Envestnet stock skidded 35% -- so will it force a rethinking of the Yodlee deal?

Update as of Thursday morning (Aug. 13): Jud Bergman, Envestnet’s CEO, returned my phone call yesterday afternoon and reiterated what he had said in an earlier email to me. It was disarmingly frank in saying he had done a horrible job of making analysts to some degree, and investors to a greater degree, understand his thinking behind the purchase of Yodlee. He also asked me whether I had listened in on his second round of presentations to analysts as hosted by William Blair. Apparently it went down at 9 a.m. on Wednesday. Before having an interview he suggested it made sense for me to read or listen to the transcript. Since then I have searched for the transcript on Envestnet’s, and William Blair’s websites, not t mention Google; the media representatives of Envestnet say they were not aware that such a conference had happened and they say they are still stymied because Envestnet execs are still in meetings. What Mr. Bergman told me, wryly, about the event was that it was better attended than the earlier version on Monday afternoon. He also spoke of what the Yodlee imbroglio is doing to his sleep schedule. He nodded off at 1:30 a.m. Wednesday and arose at 6 a.m. Whatever was said by Envestnet on the Wm Blair call was apparently enough to bring some analysts around to the optimistic Reinhart view considering that the stock had a 24% rebound yesterday. That bounce aside, the stock is still well below pre-Yodlee-announcement levels at about $35. Connecting the dots on how this Yodlee addition will help Envestnet disrupt is still proving elusive to the lay observer. Also, I couldn’t get Mr. Bergman to comment on whether the share price depression endangers the deal. All in all I am very determined to see the newer transcript and report back to you the essence of this deal. I’d hardly give a hoot if this wasn’t a company right at the core of the RIA business trying to reinvent the whole idea of what a user interface is all about and how data can be used to empower advisors in new and wonderful ways. Right now how Yodlee will do that is not to the point where a journalist, in my opinion, can put the describe the magic of the combination in plain English.

Brooke’s Note: No doubt Envestnet executives expected some negative feedback about their plan to buy Yodlee. But this? Envestnet shares lost the entire pre-bid value of Yodlee pretty much at the opening bell yesterday, Thursday. [The good news is that the shares have snapped back 24% today, Wednesday at 11 a.m. PT.] Good executives don’t worry about fickle investors but this decline cut deep. People I talked to — even competitors — seemed shocked. There are lots of superficial factors: a bad day at the stock market, the thinly traded nature of Envestnet shares, an earlier run-up of Envestnet shares and less-than-stellar earnings guidance during the earnings call that came at the same time as the Yodlee deal announcement. But when a small company buys another that is of roughly equal size and stature and news of it is delivered without a clearly articulated plan for how the acquired firm, devoid of EBITDA, carries its own weight, then perhaps you have ideal conditions for sinking a stock. Storms blow over. But in the meantime you need to limit damage. That makes the questions that this article tries to answer about the Envestnet-Yodlee deal and the giant vote of no confidence from Wall Street so important.

The tension built Monday evening as Wall Street analysts asked Jud Bergman increasingly pointed questions about his company’s just-announced purchase of Yodlee. See: Envestnet buys Yodlee and its treasure trove of 'permissioned’ data by selling its vision of the future of financial advice.

The crescendo of the exchange between the Envestnet CEO and the analysts came when William Blair & Co. LLC’s Chris Shutler dared ask, essentially, if Envestnet had just spent $600 million for information that could be had for all-but free.

“Jud, why did you — you mentioned at the outset asset that you were digging into Yodlee and decided it would be better to merge rather than partner,” said Shutler, who’s earned a mention as the No. 2 earnings estimator in IT services in 2010 from the Financial Times/StarMine list of “World’s Top Analysts.”

“Why specifically was that the case? Why wasn’t partnering good enough?”

Milk run

Eric Clarke: Sometimes the guy who
runs up the hill with the
flag has a rough day

In response, Bergman steered the conversation in the direction of the dairy barn.

