MITK - Mitek Systems

[writser]

Mitek System is (according to Wikipedia) a software company that specializes in digital identity verification and mobile capture built on artificial intelligence algorithms. The company's technology allows people to deposit checks via their mobile phones and open bank accounts from mobile devices. Additionally, the technology verifies people’s identity with patented algorithms that capture, classify and authenticate photos of identity documents including passports, ID cards, and driver's licenses.

 

Crosspost from the Paul Singer topic:

 

An Elliott portfolio company is trying to buy MITK (hostile takeover). Singer increased his bid from $10 to $11.50 today.

In the letter, sent to the Mitek Board of Directors two weeks ago, ASG CEO Charles Sansbury noted that the new offer price represents a 73% premium above the unaffected closing price on October 9, 2018, a significant premium above the average share price for all relevant periods, and a 90% premium above Mitek’s 5-year average. The letter also noted that the proposal would not be subject to any financing condition, as Elliott would commit to provide the necessary equity to complete the acquisition.

 

ASG released the private correspondence because despite the increased offer, Mitek has maintained its refusal to engage with ASG on reasonable terms that would allow ASG to conduct the necessary diligence and make a binding offer. The letter’s publication is intended to update the market on ASG’s continuing efforts to engage.

 

I bought a few shares on the open today. I guess I like Singers style a bit more than most of you. But regardless what you think of him, he's offering a price higher than what shareholders have seen the past few years, the deal has synergies and consider me skeptical about the chances of a random ~$300m company resisting the Singer antics (and financial power). Yet shares were trading at a ~15% discount to the improved offer. Very tiny position, just for the heck of it.

 

Board reply today (link):

 

Following this announcement, in the spirit of open, constructive engagement and with a focus on exploring all opportunities to deliver value for shareholders, Mitek’s CEO, Chairman and its General Counsel, along with our financial advisor, met in person with the ASG team for over 90 minutes to discuss Mitek’s value drivers and the reasons why Mitek is worth significantly more than ASG’s proposal. During that meeting, we also made it clear to ASG that we remain open to a transaction at the right price.

 

[..]

 

Nonetheless, following the receipt of ASG’s revised proposal, Mitek offered ASG the opportunity to access preliminary diligence, on a confidential, non-exclusive basis, to provide them an opportunity to increase their offer price. We requested that ASG and Elliott agree to a confidentiality agreement, including a customary standstill, to prevent the misuse of the Company’s confidential and proprietary information. Further, to demonstrate its good faith the Company also offered to provide an agreed list of specific key diligence items pursuant to the confidentiality agreement, as well as making a number of other concessions which ASG and Elliott requested.

 

Excluding other buyers. Elliott/ASG are insisting that we sign an agreement to interact with ASG as an exclusive buyer. Given the number of other parties that have expressed interest in Mitek, there is no reason for ASG to get exclusive treatment (other than reasons that solely benefit ASG).

 

 

Looks to me like the company will be sold one way or another and the board is just trying to play poker a bit to increase the price. Yet shares are trading at a significant discount to the Elliott bid. Seems like an interesting situation to me.

 

My apologies for the meager opening post. Has anybody else looked at Mitek?

[Foreign Tuffett]

Certainly does look like there's a good chance of the company being sold, with $11.50 being the current bid.

 

I think Elliott would have a good chance of winning a proxy battle, if it chose to launch one. Insiders only own 7.5%, and there's a non-staggered board. Plus you have a brand new CEO (started 11/6/18), and a CFO that very recently (11/26/2018) rescinded his resignation, neither of which engenders much confidence in management.

 

I wonder if the CFO decided to "un-resign" once he realized that the company was likely to be sold off? Why not hang around for  < 1 year to cash in?

 

 

 

[GregS]

The backroom drama has been interesting.  DeBello was fired but no one knew why, and the CFO leaving the same day was obviously concerning, then the offer comes in.  The initial offer was a lowball IMO and I think ASG is trying to strong arm a deal due to the chaos.  It's not going to happen because they overplayed their hand by coming in so aggressively.  I think shareholders and the Board realize if this went to a bidding war the price would be higher than the original $10 or current $11.50. 

 

Mitek has a dominant franchise in mobile check deposit.  Despite check usage declining, because mobile adoption is increasing, revenue here will probably grow in the double digits for some time.  They're using this cash to invest in Mobile ID.

 

Mobile ID is a much larger opportunity and has crossover with their financial industry expertise and customer base which is particularly important when you consider the regulatory hurdles.  However, it is a much more competitive industry with lots of new entrants so Mitek is ramping spend on R&D, sales and acquisitions.  Huge secular shifts in this direction make this a very attractive market and make Mitek an attractive target. 

 

My guess is the PE folks realize that companies that need digital ID verification are going to start buying up the tech companies and Mitek will be a top target.  If Mitek can manage to fend off the economic buyers and get interest from the strategic buyers the price goes higher.  I think the Board is well aware of this.  In the meantime the business is growing rapidly and they have no problem funding growth.

