EBIX - Ebix Inc

[Guest wellmont]

Whitebox Concentrated Convertible Arbitrage Fund, Ltd. (the Convertible Arbitrage Fund) is

a “feeder” entity in a “master-feeder” structure, whereby the Convertible Arbitrage Fund

invests substantially all of its assets in Whitebox Concentrated Convertible Arbitrage

Partners, L.P. (the Convertible Arbitrage Master Fund). The Convertible Arbitrage Master

Fund’s investment objective is to provide superior short-term, risk-adjusted returns through

a convertible arbitrage trading strategy. To accomplish this, the Convertible Arbitrage

Master Fund invests primarily in convertible debt, equity, and other securities of United

States issuers. In addition to its investment in the Convertible Arbitrage Master Fund, the

Convertible Arbitrage Fund holds an investment in an affiliated limited liability company.

The fair value of the fund has been estimated using the net asset value per share of the

investments.

[twacowfca]

why is ebix giving money to to rrf?

 

For 2011, the Company made a matching grant pursuant to its 401(k) Plan of $3,676, and provided a grant of $5,000 to the Robin Raina Foundation as well as a matching grant of $11,000 to the same. For 2010, the Company made a matching grant pursuant to its 401(k) Plan of $3,676, and provided a grant of $23,000 to the Robin Raina Foundation as well as a matching grant of $11,000 to the same. For 2009, the Company made a matching grant pursuant to its 401(k) Plan of $3,675, and paid a conveyance expense of $6,000.

 

Rahul Raina, is the Company’s Assistant Vice President of Business Process Outsourcing and the brother of Robin Raina, our Chairman of the Board, President, and Chief Executive Officer. During 2011 he was paid a salary of $120,000 and received no cash bonus or share-based compensation awards. During 2010 he was paid a salary of $120,000 and he received a cash bonus in the amount of $25,000. Previously Rahul Raina was granted options to purchase 225,000 shares of our common stock with an exercise price of $0.74 per share, which is equal to the fair market value of the common stock underlying the stock options at the original grant date. The options had a four year vesting period from the date of grant and expire ten years from the date of grant. This grant was not subject to any of the Company's approved stock compensation incentive plans. The expense for these options had been earlier fully recognized in the Company's financial statements. The options are presently fully vested and during the year 2011 48,000 options were exercised. As of December 31, 2011 there are 130,000 of such options that are outstanding but unexercised.

 

why didn't ebix give directly to the Alabama disaster relief fund?

 

Consistent with Ebix’s corporate mission of giving back to the communities in which we operate our business, during the year ended December 31, 2011 Ebix donated $5 thousand to the Robin Raina Foundation, a non-profit 501© charity in support of the Alabama Disaster fund.

 

His brother, who was evidently on the payroll in 2009  through at least 2012 for a modest ( by US standards) salary.  Received a large chunk of options with a strike price of $0.74, equal to the market price at the time they were granted.  When was that ?  It must have been a long time ago. What was his business relationship to EBIX when they were granted?

[Guest wellmont]

whitebox had ZERO risk.

If they did hedge, it would not have been a risk-free trade for them.

 

The Company settled this conversion election by paying $19.0 million in cash with respect to the principal component, paying $2.3 million in cash for a portion of the conversion spread, and issuing 275,900 shares of Ebix common stock for the remainder of the conversion spread.

If this was a total fraud, they could/would have paid shares instead of the $2.3M.

 

I don't know if it's a total fraud or not. but I don't necessarily agree with that argument. I believe they do lots of comparative analysis regarding dilution calculus (for all the deals they do some of which are cash some stock) vs cash needs. this analysis tells them whether to pay cash or stock at any given time. don't forget they need to make sure the stock goes up to keep this afloat. if they dilute too much it own't.

 

how was whitebox exposed if they hedged?

[mankap]

We are digressing to discuss about Whitebox.

If whitebox did not short the shares, they would have got only 19m back.They would have got only 0% return.Cost to them is the opportunity cost.Plus they are taking the risk, in case of default by the company they will get shares of a bankrupt company.

If they had shorted the stock as you are saying, shorting would have cost them money.Had the shares stayed at 16, they would have lost money equal to the cost of shorting of shares which is not insignificant.

