained manner.
[0] https://en.wikipedia.org/wiki/Words_per_minute#Alphanumeric_...
[1] https://en.wikipedia.org/wiki/Words_per_minute#Speech_and_li...
I did a stint at the Coroner' office as a intern. The doctor would at 2-3x speech into a tape recorder. I used to think he was trying to impress us by speaking so fast. "The patient had a descending artery over 50 percent occluded. The ears were symmetrical and no disginguising features. Pause Dotty--put a comma between symmetrical, and and)" Well I don't think he was showing off, just a fast thinker, and knew his job. Always wondered why he was concerned about a person's ears--maybe a pet project?
Anyways, Dotty would type those tapes, and hardly ever used the rewind button. To this day, I think about her typing skills. Nice person too.
Speech to text, to me, is so attractive because it may help to usher in a whole new, even more powerful input paradigm than anything else in-use today. It's not about speed - it's about precision.
EDIT: A study demonstrating my point can be found here: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3243272/
I don't think Goldman did anything illegal, but they certainly did a terrible job serving their client. In my view, investment bankers have an obligation to offer whatever financial and strategic advice the particular client needs, which is a function of that client's sophistication. Some clients are highly sophisticated, don't need any advice, and just want you to find them a buyer at a good price. Others can, for example, simply be good technologists but otherwise not be particularly business or finance savvy, and so will need additional guidance along the way.
To look at this particular case, moving from a 50/50 cash/stock deal to an all-stock deal without an increase in total consideration, or without the client REALLY loving the stock of the acquiring company, makes no sense. Guaranteed money upfront is always preferable (unless there are unusual tax circumstances, which I don't see being the case here). This should have been a major point of discussion and negotiation. And if an all-stock deal was decided upon, the client should've been advised with no ambiguity that there are substantial risks involved in such a deal.
In any case though, even for the 50/50 deal, substantial due diligence on the acquirer should have been recommended. Spending $50k to verify the quality of $290mm+ in sale proceeds is a no-brainer. This legitimately falls outside of the realm of responsibility of the banker to conduct this due diligence though, and should've been performed by a third party with guidance and oversight by the bankers. The bank here is conflicted anyway - their incentives would clearly be to give the "all clear" sign. Falsified revenue is extremely easy to catch - just follow the cash.
I guess the lessons here are don't work with service providers who don't value you, and always keep in mind that ultimately, as the client, you're the one that has to live with the decisions that get made.
I'd be remiss if I didn't mention that there are better sources of financial advice. At my firm, we take pride in deeply aligning ourselves with our clients by only charging fees upon successful completion of a transaction, and by being compensated in the same form that our clients are (e.g. had we advised Dragon, we would've been compensated in L&H stock, and would've therefore been highly incentivized to strongly recommend due diligence!). The Dragon/L&H deal is actually one of the case studies that inspired the genesis of our firm. I'd love to chat if this resonates with you: lharris@belstone.com.
OTOH, offloading the Banker's 0.3% is far more easier. In fact, if the overall value of the transaction is higher because it is an all stock deal, the Banker gets a better deal (after immediately selling) than if it were all cash.
Wouldn't have helped in the Dragon case which was presumably also done that way, the interest of the banker is in making sure a transaction gets completed even if it doesn't align with the client.
It's a terrible outcome, but the dot-com bubble was on fire and Dragon founders apparently wanted to cash out. You would really think they would understand their competitors better. I wonder if they were that naïve or they kind of outsmarted themselves, they knew the valuation was too good to be true and took the risk of being able to unload the stock on greater fools.
An investment banker who is effective and has integrity would first determine what a client's expectations are (particularly around valuation and transaction size), and a discussion would ensue about how that aligns with the banker's expectations of the market's appetite for such a deal. If the client is comfortable with the guidance that the banker has provided, the banker then fields offers from investors/acquirers to find the best deal available to them in the market.
If the bids come back at or above expectations that the banker and client have discussed, great, they do the deal. If bids come in below expectations, another discussion ensues on whether the client is willing to accept a lower bid or not.
Bankers' incentives are clearly to get a deal done, but at the end of the day, the go / no-go call is made by the client. And as I've mentioned, the reason a client hires a bank in the first place is to get a deal done, assuming terms are reasonable. It's not like a bank has the power to force a deal down a client's throat.
Also, another dynamic is that banks like Goldman generally charge upfront retainers in addition to success-based fees. Doing that throws a wrench into alignment in the first step, where the reasonableness of exploring a transaction in the first place should be discussed.