[Foreign Tuffett]

Writeup from the Clark Street Value blog:

 

http://clarkstreetvalue.blogspot.com/2018/12/mitek-systems-elliott-bear-hug.html

[Jurgis]

So the thesis is pretty much Elliott bid going through or someone else acquiring the company? And that the stock won't fall much if acquisition does not happen because it was trading in range close to current price?

 

If I look at financials without considering buyout, I don't see much margin of safety. Valuation is high IMO and seems to assume high growth and great results going forward...

[writser]

So the thesis is pretty much Elliott bid going through or someone else acquiring the company? And that the stock won't fall much if acquisition does not happen because it was trading in range close to current price?

 

Yes :) . The thesis is basically: nobody fucks with Paulie.

[Guest Schwab711]

So the thesis is pretty much Elliott bid going through or someone else acquiring the company? And that the stock won't fall much if acquisition does not happen because it was trading in range close to current price?

 

If I look at financials without considering buyout, I don't see much margin of safety. Valuation is high IMO and seems to assume high growth and great results going forward...

 

I don't know anything about the deal but I've looked in to the company off and on. I don't think it's FICO by any means but MITK is a highly in-demand asset with pricing power in my view. Will they take it, when, and how can I be sure how much pricing power they have was my sticking point on investing in the past. Of course that doesn't mean the stock can't or won't fall in the deal failed. I do think there's some floor on the value of the assets though.

[LightWhale]

Thanks for writing it up writser. 

 

That's from 2018 AR Mitek submitted today:

 

Our corporate documents and the DGCL contain provisions that could discourage, delay, or prevent a change in control of our company, prevent attempts to replace or remove current management, and reduce the market price of our stock.

Provisions in our restated certificate of incorporation and second amended and restated bylaws may discourage, delay, or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our restated certificate of incorporation authorizes our Board to issue up to one million shares of “blank check” preferred stock, sixty thousand of which are reserved for the Section 382 Rights Agreement, discussed below. As a result, without further stockholder approval, the Board has the authority to attach special rights, including voting and dividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficult for a third party to acquire us. We are also subject to the anti-takeover provisions of the DGCL. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval

 

Plus this is from October 23rd:

Pursuant to the Plan, the rights would become exercisable if a person or group acquires a position of 4.9% or more of Mitek’s outstanding common stock after the adoption of the Plan...Once exercisable, all holders of rights other than the person or group triggering the rights will be entitled to purchase additional shares of the Company’s common stock at a 50% discount.  Rights held by the person or group triggering the rights will become void and will not be exercisable.

 

Mitek will submit the Plan to a stockholder vote at the 2019 annual meeting of shareholders.

 

 

So it's seems that the board intends to hang in there until the annual meeting, and see whether Elliott can really win enough seats. Last year the meeting was held on March 7, so it might take a few months until we see concrete developments.

[writser]

Yes, Mitek has a poison pill in place - probably one of the reasons the stock trades where it trades. The key question is, to me, how credible is the story of the company? The Elliott bid is basically around the all-time high of the stock. Yes, the bid was opportunistically timed, but still it's way better than what the market has been offering the past few years. And the Mitek insiders? Directors own basically zero shares and get paid ~$150k / year to show up at board meetings. I'd want to keep that job too .. One director bought 20k shares in August but the rest has been selling the past few years. As do basically all insiders. So, how much value should you ascribe to the insider shtick? (always have wanted to use that word). Are these guys really true believers, do they have solid arguments and does that make them want to battle Paul Singer, the guy who seizes Argentinian sailing ships in Ghana, allegedly hires PI's to find dirt on CEO's and who was described by the AthenaHealth CEO as follows:

Bush told me that, when he began to research Elliott online, the experience was like “Googling this thing on your arm and it says, ‘You’re going to die.’ ”

 

Consider me skeptical. Paul Singer might be an asshole but he's money-good, offering a decent price and the deal seems to make sense for them. Meanwhile insiders are barking about value but own no shares, have said that they want to sell the company and have given Elliott private access to the books. If they don't come up with something good I think they will yield and/or booted by shareholders. Maybe Elliott will raise his bid another fifty cents or so to allow the board to save face.

 

Obviously things can go wrong in myriad ways but I like my odds. The bad thing is that shares have risen ~5% since my post and are now trading closer to the $11.50 offer.

[LightWhale]

I agree both about the odds and about the opportunistic usage of shtick... the references below were aimed at calibration of IRR.

[Foreign Tuffett]

Elliott has backed away from a proxy contest in exchange for the board initiating a review of strategic alternatives. "Multiple parties" have expressed interest, which is definitely a good sign.

 

https://www.sec.gov/Archives/edgar/data/807863/000080786318000117/mitk-20181221x8k.htm

 

My interpretation of this is that the board realized that putting the company up for sale was fait accompli, so why fight the process and risk getting removed?

[LightWhale]

I agree, bought a few more shares. Surprising the stock has not reacted to the news

[GregS]

Elliott has backed away from a proxy contest in exchange for the board initiating a review of strategic alternatives. "Multiple parties" have expressed interest, which is definitely a good sign.

