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Thursday, Mar 28, 2024

Investors Outraged Over Termination of ECHO Deal

The news that Electronic Clearing House Inc. and Intuit had terminated their merger agreement angered shareholders last week as ECHO stock continued its steep descent with little to suggest a near-term turnaround. In a conference call with shareholders and analysts, ECHO officials fielded a number of often openly antagonistic questions having to do with the decision to dissolve the merger agreement as well as the federal investigation that was a primary factor in the decision. Camarillo-based ECHO, which provides electronic payment processing services to banks, merchants and others, on Mar. 27 announced that it had agreed to cooperate as a government witness in a probe of online gaming websites and pay back the government some $2.3 million in what it estimates are the profits it received from providing services to so-called Internet wallet companies, which are used by customers to pay for their Internet betting activities. In return ECHO will get immunity in the probe. As a result of its probe and the payback agreement, which ECHO said will impact its “near-term” financial results,” the companies decided to terminate their merger agreement, ECHO and Intuit said. The deal, for $142 million, would have yielded $18.75 per share to shareholders of ECHO. Instead, ECHO’s stock plummeted by about $7 on the news. By presstime, shares were trading in the $11 range, down about 38 percent from the company’s $18-plus trading price immediately prior to the announcement. “The people who owned ECHO after the merger was announced tend to be the people who arbitrage,” said John Kraft, a research analyst with D.A. Davidson, which does not have a position in the company. “So they levered up and put it all on the line, and all of a sudden they got their butts kicked.” Among other things, analysts, hedge fund managers and other shareholders wanted to know details of the federal probe, why officials at ECHO decided to pay the $2.3 million in profits from the Internet wallet transactions without trying to negotiate a different arrangement and why officials did not attempt to work out a new merger agreement that took the cost of the investigation into account. “It appears they made no effort to hold the buyer to the contract at $18.75 (per share),” said a shareholder who asked not to be named. “They acquiesced for no good reason and shareholders were left holding the bag to the tune of $47.6 million in market value.” New regulations ECHO’s Iinternet wallet business, which the company estimates has yielded revenues of about $17 million since it began offering the service, ran into difficulty following the passage of the Unlawful Internet Gambling Enforcement Act in Oct. 2006. The bill resulted in new regulations concerning the responsibility of banks and other financial institutions to block these types of transactions. ECHO officials said that, as a result of the regulations, the company stopped providing services to most of those companies last year, and ended its business with the rest of those customers earlier this year. Its Internet wallet business had represented about 7 percent of its sales, ECHO said. “We gave this matter careful consideration and determined it was in our best interest to cooperate with the government and disgorge the $2.3 million so we could get on with running our business,” Joel M. Barry, ECHO’s chairman and CEO told investors in the conference call. Barry could not comment on the ongoing government investigation except to say that the probe, coupled with the expenses related to the merger agreement, would impact its financial performance. “We incurred a substantial amount of expense in connection with the proposed transaction with Intuit,” Barry said. “These expenses in combination with the federal investigation will clearly have a negative impact on our near term financial results. That said, we believe we have the resources we need ” Earnings double For its fiscal year ended Sept. 30, 2006, ECHO reported net income of $2.3 million or $0.33 per diluted share on revenues of $75.3 million. That was more than double its earnings of $1.0 million or $0.15 per diluted share in the prior year when revenues totaled $55.6 million. Barry said in the conference call that the company’s prospects were unchanged by the recent events. “We believe our business is fundamentally sound and our prospects for growth over the long term are the same as they were before we began negotiations with Intuit,” he said. But others point out that the merger agreement which took place in Dec. 2006, coupled with the ongoing federal probe will be likely to affect the company’s performance for some time to come. “We suspect both issues have been detrimental to the company’s sales pipeline and a significant distraction to ongoing operations,” wrote Kraft in a research report on ECHO on Mar. 27. “Consequently, we are lowering our revenue estimates from $89.6 million to $84.4 million in 2007 and from $106 million to $100 million in 2008. Our EPS estimates fall from $0.51 to $0.30 in 2007 and from $0.75 to $0.55 in 2008.” Noting that the firm would “prefer to let the dust settle,” D.A. Davidson also decided to maintain a neutral rating on the stock.

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