Whitebox did what they are good at.Lend money and make profit on conversion arbitrage.

Ebix got money to pay for E-Z data purchase.Ebix returned 19m+2.3m cash+275k shares within 2 years.

 

I do not know how does it prove that Ebix is a fraud?

 

[Guest wellmont]

We are digressing to discuss about Whitebox.

If whitebox did not short the shares, they would have got only 19m back.They would have got only 0% return.Cost to them is the opportunity cost.Plus they are taking the risk, in case of default by the company they will get shares of a bankrupt company.

If they had shorted the stock as you are saying, shorting would have cost them money.Had the shares stayed at 16, they would have lost money equal to the cost of shorting of shares which is not insignificant.

Whitebox did what they are good at.Lend money and make profit on conversion arbitrage.

Ebix got money to pay for E-Z data purchase.Ebix returned 19m+2.3m cash+275k shares within 2 years.

 

I do not know how does it prove that Ebix is a fraud?

 

you are missing the fact that whitebox could convert at any time  that the trade was profitable before two years. you are assuming they could convert when the loan came due in two years. you have no idea what e-z data has done since they bought it. you are guessing. because there is no disclosure. what we do know is the stock is way down since they bought ez -data. this when a time stocks in general have strongly risen.

[Guest wellmont]

forget what whitebox did. they made a ton of money on this trade in a little over a year with very little risk. that's a fact. ebix borrowed $19m for a little over a year, at a cost to shareholders of $8m. that's a fact. now why would a company that is "gushing" free cash flow do that? why would they need to borrow?

[mankap]

Why Ebix had to borrow in 2009?

The answer is very simple.

In 2009 they acquired 3 companies and the cash amount paid was more than FCF.

May 2009 - Paid 7 m cash for Facts Inc

Oct 2009 - Paid 8 m cash for Peak performance

Oct 2009 - Paid 25.5m cash for E-Z Data

[Guest wellmont]

Why Ebix had to borrow in 2009?

The answer is very simple.

In 2009 they acquired 3 companies and the cash amount paid was more than FCF.

May 2009 - Paid 7 m cash for Facts Inc

Oct 2009 - Paid 8 m cash for Peak performance

Oct 2009 - Paid 25.5m cash for E-Z Data

 

they borrowed $47m in last 3 years and issued a net of 3m new shares ($60m). why aren't they buying companies from fcf? ez data is a such a great business they will pay 40% interest to own it?

[Edward]

forget what whitebox did. they made a ton of money on this trade in a little over a year with very little risk. that's a fact. ebix borrowed $19m for a little over a year, at a cost to shareholders of $8m. that's a fact. now why would a company that is "gushing" free cash flow do that? why would they need to borrow?

This is a very strange ex post argument. You are effectively arguing that it doesn't make sense to issue any kind of convertible note.

 

Almost all convertible notes are issued with a positive rate of return. Here apparently the rate was 0. How can this be a negative sign? On an ex ante basis this was a very reasonable deal.

 

As for comparing the 8m paid over 19m borrowed:

 

This great return for the note holder (and it is a great return) was achieved exclusively due to optionality. They effectively swapped the interest on the note for a call option and made some money on it. It could just as well expire worthless and they wouldn't get anything except the principal (which was at risk).

 

A predatory lender to a distressed company usually lends at a high rate, not taking bets on the common stock while foregoing interest payments.

 

This whole angle is moot IMO.

 

[Guest wellmont]

not at all. most converts are issued with a convert price set at a premium to the current trading price, sometimes as much as 20%. that does not appear to be the case here. it looks like the bond was issued with the convert price = the current price. no premium. that makes it expensive for the issuer and attractive to the holder. it also makes it easy to make a big profit on this bond, which of course costs ebix shareholders. Second this was actually a hybrid instrument. Because whitebox demanded that the principal be repaid in Cash, like a regular bond. good for whitebox. bad for ebix. Third this was a short term loan to mitigate risk for Whitebox. Again unattractive for Ebix. Ebix borrowed from an extortionist so it could buy yet another company to keep it's roll up....rolling.

