Ellie Mae 26% Bump Seen as Tech Meets Housing: Real M&A

Ellie Mae Inc., the provider of software used by mortgage lenders to make home loans, could still reward shareholders with a 26 percent gain after surging to a record last week.

The company, which grew from a startup in the San Francisco Bay area to an $796 million provider of technology used in processing one-third of all U.S. residential mortgages, is considering a sale and may begin soliciting bids in the next two months, people with knowledge of the matter told Bloomberg News last week. Investors including Jacob Asset Management LLC said Ellie Mae warrants a higher stock price than its $30.07 a share yesterday, and acquirers may be willing to pay up to get a hold of its growth prospects.

As the U.S. housing recovery strengthens, Pleasanton, California-based Ellie Mae is projected to boost annual revenue at twice the median pace of similar-sized software companies, according to data compiled by Bloomberg. Ellie Mae could sell itself to larger software vendors such as International Business Machines Corp. or Accenture Plc for $35 a share, Oppenheimer Holdings Inc. said. Maxim Group LLC sees bids up to $38, a 26 percent premium.

“It’s really a standout among the group, and I don’t think some of that is realized at the current price,” said David Covas, a Lisle, Illinois-based money manager at Oberweis Asset Management Inc., which oversees $800 million including Ellie Mae shares. “There’s some scarcity value here as well. Anybody in the space might be looking at them.”

Cloud-Based Tools

An external representative for Ellie Mae said the company doesn’t comment on speculation. Sig Anderman, the chairman and chief executive officer, didn’t return a phone message left for his assistant.

Ellie Mae’s cloud-based technology is used to process and fund about one in every three home loans made in the U.S., Anderman said Aug. 6 at a conference. He co-founded Ellie Mae in 1997, and prior to that helped to start at least two other technology-related businesses tied to the housing industry, according to the company’s website.

Ellie Mae, whose customers are primarily mortgage lenders, is benefitting as the revival in U.S. housing gains steam. Prices for single-family homes climbed in 87 percent of U.S. cities in the second quarter, according to the National Association of Realtors.

Faster Growth

Earlier this month, Ellie Mae raised its annual revenue forecast to as much as $132.5 million, a 30 percent increase from last year. It’s projected by analysts to have a compound annual growth rate of 19 percent over the next three years, compared with the median rate of just 9.5 percent among U.S. software companies with market values between $500 million and $1 billion, revenue estimates compiled by Bloomberg show.

The company is also cheaper than most of its software peers. Its price-earnings ratio yesterday was about 48, a 72 percent discount to the group’s median multiple, the data show.

“The stock is cheap relative to their growth and the opportunity in front of them,” Greg Dunn, a fund manager at Thornburg Investment Management Inc., said in a phone interview from Santa Fe, New Mexico. “The housing market is improving and that’s a tailwind for them.”

Thornburg oversees $90 billion, including Ellie Mae shares.

There are some naysayers. Short interest in the stock reached an all-time high of 11 percent of its outstanding shares this month, according to Markit. By comparison, the Standard & Poor’s 500 Index has an average short interest level of 2.3 percent, Markit data show.

Mostly Bullish

Even so, most analysts are bullish, with nine of 10 recommending that investors buy the stock, according to data compiled by Bloomberg. Their average share-price estimate for Ellie Mae as a standalone entity is $34.29.

Using revenue multiples paid in comparable software acquisitions, Ellie Mae should be valued at as much as $38 a share in a takeover, Brad Sills, a San Francisco-based analyst at Maxim Group, wrote in a report Aug. 9.

Today, Ellie Mae shares fell 2.2 percent to $29.41 at 10:05 a.m. New York time.

Brian Schwartz, an analyst at Oppenheimer in San Francisco, pegs Ellie Mae’s sale value at $35 a share or more. IBM and Accenture are among companies that may be interested in buying Ellie Mae, Schwartz said. Dublin-based Accenture purchased Mortgage Cadence, another maker of loan origination software, for an undisclosed amount last month.

Software Shift

Ellie Mae would give a technology provider “another part of the bank that they can sell their software solutions to,” Raghavan Sarathy, a San Francisco-based analyst at Dougherty & Co., said in a phone interview. He also sees Oracle Corp. as a logical suitor. The Redwood City, California-based company and some of its rivals have been shifting toward subscription-based online software -- or cloud software, like Ellie Mae’s -- rather than programs installed on customers’ machines.

James Sciales, a spokesman at Armonk, New York-based IBM, and Peter Soh of Accenture said the companies don’t comment on speculation, when asked whether they’re considering an acquisition of Ellie Mae. Deborah Hellinger, a spokeswoman at Oracle, didn’t immediately return a phone call or e-mail seeking comment.

With no debt and $71 million of cash and marketable securities, Ellie Mae’s enterprise value is just $725 million, making it an easily digestible takeover target, Ryan Jacob, Los Angeles-based chief investment officer of Jacob Asset Management, said.

‘Dominant Player’

“The idea that someone would want to buy Ellie Mae is not terribly surprising to us,” Jacob, who owns the stock in his Jacob Internet Fund, said in a phone interview. “They are the leader now and quickly becoming a dominant player in mortgage originations.”

Thornburg’s Dunn said Ellie Mae is performing well as an independent company and doesn’t need to sell itself right now. Ellie Mae is up 401 percent since it first sold shares to the public in April 2011, data compiled by Bloomberg show.

While Oppenheimer’s Schwartz said Ellie Mae would probably garner a higher takeover price down the road when it becomes larger and more profitable, the “insatiable demand” for fast-growing cloud companies makes selling now an attractive option.

“Ellie Mae is one of the fastest growing businesses that I follow in the software space,” Schwartz said. “There certainly is high demand right now for their type of technology. It could be the right time for them to sell.”

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