> 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.
Finance firms are the parasites of society, they take advantage of all the flaws in the system to make money for themselves and give their top employees massive bonuses to keep doing what they do whilst keeping their mouths shut.
That's a pretty childish view. Lots of people enjoy home mortgages, savings accounts, and investing in companies, all of which depend on finance firms.
Nobody 'enjoys' their mortgages. Mortgages are responsible for making housing less affordable for everyone.
In the old days when people actually saved up to buy a house, the average house would cost something like 4 times the average person's annual salary. Today, we're looking at 10 to 20 times.
Mortgages allow people who would otherwise not have been able to afford a house to buy it outright - This increases the demand for housing and thus drives prices up. In the old days, people worked hard to achieve the American dream (it was an optimistic pursuit). Today, people work hard to avoid bankruptcy (we have become a fear-driven society).
As for 'investing in companies' - Big firms like Goldman Sachs mostly invest in big corporations which enslave people for profit. People in finance are more interested in helping big companies create and maintain strategic monopolies than allowing new companies to improve people's lives. Monopolies are profitable and don't require any R&D investment.
As for savings accounts, well they're not so bad, but what is the point of having a savings account if you have no money to put in it?
Also, with all the new automated payment features offered, people are encouraged to spend all their little money on things that they don't need. That means everything significant has to be purchased using credit.
What's worse is that all of these evils leverage off of each other to make things even worse overall. For example, the rise of corporations means that people are forced to move to big cities to find jobs (since jobs are harder to find in smaller towns - Because small businesses there are being crushed by corporations), this drives city apartment prices up, which increases the amount of mortgage people have to take to buy a house, which increases peoples' dependence on their jobs and reduces their ability to negotiate better salaries and prevents them from improving their conditions of living.
Mortgages offered far more people their own house that could have never purchased a house otherwise. Increased demand was met in the majority of the country with increased supply (you may have noticed that houses can be built and the majority of the US is empty). Only a few places on the coasts are so constrained that it pushes people out. The main reason that houses have gotten to be so expensive is because wages stagnated and people don't want to compromise on their demands for space/features (look at the features and size of a new KB home and compare that to the box of shit you got in the 70s). Stripping demand would not make it any cheaper to build houses the way people want.
You can buy a unit in a trailer park on a year or two of low salary. Why do you think people aren't doing that?
If you eliminate mortgages, it only forces people to rent which is a massive waste of money that concentrates wealth into those who are privileged enough to own homes.
WRT wall street, if they were only interested in supporting monopolies, they wouldn't be involved in the IPOs of any company that has a competitor ever. It's not even optimally greedy to only support monopolies because the best returns come from investments in companies that disrupt competition. So you're whole rant against wall street is a bit dumb because it doesn't even line up with the behavior of purely sociopathic greedy actors like you seem to think they all are. Keep ripping down those strawmen.
How do you feel this contrasts with the Student Aid/Loan/FAFSA regime? I made the exact same argument as op the other day about higher education and I really thinks it fits much better in that context than it does when used with housing finance.
Student loans are awful because they entice students to take on massive amounts of debt that they will have a really hard time repaying. Taking on a mortgage eliminates your rent cost. Taking on a student loan eliminates nothing.
Additionally, with student loans there is essentially no due diligence on the lender's behalf because the loans are not dischargeable in bankruptcy. So students are paying a hundred+ thousand dollars for a masters in art history that will have no return (other than intellectual). Compare that to a house, where a bank won't give you a loan if they don't agree that the house is worth that.
Savings accounts are the most honest thing in that list, and that is an exceedingly small portion of GS' business. The rest are rackets of some form or other.
Building something where nothing stood before is monumental, but last weekend I spoke to Google Translate (at a noisy party) and had it instantly and correctly translate what I said to mandarin.
I guess what I'm trying to say, is that taking the technology and making it ubiquitous on a mass market is no small fry, either.
Depends on the resources available to the company trying to popularize the product/idea. If it's a tiny start-up with limited resources, then absolutely, it's a huge accomplishment. If it's a massive company with tons of cash, together with the name recognition and momentum of n number of other products already out...then it's probably not that big of a deal, but still commendable, I guess.
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.