 

be that as it may, this company is not buying companies out of fcf because there is none. if you add up all the free cash plus all of the costs (debt, equity) to acquire new revenue, there is nothing left over. and that is with extremely low tax rate. in buffett language, NO owner's earnings to speak of. and that may be a reason why the stock price is about where it was 5 years ago. 5 years is plenty of time to "weigh" things.

[twacowfca]

not at all. most converts are issued with a convert price set at a premium to the current trading price, sometimes as much as 20%. that does not appear to be the case here. it looks like the bond was issued with the convert price = the current price. no premium. that makes it expensive for the issuer and attractive to the holder. it also makes it easy to make a big profit on this bond, which of course costs ebix shareholders. Second this was actually a hybrid instrument. Because whitebox demanded that the principal be repaid in Cash, like a regular bond. good for whitebox. bad for ebix. Third this was a short term loan to mitigate risk for Whitebox. Again unattractive for Ebix. Ebix borrowed from an extortionist so it could buy yet another company to keep it's roll up....rolling.

 

be that as it may, this company is not buying companies out of fcf because there is none. if you add up all the free cash plus all of the costs (debt, equity) to acquire new revenue, there is nothing left over. and that is with extremely low tax rate. in buffett language, NO owner's earnings to speak of. and that may be a reason why the stock price is about where it was 5 years ago. 5 years is plenty of time to "weigh" things.

 

 

Wellmont,

 

Congratulations on the thoroughness and astuteness of your analysis.

 

I've kicked the tires of EBIX ( or rather turned over a few of their rocks ) and didn't like or didn't understand what I saw or smelled.  You have nailed this roll up to the wall. This looks like WorldCom lite.  It's sad for those who trusted Robin, despite all the red flags.  :(

 

 

[Guest wellmont]

twacowfca appreciate the props. I'm not clear one way or the other that it's a fraud. to me it's just not a good business to own. But it is going to be interesting to follow because there very well could be more to the story. my gut tells me this could end very badly for shareholders.

[twacowfca]

twacowfca appreciate the props. I'm not clear one way or the other that it's a fraud. to me it's just not a good business to own. But it is going to be interesting to follow because there very well could be more to the story.

 

Fraud is usually very difficult to prove, especially to a jury.  When there are overseas subsidiaries, jurisdictional issues make it even more difficult to make a case that will stick.  Your postings provide a good starting point if the US Attorney has the determination and the budget to follow wherever this leads.

 

At the very least, the potential for deception is off the chart high here.

[Edward]

not at all. most converts are issued with a convert price set at a premium to the current trading price, sometimes as much as 20%. that does not appear to be the case here. it looks like the bond was issued with the convert price = the current price. no premium. that makes it expensive for the issuer and attractive to the holder. it also makes it easy to make a big profit on this bond, which of course costs ebix shareholders. Second this was actually a hybrid instrument. Because whitebox demanded that the principal be repaid in Cash, like a regular bond. good for whitebox. bad for ebix. Third this was a short term loan to mitigate risk for Whitebox. Again unattractive for Ebix. Ebix borrowed from an extortionist so it could buy yet another company to keep it's roll up....rolling.

Have you tried pricing the optionality of the instrument in yield-equivalent terms? i.e. if they issued a straight bond, what would the yield have to be so that the investor would prefer that.

 

I understand Whitebox got a good deal ex post, I'm just interested in how good it was ex ante. At the money options are of course more expensive for the issuer but that is the reason the not had 0 interest on it.

[Edward]

Have you tried pricing the optionality of the instrument in yield-equivalent terms? i.e. if they issued a straight bond, what would the yield have to be so that the investor would prefer that.

Oh! Found it in the 2009 10-K, page 54:

 

"The application of this accounting guidance resulted in the Company recording $24.15 million as the carrying amount of the debt component, and $852 thousand as debt discount and the carrying amount for the equity component. The bifurcation of these convertible debt instruments was based on the calculated fair value of similar debt instruments at August 2009 that do not have a conversion feature and associated equity component. The annual interest rate determined for such similar debt instruments in August 2009 was 1.75%."

 

1.75% is a baaad rate to do predatory lending at.

