Category Archives: CG Former Client

SeekingAlpha Email Alert Re: Gotham Report on EBIX

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Update 12:28 Eastern:   I am now hearing that Gotham did not publish a report.  Anyone who can corroborate one way or the other?  It seems the email alerts are sent to 2,349 people as of just now…. interesting – and one of them is me.

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Click on image to read it: The Gotham City Report has not shown up on SeekingAlpha yet – likely because it’s a Pro Report, that is distributed to paying subscribers around 24 hours prior to their making it available to us unwashed masses.  Another great strategy to increase the impact (damage) that their rumor mongering can have on the share price.  Note that Greg Farrell at Bloomberg seems to be carrying the short’s water as he’s quick to report extensively their allegations – but silent on favorable developments like the dividend re-initiation and the preliminary settlement of the class action suit – with no admittance of wrong-doing. In our view that’s a crushing blow to the all the allegations to date.

The class action was based on the unverified allegations in short reports hosted on SeekingAlpha (Gotham City and another).  That triggered a stock drop that pulled in the ambulance chasers and got the class action suit moving forward.  Adding to the insanity, the Dept of Justice launched an investigation that was based on the Class action allegations (it seems someone had been actively pushing the DOJ to get involved and uncover all this wrong doing… wonder who might have done that?) – so you have DOJ actions that are based on issues who’s genesis is found in anonymously authored short reports that were masterfully launched from SeekingAlpha.  Gotham’s 3 part report on EBIX in March 2011 is worthy of the Pulitzer equivalent of the highest honors one can give to a masterfully spun tale of nefarious doing built on a litany of half truths, missed represented facts and clever omissions.

While we’ve owned the stock for over 10 years – and while it’s been a spectacular investment – over the past 3 years we have suffered true financial injury from the short sellers very effective campaign, what galls us most is how the markets seem all to happy to facilitate the process and the regulators rough up the victim!

Join us at our sister sites – Seeking Compelling Mendacity.

CG Focus

EBIX to be Acquired for $20 Cash per Share by Goldman, Sachs

Good news – bad news.

Good news first: We are batting .500 on our stock picks for CG Focus List with today’s news that Ebix, Inc. (Nasdaq: EBIX) will be acquired by an affiliate of Goldman, Sachs for $20 per share.   The release is here:  (That’s far less impressive when you note that we have only profiled two stock and up until today they were both in the red.)

CG Focus List recommended EBIX intraday on February 13, 2013 but used the day’s close of $18.42 to track performance of the idea. Based on that price, the deal at $20 (plus one $0.075 dividend) provides nearly a 9% return in less than three months – implying an annualized return over 36%.  I guess we should be dancing in the isle … but we are not.

More good news: Strangely, the market seems to think the stock is worth more than the deal price, as EBIX closed at $20.60 and held a premium in aftermarket trading to $20.25 based on what my limited resources show.  Unfortunately, given the fear, lack of transparency and limited awareness around this company – and the fact that Goldman didn’t feel compelled to pony up more than a paltry 11x trailing EPS (and not much more than 10x trailing operating cash flow) it’s hard to understand where a higher offer would come from.  And I’m not holding out much hope that the sea of ambulance chasers now trying to shake down the company will ever deliver any value to anyone but themselves.

I am a novice in the world of merger arbitrage – but am guessing the current premium to the deal price is a function of EBIX’s huge short position: 10.6M shares short at April 15th – 28.6% of total shares outstanding.  It seems that some of the shorts are deciding to throw in the towel as this doesn’t look like it will get any better and then there’s the concept of cleansing a portfolio of failed concepts to make a more appealing product for fund participants. Once the shorts unwind their positions the premium should disappear and normal deal pricing would come into play – unless I’m completely wrong and a white knight is on the way – but again, I’m not holding my breath.

The final point to be made is that the long term performance of Ebix and its shares has been nothing short of amazing, and the CEO Robin Raina and his team are to be commended, and I am a thankful beneficiary of the value creation since March 2003.

Robin Raina was named EBIX President & CEO in 1999

The Bad News:  So what is the bad news in this you may ask and if so, perhaps you may wish to stop reading for what is to follow is a bit of spoiled, self pity and venting on what could have been even thought  There were no long term investors harmed in the making of this company…

The bad news is that this tremendous success story succumbed to a merger agreement valuing the Company at a paltry 11x trailing EPS despite its high operating margins and cash generating efficiency – this business really sang financially and generated enormous cash.  That’s why a core group of us long term investors hung on despite some terrifying bouts of short attacks and body blows to the stock price. Some of us even risked our reputations to defend a company’s honor and value in the face of those attacks and freely offered experienced counsel on ways to bolster Ebix’s Wall Street profile, reputation and to support/defend its market value from the rabid short selling vandals.

