The last four months have been an outstanding period for Synchronoss Technologies (NASDAQ: SNCR). Not for its shareholders, who have seen the value of their stock fall from $49 to $27; but potentially for its senior executives, who, through a series of baffling transactions, may have established what Roddy Boyd at the Southern Investigative Reporting Foundation dubbed the Synchronoss “friends and family plan”.
Our story starts with Synchronoss’ Q3 2016 earnings. The company reported results and offered guidance that handily beat Wall St expectations, sending the stock up from around $37 to $47 (the result also coincided with the post-election day rally). However, the intriguing development was the then-CEO and founder Stephen Waldis’ announcement that management was exploring strategic alternatives (à la sale) for its Activation business. Synchronoss’ Activation business is a mature legacy business that provides mobile handset activation and network provisioning services to carriers globally. It is not a glamorous business, but has a high mix of recurring revenues, stable margins, and is anchored by key customer AT&T. Up until the Q3 earnings call, management had not even hinted that it viewed the Activation business as non-core, and at the June 2016 Investor Day was still talking about international expansion.
One month later, on 6 December, Synchronoss announced that it was acquiring Intralinks, a virtual data room provider, for $821m equity value. Not only did Synchronoss draw $900m of debt to acquire a maturing business that has not had a single profitable year since 2007 (head-scratcher in and of itself), but Mr. Waldis also stepped down from his CEO position into an Executive Chairman role to let Intralinks CEO Ron Hovsepian run the combined company. The merger proxy agreement then revealed that Mr. Waldis had sought to leave his CEO role as early as May 2016, and ultimately bought Intralinks to get Mr. Hovsepian on board.
Coinciding with the merger announcement was the announcement that Synchronoss had divested 70% of its Activation business into a new venture called Sequential Technology International (“STI”), owned by Sequential Technology International Holdings (“STIH”), for a total purchase price of $146 million. The company would look to divest the remaining 30% to STI within the next year. Before we turn to who the buyer is, let’s have a look at the terms of the transaction that raised our suspicions.
Generous transaction terms?
- Management announced they were exploring strategic options for the Activation business on the 7 November earnings call. Just one month later, on 6 December, management announced that 70% of the Activation business would be divested to STI. This is an extremely short time frame between exploring strategic options and negotiating a sale, and suggests to us one of two possibilities: (i) management had been considering strategic alternatives for the Activation business well before they disclosed it to the public, while talking up its prospects on previous calls/Investor Day; or (ii) the transaction with STI may not have been arm’s length.
Source: 2016 Investor Day on 9 June
- An 8-K filing made on 22 December broke out the pro-forma financials for the divested Activation business in the 9 months to 30 September. This revealed a stable, highly profitable business—much more so than the low margin business management made it out to be—once you add back the operating costs that would be retained by Synchronoss. On this basis, we estimate that the $146 million price tag represents only a 2.5x EV/EBITDA multiple. Whoever acquired the Activation business got an absolute bargain at the expense of Synchronoss shareholders.
- Not only did the buyer score a bargain, they paid for the business on credit. The same filing disclosed that STIH paid only $17.3 million cash up front, contributed a negligible amount of assets, and gave Synchronoss an IOU of $83 million. The remaining $43.8 million, representing Synchronoss’ 30% stake, should be paid this year.
Who, then, is the buyer, to have negotiated such generous terms?
Who is Sequential Technology International?
Management gave very little detail about STI or STIH, calling STI a new venture formed for the divested Activation business, and leaving it at that. However, when we searched for either entity, we turned up a blank. The report by Roddy Boyd corroborated our suspicion that STI was a shell company masking the new owners of Synchronoss’ Activation business.
And this is where things get very interesting:
- As it turns out, STIH is the new name of Omniglobe International, a Business Process Outsourcing company operating in India and the Philippines that was incorporated 13 years ago. The names STI and STIH don’t exist on any corporate register. The Omniglobe International website returns an error, and the STI website was registered in November 2016, around the time the STI shell company would have been formed.
- In its 2006 IPO filing, Synchronoss disclosed Omniglobe International as a related party, due to Mr. Waldis having a 12.23% equity interest in Omniglobe and three other executives having a collective 6.45% interest, through a holding company called Rumson Hitters LLC. Mr. Waldis and the three executives had their equity interests in Omniglobe bought out by other unnamed members of Rumson Hitters following the IPO. However, Mr. Boyd’s report states that Rumson Hitters owns 50% of Omniglobe (now STIH), and that Rumson Hitters itself is “still owned by friends and family”.
- Interestingly, the STI website is registered under the name Methfessel & Werbel, a New Jersey law firm co-founded by John D. Methfessel. An STI press release around the time of the divestiture names one “John Methfessel” as the Chairman of STI. Mr. Waldis and Mr. Methfessel are both alumni of Seton Hall University, and an address search (here and here) revealed that they were once neighbours in New Jersey. A “John Methfessel” is also listed as a director of the Waldis Family Foundation.
- STI CEO Kent Mathy lists Synchronoss Technologies under “Prior Board memberships” on his LinkedIn account.
Finally, on an (un)related note, Synchronoss CFO Karen Rosenberger announced her resignation on the Q4 earnings call, and will be leaving the firm in April to pursue other opportunities.
Given these recent developments, it is perhaps not surprising that Synchronoss shares have lost 45% of their value since December 2016.
Montaka is short the shares of Synchronoss Technologies Inc. (NASDAQ: SNCR)
Daniel Wu is a Research Analyst with Montgomery Global Investment Management. To learn more about Montaka, please call +612 7202 0100.
