> 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.
Oh, so this is how Dragon died, I always wondered where they had gone. NaturallySpeaking was one of the most, ahem, shared programs of the late '90s. Tried it a few times but with all the corrections it never felt faster than my own typing (and I don't even touch-type).
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.
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: [email protected].
Having worked for a Big Four firm in an exceedingly junior role, it's quite clear how this happened, and how it could happen anywhere. These big firms attach their names to work done by very junior people. The companies have a lot of experience at what they do, so their processes tend to be okay at producing an acceptable end result, but so much of their work is done by utterly clueless junior folks, that it's amazing things don't go sideways more often. Then again, an accounting opinion is just that -- an opinion. In the end, the liability tends to be very limited.
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.
getting paid only for a successful transaction aligns interests ... if the relationship is transactional and the role of the banker is to get the deal done.
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.
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.
The article says they sold for stock, not stock options. Even so, they should have sold for part or all cash. Taking stock that's not blue chip was foolish. However, we should bear in mind the times. It was 99, and the market was roaring ahead.
GS isn't blameless, but this article makes things sound a lot worse than they really were. Fortunately for us, the best finance writer in the world is also a former GS banker and a lawyer, and he wrote a much better article on this case 3 years ago:
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.
They absolutely need to take blame for not atleast advising James Baker to put in a collar. All stock deals are hugely risky. A deal being run by a VP and associate is also a no no at most banks, and one would presume Goldman after this fiasco.
> GS isn't blameless, but this article makes things sound a lot worse than they really were. ... a former GS banker ... wrote a much better article on this case 3 years ago
Hmmm ... the version told by a former GS banker portrays GS in a better light?
I was going to reply that the author of this article isn't the best finance writer in the world, because Matt Levine is the best finance writer in the world. Then I clicked the link.
This case was very well covered at the time. Top 3 things I've learned from this story:
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.
I still can remember how 20 years ago my image processing professor used this guy as an example how you can create a successful company out of nothing with the help of computers.
The successful image processing company of this professor was killed lately by a patent troll.
Dragon NaturallySpeaking could transcribe continuous speach in the late 90's at nearly full speed, it was amazing. But then it disappeared, this explains it.
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's interesting that the ages of the bankers are so prominently mentioned in the article. Everyone is fairly young, how much experience do they really have?
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?
Someone else with IB experience will be here to add details, but those 20 and 30 year-olds were not running the deal. They would have had someone more senior overseeing them. I'm guessing it was a couple analysts and an associate or VP. Those are very junior people.
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.
The biggest take away is find a partner appropriate for the deal size you are doing. A smaller IB for which 5m fee would actually matter would have being a smarter bet.
This is true for many services you buy from other companies. The reputation of a giant is likely based on the top people in that company and sometimes based on the top people who were in that company years ago. Unless you are also a giant company you are probably getting junior people brought on to feed the pyramid. If you can find a smaller practice with smart people you will usually be better off
100%. Many boards think that by getting Goldman or Morgan you're covering your ass. They don't realize that unless you're atleast $1BN in size they really are not incentivized to do a thorough job. Why? Because M&A deals are priced off a % fee grid (50bps to ~2% depending on the deal). 2% on 580 doesn't shift the dial for Goldman.
In the Big Short Danny Moses was not going to do the deal (to short mortgage backed securities) until he got the answer to a question from the bank's sales person:
> 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.
Actually, slightly rephrased, it's a reasonable thing to consider for any non-trivial interaction: "What are your stakes here?"
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 cautionary tale about relying entirely on external advisors. There had been rumours about L&H's book-cooking for a couple of years before the Dragon acquisition and a Goldman Sachs analyst was quoted on the topic [1].
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.
What? Part of a due diligence process is looking at internal financial statements. Cashflow issues would have jumped out immediately. GS absolutely dropped the ball on this one. 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.
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.
An odd article. I suppose it was written at the time (2012) to capitalize on anti-GS fervor, while at the same time not actually covering anything bad they did. Because in the grand scheme of their criminal activities, this is an absolute nothing burger.
