Ask HN: Why does Goldman Sachs charge Dragon Systems $5 million to give advice? | Hacker News Reader

Ask HN: Why does Goldman Sachs charge Dragon Systems $5 million to give advice?

6 pointsricksta4 comments

After reading about the Dragon Systems M&A deal here on HN: http://www.nytimes.com/2012/07/15/business/goldman-sachs-and-a-sale-gone-horribly-awry.html?_r=1&hpw'

From the sound of it in the article, the bankers pretty much just came to a few meetings, gave some "advise"(or no advise at all in Dragon's case), did some paperwork, and charged them $5 Million. Why does four bankers(two in the 20s, one in the 30s) working part time for few weeks need to charge $5 million? What would that be in $ per hour? Does the job they are doing really worth the money they charge?

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The article is written from an incredibly biased point of view. Part of that bias is because evidently only people from the Dragon side commented to the reporter, and people from the Goldman Sachs side didn't comment, presumably because of the pending litigation. Just because one side comments to the media and the other side doesn't, doesn't imply anything about who's right and wrong, it's just a different strategy.

As to the M&A fee itself, the NY Times article provides no context to know if that fee was high or low for the time. A $5 million fee to advise the sale of a $600 million company does not sound out of bounds at all. That's less than 1% of the value of the transaction, a far lower fee than eBay or many other marketplaces capture. In M&A banks provide advice to their clients, but also make markets --- finding potential buyers for their clients.

Finally, it should be noted that while this deal went horribly wrong for Dragon, the NY Times did not bother to point out at that at the time of the deal none of the many investment banks and analysts that covered L.& H. noticed anything wrong, none of the shareholders of L.& H. noticed anything wrong, and until the WSJ did an investigation triggers by events that happened after the sale, no newspaper, including the NY Times, noticed anything wrong either.

Well, according to Dragon they were supposed to protect them from bad deals by doing due diligence. So that would be worth $5 mil right there if they had done their job properly, since Dragon's owners would not have gotten screwed out of all their money. But aside from that, bankers usually get paid for greasing the wheels, making introductions, getting the deal done, moving money, finding financing, getting a better price, that sort of thing. Think of them as wedding planners for two people who want to get married but have just met in person two days before.

TBH Most bankers haven't the foggiest clue how to perform due diligence. The best due diligence is done by someone in the business plus an experienced accountant. Bankers only know enough about actual company finances to value them assuming everything is kosher. If something isn't kosher in the balance sheet, few bankers I know would spot it. Most trust the balance sheet and assume that if there were any shenanigans going on that the accounting firm would spot it (despite the fact that the accounting firm can just as easily be complicit). When bankers do comment in their reports on accounting irregularities it is only in relation to one of that firm's peers in the market and in the context of helping the bank's clients better be able to make a comparison of numbers when they don't measure the exact same thing.

FWIW I'm a former investment analyst at a broker dealer that has done due diligence. In one case I was working on the investment report for a tech company that was supposed to IPO. A few months later, after being fed up with banking and becoming interested in tech, I went to work for that company as a product manager. The due diligence I did as a banker and the reality I saw as an employee were night and day. My banking self didn't know nearly enough to properly perform due diligence. The saddest part is that of all the other analysts both junior and senior were even more ill equipped to do due diligence on a company like that than I was.

Imagine you have two banks, one bank which can get you an acquisition deal worth $100m and the other which can get you an acquisition deal worth $200m.

How much extra is it worth paying the bank that can get you the $200m acquisition deal ?

Banks aren't interchangeable cogs, they vary substantially in what they can offer (using their expertise, contacts and negotiating power) and that's what companies pay for.

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