On October 24th Investview (OTCPK:INVU) completed its acquisitions of Instilend which is a provider of technologies to the rapidly growing securities lending industry. In my September 21, 2012, update "Anatomy of an Acquisition I questioned as to why Instilend had agreed to be acquired by Investview, which is an unprofitable company for a paltry amount of equity?
At the closing of the transaction Instilend's shareholders received 500,000 shares of Investview and a note for $500,000 that is convertible into Investview shares at $8.00 per share. They also are entitled to receive 10% of the net profits that Instilendm, which is now an operating subsidiary of Investview, will generate for three years. The amount of shares that they received is equivalent to 10% of the shares that Investview has outstanding at the post closing of the acquisition.
The deal that Instilend had agreed upon was perplexing. It included far less equity than what Instilend's shareholders would have received if they stayed with the terms and conditions of the initial or first letter of intent that the two companies had entered into on March 8, 2012. The first letter of intent was canceled or voided on May 7, 2012. The two companies entered into the second and final letter of intent on June 22, 2012.
Under the terms of the first deal or letter of intent Instilend's shareholders were to receive the equivalent of 56% of Investview's shares outstanding. Based on Investview's closing share price of $4.20 and its total shares outstanding at the time the first letter of intent was signed, the value of the deal was $23.5 million. At the closing of the deal they received shares that were valued at $2.0 million and a note for $500,000. Therefore, they received $21.0 million less by settling for the second deal. There is only one other difference in the two deals. Under the second deal Instilend's shareholders receive 10% of the net profits that the Instilend subsidiary generates over the next three years. They did not receive any share of the profits as per the initial deal.
In all of my 35 years that I have been in the investment industry I had never seen or heard of an instance where an acquiree accepted 90% less after the initial deal was amended. However, I can recall many deals where the acquiree had received much more by the time the transaction was closed. That's normally what happens when an acquirer is unprofitable and is making an acquisition which can reduce its deficits. That's the case here as Investview is the unprofitable parent and Instilend is now its profitable subsidiary.
The closing of the deal begs questions. Is Instilend a scam company? Is that why its shareholders agreed to 90% less than what they originally wanted? Or is it that Instilend's shareholders opted for the second deal because they believe that they can make $21.0 million or more on the net profits that the Instilend subsidiary can generate over the next three years? If that is why Instilend's shareholders closed on the second deal that means that the subsidiary would have to generate cumulative net profits of at least $210 million over the next three years. That amount would create a windfall of profits for Investview's shareholders.
In seeking answers I did my due diligence. I was able to determine from my Wall Street contacts that Instilend is not a scam company. Its fully automated Matador securities lending exchange (SLE) or platform is currently utilized by the clients of many of Wall Street's most prestigious brokers dealers. Since its inception in 2004 Instilend's technology has been used to process 82 million short sale locate transactions involving 380 billion shares. Similar to a stock exchange Instilend operates as a middleman. It receives a fee from each and every transaction. Matador provides broker dealers the following benefits:
- Reduced costs - Matador enables broker dealers to reduce labor costs.
- Reduces or eliminates fines -The fines that the 6,000 licensed broker dealers in the US are paying for Regulation SHO violations are growing fast. In 2008 Regulation SHO violations accounted for 1% of all FINRA fines that were paid by the broker dealers. That compares to the Regulation SHO fines accounting for 25% of all of the fines that broker dealers paid to FINRA in 2011.
- Eliminates risk -Matador guarantees that a broker's client has borrowed the shares to enter into a short sale. Without the platform the broker is ultimately at risk in the event that the client did not borrow the shares and does not have the funds to pay for the buy in. Instilend clients who are utilizing its Matador electronic stock locate platform have not had any failed client audits.
- Increases revenue -Matador enables a broker or client to locate and borrow stock from another brokerage firm. Without the platform the broker's client will execute the trade at another brokerage firm and the broker's loses the ability to generate the commission.
After determining that Investview was legitimate I sought out John Tabacco who is one of experts that CNBC utilizes for its features or stories on short selling. He was the CEO of company that created all of the technology and developed all of the products including Matador, etc., and sold or assigned them to Instilend subsequent to its entering into the second Letter of Intent with Investview. I was able to get some insight from him on why Instilend's shareholders agreed to be acquired by Investview:
- Investview's CEO is a visionary. Instilend's shareholders believed that Dr. Joseph Louro, the CEO of Investview, is a visionary who can get Instilend to the next level. In June of 2011, Dr. Joseph Louro became Investview's new Chairman and CEO. Dr. Louro who has since personally invested sizable amounts into Investview on several occasions vowed to clean up the company's Balance Sheet and restructure the company's business model so that it could become profitable. In the first 12 months of his tenure he was able to reduce the company's liabilities by approximately $4 million or by 66%.
- Investview's management team has the credibility that Instilend needed. The key reason why the decision was made to be acquired by Investview was that they did not have the credibility on their team to fully leverage or take the technology that they had developed including Matador to the next level. What Instilend had was the following:
- Extremely reliable technology which had been commercialized.
- 100 global broker dealer members of their Matador SLE.
- Had recently entered into a deal to license Matador to a division of one of the world's 20 largest financial institutions.
- Had recently moved their technology onto the cloud to create almost infinite and low cost capacity.
What Instilend did not have and now has since being acquired by Investview is the personnel who have the resumes that are required to exponentially increase the number of broker dealer members of their SLE. The global brokerage industry is highly regulated. The vast majority of the broker dealers and especially those who are the biggest and the most established are reluctant to take risks especially with small companies whose management lacks credibility. Broker dealers prefer to do business with entities that are managed by someone who has a significant degree of experience in the securities or brokerage industry.
One of Dr. Louro's crowning achievements was to successfully recruit Randy MacDonald as Investview's Chief Financial Officer and David Kelley as its Chief Operating Officer. Both were formerly senior executives of Ameritrade (NASDAQ:AMTD). Mr. MacDonald was Ameritrade's Chief Financial Officer and Mr. Kelley was its Chief Operating Officer. Kelley and MacDonald together have more than 50 years of senior management experience in the brokerage industry.
The management team of Instilend now has the ideal resumes that are needed for Instilend to fully leverage its SLE. Investview's senior executives give Instilend the inside track in getting the USA's largest online brokers including Ameritrade, Etrade (NASDAQ:ETFC) Schwab (NYSE:SCHW), Interactive Brokers (NASDAQ:IBKR), Fidelity and Scottrade to become members of its SLE. More importantly, since the two senior executives held high level positions at Ameritrade and Merrill Lynch, etc., they have the visibility and relationships with many of the USA's 15 to 20 clearing firms. Getting the clearing firms as members of its SLE is the key to Instilend being able to exponentially grow its membership. All together the clearing firms clear trades for approximately 6,000 broker dealer correspondents.
Further, should Kelley and or MacDonald be able to get all of the clearing firms to become members of Instilend's Matador SLE, there would be no need for Instilend to conduct sales and marketing activities to get the 6,000 broker dealers to become members of its SLE. It's because all of the clearing firms' correspondents automatically become members of Instilend's SLE when their clearing firm becomes a member.
With the credibility of Investview's senior management it should not be difficult for Instilend to get all of the clearing firms as members of its SLE. Those clearing firms and their correspondents who become members of Instilend's SLE increase their revenue and reduce their risks and fines. Should they be successful in recruiting all of the clearing firms the result could potentially be a sixty fold increase in the number of US broker dealers who are members of Instilend's SLE. The result could be an exponential increase in Instilend's revenue and profits. The securities held by the clients of all 6,000 broker dealers being available to lend to borrowers would significantly increase the percentage of all transactions that are effectuated by high frequency traders.
Should Matador become ubiquitous in the US broker dealer industry the revenue generated from the high frequency trading community alone could potentially generate several hundred million in profits for Instilend over the next three years. Even though the HFT community accounts for almost 75% of all of the volume in the stock market it is capacity constrained. A lot of the high frequency trades that are attempted can not be executed. It's due to the inability of the high frequency traders to borrow the shares for "all" of the securities that are needed to effectuate their basket transactions. Having access to the lendable securities that are held by 6,000 broker dealers who are members of the Matador SLE will result in a much larger percentage of all of the trading baskets being executed for the HFT community. The preferred trading strategy that is used by high frequency traders is to go long or short baskets of securities. There are as many as 100 different companies per in each basket. To effectuate or execute a short basket the HFT must be able to borrow shares for each and every company which is in the basket. Otherwise they will not short any of the securities in the basket. If the HFT can only borrow shares for 99 of the 100 companies that are in a short basket none of trades on any of the securities are executed. The result is that the HFT's broker loses the commission and the broker dealers who were wiling to lend the 99 securities do not receive their lending fees. Finally, Instilend's SLE loses the opportunity to generate transaction fees.
The securities lending business has enormous and untapped potential beyond the HFT community. It's because the stock market has finally evolved to the point where short selling will play an increasingly significant role in investment portfolios. Up until the last five to ten years the stock market and its very existence has been dependent upon investors and traders buying shares for the purpose of selling them at a higher price. That all changed with the advent of the Internet.
The arrival of the World Wide Web on the scene is the catalyst for what I believe will prove to be the biggest ever transformation of the Financial Services Industry in my lifetime. The Internet democratized access to financial information. It also spawned the online brokerage industry. There are now more than 32 million online brokerage accounts in the USA. The amount of capital that is flowing into these accounts has been growing at 50%. The result is that there are now millions who are making their own investment decisions and they are becoming more savvy and sophisticated with each passing day.
The truth is that investors take great risk when investing in the shares of publicly traded companies, especially the medium and small companies. As the developer of StockDiagnostics.com's proprietary OPS (Operational-cash flow Per Share) and OPS rankings which track the quarterly cash flows of all publicly traded companies, I have access to a voluminous amount of Financial Statement data. I have been able to utilize this data to make significant discoveries.
What we were able to determine is that of the vast majority of the thousands of companies which trade on the Over the Counter Bulletin Board and on lesser exchanges go out of business before even reporting a single quarter of positive cash flow. What this means is that at any given point in time there are thousands of companies that investors and traders can make money on by selling their shares short. Within the next five to ten years. I predict that there will be significant increases in the number of US online investors who will embrace and incorporate short selling strategies into their investment portfolios.
The mystery has been solved. Instilend's shareholders preferred to be acquired by Investview under the terms and conditions of the second letter of intent over the first one for a logical reason. They knew that Investview had the management team who had the ability to immediately recruit the clearing firms and their 6,000 broker dealer correspondents to become members of Instilend's SLE. Instilend's shareholders concluded that their 10% share of the profits over three years was worth more than the net $21.0 million in additional shares that they would have received based on the initial deal.
More information on the online financial sector and the companies that reside in it is available at onlinefinancialsector.com. There is a video which is available that explains why the sector's cash flow metrics are superior to many of the other industries and sectors that I follow. I have owned shares in Investview for several years and may buy and sell shares in the company from time to time.
Disclosure: I am long OTCPK:INVU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.