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Punching Above: Calling For A Blucora Breakup

Voss Capital, the Texas-based hedge fund, is punching above its weight-class, taking on the $543 market capped Blucora (NASDAQ: BCOR). Voss, running a sub $100 million AUM fund, is looking to inspire the company and fellow shareholders to split up the internet company - effectively selling the declining search provider (Infospace) and electronics retailer (Monoprice), and turning the focus to the growing tax business that is TaxAct.

Being catalyst-driven, Voss is staying in its wheelhouse with Blucora, finding a small-cap stock driven by recurring revenues.

Something we’ve talked about, including in this weekend’s Activist Strategy email, is getting things done with a small stake. Part of this is about knowing the rest of the shareholder base and being able to communicate with institutional investors effectively. Voss certainly appears to be appealing to a shareholder base that’s frustrated.

Voss has been an investor in Blucora since 2014 and the company’s market value has been cut in half since the start of 2014. Last week, the fund sent a letter to the company calling for a breakup and suggesting that the company could double if it follows a simple playbook. But, in the meshing of activism and suggestivism, it’s about telling a convincing story; as Voss lays out in the letter...

“Voss urges other shareholders to reach out to the Board and management to begin a constructive dialogue on unlocking value, firmly hold them accountable for their poor performance, and to remind them of their fiduciary duty to all shareholders.”

The crux of Voss’ plan includes divesting Monoprice (non-core) and Infospace (the declining business that’s been the unnecessary focus of Wall Street). This would help remove a huge multiples discount related to the misunderstanding of Blucora’s business, where the market is only focused on its weak web search business. The other factors adding to the trading discount is the parent management structure and fear that management will blow its large cash balance on a dumb acquisition.

With the divestitures, however, it would leave a pure play on tax software. Valuation wise, the tax business converts nearly all its earnings to free cash and has mid-forties EBITDA margins - similar companies trade 20x to 25x FCF, and with at just 20x FCF, TaxAct is worth twice the current Blucora market value. Beyond that, there’s also corporate overhead cost savings available as the parent management structure would be disbanded and a large net cash balance that could be used for a massive buyback or special dividend (and not an unfruitful acquisition).  

Here’s the full Voss letter to Blucora dated August 30, 2015.