Good Technology Investors Sue J.P. Morgan, Claiming Conflicts
September 02, 2016 / Source: The New York Times
By KATIE BENNER and LESLIE PICKER SEPT. 1, 2016
Silicon Valley start-ups often have to grapple with the competing interests of their founders, investors and employees. Now add one more to the list: their bankers.
The extent to which start-ups can be influenced by investment banks was highlighted on Thursday by the case of Good Technology, a mobile security software maker that was acquired last year by BlackBerry for a fire-sale price of $425 million.
In an amended suit in Delaware Chancery Court, Good’s shareholders said that J. P. Morgan, the start-up’s banker, had faced so many conflicts of interest in its dealings with the company that it led to Good selling itself for less than it was worth.
Even as J. P. Morgan was advising Good on its sale, the complaint said, it was also advising BlackBerry in late 2013 and pursuing future business with the company. J. P. Morgan’s need to maintain a business relationship with BlackBerry, which was the larger company, ultimately spurred the bank to put that relationship above the one with Good, according to the amended complaint.
In the end, Good, which was at one time valued at about $1 billion by its private investors, sold to BlackBerry for only $425 million even though documents obtained by The New York Times show that other suitors had made higher offers. The plaintiffs said that J. P. Morgan used the Good deal to win future business with BlackBerry.
While it is not new for banks to be accused of conflicts of interest, the issue is more salient now for start-ups. As the market for private fund-raising has slowed and the initial public offerings market has remained relatively dormant, sales have become more popular — and the potential for banks to influence how start-ups act in those transactions is set to increase.
Walmart recently agreed to acquire Jet.com, the year-old online bulk retailer, for $3.3 billion. General Motors this year said it would purchase Cruise Automation for more than $1 billion, people with knowledge of the terms said at the time, to help it expand into autonomous vehicles. In January, the Gilt Groupe agreed to be sold to Hudson’s Bay Company, the department store retailer, for about $250 million.
“When a major bank advises on an acquisition, there’s always this odd risk,” said Max Wolff, chief economist at Manhattan Venture Partners. “The relationship that matters going forward is probably with the acquirer.”
A J. P. Morgan spokesman declined to comment on Good, and a representative for BlackBerry did not immediately return a request for comment.