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Acquiring Xchanging Could Be A Game Changer For Ebix

Dec. 02, 2015 11:59 AM ETEbix, Inc. (EBIX)DXC, CTAGY, WTW34 Comments
Manoj Madhavan profile picture
Manoj Madhavan


  • Ebix is the current top bidder for Xchanging.
  • If Ebix succeeds in acquiring Xchanging, based on Robin Raina’s track record, Ebix’s earnings per share is likely to increase substantially after Xchanging is integrated.
  • Going by past acquisitions, I expect this integration to be completed in about four quarters after closing the deal.


Ebix (NASDAQ:NASDAQ:EBIX) is the current top bidder for Xchanging. If Ebix succeeds in acquiring Xchanging, based on Robin Raina's track record with 17 acquisitions between 2006 and 2011, Ebix's earnings per share are likely to increase substantially after Xchanging has been integrated. Going by past acquisitions, I expect this integration to be completed in about four quarters after closing the deal.

Current state of the acquisition play:

On Nov 16, 2015, Ebix made an all cash offer for Xchanging. The offer was 175 pence per share which works out to about $684M. This tops the original Capita (OTCPK:CTAGY) offer of 160 pence per share and the subsequent Computer Sciences (NYSE:CSC) offer of 170 pence per share. Ebix does not have $684M lying around. Since Ebix (and other suitors) has made an all-cash offer for Xchanging, it's likely that some or all of this $684M will be raised by issuing and selling new shares in the market.

A high-level snapshot of the gross margins and net margins of the players involved:

(Source: Yahoo Finance and Morningstar)






Revenues ($Million)





Gross profit ($Million)





Gross Profit Margin





Net Income ($Million)





Net profit margin





(using 1GBP = 1.51 USD)





Revenues ($Million)




Gross profit ($Million)




Gross Profit Margin




Net Income ($Million)




Net profit margin




(using 1GBP = 1.51 USD)

Computer Sciences




Revenues ($Million)




Gross profit ($Million)




Gross Profit Margin




Net Income ($Million)





This article was written by

Manoj Madhavan profile picture
Manoj Madhavan, CFA, CFP, is a Principal at Oxford Chase Advisors LLC, a Dunwoody, Georgia based Registered Investment Advisory (RIA) firm. His investment philosophy is loosely based on Warren Buffet’s principles of value investing.Manoj was born in Tiruchirapalli (Trichy), India. He has a Bachelor's degree in Engineering from Indian Institute of Technology, Varanasi, India, a Master's degree in Engineering from Louisiana State University, Baton Rouge and an Executive MBA from Emory University, Atlanta.

Analyst’s Disclosure: I am/we are long EBIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (34)

Manoj Madhavan profile picture
Wow! What a ride! When I wrote this article in January 2016, EBIX was at $34 or so. It is up 76% since then!! Even though EBIX is still one my largest holdings, I must admit that I did not expect such a fast rise and booked some profits in the mid 40's, high 40's and low 50's. Interesting year - to say the least. EBIX made two unsuccessful attempts at mega acquisitions - XChanging and Patriot National (PN). London PPL revenue has been coming in. Indian e-Gov revenue has started coming in. 2017 promises to be another exciting year. Good luck to all!
Exile of the Mainstream profile picture
You sold early...The operating business of EBIX is sound.
Manoj Madhavan profile picture
Please read my comment. EBIX is STILL one of my largest holdings. I agree that the operating business is sound.
Manoj Madhavan profile picture
Alfred - thanks for your comments. It seems that EBIX is not planning to raise its bid against CSC. Maybe, RR looked inside the onion and did not find enough high margin layers after peeling off the "bad" low margin outer layers. In any case, I trust RR to what is right for the shareholders - that was the main point of my piece.
Alfred L. Angelici profile picture
Xchanging says it does NOT expect EBIX to raise its bid against CSC. http://tinyurl.com/zff...

In my opinion, if Ebix was successful with this M&A, it would have been a "winners curse" for Ebix. Xchanging margins are significantly lower than Ebix's and would have dragged down Ebix's future margins. RR told investors last year that he was looking for high margin businesses to acquire, and he should stick to that strategy!
Manoj Madhavan profile picture
You are welcome. I am not familiar with LSE Takeover Law either :-) Just reporting what is out there. Nothing to do but to wait....
Manoj Madhavan profile picture
Here is one link (of many) that confirms EBIX is still interested:

Here is a link that mentions the 53 day rule:
Exile of the Mainstream profile picture
Thank you. I wasn't aware of the latter link. Not familiar with London Stock Exchange Takeover law.
Manoj Madhavan profile picture
Hey Protagonist - have you looked at other companies lately? Lots of companies have had similar (or worse) price swings in the past few weeks. I do not think their stock buy back would have stopped the slide. For that matter, if the only thing that props the stock is a company buy back, then, clearly, this is the wrong stock to be invested in.
Having held EBIX through much worse price swings I find this nothing to be alarmed about. And there may be more downswings (and upswings) to come. As I reckon, we are only in Day 3 or 4 of the 53 day countdown before the Xchanging acquirer is finally known.
Exile of the Mainstream profile picture
I thought CSC's bid was accepted? Where is the link to your 53 day note?
Exile of the Mainstream profile picture
EBIX's price action is ridiculous. They have been distracted by this bidding war and stopped buying back stock. 15-20% of market cap evaporated in 2 weeks.
Manoj Madhavan profile picture
Again - valid points to consider. I appreciate your point of view.

It all boils down to trust in RR's ability to execute at this higher (in terms of revenues) level.

You say he has done only small acquisitions in the past where the punishment for failure is/was small. I say that the past 20+ acquisitions were only trial runs for the BIG ONE. And I think Xchanging is probably not even the BIG ONE. If he pulls this off, he will go after bigger ones.
Just a reminder to folks out there - EBIX had an annual revenue of $12.8M in 2001. They are at $267M now! Revenues greater than Xchanging's annual business have been earned, managed and integrated by EBIX in this time period.
Brion Morrison profile picture
Manoj, I understand your point and this is likely an agree to disagree situation. My point is that 30% margin on the acquired business is extremely optimistic no matter the percentage of it that is retained.

Assume that EBIX has to pay 5% more than the current offer price to get the deal done and finances it 100% with shares at $35.5 (20.2M shares). The resulting break even margin on the remaining business is 12% if 80% of revenues are retained (ignoring any potential benefit of selling off part). That is double the existing margin, and increases to 16% at 60% revenue retention. That's the challenge for EBIX, and it is significant at a scale where EBIX management have limited/no experience. Not a recipe for success and in my opinion there is a real probability of reduced EPS. That needs to be factored in to any projected share price.
Manoj Madhavan profile picture
Brion - thanks for your comments. Your concerns are valid. However ...
1) I assumed that the entire purchase was paid with cash raised from share issuance. A much lower level of share based cash and a much higher level (my assumption was $0 debt) of debt based cash is more likely. Keeping all other assumptions unchanged, this alone will result in higher EPS per share.
2) I showed that EPS is going to be substantially higher @30% margin even if RR sheds 50% of the acquired revenue. Take that 30% and drop it down and increase the retained business to be greater than 50% and you will still end at a higher EPS number.
Long story short, I did not want to go crazy with hundreds of permutations and combinations of share issuance and realized blended margin. But you will agree that most of these scenarios end in higher EPS even with lower margins from the acquired business.
Brion Morrison profile picture
It seems quite a leap of faith to assume that after acquiring a business over twice the size of EBIX that combined margins would be anywhere close to current EBIX margins in the first few years after purchase. On the contrary, the integration is likely to be very challenging and result in an extended period of depressed margins. Looking back at prior acquisitions it seems to me that EBIX/Raina have a history of overpaying and either failing to maintain the revenues of the new business, or using them to cover up a lack of organic growth. It is hard to tell which is the case because the financial statements do not provide the necessary level of detail after purchase, but if you run the numbers it is clear that the purchases have not increased top/bottom line at the advertised rates. If they must pursue acquisitions my preference is that they continue the "small ball" that has a lower risk of value erosion, or in the best case provides incremental cash flows.

I took advantage of the short seller attacks to purchase EBIX at excellent value number of years ago, but if this acquisition goes through I expect to see much of that value torched, at the very least in the near term, and am seriously considering selling my shares.
Manoj Madhavan profile picture
birdman93 - I am not planning to reduce or trade my position. Can there be another short attack? Sure. Since I do not have a crystal ball, I do not know how low it can go, when I should sell, when I should buy back and so on. If you have done this (sell, wait for a dip and buy back) successfully before in the past 17 years, maybe you can do it again. I have traded in and out of EBIX before. I have sold covered calls in the past. I am not planning to do so this time. This time "feels different" somehow. I may be wrong, but I think EBIX went through a "trial by fire" and emerged as a stronger and more resilient company.
Thanks for the good article. I am a 17-year holder of EBIX and remain long on the company. I am concerned about the short-term. The 2012-3 troubles happened because of Ebix's acquisitions (disgruntled sellers, lawsuits, etc...) that caused the disturbance in Ebix's force. Ebix is also not your typical stock with a remaining, and apparently hard-core, short position at 32%. If RR sells stock, I am concerned that the activist shorts will pounce on that over the next few months and drive the price down. I will not cash out, but am pondering reducing my position to cash in at the 3-6 month period to catch the bounce. Your thoughts?
Maybe Ebix loses the bid but does a side deal with the eventual buyer for a piece of Xchangings insurance services or insurance software division? Smaller dollar amt, less risk, they know the business better, much smaller integration risk, etc. My 2 cents. I don't have any intimate knowledge of Xchangings Ins ops to figure out if that is even an option but whoever is buying it, might appreciate immediately recouping a big percentage of the deal. Who knows (a brief look at Xchanging's presentations shows their main platform for growth is insurance related IT, so likely not possible to break it up?).
Manoj Madhavan profile picture
Thanks for your comments stofil!
stofil profile picture
just what we longs needed to read. thoughtful insight on potentially huge deal that can affect a lot of us in EBIX. Appreciate your time and effort. Thanks.
Manoj--thank you for your insightful essay. It's reassuring to know Robin won't overbid for Xchang. If EBIX is high bidder, and issues more shares to cover the purchase, will the additional number of shares result in a decrease in PPS?
Manoj Madhavan profile picture
Thanks Wenmoose. If you look at the last table in my article, I have PPS estimates ranging from $53 to $91. I do not have a crystal ball. The actual price could be higher than $91 or lower than $53. If you read my article, you will see that I expect the PPS to increase substantially from current over the LONG term.
Manoj Madhavan profile picture
Thanks TexLong! Appreciate your comments.
TexLong profile picture
Manoj, thank you for an excellent article with very helpful data points. Great analysis. I've been long on Ebix since 2008, and I can't wait to grab the popcorn and see how 2016 unfolds. Greatly appreciate your expertise and efforts.
Manoj Madhavan profile picture
Thanks for your comments kiransky. You and I have realized the strong future that lies ahead for EBIX. Let us hope the shorts realize this in short (:-) ) order!
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