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: http://finance.yahoo.com/news/ebix-inc-enters-merger-agreement-133029301.html (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.
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 Seekingalpha.com – 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|
|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.