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
This is another reason to hate the banks. Goldman Sachs is a ruthless organization and will do anything and everything to make money. They make the mob look, Disney characters.
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:
Man I am sorry to see one of the major driving forces behind Siri and the alike not getting paid his fair share(billions is his fair share).
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!!!
If they'd gotten cash, they still wouldn't have gotten what you claim is their "fair share (billions)". They would have gotten about $464mm (80% of $580mm, Seagate had a 20% stake), assuming they didn't get a premium for taking the all-stocks. Taking the stock was their bet on getting their billions.
Jury found in Goldman's favor. It also found that the Bakers had mishandled their roles in the transaction. The jury determined that the Bakers had breached their fiduciary duty to their co-founders in failing to advise them about potential problems with the deal.
[+] [-] shadowsun7|10 years ago|reply
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.
[+] [-] bhauer|10 years ago|reply
> 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.
[+] [-] rcarrigan87|10 years ago|reply
[+] [-] toyg|10 years ago|reply
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.
[+] [-] spacehome|10 years ago|reply
Then you weren't the target audience. I got it for my grandfather, whose hand tremors made typing all but impossible.
[+] [-] samstave|10 years ago|reply
[deleted]
[+] [-] lhh|10 years ago|reply
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: [email protected].
[+] [-] rconti|10 years ago|reply
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.
[+] [-] at5|10 years ago|reply
[+] [-] kafkaesq|10 years ago|reply
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.
[+] [-] RockyMcNuts|10 years ago|reply
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.
[+] [-] luxpir|10 years ago|reply
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.
[+] [-] osullivj|10 years ago|reply
[+] [-] jmnicolas|10 years ago|reply
It's not a fact : "The Bakers believe that some of their technology made its way into Siri."
[+] [-] jackgavigan|10 years ago|reply
Really?
[+] [-] yellowstuff|10 years ago|reply
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.
[+] [-] at5|10 years ago|reply
[+] [-] hackuser|10 years ago|reply
Hmmm ... the version told by a former GS banker portrays GS in a better light?
[+] [-] jsprogrammer|10 years ago|reply
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.
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] timdierks|10 years ago|reply
[+] [-] gregdoesit|10 years ago|reply
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.
[+] [-] alm0stn3v3r|10 years ago|reply
https://en.wikipedia.org/wiki/Broadcast.com#Acquisition_by_Y...
[+] [-] youngtaff|10 years ago|reply
[+] [-] jjoonathan|10 years ago|reply
> the jury concluded that the banking team satisfactorily performed its role for Dragon Systems in all respects
> I [the judge] conclude otherwise
Yuck.
[+] [-] tobltobs|10 years ago|reply
The successful image processing company of this professor was killed lately by a patent troll.
[+] [-] dh997|10 years ago|reply
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.)
[+] [-] rcarrigan87|10 years ago|reply
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?
[+] [-] refurb|10 years ago|reply
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.
[+] [-] qaq|10 years ago|reply
[+] [-] gmarx|10 years ago|reply
[+] [-] at5|10 years ago|reply
[+] [-] jonknee|10 years ago|reply
> 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.
[+] [-] mseebach|10 years ago|reply
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.
[+] [-] gadders|10 years ago|reply
[+] [-] jackgavigan|10 years ago|reply
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: http://www.wsj.com/articles/SB912638848485991000
[+] [-] leroy_masochist|10 years ago|reply
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.
[+] [-] at5|10 years ago|reply
[+] [-] chatmasta|10 years ago|reply
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.
[+] [-] patmcguire|10 years ago|reply
[+] [-] smenyp|10 years ago|reply
"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.
[+] [-] rajacombinator|10 years ago|reply
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.
[+] [-] at5|10 years ago|reply
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
[+] [-] chad_strategic|10 years ago|reply
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:
http://richardwayner.com/index.php/about-richard-wayner
[+] [-] LargeCompanies|10 years ago|reply
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!!!
[+] [-] mseebach|10 years ago|reply
[+] [-] nvlr|10 years ago|reply
http://dealbook.nytimes.com/2013/01/24/goldman-overcomes-its...