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As a banker, I figured I'd offer my perspective: I don't think Goldman did anything illegal, but they certainly did a terrible job serving their client. In my
by lhh 11y ago
As a banker, I figured I'd offer my perspective:
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.
- at5 11y agoFormer banker here. Really impressed you guys get paid in the same form of consideration as your clients. 100% the way to go.
- jeswin 11y agoI don't see how that's risky, and might even be beneficial to the Banker. Assuming an acquiring company is $1.5B and Dragon was getting $400m in stocks, it would have been impossible to offload it immediately at a good price. 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.
- at5 11y agoLock up periods. Would apply to the banker too I'd imagine
- RockyMcNuts 11y agogetting 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.
- lhh 11y agoTo be clear, getting a deal done is the primary reason a company would hire an investment bank. 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.