 

Also note that the company had access to bank debt (someone previously speculated they didn't which led to these convertible deals):

 

page 53:

 

"As of December 31, 2009 the Company’s short term debt consists of a $25.0 million revolving line of credit facility with Bank of America Corporation. The line provides for a variable interest rate at Libor plus 1.3% and is secured by a first security interest in substantially all of the Company’s assets."

 

I will keep on digging. Currently verifying where the cash for all the acquisitions since 2000 came from exactly (debt, equity issue, or FCF).

[twacowfca]

not at all. most converts are issued with a convert price set at a premium to the current trading price, sometimes as much as 20%. that does not appear to be the case here. it looks like the bond was issued with the convert price = the current price. no premium. that makes it expensive for the issuer and attractive to the holder. it also makes it easy to make a big profit on this bond, which of course costs ebix shareholders. Second this was actually a hybrid instrument. Because whitebox demanded that the principal be repaid in Cash, like a regular bond. good for whitebox. bad for ebix. Third this was a short term loan to mitigate risk for Whitebox. Again unattractive for Ebix. Ebix borrowed from an extortionist so it could buy yet another company to keep it's roll up....rolling.

Have you tried pricing the optionality of the instrument in yield-equivalent terms? i.e. if they issued a straight bond, what would the yield have to be so that the investor would prefer that.

 

I understand Whitebox got a good deal ex post, I'm just interested in how good it was ex ante. At the money options are of course more expensive for the issuer but that is the reason the not had 0 interest on it.

 

 

Lets compare this deal to a similar distressed situation we are all familiar with, BRK and BAC.  Imagine that the strike price for the warrants BRK got wasn't seven dollars and change, but five dollars and change. Also, imagine that the interest rate on what was a loan (with greater security instead of the  preferred stock that BRK got) was way lower, in effect zero, but that the money BAC received from BRK wasn't a long term investment, but was instead a demand loan that BRK could call anytime after a short term, say one year.  Then imagine that when BAC's stock went up , BRK called their loan, exercised their warrants and made off like a bandit.

 

Wellmont, is this in effect what happened here?  If so, EBIX could probably have gotten a better deal from a pawn shop -- that is if they had any tangible assets they could pledge.

[Edward]

Lets compare this deal to a similar distressed situation we are all familiar with, BRK and BAC.  Imagine that the strike price for the warrants BRK got wasn't seven dollars and change, but five dollars and change. Also, imagine that the interest rate on the preferred was way lower, in effect zero, but that the funds BAC received from BRK weren't long term, but were instead a demand loan that BRK could call anytime after a short period, say one year.  Then imagine that when BAC's stock went up , BRK called their loan, exercised their warrants and made off like a bandit.

 

The effective rate was 1.75% as compared to the equivalent price of such an option at the time. See my earlier post. This looks far from predatory or any Buffett deals.

 

In fact, the deal terms for BAC seem much worse - free call options around 8$ strike for what, 10 years (can't recall exactly) + 8% annual interest. Compared with call option for less than two years at market price strike with 0% annual interest.

 

Also, I dug up some interesting info on the relationship between Whitebox and Ebix. They've done at least several such deals over the years with various outcomes.

[Edward]

In order to re-check myself I've constructed a summary of some items from the various 10-K's from 1998 to 2012. File is attached.

 

The numbers are from the P&L and cash flow statements.

 

 

Specifically I checked:

 

1. Software development costs / Revenue.

 

2. SG&A / Revenue.

 

3. Cash from the issue of debt and equity over the years.

 

4. Cash used for acquisitions over the years.

 

5. The funding gap between  3. and 4. and how that compares to cash from operations (to see if the number is "real").

 

The results:

 

Development costs and SG&A were cut in 2000-2004 to get the company profitable. After that, numbers stabilized at ratios comparable to other software companies (say MSFT). Looks fine to me on a comparative basis, but maybe someone can comment.

 

 

The cash flow Analysis is pretty conclusive. From 1998 to 2012 the following happened:

 

Aggregate net cash from debt issued: 106M$

 

Aggregate net cash from equity issued: (56)M$

 

Aggregate net cash used for acquisitions: (249)M$

 

Aggregate net funding gap: (199)M$

 

Compare to: Aggregate net cash from operations: 257M$

 

 

Conclusion:

 

1. Around 200M$ cannot be attributed to the issue of equity and debt, which is around 80% of the cash paid for all the acquisitions in 15 years.

