m&a deal gone wrong - GS v. dragon systems

i've been looking at the case for a while, and looks like the verdict finally went in goldman's favor:

http://dealbook.nytimes.com/2013/01/24/goldman-overcomes-its-latest-hea…

http://www.nytimes.com/2012/07/15/business/goldman-sachs-and-a-sale-gon…

here's the skinny: A married couple started a software business in their Massachusetts home and eventually sold it to a Belgian company for $580 million. Just a few months after the sale, the Belgian company, which paid for the purchase with its stock, collapsed in an accounting fraud, wiping out the couple’s newly minted fortune. the company was called dragon systems, which practically invented voice-recognition technology (think Siri)

even as a m&a banker, this is obscene. sure, it's all about the DEAL, but the process of the deal isn't supposed to blind you to its essence - which at the end of the day - is a new business. take this quote from the GS lawyer john donovan:

“When you hire a banker, you ask it to do certain things, but delving into the books, doing accounting and finding fraud, is not one of them...”

sure (I mean on the sell-side, I don't really do diligence on the acquirer) but maybe it should be our role. we can be a little more than process guys. it's no surprise that loads of corporate execs don't trust bankers. good line from an article on byron trott, the only banker Buffett trusts:

"Another said: 'Byron is not your typical investment banker. He is a facilitator of good ideas, whereas most investment bankers are just out to motivate you, to get you excited about a product that they are going to market where the investment banker gets a huge fee.'

http://www.thisismoney.co.uk/money/markets/article-1642412/Billionaire-…

although yes, I get it -- the fee pays my bonus. But still, is it right for these entrepreneuring scientists to lose their life's work? these are prelim thoughts, i might put a more coherent, thought-out article on my blog when i get the time. OK, I'm done with my rant. interested to hear what you guys think.

 
Best Response
Jay13:
i've been looking at the case for a while, and looks like the verdict finally went in goldman's favor:

http://dealbook.nytimes.com/2013/01/24/goldman-overcomes-its-latest-hea…

http://www.nytimes.com/2012/07/15/business/goldman-sachs-and-a-sale-gon…

here's the skinny: A married couple started a software business in their Massachusetts home and eventually sold it to a Belgian company for $580 million. Just a few months after the sale, the Belgian company, which paid for the purchase with its stock, collapsed in an accounting fraud, wiping out the couple’s newly minted fortune. the company was called dragon systems, which practically invented voice-recognition technology (think Siri)

even as a m&a banker, this is obscene. sure, it's all about the DEAL, but the process of the deal isn't supposed to blind you to its essence - which at the end of the day - is a new business. take this quote from the GS lawyer john donovan:

“When you hire a banker, you ask it to do certain things, but delving into the books, doing accounting and finding fraud, is not one of them...”

sure (I mean on the sell-side, I don't really do diligence on the acquirer) but maybe it should be our role. we can be a little more than process guys. it's no surprise that loads of corporate execs don't trust bankers. good line from an article on byron trott, the only banker buffett trusts:

"Another said: 'Byron is not your typical investment banker. He is a facilitator of good ideas, whereas most investment bankers are just out to motivate you, to get you excited about a product that they are going to market where the investment banker gets a huge fee.'

http://www.thisismoney.co.uk/money/markets/article-1642412/Billionaire-Buffett-and-the-only-banker-he-trusts.html

although yes, I get it -- the fee pays my bonus. But still, is it right for these entrepreneuring scientists to lose their life's work? these are prelim thoughts, i might put a more coherent, thought-out article on my blog when i get the time. OK, I'm done with my rant. interested to hear what you guys think.

No, that is not in the banker's job. Bankers aren't responsible for forensic accounting. Even basic due diligence would likely have shown the acquiring firm was a decent company. And, do you actually know how much detail was shared by the acquirer from a financial perspective?

 

I agree with OP. While I'm not in IB, so I can't actually say what responsibilities are legally upon (no moral obligations obviously) them for M&A. It just seems to me something that might be reasonable to check on if it popped up.

Brings to mind the idea of going in for an oil change and the guy in the garage not telling you that there's something really wrong with your car. After all, you hired him to change your oil, not run an operational check on your vehicle.

"History doesn't repeat itself, but it does rhyme."
 

yea, but gs had actually considered buying into L&H before, and had walked away because they found something shady. it's like a car mechanic who was going to buy a car --> realizes there is something structurally wrong with it so he doesn't buy it --> changes the oil for another person who accidentally did buy the car --> takes his paycheck without saying anything

 

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"History doesn't repeat itself, but it does rhyme."

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