Tuesday, June 21, 2016

As IDI / TransUnion Settlement Talks Begin Portfolio Manager Remains Optimistic

Threshold Capital's Peter A Delgado II is bullish on IDI (ticker: IDI) and its core business. He's also optimistic about this week's scheduled settlement talks with TransUnion (ticker: TRU):

Yesterday, Monday June 20, 2016, IDI, Inc. (ticker: IDI) an emerging company in the data fusion and digital marketing industry and TransUnion (ticker: TRU), the credit agency and consumer data behemoth have entered into court mandated settlement discussions.

Judge Paul G Hyman, Jr. Chief United States Bankruptcy Judge signed this order in his court on May 26, 2016. His signed order can be seen HERE

This judicial settlement conference was scheduled to begin at 9:30am and terminate at 11pm EST. Representatives of both IDI Inc. and TransUnion were to be on site to confer with their respective counsel and to utilize their best efforts to settle this litigation.

To review, TransUnion’s subsidiary – TransUnion Risk and Alternative Data Solutions (TRADS) is the plaintiff against The Best One (TBO) and Ole Poulsen, who is the Chief Science Officer & Systems Architect of IDI Inc.

These legal proceedings began back in October 2014 after TransUnion purchased the assets of TLO LLC (The Last One – formed by the late father of Data Fusion, Hank Asher and his business partner Ole Poulsen) out of bankruptcy (Florida Southern Bankruptcy Court Case #14 – 01793).

For those who are unfamiliar with Mr. Asher see this noteworthy Vanity Fair article from December 2004.

And here is a definitive timeline of events leading up to this litigation:

+ 1992 - Mr. Asher formed DBT Technologies with a proprietary product called AutoTrack (for Florida’s DMV).

+ 1999 - Asher gets pushed out of DBT Technologies (allegedly by billionaire Ken Langone) due to Asher’s past; FBI/DEA suspends contracts. He collects $140 million upon his departure.

+ 1999 - Asher forms Seisint with Michael Brauser (current Chairman of IDI, Inc.) with product called Accurint to compete against his former company DBT Technologies.

Derek Dubner (current CEO of IDI, Inc.) joins Seisint in 1999 as Corporate Counsel (Dubner also served as Asher’s personal lawyer).

Ole Poulsen (current Chief Science Officer & Systems Architect of IDI, Inc.) also joins Seisint in 1999 and becomes lead programmer.

+ DBT sold to Choicepoint in 2000 – Ken Langone joins Board of Choicepoint

+ While at Seisint, Asher develops MATRIX (Multistate Anti-Terrorism Information Exchange) – a majority of the 9/11 hijackers show up on Asher’s MATRIX

+ MATRIX is used to identify (vehicle ID) the Beltway Snipers – John Allen Muhammad

+ July 2004 - Asher sells Seisint to LexisNexis Group (UK’s Reed Elsevier) for $775 million.

+ 2009 - Hank Asher (with Ole Poulsen as co-founder) form TLO (“The Last One”) and states:
TLOxp has 100x the power that I had with my last previous invention.” 
TLO had over 17,500 subscribers and generated approximately $30 million in revenue when Asher dies.

Current CEO of IDI Inc. Derek Dubner, current President of IDI Inc. James Reilly and IDI Inc. Chief Financial Officer Dan MacLachlan held executive management roles at Asher’s TLO (Dubner was General Counsel of TLO, Reilly was Senior VP of Sales & business Development at TLO and MacLachlan was CFO).

+ January 2013 - Hank Asher dies unexpectedly.

+ March – April 2013 – Ole Poulsen departs TLO officially (with NO non-compete clause).

+ May 2013 – TLO – now run by Asher’s daughter’s (Desiree Asher and Carley Asher Yoost) place the company into bankruptcy in order to auction TLO’s assets. TLO bankruptcy counsel was Furr & Cohen based out of Boca Raton, FL.

+ November 2013 – Florida bankruptcy court announces TransUnion (ticker: TRU) wins the bidding for TLO LLC and pays $152.4 million in cash.

TransUnion (ticker: TRU) acquisition details of TLO LLC on page 87 of TRU’s 2013 Annual Report.

This deal closes in December 2013.

NOTE: Current Chairman of IDI Inc. Michael Brauser and Vice Chairman of IDI, billionaire Dr. Philip Frost did team up with Jules Kroll and Tom Glocer (former CEO of Reuters) to bid on TLO in bankruptcy for $104 million in a vehicle named Data Acquisition Group (DAG) – but were unsuccessful.

Michael Brauser and billionaire Dr. Philip Frost form The Best One (TBO) in September 2014 and TBO purchases Interactive Data (based in Atlanta, GA) in October 2014.

Publicly traded Tiger Media (NYSEMkt: IDI) merges with TBO in December 2014 (entry into data fusion and exit of Tiger Media’s legacy business).