 

2. I suppose that the cash came from FCF. It isn't far from reported FCF. I would love to hear from anyone who can think of a different way to get 200M$.

 

 

 

EbixBook.xlsx

[ItsAValueTrap]

1.75% is a baaad rate to do predatory lending at.

That makes no sense.  If Ebix were to use normal debt, it would likely have to pay between 4% to 16%.  No idiot will lend to them at 1.75%.

 

If you want to do your homework, calculate the Black-Scholes price of their call option.  That would be a much better approximation of the ex ante cost of their debt.  There are Black-Scholes calculators online.

[Guest wellmont]

In order to re-check myself I've constructed a summary of some items from the various 10-K's from 1998 to 2012. File is attached.

 

The numbers are from the P&L and cash flow statements.

 

 

Specifically I checked:

 

1. Software development costs / Revenue.

 

2. SG&A / Revenue.

 

3. Cash from the issue of debt and equity over the years.

 

4. Cash used for acquisitions over the years.

 

5. The funding gap between  3. and 4. and how that compares to cash from operations (to see if the number is "real").

 

The results:

 

Development costs and SG&A were cut in 2000-2004 to get the company profitable. After that, numbers stabilized at ratios comparable to other software companies (say MSFT). Looks fine to me on a comparative basis, but maybe someone can comment.

 

 

The cash flow Analysis is pretty conclusive. From 1998 to 2012 the following happened:

 

Aggregate net cash from debt issued: 106M$

 

Aggregate net cash from equity issued: (56)M$

 

Aggregate net cash used for acquisitions: (249)M$

 

Aggregate net funding gap: (199)M$

 

Compare to: Aggregate net cash from operations: 257M$

 

 

Conclusion:

 

1. Around 200M$ cannot be attributed to the issue of equity and debt, which is around 80% of the cash paid for all the acquisitions in 15 years.

 

2. I suppose that the cash came from FCF. It isn't far from reported FCF. I would love to hear from anyone who can think of a different way to get 200M$.

 

I have seen a published analysis where the cumulative FCF after acquisitions in deficit after 2012. And I believe there are also some off balance sheet issues that might effect this calculation. but one thing you have to consider is even if they have some cash left over it is "spoken for" isn't it? it can't be distributed because it needs to be used for the next step of the roll up. So your calculation really doesn't factor in that any cash left over is simply waiting to be "invested" to keep the ruse going. And how do you think about share repurchases? because even after spending at least $90m on share repurchases, there are still 3m more shares outstanding than there were 3  years ago.

[Guest wellmont]

not at all. most converts are issued with a convert price set at a premium to the current trading price, sometimes as much as 20%. that does not appear to be the case here. it looks like the bond was issued with the convert price = the current price. no premium. that makes it expensive for the issuer and attractive to the holder. it also makes it easy to make a big profit on this bond, which of course costs ebix shareholders. Second this was actually a hybrid instrument. Because whitebox demanded that the principal be repaid in Cash, like a regular bond. good for whitebox. bad for ebix. Third this was a short term loan to mitigate risk for Whitebox. Again unattractive for Ebix. Ebix borrowed from an extortionist so it could buy yet another company to keep it's roll up....rolling.

Have you tried pricing the optionality of the instrument in yield-equivalent terms? i.e. if they issued a straight bond, what would the yield have to be so that the investor would prefer that.

 

I understand Whitebox got a good deal ex post, I'm just interested in how good it was ex ante. At the money options are of course more expensive for the issuer but that is the reason the not had 0 interest on it.

 

 

Lets compare this deal to a similar distressed situation we are all familiar with, BRK and BAC.  Imagine that the strike price for the warrants BRK got wasn't seven dollars and change, but five dollars and change. Also, imagine that the interest rate on what was a loan (with greater security instead of the  preferred stock that BRK got) was way lower, in effect zero, but that the money BAC received from BRK wasn't a long term investment, but was instead a demand loan that BRK could call anytime after a short term, say one year.  Then imagine that when BAC's stock went up , BRK called their loan, exercised their warrants and made off like a bandit.

