The "soap opera" is over at Nashville-based iPayment Inc. The company announced Tuesday night that its board has accepted an offer of $43.50 per share by Chairman and CEO Gregory S. Daily, who plans to take it private in partnership with Carl A. Grimstad, iPayment's president.
The deal will cash out ordinary stockholders at a 6.8 percent premium to Tuesday's closing price of $40.74. Daily's original offer, made May 16th, was 20.4 percent above the closing price on the prior trading day.
Some analysts and other observers were surprised when the directors of iPayment did not accept Daily's original offer for the rapidly growing company, whose stock he clearly considered undervalued by the market. No directors have spoken out on the record, but the board's hesitation to accept the management buyout may have reflected unease both at the original tender offer of $38 a share (the stock having traded north of $50 a few months earlier) and at the potential for director liability in a climate of intense scrutiny of corporate governance by regulators and investors.
Daily's bid has attracted attention from observers of the payment-processing industry who know him as the co-founder, with local entrepreneur Rich Roberts, of PMT Services Inc. Daily's last job before PMT was a gig as a Comdata Network Inc. telemarketing representative. Starting their company with less than $2,000 in capital in 1984, when Daily and Roberts were both in their mid-20s, the founders grew it into a publicly traded enterprise that sold out for $1.3 billion in 1998.
Charles Trafton, a principal and stock analyst at America's Growth Capital, told the trade publication Electronic Payments Week in August that he had been confident the board would take Daily's original offer. "The people on the board are all his friends and buddies, and they knew this was coming," he reasoned.
"It's a soap opera," said another analyst, Colin W. Gillis of Boston-based Adams Harkness Inc., when asked about the unfolding interplay between Daily and the board. "It is drama."
iPayment, like PMT, has set its sights on mom-and-pop merchants who are riskier -- and more lucrative -- than large enterprises as credit-card-processing customers. Daily joined the company in 2001 in its organizational phase, recapitalized it and took it public in May 2003. Like PMT, iPayment has seen dramatic rises in revenue and earnings as more and more small and medium-sized merchants offer customers the option of paying by credit cards.
Daily's bid in May prompted iPayment's board to establish a special committee of three independent directors to evaluate the prospective deal. The company's Securities and Exchange Commission filings have not stated precisely who sat on the special committee. But it had five independent directors as of its most recent proxy statement in April 2005, and two of them resigned in August.
A logical deduction, then, is that the independents in the eye of the storm were J. Donald McLemore, Jr., Jennie Carter Thomas and David M. Wilds -- the other three directors designated as independent in the proxy statement. McLemore and Wilds are venture capitalists. Thomas is a professor of management at Belmont University and a consultant.
The company's announcement last night described the committee's investigation, in recent months, of "strategic alternatives available to iPayment for the purpose of enhancing stockholder value, including the possibility of a sale of the company and alternatives that would keep iPayment independent and publicly owned." The committee solicited bids from outside parties, but it finally became convinced that a proposal by Daily and Grimstad "represented the highest price reasonably available to iPayment" and was fair to the company's unaffiliated stockholders.
The committee retained its own Wall Street investment banking and legal advisors. Its members set their compensation at $10,000 per month, plus $1,000 per meeting attended in person, for the duration of their work. Their as-yet-unidentified chairman was voted an additional $25,000 in compensation for his or her efforts.
In the company's third quarter alone, the committee ran up $334,000 in expenses, as disclosed in its earnings report.
The transaction price of $43.50 a share suggests a value of $770 million for the company. Daily and Grimstad will pay some $629 million for the shares they do not already own. The announcement stated that they have secured $760 million in financing from Bank of America and will contribute, along with related parties, equity commitments of up to $206.6 million into the newly private enterprise.
iPayment employed 353 staffers as of September 30, 2005, the majority probably at its merchant bankcard processing center in Calabasas, Calif. and a smaller number likely at its corporate offices in Burton Hills.
Links:
Investors Business Daily [2] article from 2004 on iPayment's growth strategy
"Will iPayment Cash Out?" [3] -- Motley Fool, November 3, 2005.