The idea that anything that might be tangentially useful to someone with a medical condition must be a medical object is an absurd result of an overly litigious society and overly zealous regulatory agency. Speech-to-text software should not suddenly become "medical software" just because someone with unsteady hands wants to use it.
The speed of input is not, I believe, what is most meaningful about using voice to deliver computer instructions. Rather, it is the voice's unique capability to convey meaning to other humans that text simply cannot convey. There is a power held within the human voice that has yet to be fully exploited by software, although Baker did much great work towards this goal.
Speech to text, to me, is so attractive because it may help to usher in a whole new, even more powerful input paradigm than anything else in-use today. It's not about speed - it's about precision.
On a full size keyboard? Most veteran typists can put down words at or above natural speech rate, especially the somewhat slow and stilted speech that seems to work best for those dictation software packages.
Do you have a citation of some sort for this? Seems a bit far-fetched unless it's a person that specializes in typing language very fast. I've used computers for >8 hours a day for two decades, writing a lot of long texts in that time, and I'm nowhere near being able to type as fast as I can talk. Certainly not when it comes to a sustained pace for more than a few minutes.
Cool, thanks :) I agree that comparing dictation speed to typing speed is a different question if you're a fast typist. On a phone, it's no contest -- for me, even in my native language, dictating with Siri is vastly quicker -- but I wouldn't actually want to dictate when I write comments online, for instance.
When dictating, you also hit the classical problem of your thoughts not forming fast enough to be able to formulate yourself in writing in real time, leading to a lot of breaks as you dictate. The guideline "think, then speak" of radio communication also holds for dictation, in my experience.
Let's not forget languages that aren't ideally served by qwerty - I'm thinking asian languages in particular. Even therein, there's chinese, which has a high semantic density to syllable count, vs say japanese, which requires more syllables* to say the same thing.
*more keystrokes but same time spoken, as the natural speech cadence is faster. Can't remember source right now.
Of course those Asian languages that are difficult to type are also difficult for speech to text programs, especially ones like Japanese where understanding the context is important for choosing the correct glyph.
Typical speech is about 150 wpm, and someone making an effort can talk faster. Even the fastest typists on standard QWERTY-type keyboards have trouble keeping up with average conversation. Transcriptionists use specialized chording keyboards and can type 200+ wpm in a dedicated phonetic one-chord-per-syllable shorthand with abbreviations for common words.
I have no idea how well current speech-to-text programs keep up with 150–200 wpm speech though.
The Guiness World Record holder for typing can sustain 150 wpm on a Dvorak keyboard for 50 minutes [0]. Compare this to the average audiobook: "Audiobooks are recommended to be 150–160 words per minute, which is the range that people comfortably hear and vocalize words." [1]
So either you speak really slowly or perhaps you should challenge the world record. I've been touch typing for more than 25 years (though not in Silicon Valley, so maybe I'm lacking some magical force as a result) and can comfortably sustain 60 wpm, bursting up to about 100 wpm. There's no way I can even come close to the rate at which I'm able to speak in a sustained manner.
Growing up I knew a lady at church that definetly typed faster than I talked. She was brilliant, and should have been more than a typist, but that was the era.
I did a stint at the Coroner' office as a intern. The doctor would at 2-3x speech into a tape recorder. I used to think he was trying to impress us by speaking so fast. "The patient had a descending artery over 50 percent occluded. The ears were symmetrical and no disginguising features. Pause Dotty--put a comma between symmetrical, and and)"
Well I don't think he was showing off, just a fast thinker, and knew his job. Always wondered why he was concerned about a person's ears--maybe a pet project?
Anyways, Dotty would type those tapes, and hardly ever used the rewind button. To this day, I think about her typing skills. Nice person too.
I don't think you are being downvoted for your opinion. I think you are being downvoted because: You are not writing clear ideas. You are using aggressive language. You are not providing concrete evidence.
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.
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.
> These big firms attach their names to work done by very junior people.
Can confirm, work at a pretty large firm. Most stuff is drafted by junior dudes and signed off by their superiors. But I've also seen how the superiors sign, and mostly they do some basic checks and sign off. Further, companies tend to work with a four eyes principle that requires two signatures to sign off, and what tends to happen is that the second person says 'oh, I see xyz signed, so it must be okay' and signs it off without really checking. In fact we have folders of docs drafted by juniors that an assistant walks around with to collect the relevant signatures, which are stamped, not written.