 

Wellmont, is this in effect what happened here?  If so, EBIX could probably have gotten a better deal from a pawn shop -- that is if they had any tangible assets they could pledge.

 

I think it's probably a good way to look at it. There is no doubt that this was incredibly expensive capital. least expensive would be to use capital on the balance sheet earning nothing. But apparently there was no capital to use.

 

I've been thinking about this a bit more. And when I think back of what was going on in mid 2009, I can't think of one company that was out there actively looking for acquisitions (other than berk). Yet this company made 3, with money it did not have. Remember, many thought we were in another great depression, or headed there. The US Gov had just bailed out the banking system. Many large financial companies failed.  Most companies were hunkering down and husbanding resources. Most put their own buyback programs on hold. they were too afraid to buy back their own stock at fire sale prices. Go back and read the news. Corporate America had a bunker mentality. Yet Ebix buys 3 companies with money it doesn't even have, in the midst of one of the most uncertain times the US economy has ever seen? That tells me that this is a shark that MUST eat or die.

[Guest wellmont]

this is a question that still lingers for me. now that some of the bulls have been activated, I wonder could you explain this to me? It looks to me a carbon copy of the whitebox deal. But I don't understand the reasoning. So I was looking for some help. from the looks of it ( which easily could be wrong), for less than 2 years of borrowing, RRF got $6.8 million back for loaning $5m? why would a company Gushing fcf need to do this with a related party? Why would Ebix, a public company owned by the shareholders, do a deal like this with the Foundation of Ebix CEO, that ended up providing a large profit to Foundation, at the expense of shareholders?

 

On August 25, 2009, we entered into an unsecured Convertible Note Purchase Agreement (the “Rennes Agreement”) with the Rennes Foundation (“Rennes” or the “Holder”). As a result of the transactions consummated by the Rennes Agreement the Company issued a Convertible Promissory Note (the “Rennes Note”) with a date of August 25, 2011 (the “Maturity Date”) in the original principal amount of $5.0 million, which was convertible into shares of Ebix common stock at a price of $16.67 per share, subject to certain adjustments as set forth in the Rennes Note. The Rennes Note has a 0.0% stated interest rate. In accordance with the terms of the Rennes Note, as understood between the Company and the Holder, upon a conversion election by the Holder the Company must satisfy the related original principal balance in cash and may satisfy the conversion spread (that being the excess of the conversion value over the related original principal component) in either cash or stock at option of the Company. Previous to this transaction Rennes has been and continues to be a beneficial owner of the Company, with a beneficial ownership percentage of approximately 9.7%. In April 2011 the Rennes Foundation elected to fully convert the Note. The Company settled this conversion election by paying $5.00 million in cash with respect to the principal component, and paying $1.8 million in cash with respect to the conversion spread. Rolf Herter, a member of our Board of Directors, is also a director of the Rennes Foundation.

[Guest wellmont]

In order to re-check myself I've constructed a summary of some items from the various 10-K's from 1998 to 2012. File is attached.

 

The numbers are from the P&L and cash flow statements.

 

 

Specifically I checked:

 

1. Software development costs / Revenue.

 

2. SG&A / Revenue.

 

3. Cash from the issue of debt and equity over the years.

 

4. Cash used for acquisitions over the years.

 

5. The funding gap between  3. and 4. and how that compares to cash from operations (to see if the number is "real").

 

The results:

 

Development costs and SG&A were cut in 2000-2004 to get the company profitable. After that, numbers stabilized at ratios comparable to other software companies (say MSFT). Looks fine to me on a comparative basis, but maybe someone can comment.

 

 

The cash flow Analysis is pretty conclusive. From 1998 to 2012 the following happened:

 

Aggregate net cash from debt issued: 106M$

 

Aggregate net cash from equity issued: (56)M$

 

Aggregate net cash used for acquisitions: (249)M$

 

Aggregate net funding gap: (199)M$

 

Compare to: Aggregate net cash from operations: 257M$

 

 

Conclusion:

 

1. Around 200M$ cannot be attributed to the issue of equity and debt, which is around 80% of the cash paid for all the acquisitions in 15 years.

 

2. I suppose that the cash came from FCF. It isn't far from reported FCF. I would love to hear from anyone who can think of a different way to get 200M$.