After taking ownership of TLO LLC in bankruptcy, TransUnion (ticker: TRU) undertook a restructuring of TLO’s business and approximately ten (10) months after buying these assets, TransUnion realized that they did not own the intellectual property and source code of the TLOxp product.

They were (and still are) unable to update/improve/change the TLOxp product as the original source code was owned by Ole Poulsen (who now is the Chief Science Officer & Systems Architect of IDI, Inc.).

When Ole Poulsen joined IDI Inc. in early September/October 2014 as Chief Science Officer, he also sold his intellectual property of the TLOxp product (BOLT/bParser code) to IDI Inc. TLOxp is estimated to generate approximately $100 million in sales (for TransUnion) currently.

IDI Inc. had for over one (1) year requested internal TransUnion documents specifically pertaining to its purchase of TLO’s assets.

After a year of waiting, TransUnion delivered these internal documents to counsel of IDI on Friday, March 4, 2016 at 5:25pm (after business hours). In this discovery document (Document 295 in Case 14 – 01793-PGH) are two (2) alarming discoveries:

+ TransUnion’s own internal documents establishing its knowledge at the time of the TLO LLC bankruptcy sale auction, that TLO did not own assets that TransUnion wanted. (Specifically the BParser code owned by Ole Poulsen). – So TLOxp product cannot be updated, changed or even improved!

+ Second, TLO (then led by Asher’s daughter’s Desiree and Carly) had its bankruptcy counsel modify a carte blanche finding in the proposed sale order in order to get these assets; this carte blanche finding was submitted to Judge Paul G. Hyman’s Court, after he instructed counsel for TransUnion (and TLO – the debtor) not to include such a modification. See HERE.

Also interesting in this discovery document is the following:
“During oral depositions on TransUnion’s belated production, it was also learned that subsequent to the sale, Desiree Asher and Carly Yoost, who were controlling the debtor, received substantial benefits from TransUnion, via sham transactions, resulting in their receiving more value pro rata than other direct or indirect equity holders.”
Quite an alarming statement above – but now is clearly apparent that the Asher daughters wanted the $$$ from the sale as quickly as possible, in addition to wanting more money for themselves.

Given the above discovery in internal memos from TransUnion, I believe a compelling legal argument can be made as to the fact that Transunion has been selling a product that they do not own the intellectual property to – TLOxp – without a license; now in its 3rd fiscal year. And maybe I am oversimplifying this: if I am a company and I purchase your company in bankruptcy court/auction – items such as office lease, office furniture, customers, files, software on existing computers, bank assets, etc. does that give me the right to saying that I own the intellectual property of the Intel chip inside those desktop computers? I think the late Andy Grove would have a different opinion about that!!

Let’s take a quick look at TransUnion (ticker: TRU).

TransUnion is a leading global risk and information solutions provider to businesses and consumers. The Company provides consumer reports, risk scores, analytical services and decision capabilities to businesses.

TransUnion (ticker: TRU) was taken private by Advent International and Goldman Sachs Private Equity in April 2012 for $1.592 billion – (first announced Feb 2012).

+ TransUnion (ticker: TRU) goes public again June 30, 2015 at $22.50 per share

+ TransUnion currently has a market capitalization of $5.9 billion (and has $2.5 billion in debt – Q1 end 2016).

What has now come to the forefront of this discussion is the conduct of TransUnion and one of its largest shareholders.

On the day this discovery document was available for the public (via PACER), Monday, March 7, 2016 – TransUnion files for a secondary offering of 15,652,500 (plus an option for an additional 2,225,498 shares) from “selling stockholders” – Advent International Corp. (one of the original buyout firms). This secondary was completed on Wednesday, March 9, 2016 raising $450 million for Advent International.

And no more than ten (10) later after Judge Paul Hyman signs an order mandating settlement talks between IDI Inc. and TransUnion, TransUnion announces and completes ANOTHER secondary offering of over 15,000,000 shares. This offering wound up being 18,000,000 shares priced at $32.10 and raised over $577 million. So over the past four (4) months, controlling shareholder Advent International has sold just under $1 billion in shares of TransUnion.

Could Goldman Sachs Private Equity be far behind in selling some of their stake and lowering their exposure?

What may be most alarming to investors of TransUnion (ticker: TRU) as the lead plaintiff in its litigation against TBO (IDI, Inc.) is the fact that TransUnion has neglected to mention these proceedings in its SEC filed audited Annual Reports. There is no mention of the case or under their “Risk Factors” section in Transunion’s 2012, 2013, 2014, or 2015 Annual Reports (Pages 23 to 43).

It is important to note that TransUnion paid $154 million for TLO LLC in December 2013 – which is equivalent to approximately 10% of TransUnion’s sales (for 2015) and also 10% of TransUnion’s current equity value. How is that not a material event? IDI Inc. specifically mentions this litigation in its 2015 Annual Report under Legal Proceedings – Page 22.

At this point it is undetermined that a settlement will be reached by both parties; if no agreement is reached by 11pm on Monday, June 20 2016, then the bench trial is expected to continue over the next several weeks.