Essentially everyone is overworked and manage way too many clients and the budget is being squeezed. And there's a bit of a race to the bottom, the sales people have clients telling them 'this office can do it for $270k per year, you're offering us $350k'. And the sales people say 'alright we'll match it', which means they're going to have to generate cost-cutting measures of $80k on that client that year, which mostly involves shifting the work to interims, interns and juniors who get $15-20 an hour and invoice $150 to the client.
"Our client agreements state that for any flights exceeding 5 hours, you may fly business class." (except what they don't tell you is you NEVER fly business class, because some engagement manager is trying to impress their senior and the client by billing as little as possible).
"NEVER eat hours, because it's critical that we are able to estimate the time for each engagement in the future. If we need to find cost savings, the engagement manager will make that determination and simply bill less if necessary." (Except everyone, from the most junior plebe, all the way up to engagement manager and beyond, are all trying to impress the person above them so hours get eaten at each and every level)
Yes in the sense that all employees except the management hate the current regime because they're having their budgets and teams cut and workloads increase, so me and my peers would fully agree with you. Less cost cutting, less profit, but a more sensible workload.
No in the sense that the prices to the customer aren't coming down to cost-price. The reason for this is that we deliver ridiculous value (i.e., with $250k of annual legal work, which is puny, you can generate millions in cost savings). You'd think then, that competing business would quickly arise and drive prices down, but the industry is so cyclical (and doomed to die as lots of things get automated etc), that it's not a great industry for new entrants to compete with the incumbents (which have consolidated with lots of mergers the past 20 years become quite massive firms with strong brand names that drive tons of inbound leads, besides if you're a small new entrant you tend to get bought out anyway)
Hell these firms are all in private hands and have been for a long time, the shareholders appoint a board to squeeze as much profit... which is why I concur with the OP, a lot of the business is driven by cheap juniors under the guise of a strong brand name, where senior staff spend the majority of their time on sales rather than actual work, and are called 'vice presidents' for that reason.
On the other hand, it's not all that crazy. The funny thing is, all the juniors are 100x more educated than the seniors. You've got 23 year olds with a double master's in econometrics and tax law, while you'll find some senior VPs who got into the business in the 70s or 80s who may or may not have a bachelor's in something. Sure the seniors have the experience and the kids are often clueless when they just start out, but they're also usually sharp, hard-working, well-read (in subject material), have quantitative skills and broad competencies. So it's not all that crazy.
Thanks for the reply. It's not all that crazy and I'm glad you elaborated on why new entrants don't come into the market and suck up that profit/inefficiency.
I 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.
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.
To 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.
if you look for sage advice from people working on commission, beyond getting the thing done that they're getting a commission for, you're gonna have a bad time.
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.
Siri was developed by SRI International, basically as the commercialization of the CALO project [0]. It was initially developed as an app, and was even available in the store. The project was then spun-off into a company, and the developers were working on versions for other platforms. Apple then bought the company, making it exclusively an iOS product and integrating it into the OS.
The voice recognition technology was indeed based on Nuance technology [1]. Nuance was also a spin-off from SRI.
EDIT: This was all after ScanSoft purchased Nuance, which means it had both Nuance and Dragon technology at the time. However, due to Nuance's history with SRI, I would lean towards that being the more likely option, if they hadn't been integrated by that point.
(I worked at SRI during the Siri spin-off time period, and worked with one of the Siri developers on another project.)
"Ensuing" in this context means after the the failed acquisition and bankruptcy (2001). "Continues" means it's still ongoing. And keep in mind the context of this article is 2012.
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.
> They absolutely need to take blame for not atleast advising James Baker to put in a collar
It would seem they actually did. [1] Goldman certainly didn't provide the best service here, but I don't think what they did were illegal.
The blame for going through with this transaction falls on the clients who refused to hire an accountant when Goldman recommended it and pushed for an accelerated schedule. Heck, they agreed to an all-stock deal without even having their bankers present. (Of course, the ultimate blame lies with L&H who committed criminal fraud.)