 

current ceo has been there since 2000 or so? if this strategy was working why did they need to borrow at usurious rates in 2009? why did they borrow at high cost? what was the rush? those companies were not going anywhere in the middle of a massive recession or depression. Why was there no cash on the books to pursue corporate strategy? yet ebix did two separate converts (one with a related party) that benefited the holder of the notes tremendously, and cost the shareholders dearly; for less than 2 year money.

[Edward]

I have seen a published analysis where the cumulative FCF after acquisitions in deficit after 2012.

I have previously attached the excel file with the numbers. In 2012, the debt raised generally cancelled out the equity repurchased, and an additional 62M$ went out of the door for acquisitions. So that money also didn't come from issuing debt/equity. I would like to see that analysis you mentioned.

 

but one thing you have to consider is even if they have some cash left over it is "spoken for" isn't it? it can't be distributed because it needs to be used for the next step of the roll up. So your calculation really doesn't factor in that any cash left over is simply waiting to be "invested" to keep the ruse going.

Actually if you look at the numbers year by year, there is no cash that is just lying there waiting. And they recently started paying some of it as dividend.

 

Also I don't understand what is that you call a "ruse" if you agree that the company actually managed to generate 200M$ from operations. That's kinda the whole point, to generate cash. Later you can, god forbid, grow the "ruse" by buying another business if the IRR makes sense. What a novel concept!

 

 

And how do you think about share repurchases? because even after spending at least $90m on share repurchases, there are still 3m more shares outstanding than there were 3  years ago.

The whole calculation was a cash calculation and ignored non cash items. This was about the whole argument that no to little cash was generated by the business - which I think was debunked.

 

They used some stock to buy companies over the years. So even after buybacks share count went up.

 

The way to think about it is that when a company issues shares to buy some company, then turns around and repurchases these shares back with cash - this is pretty much as if the company paid cash for the acquisition in the first place.

 

 

 

 

[Edward]

this is a question that still lingers for me. now that some of the bulls have been activated, I wonder could you explain this to me? It looks to me a carbon copy of the whitebox deal. But I don't understand the reasoning. So I was looking for some help. from the looks of it ( which easily could be wrong), for less than 2 years of borrowing, RRF got $6.8 million back for loaning $5m?

See below.

 

current ceo has been there since 2000 or so? if this strategy was working why did they need to borrow at usurious rates in 2009? why did they borrow at high cost?

2009 10-K, page 54:

 

"The application of this accounting guidance resulted in the Company recording $24.15 million as the carrying amount of the debt component, and $852 thousand as debt discount and the carrying amount for the equity component. The bifurcation of these convertible debt instruments was based on the calculated fair value of similar debt instruments at August 2009 that do not have a conversion feature and associated equity component. The annual interest rate determined for such similar debt instruments in August 2009 was 1.75%."

 

This was at the time the annual interest rate equivalent of the call option they gave. Usurious rate indeed.... NOT.

 

By the way, at the same time they had a credit line with BofA at around libor+1.3%, which is actually a higher rate than the note rate if you price the option in yield terms.

 

However, I did not like the fact that the company gave an option instead of paying the 1.75% as straight interest, and let the lender go buy his own damn option from someone else! This is not a hedge fund and they shouldn't deal in structured products. Other than that bit, I'm fine with this transaction.

 

now that some of the bulls have been activated

Can't see myself as a bull in this case, I just prefer to look at things without a bias. Speaking of which...

 

I've been thinking about this a bit more. And when I think back of what was going on in mid 2009, I can't think of one company that was out there actively looking for acquisitions (other than berk). Yet this company made 3, with money it did not have. Remember, many thought we were in another great depression, or headed there. The US Gov had just bailed out the banking system. Many large financial companies failed.  Most companies were hunkering down and husbanding resources. Most put their own buyback programs on hold. they were too afraid to buy back their own stock at fire sale prices. Go back and read the news. Corporate America had a bunker mentality. Yet Ebix buys 3 companies with money it doesn't even have, in the midst of one of the most uncertain times the US economy has ever seen? That tells me that this is a shark that MUST eat or die.

Either that or they were reasonably profitable and sensed opportunity as others ran for the exits. I like the way everything rings alarm bells for you :)