Buying opportunity w/ SNCR drop of 11%?

Synchronoss buying Intralinks Holdings for $821M
http://www.seekingalpha.com/news/3228754

I find it amazing how quickly the market reacts to this type of news. Can anyone quickly determine whether this deal is good or bad for the company and the stock price? I’m sure there are computers at work here, which if you know the business could present a buying opportunity.

Alas, I do not know the business well enough. I’d at least have to listen to the conference call from today.

I see where they are buying Intralinks Holdings, who I know zero about. Also see they are selling at least a portion of their activation business.

Again, I have no earthly idea whether or not this is a good acquisition/sale for SNCR.

Let’s see what is said in the conference call.

Take care,
A.J.

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I find it amazing how quickly the market reacts to this type of news. Can anyone quickly determine whether this deal is good or bad for the company and the stock price? I’m sure there are computers at work here, which if you know the business could present a buying opportunity.

It’s really odd, isn’t it. I’d have to guess that the CEO, Chairman and Founder, who negotiated this acquisition, probably knows more about what is good for Synchonoss than the people who sold all those shares today to push it down 13%. He has 450,110 shares, worth about $22 million yesterday, and certainly doesn’t want to endanger his fortune by making a stupid acquisition. But what do I know? That’s just my ignorant way of thinking about it.

Saul

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This might shed some light:

BREAKINGVIEWS-M&A data-room deal lacking in due diligence
3:33 PM ET, 12/06/2016 - Reuters
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Tom Buerkle

NEW YORK, Dec 6 (Reuters Breakingviews) - A data-room deal may be lacking in due diligence. Synchronoss, the cloud-based software company, is buying Intralinks, which hosts virtual spaces for bankers to run the numbers on mergers. In this case, they stack up. Projected savings surpass the premium being paid. Acquiring a lower-margin business and its chief executive, however, isn’t adding up.

Founded in 2000 to provide services primarily to AT&T, Synchronoss is seeking to reduce its dependence on telecom titans, which today provide roughly 70 percent of revenue. It struck a partnership last year with Goldman Sachs, which also is helping finance this acquisition, to sell secure mobile-software services using technology it developed.

The presence of Intralinks in the corporate market is attractive. Synchronoss reckons there will be $40 million a year of cost savings. Once taxed at the buyer’s 38.5 percent rate and capitalized, those should be worth some $275 million today. That exceeds the extra $110 million Synchronoss is paying over Intralinks’ undisturbed share price for control.

Even so, investors knocked some 12 percent off the buyer’s market value, worth roughly $275 million. One reason could be that Intralinks is less profitable than Synchronoss. The $900 million in debt Synchronoss is taking on to finance the deal - fully 44 percent of its market capitalization - also will reduce earnings per share by about a fifth.

For a company that counts on some of Wall Street’s highest-margin businesses, Intralinks is anything but flush. It has lost money for five consecutive years. While the company’s operating margin improved by 470 basis points in the second quarter, that left it in negative territory.

As part of the deal, Synchronoss is selling 70 percent of a profitable but sluggish unit. In effect, it is exchanging stable growth today for the promise of more tomorrow. Ron Hovsepian, the Intralinks CEO set to take on the same role at the merged company, has his work cut out. That said, even as Synchronoss shares tumbled, those of Intralinks soared past the offer price. Maybe a rival suitor will jump into the data room and conduct a more sensible appraisal.

On Twitter https://twitter.com/tombuerkle

CONTEXT NEWS

  • Synchronoss Technologies, a software-services company, said on Dec. 6 it would buy Intralinks Holdings, which provides virtual data-room services for the M&A market, for $13 a share or $821 million.

  • As part of the deal, the buyer’s chief executive, Stephen Waldis, will become executive chairman of the combined group and relinquish the CEO’s seat to the target’s boss, Ron Hovsepian.

  • Synchronoss expects to generate $40 million in synergies within the first year of the deal closing, which is anticipated to happen in the first quarter of 2017.

  • Shares in Synchronoss fell more than 11 percent after the announcement. Intralinks gained 16 percent.

