Why Is Intuit Going Back to the Well on ECHO?

Implications: Intuit Inc. (INTU) and Electronic Clearing House Inc., (ECHO), have signed another definitive agreement for Intuit to acquire ECHO. Under the terms of this agreement, Intuit will pay $17 per share in cash in exchange for each share of ECHO common stock, including shares tied to options. The total purchase price is approximately $131 million on a fully diluted basis. In December 2006 these firms agreed on a deal valued at $142 million, which was abandoned by both parties in March 2007. Why is Intuit still attracted to ECHO? Where is the upside in this deal?

Analysis: The primary reason for terminating the first deal appeared to be over the deal price, due in part to the revelation that ECHO had agreed to become a federal witness in January 2007 to avoid prosecution and assist in the pursuit of illegal Internet gambling in the US. When the first deal terminated in March 2007, it appeared that Intuit should thank someone for saving it from playing out a bad hand. The deal price was over the top based on the presumed synergies that Intuit was going to have to produce after acquiring ECHO.  The new deal price, down by only 8%, is still over the top, and more than two times the recent ECHO share price (which had just hit a 52 week low).

1. In reality, ECHO is a smaller player in a game that has been driven by much bigger players. How small? Consider that ECHO is 15 times smaller than the #10 merchant acquirer and over 350 times smaller than the #1 merchant acquirer. The core payment transaction services ECHO offers, which are growing modestly, are commodity-like and differentiation is difficult for the small player.

2. ECHO’s gross revenues of $77 million are less than 3% of Intuit’s revenues. ECHO card processing revenues represent about 81% of its total revenues and are expected to be the primary source of the synergies for Intuit. Check related services revenues (e.g., check verification, check guarantee, etc.) are declining as checking volumes continue to fall. Intuit is facing a tall challenge to crank up card processing volume through its QuickBooks small business customer base.

3. Merchant acquiring for firms like ECHO is a one customer-at-a-time challenge, typically with small transaction volumes. Remarketing this service through community banks or other channels faces the same challenge – small volumes at the customer level.

4. ECHO’s management team and its largest shareholder, Discover Equity Partners, have to be pleased with this deal price. Otherwise, waiting for ECHO to generate the revenue growth and improved profitability to produce a market cap over $120 million would take years at best.