And as an investor, it is important to understand any potential outcome.

Let’s say in this exercise that TransUnion wins this case; and Mr. Poulsen and IDI Inc. are ordered to hand over the “BParser code” – it is imperative to keep in mind that the TLOxp technology is over five (5) years old currently, and to many in the industry, is outdated.

As far as IDI, Inc.’s own products, a negative ruling against IDI Inc. would be a non-event because IDI Inc.’s new, proprietary offering that competes against TLOxp – called idiCORE - is based on completely new programming language (written by Ole Poulsen).

idiCORE was recently released in late April. idiCORE™, a product to serve the risk management industry that provides instant, comprehensive views of individuals, businesses, assets and their interrelationships.

idiCORE is an advanced analytical solution to be used across multiple industries, including law enforcement, government, financial services, insurance, and corporate risk.; CEO Derek Dubner recently commented:
“We have already commercially launched idiCORE, methodically targeting various industry segments with plans to quickly transition to a full rollout. This is no small feat as we had to build a cloud-based data fusion platform, proprietary algorithms, acquire and assimilate massive data sets, and load test to ensure stability for thousands of users. Legacy systems took upwards of 3-4 years to accomplish this. From the time that we finally completed staffing our Seattle office, we have accomplished this in less than 14 months.”
On June 6, 2016, IDI, Inc. provided a business update specific to idiCORE:
"In just 32 days since the commercial release of idiCORE (May 2, 2016), IDI has on-boarded over 2,800 users. These users represent a variety of industries within the risk management space, including law firms, debt recovery companies, investigative companies, process servers, and more. Derek Dubner, CEO of IDI stated, “While confident that we would see positive market reaction upon the release of our new technology, the current rate of adoption has exceeded our own expectations for the initial commercial offering of idiCORE. This is especially exciting given that this is only an early phase of the evolution of this product. We know historically that strong market adoption is the precursor to integration into end-user workflow, which then translates to strong revenue.”
So how does IDI’s new revolutionary product – idiCORE compare to its direct competitors? 

Specifically, TLOxp and Lexis Nexis’ Accurint product? After putting these products in a side-by-side comparison, here is what I discovered:

TLOxp – a preferred product over Accurint (mostly due to better friendly interface). A newer product that has an age of no more than 7 years – but now becoming dated.

Accurint – contains more comprehensive historical address information (pre-2000). Priced on par with TLOxp. Users sometime subscribe to both TLOxp and Accurint to check/verify the information from each system.

Westlaw – not a very comprehensive search product; information is “stale” and incomplete. Lawyers are compelled to search other databases for more detailed information; very expensive and the highest price per search. But still the premier product in case law search.

idiCORE – almost 2 months in commercial release; customers love the fast results (due to proprietary IDI programming and cloud infrastructure. Better user interface (than TLOxp) and very easy to navigate. Customers are impressed with the accuracy of data as well as the breadth of information available. Going to be a huge player in this space and will win business away from Accurint and TLOxp.

IDI is a young, emerging, fast growing Company in the data fusion space and with its recent launch of revolutionary idiCORE product combined with its strength of digital marketing subsidiary Fluent LLC the Company will soon be acknowledged as a leader in its field.

IDI Inc. is already beginning to receive this recognition as it has been selected for inclusion in the Russell 3000 Index and Russell Global Index which will be reconstituted on June 24, 2016.

As an investor can clearly see the late Hank Asher’s legacy is indeed intact; most of his trusted employees and partners have elected to transition over to fast growing IDI Inc. simply because they have the best and far superior product in the industry.

For investors familiar with such an industry and trying to put this idea of data fusion into today’s modern context, the company Choicepoint (formerly on the NYSE:CPS) is the best example that I can think of that best exemplifies a data fusion & mining business. Choicepoint was spun off from Equifax Inc. in 1997 and was primarily a data aggregation company that acted as a private intelligence service to government and industry. After several years of rapid organic growth combined with strategic acquisitions, Choicepoint was bought by Reed Elsevier in February 2008 for $3.6 Billion.

I believe IDI Inc. will have a short life as a public company - its exceptional management and superior cloud based products will make it a leader in the digital consumer marketing and data fusion space.

If I had any “fear” about IDI Inc. and its future it would be the danger of them being bought out during this short time period (next 4 - 5 years) by the likes of Google Analytics, Facebook, IBM’s Watson Division, Oracle, or Reed Elsevier.


Peter A Delgado II is the Managing Director of Threshold Capital Corp, a state Registered Investment Adviser in the State of New Jersey. Threshold Capital Corp and its Clients currently hold a position in IDI Inc. The above commentary represents the opinions of Peter A Delgado II and Threshold Capital Corp and in no way constitutes a solicitation of business or investment advice. All of the above referenced information is factual to the best of my knowledge and is publicly available.

NOTE: More IDI analysis HERE.

1 comment:

Happy Landlord said...

these guys from trans union are nothing but thugs!