For that loyalty, we are now getting cashed out after a substantial decline in the value of our equity over the last 2-3 years,  despite continued strong execution in the business.

Note to self – next time sell more, a lot more!

To put today’s deal into perspective, EBIX’s shares closed 10% higher at $22.30 on May 2, 2011 – just two years ago, and that price represented an enormous haircut – courtesy of a remarkably well orchestrated short attack launched from – from a high closing price of $29.33 on March 23, 2011 (and yes, I’ve not adjusted for deals, etc. so it may not be as bad). That attack was masterful in every aspect of its manipulation of facts to create illusions of impropriety, poor character and even fraud – and it took the stock as low as $13 before its venom started to wear off (for a while, only).

During this two year period of shareholder value smallification, the Ebix business hummed along very impressively as reviewed below and they even bought back a lot of stock. But for some reason, the Board and management had clearly develop no plan to restore or even protect the Company’s image should they try to attack them again.  Two years later, a perpetrator with a remarkably similar pattern – struck again.  And again EBIX proved ineffective in translating their impressive business, domain expertise, recurring revenue base, and growth record AND potential into greater shareholder value or in mitigating its loss from rogue reports.

Ebix, Inc. Income statement Highlights
(in thousands) 2012 2011 2010 Change 2010 to 2012
Total Revenue 199,370 168,969 132,188 51%
Operating Income or Loss 77,008 68,748 52,507 47%
Income Before Tax 78,029 73,495 59,654 31%
Income Tax Expense 7,460 2,117 635 1075%
Net Income Applicable To Common Shares 70,569 71,378 59,019 20%

So it’s hard to jump for joy with this deal news. For someone who has spent a career in helping companies forge relationships and appreciation with investors – it causes immense frustration that Ebix refused to meaningfully alter their IR strategy or approach and that they were unable to proactively neutralize the short theses and build stronger support from Wall Street.  There was much that could have been done that would have either eliminated the need for this transaction or caused the buyer to pay more for the value they are receiving.

In closing, this outcome was a shock but not surprising – for at the end of the day – EBIX has chosen a path that will deliver great financial benefits to its management team and a modest lift to the recent share price for its holders.  Likely of far greater importance was putting an end to the incessant and highly personal critiques from “the shorts” and the widespread paranoia, concern and distrust these attacks were able to create across Wall Street.  And with petty avarice aside, most long investors such as myself are able to walk away from this stock having earned a solid or even remarkable return.  And professionally, as in a lab experiment, it allowed me to see first hand the valuation vacuum that can develop when investor communications, relationships and open dialogue are not optimized.  In effect, I was witnessing the “control” patient taking the placebo, and it confirmed the fundamental value that my skill sets do provide for those who listen.

So that’s a very long winded wrap up – and so now we need to find some more ideas to present and try to extend our hand.

Thanks for reading.

CG Focus List

P.S. We remain confident that our second CG Focus List stock, Klondex Mines Ltd. (TSX: KDX or OTCQX: KLNDF) is in great hands with a new management team and is well poised to make us look good as they transition from exploration into initial gold production this year and continue to explore and develop their Fire Creek property in Nevada.


EBIX – Analyst at $11B Fund Counters Gotham Smear

I had submitted the following article to Seeking Alpha but it was rejected so rather than play the game, I decided to publish it here.  Hope you find it helpful.  The analyst I site is at a highly credible growth fund manager known for long term ownership of stocks. He of course is not in a position to comment on behalf of his firm so he asked that I withhold his name.  SA should understand that.

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A Screen Capture of my “Declined” advisory from SA.

Interesting that SA refuses to publish my post when they freely published an anonymous report from a newly created firm…  I’m not comfortable with their editorial censorship – particularly given all the things I have read on the site.  It does seem they are not being impartial?  Let the readers decide.

Wanted to pass on the following unsolicited comments from an analyst at a well respected, $11B growth manager regarding EBIX and the Gotham City “Report.” He has particular expertise in accounting in Singapore and accounting in general – clearly something the Gotham writers are assuming most people don’t have. His fund does not have a position in EBIX at this time.