“So, you’re basically asking if you need a quart of milk, why did you buy the cow, is that what you’re asking Chris?”

Assured that it was indeed the question, Bergman gave a 125-word reply devoid of barnyard metaphors.

“So, as we look at the revenue synergy across, the cross-sale synergy, the footprint that they — Yodlee — had internationally and the market leadership they had in data aggregation, which was a very important element of our long-term strategy, we concluded that we were better off owning the technology, the capabilities, the patterns, the interface library with a hub of interfaces because as we seek to deeply integrate this capability into financial planning, investment planning and the investment management process, we just have a lot more flexibility of getting the solution right. We also see that with the synergies on the cross-sales, we wanted to be the full beneficiary of those instead of sharing the benefit of that which a commercial arrangement would have.”

That voluble answer, various observers say, made an impression on Envestnet shareholders because Yodlee has no appreciable earnings — putting all the weight on the company’s stated vision. The vagueness of the answer was perhaps not reassuring. We may never know.

'Cultural integration’

We do know that Envestnet’s shares wasted no time cratering by $15.83 to $29.39 — 35% — in Tuesday trading, even as Yodlee’s shares soared 28% to land north of the $16 mark.

“Sometimes the guy who runs up the hill with the flag has a rough day,” says Eric Clarke, president of Orion Advisor Services LLC, of the sharp reaction by Wall Street to the Envestnet CEO’s bold strategic play.

Clarke adds that Wall Street may perceive risks that go beyond the financial — namely merging a Yodlee workforce of nearly 1,000 people, many of whom are Silicon Valley-based idealists bent on helping everyman with their finances, with Envestnet’s people for whom improving the SMAs and UMAs of the wealthy is a primary goal. See: Envestnet buys baby robo-advisor to add 'last mile’ to its grown-up platform.

“The biggest challenge is the cultural integration,” Clarke says.

Undiscovered rationale

Envestnet is hamstrung in communicating its larger vision in buying Yodlee, according to James Carney, head of ByAllAccounts as well as RIA software at Morningstar Inc. But that vision does not involve account aggregation because that data and technology can be had so cheaply.

Still, Carney says that an Envestnet vision and reasons for the Yodlee purchase exist, perhaps based on information that can’t be shared before the deal is closed.

“They clearly have reasons. Jud Bergman is a solid guy,” he says. See: Jud Bergman defies advisor feedback as Envestnet stares down the barrel of change.

ByAllAccounts and Yodlee really don’t compete on the same playing field, Carney says. “We’re focused on super high-quality transactions. Yodlee is more consumer based. We’re not competing day to day.”

Another observer, from another account aggregation firm, agreed that Yodlee’s aging platform is fine for consumers but not sufficient for many wealth managers.

Missing link

James Carney: They clearly have reasons.
Jud Bergman is a solid guy.

Bill Crager, president of Envestnet, also took a crack at defining the deal’s synergistic value to his company and boiled it down to consumer finance data.

“It’s what has been missing,” he said to InvestmentNews. “We’ve got a very comprehensive wealth management and investment management platform, but we really haven’t engaged at all in the consumer finance part of an investor’s life.” See: How Envestnet is taking its stranglehold on money-managers-to-IBD reps distribution to a much wider channel base of financial advisors.

He added in that interview: “Bank accounts and credit card information or mortgages have been separate from investment life,” he said. “By acquiring Yodlee, we pull those pieces together in a very powerful way.”

Crager did not respond to a request for comment sent directly by email, Bergman responded by saying that clients have been quick to embrace his vision, analyst have been lukewarm and investors not warm at all. He added that he would be open to a phone discussion. I replied to that email but have yet to hear back.

A spokeswoman for Envestnet says the executives have had huge demands placed on their time by stock analysts and she is working to find time on their schedules.

But Bergman suggested on the Monday analyst call that not all data can be rented — and certainly these kinds of business relationships are necessary.