To use a legal word I don't fully understand, it seems Goldman was completely negligent here, but not necessarily in a criminal way -- if that's possible. They had a client that needed a lot of hand-holding, but it was small potatoes to a big bank, and they utterly failed to serve their client's interests.
Of course, because they're the big fish, they've probably covered their asses pretty well in a legal sense, and won't owe a dime. It's not right, but it's probably what will happen, legally.
Can confirm, work at a pretty large firm. Most stuff is drafted by junior dudes and signed off by their superiors. But I've also seen how the superiors sign, and mostly they do some basic checks and sign off. Further, companies tend to work with a four eyes principle that requires two signatures to sign off, and what tends to happen is that the second person says 'oh, I see xyz signed, so it must be okay' and signs it off without really checking. In fact we have folders of docs drafted by juniors that an assistant walks around with to collect the relevant signatures, which are stamped, not written.
Essentially everyone is overworked and manage way too many clients and the budget is being squeezed. And there's a bit of a race to the bottom, the sales people have clients telling them 'this office can do it for $270k per year, you're offering us $350k'. And the sales people say 'alright we'll match it', which means they're going to have to generate cost-cutting measures of $80k on that client that year, which mostly involves shifting the work to interims, interns and juniors who get $15-20 an hour and invoice $150 to the client.
Do you think you guys could just make a little less profit?
Yes in the sense that all employees except the management hate the current regime because they're having their budgets and teams cut and workloads increase, so me and my peers would fully agree with you. Less cost cutting, less profit, but a more sensible workload.
No in the sense that the prices to the customer aren't coming down to cost-price. The reason for this is that we deliver ridiculous value (i.e., with $250k of annual legal work, which is puny, you can generate millions in cost savings). You'd think then, that competing business would quickly arise and drive prices down, but the industry is so cyclical (and doomed to die as lots of things get automated etc), that it's not a great industry for new entrants to compete with the incumbents (which have consolidated with lots of mergers the past 20 years become quite massive firms with strong brand names that drive tons of inbound leads, besides if you're a small new entrant you tend to get bought out anyway)
Hell these firms are all in private hands and have been for a long time, the shareholders appoint a board to squeeze as much profit... which is why I concur with the OP, a lot of the business is driven by cheap juniors under the guise of a strong brand name, where senior staff spend the majority of their time on sales rather than actual work, and are called 'vice presidents' for that reason.
On the other hand, it's not all that crazy. The funny thing is, all the juniors are 100x more educated than the seniors. You've got 23 year olds with a double master's in econometrics and tax law, while you'll find some senior VPs who got into the business in the 70s or 80s who may or may not have a bachelor's in something. Sure the seniors have the experience and the kids are often clueless when they just start out, but they're also usually sharp, hard-working, well-read (in subject material), have quantitative skills and broad competencies. So it's not all that crazy.
"Our client agreements state that for any flights exceeding 5 hours, you may fly business class." (except what they don't tell you is you NEVER fly business class, because some engagement manager is trying to impress their senior and the client by billing as little as possible).
"NEVER eat hours, because it's critical that we are able to estimate the time for each engagement in the future. If we need to find cost savings, the engagement manager will make that determination and simply bill less if necessary." (Except everyone, from the most junior plebe, all the way up to engagement manager and beyond, are all trying to impress the person above them so hours get eaten at each and every level)
Saying they did a "terrible job", and "didn't do anything illegal" is rather deft way of talking around the ethical issues at the heart of this saga.
Some of the code in Siri originated from Mr. and Mrs. Baker's company, Dragon, which they eventually sold for stock options. Those options tragically turned out to be based on cooked-books and worth nothing, after completion of the sale guided by GS.
The ensuing legal battle continues, as do the fortunes of those who bought the remaining Dragon tech (Nuance, specifically) and licensed it to Apple et al.
Really?
"Ensuing" in this context means after the the failed acquisition and bankruptcy (2001). "Continues" means it's still ongoing. And keep in mind the context of this article is 2012.
There is no redundancy.
As was pointed out in another comment[1], Goldman Sachs won the ensuing court case.
Which begs the question: Does the legal battle in fact, continue, or is the matter settled (in which case the parent's author is talking crap)?
Which is why I asked "Really?"
It's not a fact : "The Bakers believe that some of their technology made its way into Siri."