Oh not illegal for sure. But they dropped the ball. Bankers are shielded from practically every type of litigation based on engagement letters. But that doesn't mean that they didn't fail their client. I mean practically speaking if bank A botched a deal for Facebook, not many large tech companies would be lining up to engage them. They can't hold their hands up and say well its your fault so boo hoo. If that was acceptable behaviour in the market, nobody would hire bankers. Having seen bankers roll out a deal on a company that later proved to be a complete fraud, believe me when I say that people get fired for messing up. Which should give you some idea of whether the bank itself thinks someone dropped the ball.
Also it sounds like he said she said on the all stock thing. The Bakers say bankers weren't around. Also any decent banker would be able to tell you to up your asking price to account for rolling hedging costs and/or other risks.
> 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?
Not necessarily in a better light, but it's a wildly relevant, informed, and interesting perspective IMO.
"I really do feel for the bankers here. It’s Friday afternoon and nobody’s reading so I feel comfortable making this confession: when I was a banker I once underwrote some convertible bonds for a company that we’ll call Company X, and later when I was a blogger Company X went bankrupt and those bonds are … those bonds are not doing so hot, these days. That keeps me up at night, sometimes."
Assuming it's better to have both sides of the story, could you ask for a better representative from the GS side?
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.
The much more fascinating part of that story is how Mark Cuban had the foresight to convert the all stock deal to an all cash deal (from his perspective) by engineering a sophisticated straddle hedge on the stock of the acquiring company. A scheme he created by collaborating with, you guessed it, Goldman Sachs.
He bought put options (his right to sell at a particular price) below the market price and sold call options (a counterparty's right to buy at a particular price) above the market price.
If you price them right you can use the money from selling the call options to buy the put options which makes it costless in net cash terms.
Market price was: $95
Put: $85
Call: $205
The reason the spread between the two is so high has to do with the time value of money and some other technical stuff, but those were the collar values.
Yahoo's stock went up to the $230s which was above the call option price, if the options had been exercised at that time, Mark Cuban would have lost out on the gain in price above the cap ($205). By the time they were exercised however, the stock was totally in the toilet and Mark Cuban was able to sell at $85.
It's not really an unusual deal but not many people were doing that in 1999, collar trades are much more common now because people remember the first crash.
That's about right. The other hedge he did prior to the collar hedge, where he shorted a fund containing Internet stocks but less than 5% Yahoo stock (to comply with the terms of his lock up period), was also quite creative.
i'm not familiar with options trading - can you confirm if this is the right intuition?
he basically sold an option on the high end to cap out his gains and used that money to buy an option on the low end to ensure a profit, which guaranteed that he ended up with stock that was guaranteed to be worth something?
i.e. he traded away an unlimited upside in order to gain a protected downside?
Goldman did apparently win a jury trial. While this case looks horrible the idea of a judge respecting a jury's verdict doesn't seem like the horrible part.
Is there precedent for a judge overturning a jury's verdict immediately after it's handed down? I imagine you'd need a reason quite a bit above and beyond "I disagree" but even so I'm not sure if that would violate the right to a jury trial or not.
In general, in the U.S. a judge can overturn a jury's verdict only if the judge concludes:
(i) that no reasonable jury could have reached the verdict on the evidence of record -- if reasonable people could disagree, given the evidence of record,, then the verdict must stand; or
(ii) that the verdict was (or was likely to have been -- I forget which it is) the product of bias or prejudice; or
(iii) that (in hindsight) the judge screwed up in giving the jury its instructions about how to apply the law.
There are also some procedural prerequisites, e.g., for item (i) the losing party must have moved for "judgment as a matter of law" before the case was submitted to the jury, while for item (iii) the losing party must have objected to the flawed jury instructions before they were given to the jury.
For federal courts these requirements derive from the Seventh Amendment to the Constitution, which provides in part: " ... no fact tried by a jury, shall be otherwise reexamined in any court of the United States [which means federal courts], than according to the rules of the common law." [1]
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.
Actually not surprising that GS would let a VP and an associate run this deal. $580MM is small potatoes for Goldman, and it was 99 so they were up to their eyeballs in deals. There was probably a senior banker committee overseeing the deal but they really just rubber stamp stuff and never look at the details. The details in this case were what crushed James Baker's take. Note that a good/experienced banker would advise the client to put in a collar in an all stock deal.
