In October 2020, the ratings agency S&P Global (colloquially better known as Standard & Poor’s) announced the acquisition of financial information and technology provider IHS Market in a $44 billion mega-merger.
As part of this deal, Standard & Poor’s has inherited a $100m blockchain headache.
IHS Markit (also known as Markit) has been embroiled in a messy and embittered dispute of david-and-goliath proportions since May 2018 with a small blockchain startup, Symbiont. This dispute has culminated in a four-day trial at the end of December 2020, which I attended virtually.
A final hearing to decide on the fate of the matter is scheduled for April 2021 at the Delaware Chancery Court, presided over by Travice Laster Vice Chancellor, a well-respected judge with a strong background in blockchain matters.
The stakes are high.
If Symbiont is successful in their case, Standard & Poor’s IHS Markit division may be ordered pay Symbiont damages in the range of $29m to $105.5m according to valuation expert testimony during December’s hearings. If the case is decided in favor of the defendant, it could put the brakes on an industry development that could have potentially saved banks “at least $500m a year” in North America alone by modernizing one of the least efficient areas of financial services.
Joined At The Hip
The dispute centers around a joint venture that was established by financial services software and data provider Ipreo and blockchain powered “smart securities” startup Symbiont on March 3rd, 2016. Two years later, Ipreo would be swallowed in an acquisition by the financial software and data behemoth Markit for $1.86bn.
The joint venture — Synaps — aimed to provide blockchain powered solutions for the syndicated lending market where multiple banks share the financing of large loans to corporate clients. Synaps combined a new approach to the process of arranging and managing these loans which combined Ipreo’s cutting edge Loan Transaction Servicing (LTS) technology with Symbiont’s blockchain powered smart loans product.
A key goal of Synaps is to offer a new financial platform that can compete with — and take market share from — ClearPar, a software offering from Markit which supports the creation, trading, settlement and servicing of syndicated loans. ClearPar operates at a near monopoly, enjoying a near 99% market share.
The enormous syndicated lending industry — $1.5 trn of syndicated lending is done in North America alone and $12 trn is syndicated globally — is ripe for this disruption. Millions of faxes (and scanned images of pages via e-mail) are generated as part of the lending process every year. The time taken to settle a loan can be as long as 20 days which is glacially slow when compared to stocks in the U.S. which settle in two days.
Some in the industry blame Markit for this state of affairs, suggesting that its monopoly with ClearPar has made the company complacent and therefore complicit in perpetuating the woeful state of the market.
Synaps seeks to bring a new blockchain-powered approach to these loans which would digitize the paper trail and reduce average settlement times from 20 days to 3 days, and in the process, save the industry “$500m a year” in North America alone.
I was personally involved in the first blockchain syndicated lending proof of concept in 2015 with Credit Suisse that used Symbiont’s Smart Loans solution so can personally attest to opportunity in the market that blockchain based solutions can bring to speed up settlement.
A Poison Pill Clause?
The crux of this case concerns a dispute about the meaning of a non-compete clause in Synap’s joint venture contract which was formulated in 2016 as Symbiont and Ipreo were forging their alliance. Symbiont asserts the provision was designed to stop an acquisition of Ipreo by Markit. Ipreo and Markit dispute this was the intention of the clause.
Markit had previously considered acquiring Ipreo some years prior and ClearPar is a direct competitor of what Synaps was seeking to build. Symbiont’s CEO Mark Smith lobbied Ipreo executives for a provision that would compensate Synaps (and therefore indirectly, Symbiont) if Ipreo were taken over by a company with a competitive offering by forcing that acquirer to funnel all of its lending business through Synaps.
For Markit, that would have meant somehow merging ClearPar with Synaps’s offering or simply migrating its customers of its flagship offering to Synaps and shutting down ClearPar. Not a palatable scenario for Markit.
And while there is wording in the joint venture agreement to this effect, the dispute arises from what entities are, and are not covered. Specifically, the provision appears to guard against an “affiliate” being acquired. And it’s primarily on that interpretation of the word “affiliate” that is dispute rests and with it, potentially tens — if not hundreds — of millions of dollars of damages which could flow to Symbiont if they are successful. That is based on ClearPar’s revenues which are stated to run to “hundreds of millions a year” and Symbiont owns half of the Synaps venture.
Symbiont asserts that the non-compete clause was triggered when Markit announced its acquisition of Ipreo on May 21st, 2018 and as is suing for years of lost revenues that Markit should have run through Synaps’s platform.
Symbiont is also pressing for damages they claim were caused to Synaps by Markit’s acquisition of Ipreo; that the acquisition sabotaged Synaps’ fundraising effort with Wall Street banks and that Markit also poached Synaps’ CEO, Joe Salerno violating a non-solicit contract (Markit disputes this saying that this non-compete was verbally waived in a phone call between CEO’s).
Symbiont also accuses Markit of deliberately dragging their feet in resolving the matter to run down the clock, knowing that this could stall the momentum which was critical for Synaps to maintain to succeed.
These developments, the plaintiffs claim, sealed Synaps’ fate.
Markit Strikes Back
Ipreo and its parent company Markit dispute Symbiont’s version of events.
The president of Ipreo at the time — Kevin Marcus — testified during the recent proceedings in December 2020 that the non-compete provision in the joint venture explicitly carved out and excluded certain parties from that agreement, namely Ipreo’s backers Blackstone
Marcus stated under oath — “I had to tell him [Mark Smith] in no uncertain terms that there were certain things that were open for negotiation in this kind of agreement; that issue wasn’t one of them. We had a specific directive from our board — and I didn’t even need it because I know private equity just would never engage, sign off on an agreement that in any way restricted or encumbered the exit. I mean, they were in there to sell, frankly, to the highest bidder. And any kind of complexity or restriction changes that entire bidding process. So I shared that with Mark Smith directly and said that was nonnegotiable”.
Certainly Marcus seems to be clear on his interpretation of the passage. It does seem odd that the two CEOs of Ipreo and Symbiont could have such vastly different reads of a situation.
This raises a number of questions; does the clause indeed reflect what Marcus indented or did Ipreo’s lawyers make an egregious error in translation when drafting the clause? Or, as the defendants assert, has Smith has “made repeated false assertions” as part of a strategy “to use the Markit-Ipreo transaction to try to extract money from Markit as part of its Synaps exit strategy.”
Synaps — A Promising Venture Or A Bust?
Markit and Ipreo also dispute Symbiont’s portrayal of Markit having effectively sabotaged Synaps through the acquisition and resultant delay in resolution, claiming, in effect, that Synaps had poor prospects of success anyway.
One half of Synaps — LTS — provided by Ipreo, was painted by the defense as an initiative that hadn’t really got traction in the market, that the Ipreo board was running out of patience with it and wanted to find a way to “reduce the cash burn”. The other half — the Symbiont technology —was presented as having overstated its capabilities and having been nowhere production ready.
They also pointed to the fact that Synaps, despite operating for two years at this point, “had no revenues, nor clients, and no firm investment”. The defense team pointed to the fact that Synaps had missed major milestones and had never released a production-ready system.
Raising The Funds And Herding The Cats
On the face of it, there did appear to be interest from Wall Street banks and Salerno had solicited a number of banks including Credit Suisse, BNY Mellon, US Bank, Citi, Deutsche Bank and BNP Paribas, many of whom had signed term sheets. The defense was also able to show how investor dried up immediately after Markit’s acquisition; investors were clearly spooked by the specter of sharing their investment with a competitor.
But in Marcus’s view, this was all just window dressing, and the banks were never that serious to begin with.
Marcus stated that signed term sheets do not imply that an investor will commit funds; rather term sheets are non-binding agreements which enable curious investors to have a “free look” in greater detail into a deal. In other words, term sheets merely allow the curious to go window shopping and part of the fun of that activity is there’s no commitment to buy.
“Frankly, one of the things I had learned through the banking grapevine, if you will,” stated Marcus in his testimony, “was that even one of the lead banks who had expressed the most enthusiasm, I had learned that the individual leading that effort didn’t have buy-in of his senior management.”
By Q2 2017 it did seem apparent that Synaps’ fundraising endeavors was talking longer than expected had hit a speed bump as it missed a key milestone of securing a deal and investment.
Part of the challenge was Synaps needed investment from at least six banks owing to regulations that require that banks have less than a 20% equity share in a financial infrastructure company.
Furthermore these institutions were wary of non-banking entities also investing which ruled out NASDAQ
Symbiont’s petition for damages appears to rest on an assertion that Markit’s acquisition caused the failure of an otherwise promising business venture and hence Symbiont should be compensated for the revenues it would have otherwise been able to enjoy.
The defense attempted to undermine the assertion that Synaps was likely to be successful though expert witness testimony from Eugene Holman Professor of Business Administration at Harvard Business School.
Professor Holman’s opinion was that Synaps not only would have had little chance of raising money given how long the fundraising process had dragged on but also was unlikely to achieve market success had they become funded given the challenges the company faced in the marketplace.
The defense also pressed on the fact that Symbiont hadn’t included Synaps on their balance sheet for accounting purposes. The inference being that Symbiont would have included Synaps if they actually believed it to be worth anything.
Within Synaps, the relationship between Smith and Salerno appears to have been tense; arguments developed about the state of Symbiont’s solution and the direction for the Synaps platform as a whole, leading to an increasingly caustic work environment.
Salerno started to form the view that the Symbiont platform was not as production ready as Smith led him to believe. Furthermore Salerno felt that Symbiont’s development was proceeding too slowly and did not have enough resources dedicated to the effort.
“Mark [Smith] was quite boastful about the capabilities of their platform,” stated Salerno at the trial, “he consistently stated very clearly that they were production ready…. we relied upon Symbiont’s software contribution being also ready….the representations by Adam Krellenstein and Mark Smith….were exaggerated.”
Things came to a head during an industry demonstration — “Project Journe” that was performed at the blockchain lab of blockchain consultancy and software provider R3. Intended as a way of demonstrating the capabilities of the platform to over 20 banking organizations and to act as a springboard for financing discussions, the deadline was moved from the end of 2016 to March 15th, 2017 as the platform wasn’t ready in time.
Performance issues appeared to be plaguing the Symbiont solution — a concurrency bug, referred to by Symbiont developers as a “land mine” and “just horrible” was resulting in transactions being not recorded at relatively modest loads.
There’s nothing more deflating than a product demonstration bombing so the Synaps team resorted to a heavily scripted and rehearsed demonstration to avoid these issues, with an intention of “refactoring” the platform later to address this as well as other challenges with the technology.
As bad as this seems, it’s not uncommon for demonstrations using leading edge technology to be brittle and are usually somewhat of a nail-biting endeavor. Even the best have struggled; the first public demonstration of the iPhone had to be heavily scripted because it was “buggy as hell.”
Despite these challenges, Project Journe was a success and received favorable PR. However, this victory would be soon overshadowed by a confrontation, the seeds of which were sowed during the demonstration.
Did You MVP Or Did You Not To MVP….That Is The Question
Following the success of Project Journe, Caitlin Long, who was Symbiont’s President at the time, e-mailed Symbiont’s board to highlight the success of the demonstration and claimed that they had met the obligations of a key contract that Symbiont had agreed with Synaps.
That contract stipulated that Symbiont would work towards building its technology up to the point that it met certain requirements — both functional and performance. Once these had been met Symbiont would receive a boost in equity ownership for Synaps and would start getting paid.
Having got wind of Long’s e-mail and finding issue with her claim, Salerno e-mailed Smith to point out areas where Symbiont was yet to meet the requirements (not least the concurrency “land mine”). Symbiont’s reaction, according to Salerno, was visceral. ”Their reaction that was extreme in reaction to us sending across a specific list of how we felt they hadn’t met the SOW…..Symbiont, frankly, became unhinged. They took grievous offense at my characterization of them not meeting the SOW. And they were, frankly, outraged.”
Through the subsequent months, that contract would continue to cause tension between the two organizations as Salerno continued to express concern about the concurrency bug and other issues with the platform while also pressing to Symbiont deviate from the original agreed scope which he believed was now no longer relevant. Salerno had spent more time talking to clients and appeared to have a more refined idea of what they wanted from the first view.
This caused tension with Symbiont, as meeting the original scope in the contract would get them paid irrespective if it was no longer what the clients wanted. Symbiont was also becoming increasingly frustrated with Salerno who seemed to have lost focus, becoming “lost in the process…[and]…in over his ski’s”.
The deal was changed to one where Symbiont would provide resources under Salerno’s instructions, but not long after, the Markit deal was announced, Salerno was recruited away Markit. Symbiont now seeing Salerno as the fox in the hen house, locked him out of the Synaps office and work on the platform ground to a halt.
Startup Life — Not For Wilting Flower Cry Babies
Nobody wants to go to court if they can avoid it because proceedings invariably dredge up embarrassing aspects of business that companies prefer to keep private. And this action is no exception, offering out an array of dirty linen for public consumption, painting the key participants in an unflattering light.
Markit, comes across as a bully — both in their written intentions; its corporate plans speaking of “bolster [ing] barriers to competitors”, as well as through its actions; targeting ClearPar clients that were considering investing in Synaps with offering large discounts to keep them onside.
Smith is portrayed as an aggressive character, with a highly inflated view of what his company was worth and the capabilities of its software, who would often resort to name calling. Smith called Marcus “completely unethical, immoral, and nefarious” and said of Ipreo — “we are partnered with a bunch of wilting flower cry babies.” The Symbiont technical team are characterized as thin-skinned technical divas who would react poorly when challenged about their technology and appeared to be disorganized without much evidence of technical project management being in place.
This should be taken with a pinch of salt as startups are inherently hard and scrappy. For an entrepreneur, a startup isn’t a job, it’s an all-consuming life choice with great uncertainty, where individuals put their life on pause to innovate even though the odds that are stacked against them.
So we should be careful not judging startups in the same way we would mature companies, who have more resources and face less of a daily existential threat. Symbiont, in particular seems to have taken on a lot. The challenges they face as a startup are made more acute by operating in a particularly tough segment; business to business financial services software using a nascent technology that many in the conservative world of financial services remain wary of.
Unlike many in that space, company has already proven that it can defy the odds, having been one of the few to have deployed their technology in a production environment — they are live with a blockchain solution, albeit not in the lending space, with both Vanguard and CRISP (the Center for Research and Securities Pricing) for a use case in index data pricing.
This Synaps venture, however, appeared to be infinitely more complicated in every dimension; the existence of an incumbent protecting its market and the number of investors and clients involved. The company needed to convince six financial institutions to invest and use the software, each one representing a labyrinth of approvals to be gained.
Day Of Judgement
Travice Laster Vice Chancellor will reconvene the case in April this year. He is no stranger to blockchain technology having been involved in an initiative to change Delaware’s state regulations to be more blockchain friendly, along with Symbiont. So the case is in the good hands of someone with a deep understanding of the technology.
It’s going to be an interesting Spring in fintech. We shall return with an analysis of the verdict in the spring.
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