Tuesday, December 11, 2018

Mitek Systems: Elliott Bear Hug

Mitek Systems (MITK) is a small software company that a decade ago invented the image capture technology enabling check deposit now embedded in almost every bank's mobile app.  The product is loved by both banks and their consumers, for banks it is much cheaper to process a mobile deposit than to maintain the ATM/branch infrastructure and for consumers they can make a deposit instantaneously from anywhere without needing to stand in line.  While growing -- Mobile Deposit is 65-70% of Mitek's business -- mobile check deposits only make up a small percentage of the overall number of bank transactions, however paper checks continue to decline in use and Mitek needed a second act for its image capture technology.  They turned to mobile identification verfication; to open a bank account in the U.S., banks need to complete a series of steps to "Know Your Customer" (KYC) and that includes getting a government ID.  If banks or other regulated entities want to source customers through their mobile app, they need a way to verify their identity, opening up another growth path for Mitek.  The user takes a picture of their government issued ID and a selfie, Mitek's software compares to the two to confirm a match and also ensures the government ID is valid.

It's an interesting business and a nice little growth story, but what makes it especially interesting is Elliott Management (via a portfolio company called ASG Technologies) has made a hostile bid for the company, first at $10/share and now at $11.50/share in cash, MITK trades a touch over $10 today.  Elliott is of course a famous large activist investor known for getting their way, I personally recall how quickly American Capital (ACAS) changed course and folded to their demands a couple years ago before being pushed into the hands of a strategic buyer.  Mitek is a much smaller company at ~$370MM market cap, no debt, and no controlling shareholder.  Until recently, the company didn't have a CEO or a CFO, presumably that's when Elliott smelled blood and made their initial bid for the company.  Prior to the bid becoming public, but after it was made privately, Mitek did a strange thing and established a shareholder rights plan to protect the NOL, despite the NOL being only $27MM and thus insignificant to the value of the company.  More likely they were trying to prevent Elliott from acquiring a significant stake in the company in order to buy time and possibly end up in the arms of someone of their own choosing.  Mitek issued a statement regarding the most recent $11.50 offer, in it they disclosed that "other parties have expressed interest in Mitek" and also disclosed that Elliott is looking to replace the board with its own slate of directors.  With the shareholder base turning over quickly to arbs and others sympathic to Elliott, management is likely overmatched here.

At current prices you have low teens upside to Elliott/ASG's $11.50 offer, with the potential for more if the board is able to squeeze out a third bid from Elliott or able to quickly find a white knight strategic partner willing to pay an even higher premium.  If not, the stock probably falls temporarily but with the growing business providing some downside protection as mobile deposits continues to grow and identity verification gains traction.

Disclosure: I own shares of MITK

28 comments:

  1. Great minds think alike :P . I opened a small topic about this name on the CoBF forum. My thoughts are more or less in line with yours. Also own some shares.

    Have also looked at NRE a bit. However, as far as I could see the current trading price (or at least this was the case a few days ago) more or less implies you buy the portfolio (minus Trianon tower) at a a $160m discount to the appraised value of $1300m. Currencies also moved a bit so you're looking at a ~10% discount or something to appraised NAV. Is that so spectacular?

    Will probably turn out ok if they manage to sell the whole company at once, but if they decide to sell their assets piece by piece there might not be that much upside left for shareholders?

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    1. NRE - The 10% discount is on an unlevered basis, could be a lot better (or worse!) on a levered basis that does make it pretty interesting to me. I've heard from a few people closer to the story that there is a possibility this goes for a slight premium NAV based on some inbound calls the company has received in the past. But I'm going into it with some healthy skepticism too.

      Glad we agree on MITK, I do like to look for yours once a week or so, but hard to cut through the political nonsense. Keep up the good work, you're one of the best voices on the board.

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  2. Great write up, I agree with your line of thinking on MITK. I think chances are there will be other PE that will come around sniffing and potentially big a little higher for them. Probably at $12~. Company financials are also not too shabby.

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  3. Are the weak(ish) numbers being put up just a function of temporary capital investments into the second act of the business? Or do you think this is a case of a bad entrenched board and management team?

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    1. The numbers seem fine to me? Revenue was $45MM in 2017, $64MM in 2018, guiding to $83-86MM in 2019, that's a pretty healthy growth rate. I think its more the management and particularly the board were caught off guard here, don't know why the original CEO left, but it created an opening for an opportunist like Elliott.

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  4. How far is the potential downside if ASG withdraws?

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    1. $7-8 initially? So kind of a lot. I don't have an exact handicapped percentage of this thing closing, but I think its pretty high it gets sold to someone. FWIW (likely not much) the few analysts that do cover the stock have some pretty lofty price targets on it, $14-20 range.

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    2. Any thoughts/news on other bidders? I've through the grape vine that another party is thinking about bidding against ASG/Elliott but I'm taking that with a grain of salt.

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    3. You're better connected than me! I'll take management's word that other parties have expressed interest in them, but I'm not smart enough to know who?

      Pure uneducated guess, but would DOCU be interested? Similar goal of disintermediating paper/wet signatures in the financial and other regulated entities space.

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    4. Ha, it's only hearsay, I wish I had better intel on who exactly is expressing interest in them. DOCU sounds like a logical fit and bidder but honestly any PE firm could want this as well.

      I think the probability of them getting bought out is pretty high.

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  5. http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/mitk-mitek-systems/msg356162/#msg356162

    So what are the odds now?

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    1. I think odds are pretty good that it will be sold one way or another.

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    2. I agree. It likely pushes out the time frame a bit versus just folding to Elliott's $11.50 bid, increases the risk/range of outcomes (what if our economy does fall into a recession?), but it's likely best for shareholders in the end and I'd guess fetches a higher price than $11.50.

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    3. On Monday, Mitek (NASDAQ:MITK) disclosed it had received acquisition interest from multiple parties. Benchmark analyst Mark Schappel says the disclosure supports the firm's view that shares could be worth $12 to $13 in a normal operating environment.

      Elliott/ASG has an outstanding $11.50 per share offer that the Mitek board rejected.

      Benchmark maintains a Buy rating and $12 target on Mitek.

      Source: Bloomberg First Word.

      http://investors.miteksystems.com/static-files/5bcb13b5-099c-46d7-9639-d95d68b3d527

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  6. Sold yesterday, the risk-reward deteriorated as the shares increased rapidly in my view.

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  7. Mitek is attracting private equity interest, according to TheDeal.com sources.

    Mitek started its auction in December. The company will set a deadline for the first bids at the end of this month and decide by the end of March whether to accept.

    Benchmark's Mark Schappel thinks Jack Henry (JKHY -2.4%), Fidelity National Information (FIS -0.6%), and Paylocity (PCTY +4.6%) could be among the interested parties.

    Source: Bloomberg First Word.

    Interesting, looks like ASG will probably lose their bid and this will hopefully get sold north of $12.

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    1. I saw that too, there seems like little doubt that Mitek will receive an attractive offer, but is management properly pressured and smart enough to take it? I'm guessing so, investor base has turned over, Elliott will keep the heat on them, etc.

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  8. Opinion on what the fallout would be if they refused all offers? You suggested above a pullback to 8-9? Does this still stand?

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    1. Maybe? I don't have a strong feeling on it, but also don't think much has changed since that initial guess, operating results from the quarterly results seemed in-line with expectations.

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  9. Thoughts on today's price movement? Up 6% on seemingly no news, my best guess is that funds are picking up MITK on the hopes that auction offers will be substantially higher than Elliotts offer. I've heard rumors/channel checks that offers of $15+ are being floated...but very skeptical

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    1. No thoughts, I'm not connected enough to hear the rumors, but not surprising that they're starting to come out as we're nearing the end of their timeline. My initial impression is similar to yours, seems too high at $15, might not be much (any?) upside from here, but I've decided to hold until we know definitively.

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  10. ZHX523 - where are you hearing these rumors? Why are you skeptical? Thanks.

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    1. I have friends that work in IB/PE which I've consulted and they've thrown that number out as a possible price target. They have also asked around and that was the price range that were rumored to be possible. I'm skeptical because that PT is essentially hearsay and when I push for clarification none of them seem to be able to back out that number for me. Since I can't justify/understand why $15+ would be an adequate PT, I'm skeptical.

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  11. As of today:

    Benchmark raises its Mitek Systems (NASDAQ:MITK) target from $12 to $15 citing buyout chatter.

    The firm thinks Mitek could be worth more than the $12 to $13 per share that Benchmark suggested in October.

    Analyst Mark Schappel cites enterprise multiples increasing since that time, Mitek's story progressing in a positive direction, and the arrival of a new chief executive.

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    1. And today the market doesn't believe the chatter?

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    2. Could be a broad market sell off? Not sure...but price action seems a bit fishy...there was a huge block of shares being sold a few days ago and it seems to have continued..hopefully its just noise and we get some news soon?

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    3. Same firm is now saying $18.50 to $20? I wish it was an M&A reporter leaking news rather than an analyst seemingly guessing.

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    4. I completely agree, they seem like they're full of crap...now it makes me very skeptical of PT of $15+.. perhaps it may be wiser to take the gains/lower position while investor's expectations are high..

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