Ellie Mae's (ELLI) Encompass software is ubiquitous in the mortgage industry, and the company's stock has been owned and recommended by Motley Fool portfolios. But it won't be anymore -- the mortgage industry software provider is going private. Shareholders will get a nice premium compared to the most recent values, though not relative to prices prior to the market's fourth-quarter sell-off.
But, as Market Foolery host Mac Greer and senior analysts Andy Cross and Jason Moser discuss in this segment of the podcast, it's a strong company with dominance in its niche -- should investors hold on in case an even better offer appears?
A full transcript follows the video.
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This video was recorded on Feb. 12, 2019.
Mac Greer: Ellie Mae be going private. Jason, you gave me that line. You guaranteed me that that line would work! And I'm not sure it did!
Jason Moser: It made me laugh. Come on, listeners!
Greer: So, Ellie Mae is a mortgage software provider. It's being acquired by private equity company Thoma Bravo in an all-cash deal at $3.7 billion. Jason, I know this is a company you follow. Shares of Ellie Mae up big today. What do you think?
Moser: It is, it's one I was chatting with Simon Erickson back in Texas here earlier about, it's one that he and I covered on MDP, one we owned in MDP, owned for quite some time. It's not a shock to me to see this. Their Encompass lending platform is really strong. Chances are, if you've bought a home or refinanced your home, some of, if not most of those documents you've signed were generated from Ellie Mae's Encompass engine. They have a very good business there. Growing relationships with lenders, switching costs grow over time, pricing power comes from that. It's an attractive business.
To put that into context, with MDP, this was a big winner. I recommended it as a Best Buy Now in MDP seven different times going all the way back to January 2016. It recorded absolute positive returns six of those seven times, market-beating five of those seven times. I personally have owned shares and have done very well with those as well.
I'm sad to see it go. It's worth noting, there's a 35-day shop-around clause for Ellie Mae management. That means the board can go out there and at least look at other potential suitors if they feel like there's a better offer out there. Take that with a grain of salt -- $99 in cash is a pretty good offer for today.
Greer: What does a shareholder do here? Do they go ahead and sell, or do they get greedy and wait?
Moser: Far be it for me to advise shareholders what to do. I have the luxury of basically having to hang onto my shares anyway because we'll be talking about it for a while and our trading guidelines here tell me that I need to hang onto those shares until I shut up about it.
I would not sit there and tell you that there will not be a competing offer. It's an attractive business. It generates a lot of cash. I can see a competing offer coming in. I think that right now, the state of the housing market is just uncertain enough where Ellie Mae management might feel like this is a good offer. Particularly, listen, they've got earnings coming out on Thursday, so they may drop a bombshell on Thursday that could make this offer look really nice. We just don't know.
I think, unless you have a better place for that money, hanging onto those shares is probably the most level-headed way to go about things. It does sound like $99 in cash is going to be the worst-case scenario.