Goldman Takes Ebix Private as Probes Said to Intensify

Goldman Sachs Group Inc. (GS) made its $820 million offer to take Ebix (EBIX) Inc. private as U.S. regulators intensify their probes of the insurance software maker, according to people familiar with the matter.

The all-cash deal amounts to about $20 a share, Atlanta- based Ebix said yesterday. Its shares jumped 11 percent on the news to $20.60 in Nasdaq trading, the biggest one-day gain since October 2011. The shares dropped 5.1 percent to $19.55 at 12:26 p.m. today in New York. A “go-shop” provision allows Ebix to solicit competing bids in the next 45 days.

Should no better offer emerge, New York-based Goldman Sachs will become the owner of a company whose accounting practices were already under scrutiny by the U.S. Securities and Exchange Commission in November, according to four people with direct knowledge of the matter.

That probe, consisting of interviews with former employees, has since been upgraded to a formal investigation, according to a person who was briefed on the matter after the Goldman Sachs deal was announced and who asked not to be named because the matter was confidential.

Ebix is also the subject of an Internal Revenue Service investigation, according to this person, along with a second individual with direct knowledge of the matter.

Photographer: Jin Lee/Bloomberg

Flags fly outside of Goldman Sachs Group Inc. headquarters in New York. Close

Flags fly outside of Goldman Sachs Group Inc. headquarters in New York.

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Photographer: Jin Lee/Bloomberg

Flags fly outside of Goldman Sachs Group Inc. headquarters in New York.

‘Complete Lie’

Ebix Chief Executive Officer Robin Raina denied the existence of an SEC probe in November. “You could not be more off the mark -- that is a complete lie and at least not known to us in any manner whatsoever,” he wrote in an e-mail at the time.

Tim Lynch of Joele Frank, Wilkinson, Brimmer Katcher, a spokesman for Ebix, declined yesterday to comment on any regulatory probes. He said the company’s public statements on accounting and tax issues remained in force. Andrew Siegel, another company spokesman, had no immediate comment today on whether Ebix had received a subpoena.

In the press release announcing the deal, Goldman Sachs managing director Sumit Rajpal said, “We look forward to working with the company and helping it maximize its growth potential.” Andrea Raphael, a Goldman Sachs spokeswoman, said the company had no comment beyond the public statement announcing the deal.

Justin Jeffries, the Atlanta-based SEC attorney who is said by people who have been interviewed by him to be leading the investigation into Ebix’s accounting practices, didn’t return calls seeking comment.

Overseas Revenue

The IRS is looking into Ebix’s policy of booking revenue from sales made in the U.S. to units overseas, particularly in India and Singapore, where the company enjoys low tax rates, according to the two people informed of the IRS probe, who asked not to be named because the investigation is confidential.

According to its SEC filings, Ebix’s transfer-pricing strategy has helped keep its tax rate low. In 2012, Ebix paid $7.5 million in taxes on pretax income of $78 million. For the prior year, Ebix paid $2.1 million in taxes on pretax income of $73.5 million.

Lev Glikman, the IRS analyst in charge of the probe, according to the two people informed of the matter, declined to comment. In its most recent annual report, Ebix listed the possibility of “greater than anticipated tax liabilities” as a risk.

‘Regular Review’

“We are subject to regular review and audit by both domestic and foreign tax authorities,” the company said. “Any adverse outcome of such a review or audit could have a negative effect” on earnings.

The company is facing lawsuits that have advanced to the stage at which parties exchange evidence. A shareholder class action, or group lawsuit, claims the company’s management made materially false and misleading statements from 2009 through June 2011.

In its 2011 annual report, Ebix described the class action and several so-called derivative actions, suits brought by third parties against directors on behalf of the company, as unlikely to succeed. “The company believes that the complaints are legally insufficient,” according to the report.

A federal judge disagreed and last year allowed the class action to proceed. In its most recent annual report, Ebix said that “the likelihood of an unfavorable outcome for this matter is not estimable.”

In a suit over a $1.5 million earnout, lawyers for Peak Performance Solutions Inc., which was sold to Ebix in 2009, are planning to take depositions from Ebix executives in a month, according to Peak’s lead attorney, Albert Lucas.

Acquisition Boost

Boosted by acquisitions, Ebix’s revenue has grown over the past decade to almost $200 million a year from $12 million, while its net income surged to $70.1 million for 2012 from $500,000 in 2002, according to data compiled by Bloomberg.

Ebix became a small-cap darling, winning recognition from Fortune and Forbes magazines as one of the fastest-growing technology companies in the U.S. In early 2011, the company’s share price approached $30 and its market capitalization surpassed $1 billion.

As the shares rose, Ebix became a target of short-sellers who questioned its business strategy and reliance on low-tax zones in India and Singapore to help it meet earnings targets.

On March 22, 2011, a blogger writing under the name Copperfield Research posted a critical analysis of the company’s earnings on the Seeking Alpha website. The article described Ebix as a “house of cards.”

Stock Drops

Two days later, Ebix fell 24 percent to $22.52. The market capitalization shrank to $878 million from $1.2 billion.

Ebix responded, saying the Copperfield Research argument misrepresented and distorted facts “not relevant to the company’s current financial position, long-term growth prospects and management policies.”

This February, short-seller Gotham City Research posted its own negative conclusions about Ebix on Seeking Alpha. The post revealed the existence of a $65.8 million related-party loan on the books of Ebix’s Singapore unit that was never disclosed in the company’s filings with the SEC. The shares dropped to $14 from $19.07 that day.

Raina, Ebix’s CEO, subsequently described the loan as an “inter-company” transaction that didn’t need to be disclosed in consolidated earnings statements to the SEC.

Following yesterday’s announcement about the Goldman Sachs buyout, Gotham City Research issued a statement.

“We believe that should Goldman Sachs or another entity acquire Ebix, they will come to regret it,” wrote Daniel Yu, director of research at Gotham City. “That said, public investors are clearly better off if Ebix no longer participates in the public markets.”

To contact the reporter on this story: Greg Farrell in New York at gregfarrell@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net;

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