I called the analyst who sent this to me to thank him and get his permission to redistribute it. Among the things he said was the accounting was perfectly normal in his view and even noted that Google has 8 Singapore registered sub’s but mentions none of them in their 10-K (I take him at his word). He said it made sense to him but he could see how they (Gotham) were presenting this as irregular.

Subject: EBIX

Date: February 21, 2013 3:03:13 PM EST

I saw the move in EBIX shares today, and read the “research” by Gotham City Research on Seeking Alpha. Neither I nor my firm have a position in EBIX, but I have been following them since meeting with the company last summer. I saw your comment on the article and thought you may handle IR for the company. If that is the case, I would like to pass along a few observations that may be of use to you. For background, I have an undergraduate degree in accounting and finance, am a CFA charter holder, and at one time negotiated a pioneer tax status extension with the Singapore Economic Development Board (EBD) for a company that had made a number of acquisitions.

1. The credibility questions in regards to the 990 filings do seem spurious, as the author fails to point out that Robin Raina has contributed “about” $2MM a year to his foundation for the past few years, which is perhaps what he was referring to in the interview.

2. The inter company (aka “related party”) loan that seems to be the primary concern of the author would not be disclosed on a consolidated balance sheet, unless the obligation was subject to exchange rate fluctuations, which is almost never the case. If inter company transactions were reflected on consolidated balance sheets, or in footnotes, companies like Google or GE would require hundreds of pages for footnotes alone in their 10-K.

3. To me, knowing accounting, the transactions seem to be fairly obvious, though confusing to those that have never seen cross border IP transactions at the granular level. It appears that US Parent loaned money to Singapore sub, which purchased the intellectual property in the Australia transaction, with the tangible assets staying with the Australian sub. On a consolidated basis, this all rolls up to one clean balance sheet. Why? The company is taking advantage of Singapore’s favorable tax climate by having that subsidiary purchase the intellectual property in the foreign transaction, and then using “transfer pricing” to determine the portion of the revenue for each contract that is “earned” with the IP in Singapore, with the remainder of the revenue “earned” in Australia, thus lowering the effective tax rate. See comment 5 below.

4. The Australia cash flow statement does appear to be somewhat incorrect, in excluding the two offsetting items, but this does not impact the actual cash flow calculation, nor does it impact the consolidated financials since these were all inter company transactions.

5. The difference in the revenues and income for Australia per SEC and ASIC filings seem to be explained in that on a books basis it reflects the tax treatment where a portion of the revenue from a customer is attributed to the intellectual property held by the Singapore sub, while the revenue is actually generated by customers in Australia. For comparison, look at how Google runs revenue through its low tax subsidiaries (i.e. Ireland) on a tax basis, while reporting those revenues as being from the United States in its SEC filings.

6. On the unbilled receivables question, it seems that the company is properly accounting for these. As a refresher, Unearned Revenue is a Balance Sheet account, appearing on the liability side. Unearned revenue can be created if a payment is received for work yet to be completed, or for billings on long term contracts. For a nice summary, see:

7. Why has the company not responded? I imagine it is because they are in a quiet period pre-earnings release, though I have not confirmed this. Impeccable timing on the part of the author.

8. Final note, take a look at the open interest in the Mar 15, 16 and 17 strike puts last week. Unusual? Looks like someone is having a good day.

As for the open interest in options he mentions, he said that on Bloomberg he could see the open interest in March 2013 Puts was limited but ramped substantially a week ago. He said economic studies confirm over and over that options that are 25% or more out of the money, with one month to expiration, are generally like a lottery ticket – they rarely pay off; and that institutional investors would not purchase them. So the aggressive purchase activity is an aberration. From my notes, this is what he saw on Bloomberg – it may be off slightly but the gist is correct and you can look for yourself.

March 2013 EBIX $17 Puts – the open interest went from 700 to 1,900 contracts from 2/13 to 2/14, all trading at the ask price.

March 2013 EBIX $16 Puts – the open interest went from 1,100 to 1800 contracts from 2/13 to 2/14

March 2013 EBIX $15 Puts – the open interest went from 680 to 1,200 contracts from 2/13 to 2/14 – someone paid $0.40 for what is now priced at $2.50

So with the same authority that Gotham questions EBIX, I can state that Gotham – or someone knowledgeable about their plans clearly placed their bets on these options (and perhaps the stock as well) prior to a premeditated plan to attack the stock. They made that investment even before they bought the Gotham website.

