Globe & Mail Article With global growth prospects and a sizeable dividend, DH Corp. was one of Canada's most promising financial technology companies. Then, over the span of six months in 2016, it lost more than half of its $4.2-billion market value. Last week, management said it is exploring sale options.
Such a swift and steep decline took investors by surprise. Yet, anyone scrambling to make sense of DH's tumble shouldn't be so shocked: Some warning signs were there.
In October, 2015, short seller Lawton Park Capital Management released a scathing report on DH, attacking the company on multiple fronts. Some arguments were more cogent than others, but a crucial one suggested DH's historical business was declining too quickly, while its recent string of acquisitions were expensive bets that weren't paying off as handsomely as hoped.
DH used to be known as Davis + Henderson Corp., and the company specialized in processing cheques. By 2006, management realized the need to diversify for the digital world, so the company looked to transform itself into a fintech leader.
In 2012, DH tapped Gerrard Schmid to lead the shift, and he went buying. In 2013, DH acquired Hartland Financial Services for $1.2-billion (U.S.) in cash, and when the deal closed 36 per cent of DH's sales suddenly came from the United States.
DH struck again in 2015, buying Fundtech Ltd. for $1.25-billion in cash. Because so many U.S. banks were struggling with legacy payment systems and increasing regulations, they needed the services provided by companies such as Fundtech to make them more efficient and to keep them up to speed on new rules.
A few months after, the short seller released its report, arguing that DH's "acquisitions have not made this a better business - only a bigger one."
Investors eventually shrugged the concerns off, but troubles emerged this spring. When DH reported its first-quarter earnings in April, analysts started to ask questions about its LaserPro business in the United States, which helps process loan documents, because revenue seemed challenged. DH's stock took a hit. It's mostly been a downward spiral since.
In October, DH reported quarterly earnings that were 20 per cent below analysts' estimates. The company also reduced its profit guidance for the second consecutive quarter. The Canadian cheque processing business is deteriorating faster than hoped; the crucial LaserPro product is still seeing slow revenue growth; and revenue and income from the Fundtech business is weak.
All of that is troublesome because DH has substantial debt stemming from its acquisitions. Under pressure from the leverage, DH announced in early November it had reworked the terms of its borrowings.
But it wasn't enough. Eleven days later, the company slashed its dividend by nearly two-thirds. DH is predominately owned by retail investors - and retail investors like dividends. After hitting a 2016 high near $40 (Canadian) a share in April, DH's stock plummeted toward $14 in mid-November.
Asked about all that's transpired since the short seller report was released, a DH spokesperson wrote: "We strongly disagree with last year's short selling report assertions regarding future revenues," adding that "some of our clients have been impacted by various economic conditions in 2016, which has slowed down the timing of certain sales on some products."
Last week, the company revealed it was entertaining a possible sale, but said no formal offers have been made. The stock now trades for $22.68, about what it was worth before the two big acquisitions. A sale might help shareholders recoup some of the previous gains, but should DH get bought it would close a chapter for a company that was supposed to make Canada shine as a global fintech leader.
Tue, 13 Dec 2016 5:00 EST