The voice recognition technology was indeed based on Nuance technology [1]. Nuance was also a spin-off from SRI.
EDIT: This was all after ScanSoft purchased Nuance, which means it had both Nuance and Dragon technology at the time. However, due to Nuance's history with SRI, I would lean towards that being the more likely option, if they hadn't been integrated by that point.
(I worked at SRI during the Siri spin-off time period, and worked with one of the Siri developers on another project.)
[0] https://en.wikipedia.org/wiki/CALO
[1] http://techpinions.com/nuance-exec-on-iphone-4s-siri-and-the...
http://dealbreaker.com/2013/01/dragon-systems-shareholders-c...
The summary is that it's not really the merger adviser's responsibility to look into the stock of a public company acquirer, even though it feels like it ought to be.
It would seem they actually did. [1] Goldman certainly didn't provide the best service here, but I don't think what they did were illegal.
The blame for going through with this transaction falls on the clients who refused to hire an accountant when Goldman recommended it and pushed for an accelerated schedule. Heck, they agreed to an all-stock deal without even having their bankers present. (Of course, the ultimate blame lies with L&H who committed criminal fraud.)
[1] http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepren...
Also it sounds like he said she said on the all stock thing. The Bakers say bankers weren't around. Also any decent banker would be able to tell you to up your asking price to account for rolling hedging costs and/or other risks.
Hmmm ... the version told by a former GS banker portrays GS in a better light?
"I really do feel for the bankers here. It’s Friday afternoon and nobody’s reading so I feel comfortable making this confession: when I was a banker I once underwrote some convertible bonds for a company that we’ll call Company X, and later when I was a blogger Company X went bankrupt and those bonds are … those bonds are not doing so hot, these days. That keeps me up at night, sometimes."
Assuming it's better to have both sides of the story, could you ask for a better representative from the GS side?
Goldman advised a client and that client not only didn't get money on the deal, but also lost everything it had prior to the deal.
1. If you sell do your company, never do it for all-stock (or at least almost never)
2. Have a plan B in case the company who aquired you goes bankrupt - the very next day.
3. No one will care about your company as much as you do. So don't outsource important parts of the process such as: reading all the paperwork and checking references of the acquirer.
https://en.wikipedia.org/wiki/Broadcast.com#Acquisition_by_Y...
And there are a bunch of technical explanations around, here's one: http://investmentxyz.blogspot.com/2006/05/cubans-collar-anat...
I remember seeing Cuban himself explain it in detail, that's probably out in the Google somewhere.
He bought put options (his right to sell at a particular price) below the market price and sold call options (a counterparty's right to buy at a particular price) above the market price.
If you price them right you can use the money from selling the call options to buy the put options which makes it costless in net cash terms.
Market price was: $95 Put: $85 Call: $205
The reason the spread between the two is so high has to do with the time value of money and some other technical stuff, but those were the collar values.
Yahoo's stock went up to the $230s which was above the call option price, if the options had been exercised at that time, Mark Cuban would have lost out on the gain in price above the cap ($205). By the time they were exercised however, the stock was totally in the toilet and Mark Cuban was able to sell at $85.
It's not really an unusual deal but not many people were doing that in 1999, collar trades are much more common now because people remember the first crash.
he basically sold an option on the high end to cap out his gains and used that money to buy an option on the low end to ensure a profit, which guaranteed that he ended up with stock that was guaranteed to be worth something?
i.e. he traded away an unlimited upside in order to gain a protected downside?
> the jury concluded that the banking team satisfactorily performed its role for Dragon Systems in all respects
> I [the judge] conclude otherwise
Yuck.
(i) that no reasonable jury could have reached the verdict on the evidence of record -- if reasonable people could disagree, given the evidence of record,, then the verdict must stand; or
(ii) that the verdict was (or was likely to have been -- I forget which it is) the product of bias or prejudice; or
(iii) that (in hindsight) the judge screwed up in giving the jury its instructions about how to apply the law.
There are also some procedural prerequisites, e.g., for item (i) the losing party must have moved for "judgment as a matter of law" before the case was submitted to the jury, while for item (iii) the losing party must have objected to the flawed jury instructions before they were given to the jury.
For federal courts these requirements derive from the Seventh Amendment to the Constitution, which provides in part: " ... no fact tried by a jury, shall be otherwise reexamined in any court of the United States [which means federal courts], than according to the rules of the common law." [1]
[1] https://www.law.cornell.edu/constitution/seventh_amendment
The successful image processing company of this professor was killed lately by a patent troll.
