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For Some Reason Goldman Doesn't Want To Buy Company Accused Of Accounting Fraud

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This is a not a phrase that you see a lot in the M&A context:

We want to thank Goldman Sachs for their interest in acquiring Ebix and we are naturally disappointed that we could not complete a transaction at this time.

Thanks guys! Really enjoyed getting to know you but it just didn't work out. Because of the fraud.

Maybe? This Ebix situation is pretty weird. Ebix is a $400mm market-cap company ($800mm yesterday!) that makes, I don't know, insurance software, or software insurance, or something. Also it may or may not be committing massive accounting fraud. In July 2011, a bunch of people sued it, either because it was committing massive accounting fraud or because they're manipulative short sellers or just because of a big misunderstanding. The jury is still out,1 though the SEC is looking into it, so maybe there's something to it?2

While all this was going on, Goldman Sachs agreed to buy Ebix on May 1, for about $820 million, because I guess Goldman wants to get into the insurance software or software insurance or accounting fraud businesses.3 And today they terminated the deal. By mutual consent. With no hard feelings either way.

The cause of the termination is that someone else thinks something is fishy at Ebix:

The decision to terminate the merger agreement was the result of a letter received by the Company on June 14, 2013 from the U.S. Attorney for the Northern District of Georgia that it had opened an investigation into allegations of intentional misconduct that had been brought to its attention from the pending shareholder class action lawsuits against the Company’s directors and officers, the media and other sources. ... The Company has been informed by the office of the U.S. Attorney that their investigation is in its preliminary stages and that it is too early to make a determination of whether any violation of the securities laws or other laws has occurred, or whether any individual or entity could be considered a target, subject or witness in the investigation. The merger agreement is being terminated without payment of a termination fee by either party and each party and certain significant shareholders of the Company and each of their respective affiliates have agreed to release each other from all claims arising under or related to the terminated merger agreement and related transaction agreements.

Ebix's stock is down ~44% on the news, and it doesn't even have the consolation of a termination fee. The merger agreement has a $45 million termination fee if Goldman bails, but lets Goldman get out of the deal for free if Ebix is subject to an investigation that is "material to the Company and its Subsidiaries, taken as a whole."4 That's a rather lighter standard than the usual "material adverse effect" standard, which suggests that everyone knew this might be a possibility going in. Which makes sense, since, going in, they knew about both the shareholder suits and the SEC investigation. The fact that the U.S. Attorney wanted in can't be a complete surprise.5

So ... why'd they do the deal? Presumably Goldman did some due diligence on Ebix. They knew about all these fraud claims and shareholder lawsuits. They could talk to Ebix executives and scrutinize whatever the lawsuits were going on about and so forth. Yet they agreed to buy the company, and are backing out two months later. Here are some possibilities:

Like: if this investigation is serious and took Goldman by surprise, that seems like rather weak due diligence. If it's serious and didn't take them by surprise, that seems like rather an odd choice in acquisitions. ("Let's buy this company! Its accounts are completely fake!") If it's unserious, that seems like sort of an unsporting reason to terminate the agreement.

Which is it? Oh I have no idea. But remember Dragon Systems? That was a Goldman client that agreed to take hundreds of millions of dollars of stock in a company that turned out to be a massive accounting fraud. Which Goldman sort of forgot to ask about, in due diligence. Because, in part, they didn't have no policy manual governing due diligence that encouraged bankers to ask, y'know, "are you a giant fraud?" Maybe they should get on that.

Goldman Sachs Drops Ebix Deal as Prosecutors Open Probe [Bloomberg]
Ebix and Affiliate of Goldman Sachs Agree to Terminate Merger Agreement [Ebix]

1.Not literally I mean. You can read the complaint here and the motion to dismiss here. They are ... long? I skimmed the complaint and I wasn't, like, moved; there is a lot of blather:

For example, on March 23, 2010, the senior billing analyst created an excel spread sheet titled "Collection Research All cust" that she transmitted to Ebix controller Sean Donaghy ("Donaghy") by email dated March 24, 2010. The spread sheet detailed collection issues with at least 26 customers. For example, for customer identification number FLEM100, the spreadsheet indicates that that nine invoices had been emailed to the customer that went unpaid (invoice numbers 3507, 3571, 4105, 4418, 4663, 5163, 5194, 5526 and 5989). The spread sheet indicates "per Sean do not send customer anymore invoices. Sean to review report customer will fax him." Another customer, identification number THIE, received emailed invoices 5195, 5218, 5237, 5261, 5284, 5306, 5328, 5351, 5369, 5402, 5430. Ebix continued attempting to collect on these invoices in mid-2010 even though, the spread sheet indicates, "customer response – ―contract cancelled 1/1/09." Thus, Ebix was billing and recording amounts as receivable when the customer had terminated the relationship.

I mean. That sounds bad. But, like, do you care? And does it roll up into fraud? Later there's some stuff about some tax shenanigans that the plaintiffs think are "possibly illegal," which is kind of different from "actually illegal"? I dunno, the complaint is like 162 pages long, feel free to read it and decide if it adds up to fraud.

2.From Ebix's 10Q:

On April 16, 2013, the Company received a second subpoena from the SEC seeking additional documents in their formal, non-public fact-finding inquiry and investigation styled In the Matter of Ebix, Inc. (A-3318), which primarily relates to the issues raised in the matter styled In re: Ebix, Inc. Securities Litigation, Civil Action No. 1:11-CV-02400-RWS (N.D. Ga.). This follows the receipt by the Company on December 3, 2012 of the first subpoena from the SEC dated November 30, 2012, stating that the SEC is conducting this non-public fact-finding inquiry and investigation and seeking documents relating to the issues raised therein and in an online news article based on unnamed sources, published on November 3, 2012 speculating about the existence of such an investigation.

3.Needless to say some shareholders sued over that too. Ebix is either an overvalued accounting fraud or selling itself too cheaply for nefarious reasons.

4.The fee is in Section 11.03(c). Section 10.01(c)(ii) lets Goldman terminate for breaches of reps and warranties, if they would cause the conditions in section 9.02(a) not to be satisfied. Section 9.02(a)(iv) makes it a condition to Goldman's obligations that:

the representations and warranties of the Company contained in each of Sections 4.12 and 4.22 of this Agreement (disregarding all materiality and Material Adverse Effect qualifications contained therein) shall be true at and as of the Effective Time as if made at and as of such time (other than representations and warranties that by their terms address matters only as of another specified time, which shall be true (disregarding all materiality and Material Adverse Effect qualifications contained therein) only as of such time), with only such exceptions, in the case of this clause (iv) only, as are not, and would not reasonably be expected to be, individually or in the aggregate, material to the Company and its Subsidiaries, taken as a whole ...

Section 4.12 represents that:

The Company and each of its Subsidiaries is, and since January 1, 2010, has been, in compliance in all material respects with, and to the knowledge of the Company is not under investigation with respect to and has not been threatened to be charged with or given notice of any violation of, any Applicable Law. There is (a) no material judgment, decree, injunction, rule or order of any arbitrator or Governmental Authority outstanding against the Company or any of its Subsidiaries and (b) no judgment, decree, injunction, rule or order of any arbitrator or Governmental Authority outstanding against the Company or any of its Subsidiaries that in any manner seeks to prevent, enjoin, alter or materially delay the Merger or any of the other transactions contemplated hereby.

5.Is it material? I mean, it doesn't seem material yet, does it? It's "too early to make a determination" and so forth. But I guess everyone sees some unpleasant writing on the wall?


Goldman Surprised To Find Carl Icahn Being Kind Of A Dick

Sell-side M&A work is mostly a pretty good and lucrative business model but it has a few flaws. Try to spot a key one here: (1) you represent a target; (2) you spend your days fighting tooth and nail with the buyer to try to make them pay more and give up optionality, and generally to get more of the benefits of the deal for the target than for the buyer; (3) then the buyer acquires the target, fires all the directors and officers, changes the locks, and replaces the stationery; (4) then you get paid. Did you spot the problem? Carl Icahn did: