Inforte Corporation: Why Being Acquired is the Right Decision

On the day Inforte Corp. (OTCQB:INFT), an e-business, SAP, and analytics consulting firm, was to announce financial results the first quarter of 2007, it was also announced that Business & Decision Group will buy them for $4.25/share in cash.

I have long seem some form of an acquisition or going private transaction with Inforte Although they are relatively small with a little over $40M in annual revenues, they have been cash flow positive for the longest time, have no debt, and per their most recent filing, had $2.55/share of cash in the bank. Inforte recently traded as low as $3.11 and closed at $3.20 on Friday, May 11, 2007.

To me, it was always a no-brainer that some form of terminal event like this would happen, but I am disappointed in the offering price of $4.25/share. While at one point, I estimated a fair take over-range to be $4.50-$6.50, I thought something closer to $5.50 would be in the mix.

I do believe this is somewhat of an act of desperation by management and likely a move in the best interest of the shareholders. We saw INFT close down Provansis in December 2006, a company they invested in and watched go to zero. Recently, an 8-K was filed regarding the termination of a person's employment and the subsequent payout of $1M+ and 66,000+ shares of stock. This originated from INFT acquiring an analytics business and the resulting deal via an earn out that should have happened. For whatever reason, it did not end well. "

INFT runs a solid business, but they have not been able to yield significant shareholder value. Long term, this one has been a big loser - going public and trading as high as $80 per share back in early 2001. Of course, they were also somewhat victimized by the bad timing of the Internet bubble collapse, but they were never really ever to get back on their feet, even with all of that cash in the bank. They also paid out nearly $20M in cash in 2005 via a special dividend, so at one point, they had even more.

I think B&D Group saw this weakness and offered a price that was likely a lowball offer, but an effective offer considering INFT's situation in the marketplace, management inability to turn things around from a shareholder value perspective, and the recent events that were starting to take their toll on the INFT balance sheet. Reports about the acquisition also indicate that INFT's cash balance declined by more than $2M from Dec 31,2006 to present - not a good sign for INFT.

I believe the 1Q 2007 report will be less than positive and feature some elements that may have stood to drive the price on INFT further down - perhaps under $3. If that is the case, the announcement of this acquisition is good timing as whatever is in the 10-Q, regardless of how bad, will have minimal impact on the stock price. INFT will likely trade in the $4.10-$4.15 range and get closer to $4.25 as the final acquisition date draws near.

So, INFT comes to an end and although management was not able to do anything to make INFT a home-run investment, I must give them credit for swallowing their pride (30%+ is owned by the management/founders) and recognizing that the timing of this announcement is critical to maintaining shareholder value considering the further risk to the stock price.

It likely was not an easy decision and a gut-wrenching one for them, but despite the problems INFT has had, they took the high-road in this case.

Disclosure: Author has a long position in INFT

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