4 ms·
A few things to keep in mind: 1. Although GS had passed on investing in L&H, that decision would have been completely unknown to the investment bankers working
by leroy_masochist 11y ago
A few things to keep in mind:
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 11y agoWhat? 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.
- leroy_masochist 11y ago> Part of a due diligence process is looking at internal financial statements. 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/SB10001424052748703989304575503500899087566 http://www.wsj.com/articles/SB100014240527487039893045755035... [1]: http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepreneurs-in-rubble-of-a-collapsed-deal/ http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepren...
- at5 11y agoTechnically you're right. But a banker's role is really to provide advice on the deal and work in the best interests of the client. Sophisticated clients don't need bankers so don't pay them much (PE firms sometimes pay as little as a few hundred grand). And it's fairly justified because short of leveraging their sales force and/or balance sheet, bankers add little value in standard processes like M&A or capital raises. Definitely dropped the ball. If Goldman was a no name shop their argument that they were let off the hook in a court of law would not help them win clients. 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.