A Goldman Sachs Group Inc affiliate (GS.N) plans to spend $743 million to buy Ebix Inc (EBIX.O), an insurance software provider that has been a target of allegations from short-sellers about inaccuracies in its financial statements.
An affiliate in Goldman's merchant bank agreed to pay $20 per share for Ebix, which repeatedly has denied claims by the short sellers - some made as recently as in March - in critical reports posted online.
The on-and-off allegations of shoddy accounting practices have roiled the company's stock, sending its shares down 37 percent since accusations first surfaced in March 2011 through Tuesday's close before news of the deal broke.
The signal of confidence from Goldman sent Ebix shares up 11 percent, to close at $20.60 on Wednesday.
Sumit Rajpal, a managing director at the bank, did not address the controversy that has surrounded the company. He said in a statement that Goldman has "great respect" for Ebix and wants to help it grow.
Ebix has repeatedly denied short sellers' allegations in the past. A spokesman offered no further comment on Wednesday and its investor relations department did not respond to a request for comment.
Goldman's merchant bank makes private-equity type investments in companies using the bank's own capital as well as client money. A person familiar with the matter said Goldman performed due diligence on Ebix and felt confident that accusations leveled against the company had no merit.
The price offered by Goldman is a 7.5 percent premium to Ebix's closing price on Tuesday. The merger agreement includes a "go-shop" provision that allows Ebix to seek a better deal from other potential acquirers over the next 45 days.
Ebix Chief Executive Robin Raina, who owns a big chunk of the company's stock, said the board had considered "a number of potential alternatives" and unanimously agreed to be taken private by Goldman.
The buyout was unexpected, given Ebix's recent history and languishing stock price.
Ebix first confronted accusations that its financial statements were inaccurate on March 24, 2011, when an unidentified person posted a report on financial blog Seeking Alpha questioning its accounting, sales and expenses. The blogger, using the name Copperfield Research, said he or she was shorting Ebix shares.
Ebix refuted the claims but its shares, which had previously been trading around $29, fell 24 percent that day.
Accusations did not stop there.
A Bloomberg report on November 5 that the U.S. Securities and Exchange Commission was looking into Ebix's accounting practices sent its stock down 14 percent.
The company denied that it was being investigated by the SEC and no official investigation has been announced. Correspondence between Ebix and the SEC show the agency's staff questioning the company about some of its statements and asking it to improve disclosures.
Then on February 21, a firm called Gotham City Research LLC posted a critical report on Seeking Alpha about Ebix and its accounting practices. Ebix's stock fell 27 percent that day.
Gotham City has ties to short seller Daniel Yu, an investor who earlier gained attention by shorting Green Mountain Coffee Roasters Inc GMCR.O and Sino-Forest Corp, and frequently shares his investment ideas on Twitter.
At the time, Ebix called Gotham's report "unsubstantiated" and said its accounting "is appropriate and complies with all SEC reporting requirements."
If Goldman's deal goes through, it will also assume roughly $77 million in Ebix debt, bringing the total deal value to $820 million. Goldman and Credit Suisse AG CSGN.VX have made debt financing commitments.
Morgan Stanley (MS.N) advised Ebix's board, which unanimously voted for the deal. Raina and the Rennes Foundation, which together own 19 percent of the company, also voted in favor of the deal.
(Reporting by Lauren Tara LaCapra in New York; additional reporting by Sayantani Ghosh in Bangalore; Editing by Supriya Kurane, Matthew Goldstein, Paritosh Bansal and Andrew Hay)