INFT - Bought Out at $4.25; Another Notch on the Belt

This morning, it was announced that Inforte (NASDAQ: INFT) will sell out to Business & Decision Group for $4.25 in cash. The transaction is expected to closer within 90 days.
I honestly think the price for this acquisition is too low, considering that INFT has $2.55/share in the bank in cash, no debt, and is cash flow positive. I thought we would see something closer to the $5.50 range.

Regardless, rack up another win for me - and any loyal Terence followers. The key to the success in this investment was 'averaging down', which is typically not a suggested strategy. I originally bought at $4.02 and continued to buy more during its demise down to as low as $3.11.
I do believe this is somewhat of an act of desperation by management and likely a move in the best interest of the shareholders. We saw INFT close down Provantis in December 2006, a company they invested in and watched go to zero. Recently, an 8-K was filed regarding the termination of a person's employment and the subsequent payout of $1M+ and 66,000+ shares of stock. This originated from INFT acquiring an analytics business and the resulting deal via an earn out that should have happened. For whatever reason, it did not end well.

INFT runs a solid business, but they have not been able to yield significant shareholder value. Long term, this one has been a big loser - going public and trading as high as $80 per share back in early 2001. Of course, they were also somewhat victimized by the bad timing of the Internet bubble collapse, but they were never really ever to get back on their feet, even with all of that cash in the bank. They also paid out nearly $20M in cash in 2005 via a special dividend, so at one point, they had even more.

I think B&D Group saw this weakness and offered a price that was likely a lowball offer, but an effective offer considering INFT's situation in the marketplace, management inability to turn things around from a shareholder value perspective, and the recent events that were starting to take their toll on the INFT balance sheet. Reports about the acquisition also indicate that INFT's cash balance declined by more than $2M from Dec 31, 2006 to present - not a good sign for INFT.

I believe the 1Q 2007 report will be less than positive and feature some elements that may have stood to drive the price on INFT further down - perhaps under $3. If that is the case, the announcement of this acquisition is good timing as whatever is in the 10-Q, regardless of how bad, will have minimal impact on the stock price. INFT will likely trade in the $4.10-$4.15 range and get closer to $4.25 as the final acquisition date draws near.

So, INFT comes to an end and although management was not able to do anything to make INFT a home-run investment, I must give them credit for swallowing their pride (30%+ is owned by the management/founders) and recognizing that the timing of this announcement is critical to maintaining shareholder value considering the further risk to the stock price. It likely was not an easy decision and a gut-wrenching one for them, but despite the problems INFT has had, they took the high-road in this case.

Sometimes, it is just time to move on and as bad as INFT has been for many investors over the years, it was good for me, especially since I averaged down from my initial purchase. As mentioned previously, averaging down is typically not a good strategy, but to me made sense in this case, as the cheaper INFT got, the more compelling its value proposition was.

To succeed in investing, you often have to stick to your guns, despite it being very difficult. It was downright hearbreaking to watchin INFT continue to falter, regardless of how low I thought I bought it. I continued to think - if it was a good buy at $3.75, it is a better buy at $3.50. The fundamental reason why I bought (strong cash value, low price to book, immient take over target, etc.) never changed. It did weaken some and did not become as attractive as they filed their 10-K annual report for 2006 and some developments indicated those propsects may have gotten weaker, but nevertheless, I hung in there and came out with a win.

Not a home run - not a huge win - I wish I would have bought SEB with my INFT money, but you never went broke taking a profit and my upward climb continues.