First off, let’s discuss why Copperfield/Gotham is a failure and incompetent. They think EBIX transfers cash into the U.S. and doesn’t pay repatriation taxes on it. Wrong. They think EBIX doesn’t make enough cash to operate. Wrong. They think EBIX is shielding taxes inappropriately. Wrong. They think EBIX transferred $66m to Singapore and now that money is unaccounted for. Wrong.
So how does EBIX really operate?
It’s simple. They make acquisitions (of both IP assets and the remaining assets of a business – so in two separate and simultaneous transactions) with foreign subsidiaries. They do with subsidiaries in India, Australia and now Singapore (starting in 2009). They do this because of the favorable tax treatment they get with these foreign subsidiaries. All legal. All common. Given that 70% of the cash they generate originates in the U.S., they need to transfer cash to these foreign subs to make the acquisitions. They do this through intercompany loans done at arm’s length terms. They use an above market interest rate, and they use the capital stock of acquired companies in these foreign subs as collateral for the loans. All of the intercompany transactions don’t show up in the consolidated financials because they net out in the consolidating process. How common is all of this? Let’s put it this way: if they didn’t operate like this, it would be HIGHLY unusual.
I was an investment banker for many years. I worked on many many M&A transactions, including cross-border deals. This is as common as the sun rising in the east and setting in the west.
Copperfield / Gotham’s whole case just went up in smoke.
Much appreciate your take on the situation. One thing I would say though is Copperfiels/Gotham are not incompetent. They KNOW what they are publishing is complete bunk. It doesn't matter. They have sufficient firepower to drive the stock down themselves.
What is a more important question is how are they hoping to make money? This only works if it scares enough Longs into selling. By now most Longs are wise to their game.
If we assume a hedge fund behind this manipulation then what do they hope to gain? As a no-growth company Ebix are worth about $25. As a 10% grower they are worth about $35 ($70m FCF, 5-yr 10% growth, 3.5% terminal rate, 11% discount rate). The market will eventually realise these prices and therefore at some point the hedge fund need to cover their short position.
My view is that there may be a fraud being perpetrated against the clients of the hedge fund. The hedge fund itself, at best, may come out even. However, the hedge fund managers are front running on the information for personal gain. Anyone that knows when the Seeking Alpha article comes out can use that information to gain.
I would rather say they were effective. This whole thing smells of manipulation.
Notice how the last 2 pieces were very similiar? They both tried to attach Raina personally. One they said he sold his shares ( that was false) and one were they said he lied about how much money he donated ( it really doesn't matter and who has reached out to the people that wrote that Raina was the man of the year t confirm everything?)
The key at this point is the business. A software company selling at 7.5 times earnings is crazy.