What: Shares of Envestnet (NYSE:ENV) fell more than 30% on Tuesday, while Yodlee (NASDAQ: YDLE) stock rose 30% on news that the former company is buying the latter in a cash-plus-stock transaction valued at roughly $590 million.
So what: Envestnet, which makes software tools to help investment advisors provide their wealth management services, wants Yodlee for its cloud-based financial services know-how. Together, the two platforms are expected to result in better tools and plenty of cross-selling opportunities.
The transaction is expected to close in the fourth quarter of 2015 or the first quarter of 2016, depending on regulatory approvals and approval from Yodlee shareholders. The boards of both companies have already approved the merger.
Now what: The market reaction to Envestnet's cloud-computing acquisition has been nothing but negative. Yesterday, Envestnet's market cap stood at $1.6 billion and Yodlee's value stopped at $370 million. Today, the combined market caps of these two companies add up to $1.6 billion. In essence, the entire $370 million of Yodlee's former investor value has been erased.
Envestnet also reported second-quarter results on Monday night, concurrent with the Yodlee buyout announcement. But you can't blame that report for today's pessimistic reaction: Envestnet's revenues rose 21% to $103 million and earnings increased 33% to $0.24 per share. Both of these figures exceeded analyst estimates by a modest margin.
In a conference call with analysts, Envestnet CEO Jud Bergman was asked why he decided to buy Yodlee rather than simply setting up some kind of partnership.
"You're basically asking, if you need a quart of milk, why did you buy the cow?," Bergman responded. "Ultimately, the analytics that come from data of the tens of thousands of advisors that we have and the millions of accounts that those advisors represent, combined with the network of 20 million paid users for Yodlee's financial aggregation capability, was a much better profile to own the technology in a merged entity than it was to share the technology through a commercial arrangement, an arm's length commercial arrangement."
Envestnet investors respectfully disagree with that conclusion today. The proof, as always, will be in the pudding. The table should be set in approximately six months, so come back in the quarters after that to see how this merger actually worked out.
Meanwhile, I'll say that the core idea makes plenty of sense. The acquisition marries one traditional software provider's customer network to an up-and-coming toolkit with overlapping target markets. The cross-selling opportunity looks particularly interesting.
Long story short, I don't think that Envestnet's shares should be trading 30% lower today. But they are. Enjoy the quick buy-in discount, or sit back and watch how the merger actually develops -- the choice is up to you.