Just trying to provide some balance to the story.

Disclosure: I am long EBIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Have been a shareholder for nearly 10 years and am disgusted by how the media covers this hatchet job as if it were credible – when the author is anonymous and the website was launched last week.

This article is tagged with: Long Ideas

HERE’s The response to my submission.  I can publish it here now because it’s not on SA.




Dear David Collins,

Thank you for the submission, and we do welcome counterpoints, but in order to publish we’d need several revisions. First, we’d ask you to identify the fund the analyst is with, or explain why you can’t. Second, the information on the options is interesting, but the allegations of impropriety are not sufficiently supported. Lastly, if the analyst could provide sources supporting their statements, that would add to the credibility.

Sincerely Yours,

SA Editors

EBIX, Inc. Nasdaq: EBIX – Our Valentine?

Insurance Services/Software Provider EBIX, Inc. (EBIX) – Our Valentine? 2/13/13
(Alert issued intraday, stock closed at $18.42, up $1.24 (7%) on 1.3M shares)

EBIX Chart

13M shares short out of 37M… we hope the shorts are saying… “What me worry?”

Our planned approach for CG Focus List was to prepare a more formal and thorough one page Alert on each idea, but for those who know us and EBIX – and given time constraints – we threw this together to re-flag the idea for you on a day when the stock is acting “better.” We were not planning to profile EBIX at this time, but today’s trading was brought to our attention by a chartist we know who had told us the stock was a “Sell” on a technical basis the past two years; he now thinks it looks attractive but not conclusive.  We have been working on what was going to be our first idea for CG Focus List. It is almost ready for the presses so you will see one more idea in the next few days.  Then we’ll get back to asking for your favorite stock ideas!  Please be generous and please spread the word about CG Focus List.

As long term believers (and shareholders) in the EBIX story the past 10 years (though we have seen the stock stagnate the past 2 years under waves of rumor & innuendo while getting progressively cheaper…) today’s trading activity makes us think it’s not hopeless that Wall Street could love again… Thank you St. Valentine!?

The naysayers can sling all the mud they like about the stock & the CEO (a former client for 2 years ~2004-2006), but the growth, cash flow and business premise all seem very real; and the execution over 10 years nothing short of amazing. Further, we are hopeful that organic growth will seep into the numbers more each successive quarter as the sales team and selling/cross-selling initiatives they have put into place the last year or two mature at the same time the Company’s expanded size and scope make it more likely to win new or additional business from larger insurance players.

As a major holder of the stock said to us the other day, and we’ve not checked his math yet but he knows the story well (we paraphrase): “if EBIX delivers on the CEO’s goal of growing to $500M in sales with comparable operating margins (~39%) within 3 years, the share price should rise 2-fold while maintaining the same single digit multiple and paying us a 1 1/2 % yield along the way…” (We note that the prior goals of $100M & $200M in sales seemed a stretch but have both been achieved as promised).

Someone’s going to be right on the stock, but we believe that 10 years of precedent with a CEO who’s executed well and delivered as promised on the business while increasing his exposure to the stock is a data set that is more reliable than the scurrilous rumors adeptly floated into the market to scare away week hands. Of course we could be wrong so we keep asking the tough questions as well…

The shorts have certainly succeeded in creating fear around the name, but perhaps the tide has turned and they are experiencing some fear as the stock comes to life on no news as Q4 reporting approaches.

Either way, we do expect the shorts to return with their proven methods, particularly if the shares continue their rally in the coming days and months.  They’ve been masterful and far too successful in scaring 25% and more out of the stock each time they make a run for the Company.

Suffice it to say, we think the story is worth a very close look and a fair review of the pros and cons.

EBIX is covered by Craig-Hallum and Singular Research and perhaps Northland – not sure?

Steve Barlow is the IR guy and very good at it.

Steve Barlow

Call him not us!  He’s paid to know the answers. We’re just trying to add value by exchanging ideas worthy of consideration.

Disclosure: CG Focus List and/or its affiliates have had a long position in EBIX shares for years but per our policy we have not bought or sold shares related to this position in the last five trading days following today’s article. Feeling the stock was depressed and a potential rebound candidate on Q4 results, we had put in place a modest LONG trading position more than five days prior to this article. We may reduce this position as a result of the execution of out of the money limit orders, depending on EBIX market activity.