Moral of the story: don't ever pay upfront for deal advice because interests aren't aligned, light a fire under the due-diligencers by making it a % of the deal.
Not everyone at Goldman is evil I can vouch for that personally, but also not everyone there (or in M&A / wall st circles) doesn't gradually acquire some degree of jaded entitlement or dispassionate, insular inhumanity either... that's what a city and high earnings does to some people. Plus, not knowing business, not having a strong relationship with an IB and not doing your own due-diligence are all contributing personal failures. Regardless, the other party spears to have committed fraud and Goldman seems it didn't completely live up to its fiduciary duty in this instance. The nails in these employees' coffins is not meeting with the press to express reasonable and legally-defensible answers, it makes them look guilty. (You've got to know when a blanket best-practice such as not speaking to the press during ongoing legal matters should be broken without compromising the case.)
It could be justified if a more senior banker with a lot of experience was overseeing them. But seems like that wasn't the case.
It really makes me wonder, how much value are these guys actually adding to the transaction? If a bunch of 20 somethings can broker this deal, are the services really worth the insane fees being charged?
Now as the article said, the deal was quite small for GS, so it's likely the amount of time spent on the deal by the senior person was small.
> I'll do it, but only after you explain to me how you are going to fuck me.
Seems like an appropriate question whenever dealing with an investment bank.
Even with the best of intentions, people are complex and complex transactions between two or more of them are complex-squared. Taking the time to make sure both parties understands what the other does and doesn't bring to the table is important for success.
A sad outcome for the Bakers but they weren't entirely blameless (although Goldman Sachs were certainly very lucky to get away scot-free).
1. Although GS had passed on investing in L&H, that decision would have been completely unknown to the investment bankers working on the deal for Dragon -- by design. The "Chinese Wall" between the investment banking, securities, and asset management divisions of large financial institutions severely limits the communication between and among these parts of the firm.
2. Investment bankers are not accountants or lawyers. This is stated on the cover page of every investment banking presentation and at the bottom of every email that leaves the network. Telling the Bakers to hire accountants to do accounting diligence was not an abdication of responsibility; it was sound advice, not to mention GS's legal responsibility per numerous SEC regulations.
3. Apart from what may have been discovered during an unrushed diligence process conducted by accountants, there were rampant rumors at the time of the deal that L&H faced cashflow issues.
4. This is the big one: the Bakers got impatient with GS taking what they felt was too long to look at the deal, and decided to meet with L&H on their own in order to get things moving faster. At a meeting not attended by the investment bank they hired to maximize the value received by shareholders in a sale they agreed to take all-stock consideration instead of 50/50 cash/stock. Let that one sink in for a bit.
5. The main reason that the Bakers lost the case against Goldman is that they previously, and successfully, sued L&H and its bankers/accountants alleging that they fraudulently covered up problems to an extent that said problems could not have been reasonably uncovered during a thorough diligence process. Goldman's lawyers used this previous sworn testimony to withering effect in cross-examining the Bakers.
Disclaimer: I'm a former GS investment banker. I wasn't there in the late 90's and I'm not there now.
My own personal take on this is that, when M&A markets are frothy, banking teams get younger and less experienced because a relatively fixed-quantity resource (licensed investment bankers at a given firm) are being spread thinner and thinner against an increasing number of deals. Keep that in mind and proceed with caution if you have to sell your company under such conditions.
In terms of what GS could have done better: I think one of the big issues here was that Gene Sykes, who is a genuinely brilliant guy with excellent bedside manner, was MIA on the deal even though he was nominally in charge of the team. My guess is that if Gene were doing weekly update calls with the Bakers, they would not have done colossally stupid shit like try to hijack the process themselves. I think they were likely getting the right advice from the younger bankers on the team -- don't rush this, we need to do this right, let us have these conversations for you, etc -- but that advice does not carry the same weight coming from a 27-year-old associate compared to when it comes from one of the most accomplished dealmakers of his generation.
Also: cash is king. Be very wary of all-stock deals.
L&H conducted accounting fraud; both of its founders received criminal convictions for doing so [0]. The whole point of accounting fraud is falsifying internal financial statements. It is true that investment banks conduct diligence by looking at a company's financials, but this is for valuation purposes -- i.e., analyzing how the company has performed relative to other comparable companies. Investment banks do not employ forensic accountants who specialize in sniffing out fraud; accounting firms do. The issues in question were the kind that would be discovered in the diligence process by competent accountants, not competent investment bankers.