 

https://www.sec.gov/Archives/edgar/data/807863/000080786318000117/mitk-20181221x8k.htm

 

My interpretation of this is that the board realized that putting the company up for sale was fait accompli, so why fight the process and risk getting removed?

 

It seems the greenmail option is off the table for awhile, that's good news.

 

Obviously a more open sales process would be best for shareholders in getting the best price.  Maybe Elliott realized they weren't going to win a proxy contest?  Another possibility would be a take private by management and Elliott.  Might end up at a higher price than current offer but probably would still undervalue the company.

 

I agree stock should be higher today.

[writser]

Elliott has backed away from a proxy contest in exchange for the board initiating a review of strategic alternatives. "Multiple parties" have expressed interest, which is definitely a good sign.

 

https://www.sec.gov/Archives/edgar/data/807863/000080786318000117/mitk-20181221x8k.htm

 

My interpretation of this is that the board realized that putting the company up for sale was fait accompli, so why fight the process and risk getting removed?

 

Yeah, seems unlikely that Elliott would back down from a proxy contest without cause. Probably they reached some sort of an agreement: we pull the proxy contest if you don't obstruct the sale process. But then again, what do I know. Seems like the most sensible explanation but hard to read the tea leaves. Thanks for bringing up the news here. Bought a few more shares during the festivities.

 

Strange price action past few days (though I guess that was true in basically every stock) but you don't hear me complaining.

[LightWhale]

I got out at 11.32, for 12% in three weeks. 

I hope for you guys I'll be missing out on bidding war.

[writser]

Value investors always sell too early, right? I sold the majority of my position as well. So far the best bid is $11.50 and shares are trading very close to that price as of today. Hard to handicap the chances of a higher bid (so far I've seen nothing that indicates a bidding war) and there's still some downside if management does something stupid. Wouldn't mind adding opportunistically if it drops a few percent.

[LightWhale]

In retrospect, considering our conviction after the latest management announcement, the right play might have been to lever up the position, fully covered by the 7.5 puts, which were dirt cheap.

[writser]

My conviction wasn't that high. In hindsight it's always easy to say a position should have been much bigger (and I love to complain about that every time an investment works out). But in reality unexpected things happens. If shares drop 10% I'd feel like an utter idiot losing a shitload of money after doing basically two hours of due diligence and a circle jerk in this topic.  I'm usually a bit (too?) conservative. My position sizing was ~3% here. Something like 6% could have been fine but I really would feel uncomfortable with a much larger position. I'm also usually skeptical about using options.

[writser]

At some point today shares were down almost 10%. Thinking about buying back some shares.

[Foreign Tuffett]

Presentation at investor conference starts in ~30 minutes.

 

http://investors.miteksystems.com/events-presentations

[LightWhale]

To save others the bother - Unless I dozed off at some point, nothing relevant to the acquisition

[writser]

Value investors always sell too early, right? I sold the majority of my position as well. So far the best bid is $11.50 and shares are trading very close to that price as of today. Hard to handicap the chances of a higher bid (so far I've seen nothing that indicates a bidding war) and there's still some downside if management does something stupid. Wouldn't mind adding opportunistically if it drops a few percent.

 

Obviously ..

[landstander]

Same, got out at $11.25 at the start of the year. I tell myself better early than late. It doesn't help, but that's what I tell myself =)

 

Thanks for the topic, good idea that worked out faster than I expected.

[Castanza]

Link to Aite Report

 

https://www.miteksystems.com/aite-aim-whitepaper

 

Observations from ER.

 

Agilisys

 

I believe their expansion into the casino/gaming industry will prove to be vital and lucrative as online gaming regulations relax causing an influx of "couch gamblers"

from mobile devices.

 

Growth and Cash Flow

 

They have continued to be on par with their growth estimates and cash flow. During the conference call someone asked why cash flow was slightly

less this quarter than the previous two. Jeff responded by saying it was due to bonus payout, acquisition and other standard expenses. And that

moving forward we should continue to see similar growth. This was encouraging.

 

Competition

 

Mobile check deposits are completely cornered by them. There certainly is other competition out there (Listed in linker Aite Report). Mitek is regarded as the "best in class" currently. However in my opinion they need to expand their geographical influence to Asia.

 

Growth

 

I like that growth is not entirely depended upon their marketing efforts. A lot of it is organic through their "partners" or "customers" that utilize their system. However I'm not sure if I like their pricing strategy as it focuses on volume rather than per transaction such as some competitors. However they did take a few questions regarding price leverage and whether or not they would exploit this. Its something they are looking into, specifically in Mobile Check Deposits.

 

All in all I think it was a good solid ER, Fundamentals still look strong as well as guidance. However the competition is there and I hope Mitek can continue to hold an edge. I think they have an advantage in the financial industry over competition which is a key focus for them. I personally would like to see them expand into gov't related services. States are clearly headed towards virtual drivers licenses etc. I believe there is room for more than one company in this field. The key is picking the right industries to target.

[Foreign Tuffett]

Maybe I'm a rube, but I thought earnings were fine + they affirmed 2019 guidance. Obviously it's too early in the process for there to be any update on the strategic alternatives process. Anyway, as of this morning I am back on this pain train.