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.
> 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]
Technically 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.
> But a banker's role is really to provide advice on the deal and work in the best interests of the client.
In this case, they strongly recommended that the clients hire an external accountant who would be more skilled in investigating cash flow fraud. Forensic accounting is out of the scope of the banker's engagement, but recommending that they hire someone to do it was serving the client.
It really seems like Dragon was pushing the transaction to go faster, against Goldman's recommendation.
> Goldman says the all-stock deal was approved without their presence; Baker says they didn't show up.
So they both agree that the Bakers accepted an all-stock deal without Goldman's recommendation. While Goldman comes off looking lazy here, it doesn't make them liable.
I think you misunderstand. It's not a legal issue. It's whether you provided adequate service. And Goldman didn't. And bankers are almost never liable fyi because of the language baked into engagement letters.
It's also not about forensic accounting. A 5 person deal team is quite tiny especially if they're mostly junior. The acquiree should absolutely have access to internal documents in an all stock deal; your future is at stake here. Something like already factored receivables somehow requiring payments to be made in future periods makes no sense and would jump out immediately to anyone half competent who bothered to look.
Not showing up for a meeting is not the same as saying after the fact, 'ok guys let's close this'. I can guarantee you Goldman signed off on it. You don't sign merger documents at the meeting itself. GS likely said "fuck it all stock it is". They get paid anyway, in cash.
> GS likely said "fuck it all stock it is". They get paid anyway, in cash.
Massive category-mistake here. Investment banks don't have sign-off authority on these kinds of transactions, they serve as a advisors. And in this particular case, GS's defense was based on the fact that Dragon didn't follow their advice. Both in terms of the consideration and in terms of Dragon's option to hedge the stock they received as consideration.
By the way -- GS got 1% on this deal, when it's normally up around 2 or 3. The engagement letter didn't even make them advisors to the board, just to management. That's a much lower standard of care. If I had to guess, I'd say that the Bakers were trying something along the lines of, "Potential buyers won't fuck us over if we hire Goldman. What's the cheapest we can hire Goldman for?"
They hired the firm on an extremely limited mandate at a time when the tech M&A market was going haywire. They got a junior team that, while it provided substantively good advice, did not do remotely enough to protect the client from its own brash stupidity (this is not a formal responsibility, but is the kind of thing that partners like Gene, who was nominally on the deal but couldn't even remember it under oath, are good at). FWIW, I agree that GS does not come across well in this particular episode.
Ah yea but bankers are like real estate agents; their incentive is to maximize their return per unit of time invested. If GS didn't think there's going to be a large marginal return (on time) in asking for more from the buyer then they'll say ok, you're happy I'm happy. It's about incentives. And yea I am aware they don't sign off but the Bakers aren't exactly experts; they would have said yes if the bankers said yes and the numbers seem high enough for them. It raises the question of whether there is any value in standalone M&A advice. Sophisticated sellers don't need pitchbooks and are well able to pull together their own models. Unsophisticated sellers basically go along with the bankers; who have no skin in the game and just want to close the deal. And then these sellers potentially end up with bad outcomes.
And yea the Bakers definitely should have gone with a smaller bank given the deal size. But hey, BODs make that mistake all the time too. Also given the size of the Bakers stake (50+%), not much difference between board advisory and management advisory is there? Theirs is the deciding vote.
Agreed with you on the last point. Been on more than one deal team where we've had to talk clients out of shooting themselves in the foot. But that's part of the game. No engagement letter covers that but a sensible client would expect that from their banker. Legally GS was always in the clear.
> And yea I am aware they don't sign off but the Bakers aren't exactly experts; they would have said yes if the bankers said yes and the numbers seem high enough for them.
What are you trying to say here? The whole crux of this case is about the Bakers ignoring GS' advice.
> the Bakers definitely should have gone with a smaller bank given the deal size
$500mm is right about the median deal size of GS sell-side M&A engagements (at least it was when I left several years ago).
> not much difference between board advisory and management advisory is there? Theirs is the deciding vote.
If you are in fact an investment banker, you should be familiar with the non-trivial differences in the bank's responsibilities to the BOD and management team, regardless of BOD makeup and/or management's ownership of Company.