“One of the things we highly value is the network effect. It’s 850 clients but it is access to some 14,000 financial institutions. It’s not just an investment solution but it’s credit cards, mortgages, credit unions. So [it’s] that base of that network of interfaces that we believe is going to be very valuable to deeply integrate to registered investment advisors, practices and independent broker-dealers, insurance regional broker-dealers, banks, trust companies.”

Rent-an-aggregator

This explanation makes sense but only to a point, says an executive of an account aggregation company who asked not to be identified for this article.

“If Envestnet wants to offer a 'your clients look more like X than Y, stop investing like they’re Y’ tool, they need enough data to correctly identify X versus Y. Granted, renting an aggregation provider and exposing it to Envestnet’s massive customer base might just accomplish the same thing — and after the WSJ article on Yodlee from Friday, everyone who uses them will be clamoring to make sure that their contract terms prohibit sharing and commingling data.”

Indeed, the Wall Street Journal’s Friday investigative report about Yodlee revealed that Yodlee’s use of information has already caused virtual advisor Personal Capital to add a paragraph to its privacy disclosure, warning customers that third parties might “be contractually allowed to rent, sell or otherwise make commercial use.”

Motley Fool summed up the severity of the Envestnet paper value loss as it relates to the Yodlee deal announcement in this way: “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.”

When Yodlee completed its IPO in October 2014, it priced the offering at $12 a share, valuing the company at about $340 million. Yodlee shares rose 40% its first trading day but finished the day up 12%.

Control delete?

Anil Arora: The increase in deferred
revenue is an indicator of the
magnitude and size of the conversion
base that we expect to bring
on in the second half of
2015.

Given that a CEO’s top job is to preserve and enhance shareholder value, Clarke speculates that Bergman will have to at least consider scuttling this Yodlee acquisition. The deal comes with a 3% forfeiture fee in the event Envestnet pulls out.

“It’ll be interesting to see whether he sticks to it,” Clarke says.

Joel Bruckenstein, producer of the T3 conferences, also raised the issue of the ripple effects of the stock plummet. He imagines that the deal price was calculated based on a higher valuation of Envestnet shares. He also wonders how other transactions like the purchase of Finance Logix and Upside, both paid for largely with stock as currency, could be adversely affected.

At 3%, maybe $18 million, the kill-fee on the Envestnet-Yodlee deal is steep, but maybe not in the grander scheme.

“That’s a small price to pay relative to the market cap.” says Clarke, adding that Envestnet potentially has its credit line tied to a certain market capitalization and it may have to cough up more shares now to Yodlee to make the deal happen.

In the bag

Whether the stock movement will affect the company’s determination to buy Yodlee in a tail-wagging-the-dog way is speculative, but Envestnet certainly has a tiger by the tail in its new corporate mate. The Wall Street Journal article says that Bank of America Corp. fueled nearly 14% of Yodlee’s revenue in 2014. Other giant marquee customers include J.P. Morgan Chase & Co. and financial services giant USAA.

But Yodlee’s ability to harvest the data from those companies has its limits, according to what those companies told WSJ. USAA doesn’t permit Yodlee to “store personally identifiable information about our members,” a USAA spokeswoman told the newspaper.

BoA “ensures all third-party vendors protect customer data at standards that meet our policies, regulatory guidance and requirements, and are in accordance with our customer privacy policy,” the mega-bank told the WSJ. A spokeswoman for J.P. Morgan told the Wall Street Journal that the bank doesn’t give Yodlee any access to transaction-level data and doesn’t allow the company to sell such data.

Bank of America, along with Fidelity Investments, is one of Yodlee’s biggest owners.

But bigger customers for Envestnet and Yodlee may soon to be announced. Shutler asked Anil Arora — CEO of Yodlee — and Bergman how good they felt about hitting “implied Q4 numbers.”

Arora said those accounts are in the bag — on board but just not according to accounting rules.

“And one indication you see that they are live — accounts already on — is the increase in deferred revenue is an indicator of the magnitude and size of the conversion base that we expect to bring on in the second half of 2015,” he says.