  • PJT Partners acted as lead financial adviser on the deal. Goldman Sachs and Credit Suisse are providing debt-financing commitments and Goldman is also advising Synchronoss.

  • SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe

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This AM I added some to my shares of SNCR.

I hope I was right.

Frank

Saul’s point is a good one, The CEO of SNCR is not stupid

While I agree with Saul and Coffee that the SNCR CEO is not dumb … CEOs, Chairmen and Founders often make ill-advised acquisitions with the best of intentions, no matter how well they know their business. They can be made out of a desire to quickly build revenues, market share, market caps, avenues into new lines of business, or just good ol’ fashioned ego.

Major acquisitions very rarely deliver value to the shareholders of the acquirer. Synergies and cost savings are overestimated or go unrealized, and the potential value gets transferred to the shareholders of the acquired company (via the premium), lenders (via service on all that new debt) and the bankers (who pocket 2% or more in fees, just in time for bonus season). You don’t have to think hard to come up with a list of disastrous major acquisitions, do you?

Bolt-on acquisitions (smaller, more minor additions to augment/improve businesses), however, are more often successful in capturing the desired value for the acquirer. They’re less splashy, less expensive in terms of premium and less likely to fundamentally change a (successful) business plan.

Which is this? A very cursory look at the numbers: a $2B market cap company just made an $821M acquisition. Seems more like a major acquisition than a bolt-on. Moreover, the current Intralinks CEO will be the CEO of the combined enterprise when the transaction completes! Now it’s starting to feel more like a “merger of equals.” Ugh. The list of successful mergers of equals is quite small, indeed.

I am long SNCR, but I know nothing about Intralinks, its CEO, or the full impact of SNCR divesting their activation business. I didn’t sell today, and I probably won’t tomorrow … but today’s events are enough to make me seriously rethink my investing thesis on this one.

This looks like it could represent a major business plan pivot for SNCR. Will it be a successful move away from dependence on “telecom titans” and to a better niche in “the cloud”? Or just additional clutter on the scrapheap of failed acquisitions?

They call me,
MrTBS

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“…Or just additional clutter on the scrapheap of failed acquisitions?”

Mr. TBS,

Thank you for your historical perspective of the “deworsification” of many (most?) major acquisitions.

Jim

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Here’s what I don’t get about the whole thing. In last month’s CC, SNCR projected between 682M and 689M for 2016. About 400M of that is cloud, and they said cloud would be north of 520M in 2017. So that puts them at 800M for 2017 before we ever heard of Intralinks. Intralinks has around 300M of annual revenue. So shouldn’t that put 2017 for the combined SNCR at 1.1B or so? Yet this came out yesterday:

With the deals, SNCR is giving initial 2017 revenue guidance of $810M-$820M, and pro forma EPS of $2.45-$2.60. $40M of combined synergies are targeted.

Now I know they sold a portion of their activation business to Sequential Technology, but not all of it, right?

The numbers don’t seem to add up.

Bear

Thanks, Mr TBS,
I guess I was trying to kid myself that the CEO knows what he’s doing. But this company had just turned the corner and was on an ascension course, and this acquisition turned it into an unknown quantity. Thanks again for a bit of realism.
Saul

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I second that.

I guess I was trying to kid myself that the CEO knows what he’s doing. But this company had just turned the corner and was on an ascension course, and this acquisition turned it into an unknown quantity. Thanks again for a bit of realism

Saul, does this mean you intend to exit your position in SNCR?
I am leaning that way myself, but would take a loss. I just might wait a bit for the dust to settle.

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This stock has gone nowhere for a long time.

I owned SNCR once before as a RB rec. Sold out back then, but recently bought back in … maybe the CEO is uh lacking something.

Maybe I am uh lacking something.

But… the rest of my holdings today are making me feel better.

As for evidence that CEOs are not always in tune to even business, much less politics, etc., I present AOL/Time Warner, that is now just Time Warner. AOL ended up taking over Time Warner in a merger/acquisition, lord knows what it was, and Time Warner execs let all this happen at the peak of AOL that came crashing down shortly thereafter. Time Warner, huge media company was clueless that AOL might not be all it was cracked up to be once broadband proliferated and dial up died.

Easy to say in retrospect, right? Well yes. The Fool was an early investor in AOL and made a mint off of it. But the Fool, to my recollection, did not notice this either.

However, many here did question what AOL would do when broadband proliferated and sending little AOL discs en masse would no longer be adequate. One would have thought Time Warner would have had some experts that raised these concerns with them. But perhaps so, but poo pooed I would suspect.

I had a similar issue with the eBook development in 2000. The marketing consultants all said the eBook was one of the most highly rated consumer products they ever tested. Turns out if they sold 100 world wide in the end they got lucky. No one ever listened to my common sense issues with the device (I was a mere intern). What you gonna do.

Probably the same sort of thing happened with AOL/Time Warner.

But point appears to be evident. Yes, management, even of the biggest companies, can be blind when it comes to mergers and acquisitions. Why not, you have investment bank advisors and other interested parties, all who will make money on the transaction, wining and dining and schmoozing you, and so it goes…

There are some good combinations. But usually, as indicate earlier, the only good combinations are those that are smaller, niche companies, that provide something new and unexpected to the acquirer. Priceline, for example, made a momentous acquisition of this sort.

Tinker

Saul, does this mean you intend to exit your position in SNCR?
I am leaning that way myself, but would take a loss. I just might wait a bit for the dust to settle.

I reduced my position some today in response to that welcome dose of reality. I doubt I will sell out all of it, but I don’t know right now. By the way you wrote I am leaning that way myself, but would take a loss.… Speedy, in deciding whether or not to sell a position, it doesn’t matter where the stock has been, or where you bought it. What matters is where it’s going from here. (That’s a general rule. This is all so new that I don’t have a clue right now where SNCR is going.)

Saul

Thanks Saul. I appreciate the response!

Speedy, in deciding whether or not to sell a position, it doesn’t matter where the stock has been, or where you bought it. What matters is where it’s going from here. (That’s a general rule. This is all so new that I don’t have a clue right now where SNCR is going.)

Definitely, if it is in a IRA or especially a Roth IRA. For stocks in a regular investment account, the entry point is every bit as important imo, because of the tax ramifications. Sometimes it is worth holding some stocks you have taken big losses on if you expect them to definitely go up, because you have a card up your sleeve when it comes to tax time, where if forced to do so you can sell one of your losses that has the least certain prospects of near-term growth.

After listening to the SNCR conference call on the acquisition I’m no happier. A lot of corporate-speak, and hopes for great synergy. But selling their cash cow, buying a new company almost as big as they are that’s losing money, changing CEO’s, all at the same time, just isn’t for me. I’ve continued to reduce my position.
Saul

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Yes, management, even of the biggest companies, can be blind when it comes to . . . most anything.

In my 30 year career I’ve countless examples of management blindness (mind you, I was in management for 10 years). Most managers are just ordinary people. An extraordinary manager is a rarity - even as you approach the exalted “C” level. Many of them are petty, thin-skinned, vindictive, and suffer from all the same personality foibles that afflicts non-managers.

This is why trying to learn about the top management is one of the most important criteria (for me, anyway) when it comes to due diligence and deciding if I’ll invest my money with a company.

If the guy at the top is a flaky individual, I don’t care about the financial performance, maybe he’s lucky (how long will that last?), maybe someone else is really driving the show (who, how long will he stick around?), etc.

Once I got to know Garrabrants, I got out and stayed out of BOFI (actually, I got out a little earlier, but I stayed out as I learned about the guy). I never felt comfortable with Pearson so I stayed away from Valeant (despite TMF boosting). I could go on, but why bother. You get the point.

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I am not sure what Garrabrants has to do with SNCR but I am very glad I didn’t listen to anyone that had preconceived opinions of them. Bofi keeps performing amazingly and all of the people who have been bearish, while holding the stock down, have been completely wrong about the business.

Andy
Very happy shareholder

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