Ann: Acquisition of Capricorn Investment Partners, page-2

re: Ann: Acquisition of Capricorn Investment ... Not sure if this is good or not. Looks like an easy way to get a back door listing for a small business.

Upfront cost of $9.253m to buy forecast earnings of $1.2m. Thats a price earnings multiple of 7.7 if they achieve forcast but before the bonus $5m. If they got the additional $5mil that would blow out the price paid to earnings multiple to 11.88 or thereabouts which is very high. They don't state what the conditions are to get the additional $5mil which seems rediculous since it is clearly material to anybody looking to evaluate the value of the transaction.

I believe current earning per share for IAW is about $0.011. The earnings per share from the existing business would be dilluted to approx $0.0065 due to additional stock issued and if EBITA for the acquired businesses came in at the $1.2m forecast that would equate to approx $840,000 in earnings (after tax) which is approx $0.00494 CPS. Therefore total combined earnings would be $0.01144 which is marginally above the current undilluted EPS.

The above calculation shows that on a pure EPS basis there is little net gain or loss in this transaction assuming the acquired businesses performs as forcast. However this ignores the $4.5mil is cash that is paid to the vendors and a possible additional $5mil later. That cash paid out will certain have a significant impact on EPS as it will surely result in higher borring costs. My guess is that the impact on earnings resulting from interest is likely to be somewhere between $300k and $600k (depending on bonus payment). Clearly any interest needs to be balanced against the $1.2m EBITA figure quoted which would then be $900k before tax, and $630,000 after. Dilluted EPS on $630k is only $0.0037 which would make group earnings a combined $0.01 which is approx 9% below what it is today. EPS would be much lower again if the $5m were paid out, although since we have no idea of the performance targets set, it very hard to establish a valid scenario for such a calculation.

So if the above figures are correct this transaction would likely achieve the following:

Net loss of EPS of 9% (based on acquisition forecast and borrowing costs)
Net loss of EPS of approx 20% if $5mil bonus is paid
Significant debt obligation
Unknown chances of achieving forcast so the above could be better or worse than my calcs
Unknown debt associated with current business so the EBITA forecast seems a little meaningless
Unknown hurdles to get $5m bonus payment


As well as looking at the basic transaction numbers I was interested in the quality of the business being acquired. There is a lot of talk about growth but the table showing funds under advice seems to tell a slightly different story. The vast majority of funds under advcie are with the Pentad business. That business has grown from 295m to 330m between 2010 and 2013. Thats total growth of 10% over 3 years, ie 3% per year. That looks more like treading water than growing.

I'm also interested in why they have quoted the trend for funds under advice rather than earning for the business in their yearly chart. We all knwon that this industry has taken a big hit in recent years with the recent abolition of trailing and undisclosed commissions. I for one don't care nearly as much about how much "funds under advice" these guys claim to have, I care about the revenue trend and this they seem to have declared absolutely nothing. Are they earning more or less for each dollar under advice than they were 1, 2 or 3 years ago? They don't seemt o think we need to know that which is extremely concerning.

Lots of talk about synergies also but on that I'm struggling also. If anything I would see a potential conflict of interest between representing a client in both of these lines of business.

Personally I'm not seeing how any of this benefits IAW shareholders. It looks like loads of unknowns, loads of debt, reduction of EPS, probably cancellation and contraction of dividends, and buying into an industry which is at best described as "in turmoil".

Where is the upside?

Happy to be corrected on any of my calculations and to hear anybody elses view on this.