> Also not recommending your client put in a collar after an all stock deal? Don't know about Goldman but that was pretty much standard advice at mine.
As a matter of fact, GS did recommend a collar, and the Bakers ignored this advice: "the Bakers did not take steps to hedge the Lernout stock they received when advised of their ability to do so." [1]
[0]: http://www.wsj.com/articles/SB100014240527487039893045755035...
[1]: http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepren...
Cash flow fraud is extremely easy to follow if you look for it; more so if you have monthly/weekly invoices and reconcile that with the cash flows. You'd have noticed the loan treatment of factored receivables quite quickly.
On the hedge (and the whole lawsuit); looks like a he said she said really. Goldman says the all-stock deal was approved without their presence; Baker says they didn't show up.
In this case, they strongly recommended that the clients hire an external accountant who would be more skilled in investigating cash flow fraud. Forensic accounting is out of the scope of the banker's engagement, but recommending that they hire someone to do it was serving the client.
It really seems like Dragon was pushing the transaction to go faster, against Goldman's recommendation.
> Goldman says the all-stock deal was approved without their presence; Baker says they didn't show up.
So they both agree that the Bakers accepted an all-stock deal without Goldman's recommendation. While Goldman comes off looking lazy here, it doesn't make them liable.
It's also not about forensic accounting. A 5 person deal team is quite tiny especially if they're mostly junior. The acquiree should absolutely have access to internal documents in an all stock deal; your future is at stake here. Something like already factored receivables somehow requiring payments to be made in future periods makes no sense and would jump out immediately to anyone half competent who bothered to look.
Not showing up for a meeting is not the same as saying after the fact, 'ok guys let's close this'. I can guarantee you Goldman signed off on it. You don't sign merger documents at the meeting itself. GS likely said "fuck it all stock it is". They get paid anyway, in cash.
Since this article is literally about a lawsuit, it does seem like a legal issue.
I think we probably agree though. Goldman absolutely did a poor job on this deal, but that doesn't make what they did illegal (as many commenters here seem to feel).
Massive category-mistake here. Investment banks don't have sign-off authority on these kinds of transactions, they serve as a advisors. And in this particular case, GS's defense was based on the fact that Dragon didn't follow their advice. Both in terms of the consideration and in terms of Dragon's option to hedge the stock they received as consideration.
By the way -- GS got 1% on this deal, when it's normally up around 2 or 3. The engagement letter didn't even make them advisors to the board, just to management. That's a much lower standard of care. If I had to guess, I'd say that the Bakers were trying something along the lines of, "Potential buyers won't fuck us over if we hire Goldman. What's the cheapest we can hire Goldman for?"
They hired the firm on an extremely limited mandate at a time when the tech M&A market was going haywire. They got a junior team that, while it provided substantively good advice, did not do remotely enough to protect the client from its own brash stupidity (this is not a formal responsibility, but is the kind of thing that partners like Gene, who was nominally on the deal but couldn't even remember it under oath, are good at). FWIW, I agree that GS does not come across well in this particular episode.
And yea the Bakers definitely should have gone with a smaller bank given the deal size. But hey, BODs make that mistake all the time too. Also given the size of the Bakers stake (50+%), not much difference between board advisory and management advisory is there? Theirs is the deciding vote.
Agreed with you on the last point. Been on more than one deal team where we've had to talk clients out of shooting themselves in the foot. But that's part of the game. No engagement letter covers that but a sensible client would expect that from their banker. Legally GS was always in the clear.
What are you trying to say here? The whole crux of this case is about the Bakers ignoring GS' advice.
> the Bakers definitely should have gone with a smaller bank given the deal size
$500mm is right about the median deal size of GS sell-side M&A engagements (at least it was when I left several years ago).
> not much difference between board advisory and management advisory is there? Theirs is the deciding vote.
If you are in fact an investment banker, you should be familiar with the non-trivial differences in the bank's responsibilities to the BOD and management team, regardless of BOD makeup and/or management's ownership of Company.
3) Was a lawyer before banking. Can assure you the stake matters. Try not practising law without a license perhaps? In a court of law the difference is trivial.
2) Depends on the market. 99 was a once in a career market hence a VP leading the deal.
In any case never said it was a legal issue. GS messed up. No bank wants to be in a position where they point to clauses in their engagement letter to point out that they did fine by the client.
