Electronic Clearing House Inc.'s foray into processing Internet wallets for online gaming six years ago has had unfortunate consequences. Intuit backed out of an agreement to buy the company when ECHO disclosed and quickly settled a federal probe in late March for $2.3 million.
The acquisition would have given ECHO broader market scope. Intuit is the maker of QuickBooks, Quicken and TurboTax software.
ECHO accepted a nonprosecution offer from the government regarding ECHO's role as processor to Internet wallet sites, which typically hold funds for online gamblers.
The $2.3 million the company will disgorge is its estimated profits from processing and collection services provided to such clients since 2001, ECHO Chairman and Chief Executive Officer Joel M. Barry said in a conference call with investors March 27, the day of the disclosures.
ECHO was never identified by U.S. attorneys as the target of the probe, he said. Rather, the Justice Department has enlisted the company as a witness against other parties.
ECHO ceased most Internet wallet business when the Unlawful Internet Gambling Enforcement Act was signed into law in October 2006. It is now out of the Internet wallet business entirely. Barry said he could not discuss under what laws the government is pursuing its case.
Intuit and ECHO mutually agreed to terminate the contract, a decision criticized by investors on the call. "Given the beating your stock is taking - down over $7 [per share] - if you had taken a price cut, ... it might have been better for shareholders," said investor Paul Glazer.
Intuit may have backed out of the deal because of its own disappointing earnings, "so their threshold for risk might have been lower," commented Dorsey R. Gardner, President of Kelso Management Co.
"I don't understand how that's in your best interest," said Troy Hottenstein of RG Capital Management. "You should have held them to that deal."
The Intuit deal "spread us across a broader market than we would like to operate in," Barry said. "We still believe the value of ECHO is very high." Gardner suggested Intuit's decision gives ECHO other merger opportunities: "I thought you were selling kind of cheap. At today's prices, selling at one-times revenues is a huge discount," he said.
Barry said as ECHO refocuses on its traditional market, it will see operational savings from a new processing platform, which was in development for several years. "The Intuit transaction represents an endorsement of our business strategy" of focusing on technology and embedded software solutions, said Charles Harris, ECHO's President and Chief Operating Officer. ECHO reported revenue of $75 million for 2006.
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