1) In practice there is no way the deal would have proceeded without GS giving the go ahead. Nowhere in your sources does GS say they said no to the deal as was consummated.
3) Was a lawyer before banking. Can assure you the stake matters. Try not practising law without a license perhaps? In a court of law the difference is trivial.
2) Depends on the market. 99 was a once in a career market hence a VP leading the deal.
In any case never said it was a legal issue. GS messed up. No bank wants to be in a position where they point to clauses in their engagement letter to point out that they did fine by the client.
> I think you misunderstand. It's not a legal issue.
Since this article is literally about a lawsuit, it does seem like a legal issue.
I think we probably agree though. Goldman absolutely did a poor job on this deal, but that doesn't make what they did illegal (as many commenters here seem to feel).
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.
"It was at this meeting that L.& H. proposed shifting the $580 million deal from half stock and half cash to all stock. The Bakers, with their high-priced investment bankers M.I.A., agreed."
"Goldman’s lawyer, John D. Donovan of Ropes & Gray in Boston, has argued that under the terms of the engagement letter, only Dragon Systems had the right to sue, and Dragon no longer exists. Goldman has even filed a countersuit against Ms. Baker, contending that by suing Goldman she had breached the contract."
Wow. I don't know enough colorful language to describe that position.
How the hell is it that ALL of the posts saying anything negative about GS have been reported or downvoted or in gray. When did HN become such a staunch defender of investment bankers? Goldman Sachs repeatedly acts in the interest of themselves over their own clients.
I actually took a math class taught by another former Dragon co-founder not mentioned in this article. I think he got screwed even harder than the Bakers, he always said he was good at math but bad at "business stuff".
At this point, we have to ask, exactly what is require to get a legal decision that goes against these folks. Given that this case was settled after the financial crisis, and so sentiment would not be on the bankers' side, it is even more surprising.
Some of the comments here surprise me. Why should sentiment matter at all? Defendants are presumed innocent. Except under pretty specific circumstances they do not have to prove their innocence, just cause enough doubt to be construed as reasonable.
Some people are able to vote not guilty for a defendant they despise, because that's what you're supposed to do as a juror if the facts dictate. If you're not able to do that, you have no business being on any jury, whether the defendant is a bank or a pauper. And even if you lie during voir dire (which is a crime), with a presumption of innocence all you'll achieve is a hung jury.
It wasn't a criminal case, so there was no presumption of innocense. The jury found that preponderance of evidence was in favor of the defendant. In theory, sentiment shouldn't matter, but in practice it might, which suggests that perhaps the case was not actually quite as clear-cut as the article implies...
As the other reply says, it's a civil case. Preponderance of Evidence applies, which is a much, much lower bar. Think, millions of dollars awarded over coffee that was served too hot.
And, civil or criminal, if you think that sentiment doesn't come into play, then you probably think justice is blind, politicians don't lie they just over promise, and that the markets are rational. What a wonderfully, blissfully ignorant state to exist in.
This may sound rather vindictive, but I have personal reasons for this statement... and that is I hope I can live long enough to see the smoldering corpse of Goldman Sachs being buried in a grave covered with a thick layer of cement. They are a corrupt organisation.
Wow that sucks. One is tempted to admire the chutzpah of GS defense lawyers, simultaneously claiming both that their contract was with a company that no longer exists and that the lawsuit was a breach of that contract by the Bakers. Now that was a shitty contract! If one requires M&A work, one must already have an experienced M&A attorney to approve the "engagement letter". To get a reference to such an attorney, one must already have spent lots of money with a different law firm that is large enough to have a partner with a clue. Good luck with that, if you've been spending all your time developing technology rather than e.g. orchestrating dodgy real estate schemes like a particular presidential candidate. The house always wins.
As a juror, I would never vote "guilty" on a drug crime. Also, I would always find for the plaintiff if GS were the defendant.
While it may be slightly OT for this, I think it is an important consideration.
It is a very coherent answer to the question: "What should you do if you're required to report for jury duty as part of a system that you think is likely to produce an unjust outcome?"
I've already served as a juror. Neither of the conditions cited above applied. It's not as though I would hide either of those from the court anyway. They're welcome to conduct their simulation of justice; I decline to take part.
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.