I'm surprised the Bakers did not try to repurchase their technology in the bankruptcy sale. If other firms scooped it up for as little as $7m, surely the Bakers could have raised that much from a few opportunistic venture capitalists who understood the technology was better under the care of the Bakers than any other third party.
Of course this was right when the dotcom bubble popped, so maybe raising $7m from VCs to buy back technology they just lost in a messy bubble popping deal would be incredibly difficult and require more dilution than it was worth.
Also, what if they had just recreated a new company with the same technology? Who would sue them? The acquirer of their IP was bankrupt. Why not rebuild the technology and wait until the secondary acquirer sues? By that time they could have had a fully formed legal argument for their rights to the IP, and probably a better argument than whatever they're using against Goldman.
Ultimately, Dragon hired Goldman as an advisor. Only the Dragon board had the ability to approve or deny a deal. Goldman had no vote. Therefore all responsibility for poor decision making should fall on the board, not Goldman. Did Goldman give shitty advice, or none at all? Yes. But it sounds like Dragon knew the advice was shitty, but chose to proceed anyway. No way this case falls in their favor. I just hope they don't lose even more money in the Goldman counter suit.
There best hope is a sympathetic jury (is it even a jury trial?) that rules emotionally based on the story of a nice couple of people getting screwed by the venerable Goldman Sachs. I hope for the Bakers' sake they win this case. They seem like remarkably caring people who got tangled up in the wrong place at the wrong time.
"Why would you hire an investment bank to advise you on an M&A deal? It’s sort of an uncomfortable question."
This reminds me about Warren Buffet saying that asking an investment bank about M&A advice is like asking a barber if you need a haircut.
In fact, without other info, I'm inclined to side with GS on this one. Some things that would make the story actually interesting include: what were/are GS's connections with senior execs at the L&H co, or at Nuance. Without intent, there's no story here, just incompetence in the worst case.
Otherwise it seems like a simple case of a mom n pop team getting in way over their heads and penny pinching at the wrong time. The abnormally low transaction fee (guaranteeing poor service), lack of other DD, failure to instantaneously hedge out their exposure to the acquirer's stock, etc. Also they probably knew the deal was too good to be true at the time, hence the rush to take the all stock deal. Afterwards, seller's remorse and failing to accept their part in the blunder. Very typical.
PE firms pay a few hundred grand for senior level attention more often than you'd think. Fee grids are based off the complexity of the deal, and frankly the seniority and number of people involved. Banks think about the ROI of their salary payments on a daily basis
I do agree the Bakers should have done a little better, but still Goldman will take both sides of the trade as point out in the article.
This is another example of the banking system destroying intellectual property, for the sake of profit. Meaning, SIRI or voice technology could be a few years ahead had it not been for the fact that Dragon was auction off. (We will never now for sure.)
If you want to hire the leader of the goldman four you can do so here:
Personally, I have much smaller inventor-ship horror stories that have taught me any further advances from big money people/companies is that I need to paid ... X huge billion to million dollar company deposit money in my bank and do it now before we go any further with any type of business relationship.
Don't ever get drunk on the excitement of the biggest companies and such in the world chasing you .... focus on them paying you/depositing CASH in your bank or hand ..otherwise tell them to take a jump in the lake and to come back to you when they are ready to deposit money in your bank!!!
http://dealbook.nytimes.com/2013/01/24/goldman-overcomes-its...
Case closed.
Wow. I don't know enough colorful language to describe that position.
This is going to be downvoted too, isn't it?
Some people are able to vote not guilty for a defendant they despise, because that's what you're supposed to do as a juror if the facts dictate. If you're not able to do that, you have no business being on any jury, whether the defendant is a bank or a pauper. And even if you lie during voir dire (which is a crime), with a presumption of innocence all you'll achieve is a hung jury.
And, civil or criminal, if you think that sentiment doesn't come into play, then you probably think justice is blind, politicians don't lie they just over promise, and that the markets are rational. What a wonderfully, blissfully ignorant state to exist in.
As a juror, I would never vote "guilty" on a drug crime. Also, I would always find for the plaintiff if GS were the defendant.
What in the world does that have to do with anything?
> Also, I would always find for the plaintiff if GS were the defendant.
"Presumption of innocence unless I don't like them" and all that, I guess.
It is a very coherent answer to the question: "What should you do if you're required to report for jury duty as part of a system that you think is likely to produce an unjust outcome?"