This makes me sick - I'm no M&A expert so it's unclear what Goldman's exact due diligence responsibilities should have been but clearly they screwed up if they helped execute a transaction against a company that basically didn't exist.
The article lets the founders completely off the hook, however, which I believe is also unfair. A $580M all-stock deal at the height of the bubble? Signing away your life's work without calling your acquirer's customers? Come on.
I hope the founders get paid (on Goldman's dime) but they have to carry some of the blame here.
> Signing away your life's work without
> calling your acquirer's customers
The founders were PhD's whose expertise was in voice processing, I find it believable that they figured that the Goldman bankers were professionals that wouldn't "execute a transaction against a company that basically didn't exist."
Places where I do think that they deserve some blame:
1. They seemed to have some reservations about the company. They questioned the Goldman Sachs' bankers about them. It doesn't seem like they got a very satisfactory answer, but instead of pushing for one, they just assumed that the bankers knew what they were doing.
2. They let that phantom memo fall between the cracks. No one followed up on finding out who sent it. No one followed up on this idea that the accountants need to do the due diligence instead of the bankers, even though the suggestion 'shocked' them.
3. They went to meetings, and made agreements without consulting the bankers. Sure the bankers probably should have warned them about (e.g.) taking the all-stock deal over the half-cash/half-stock deal, but I find it odd that they would make this agreement without consulting the bankers. They could have either gone over the possibilities prior to going into the meeting, or made the agreements contingent on a review by the bankers.
It really isn't clear what GS was providing if they didn't do the most basic due diligence. I did that kind of stuff as a lowly associate at a university-affiliate VC fund, so I don't see how a firm being paid millions of dollars can't find someone to make a few phone calls.
Proceeding without the DD questions being resolved and going ahead with a last minute change to the deal doesn't seem like incredibly good judgement on the founders' part, but then again, shouldn't GS have - in their advisory role - warned them about any of this? And, while the founders being non-business type people may excuse them from some of the blame here, their CFO really doesn't have a similar excuse and probably didn't do them any favors.
Where was Seagate at in all of this? Unless I missed something, they owned 25% and could have at least been useful in helping with due diligence on the supposed Asian customers.
If all of this is true, GS really doesn't look good here, but a lot of people had a hand in this getting so screwed up.
OT: Was anyone else surprised by how much vacation the supposed junior level associate was able to take at GS?
While Goldman are culpable for at minimum the fraudulent valuation services and poor deal preparation, I would foot the blame for the overall transaction almost squarely on Dragon's CFO and a pressuring board. Regardless of the advisor, it seems clear they would have made a poor deal.
What CFO does not insist on rigorous due diligence when dealing with a potential merger? This is basic finance.
It is rarely the responsibility of the M&A adviser to conduct due diligence themselves. They recommend and sometimes oversee accountants and legal bodies on behalf of the client.
So, this NY piece is missing a fair bit of key info about who, if anyone did due diligence on behalf of the client.
In addition, the proposed changes to the terms of the deal should have been obvious flags to the CFO that there was something very wrong (if you have due diligence concerns why would you give up even more/all the cash in a deal?).
Finally, anyone, but especially the CFO, should understand the incentives of the kind of advisor and buyer you hire:
- if you hire a bulge bracket adviser, you can expect their primary motivation are upfront and transaction completion fees for a tiny deal and little future prospects.
- if you are targetted by a buyer who is aggressive in offering a share deal, it is a clear indication that they consider their shares overvalued at that time.
I'm totally biased against Goldman to begin with and based on what I read in this article (assuming it is truth) I do think they should be on the hook for dropping the ball here (though I don't think they should be on the hook anywhere near $1 billion, maybe $100-200 million or so).
However, it sounds like this was a clusterfuck across the board, and the founders and their then-CFO aren't totally blameless here.
I agree too. I also realize that the Times article can't possibly delve into every detail. It's quite possible that the incompetence at Goldman Sachs was egregious and that Goldman really should be massively punished. But, like you, the article does not show the Dragon executives in a flattering light either.
The article lets the founders completely off the hook, however, which I believe is also unfair. A $580M all-stock deal at the height of the bubble? Signing away your life's work without calling your acquirer's customers? Come on.
I hope the founders get paid (on Goldman's dime) but they have to carry some of the blame here.