Web Gambling Torpedoes ECHO’s Deal To Be Acquired by Intuit

Merchant processor Electronic Clearing House Inc. and accounting-software giant Intuit Inc. on Tuesday announced that their planned $142 million merger is off. ECHO chairman and chief executive Joel M. Barry laid much of the blame on a federal investigation into Internet gambling that will involve a $2.3 million settlement from ECHO. Both ECHO and Mountain View, Calif.-based Intuit, the maker of such popular financial-management software programs as QuickBooks, Quicken, and TurboTax that is expanding its payments-industry presence, said they canned the deal–originally announced Dec. 14–by mutual agreement. Intuit would not comment beyond its press release. In its own release and in a Securities and Exchange Commission filing, ECHO simultaneously announced the end of the merger and that it is a cooperating witness in a federal investigation into the activities of its so-called “Internet wallet” customers that provided services to Internet gambling sites. While admitting no wrongdoing, ECHO said it has entered into a non-prosecution agreement with the U.S. Attorney for the Southern District of New York in which it will pay the federal government?”disgorge” in the company's terms?$2.3 million. That is the amount of ECHO's estimated profits by providing U.S. processing and collection services through the Internet wallet business from 2001 until it ended all Web-gambling processing services this February. Camarillo, Calif.-based ECHO also agreed not to provide automated clearing house processing services to any U.S. Internet gambling business as long as Web gambling is illegal in the U.S. The processor also said it will cooperate with investigators from the U.S. Attorney's office, the Federal Bureau of Investigation, and other agencies for a year. U.S. authorities have long looked with suspicion on Internet gambling. Last September, Congress passed the Unlawful Internet Gambling Enforcement Act, which bars processors from handling online payments for gambling sites. “We felt like the time and the money spent to get into lengthy discussions and such with the government would have been much more harmful to the shareholders than getting this behind us at this time,” Barry said in explaining the settlement at an investor conference call Tuesday. At its peak, the Internet-wallet business provided less than 10% of ECHO's revenues, according to Barry. ECHO's announcements did not directly connect the Internet gambling brouhaha to the collapse of the deal in which Intuit had agreed to buy ECHO for $18.75 per share. But in prepared remarks at the start of the investor call, Barry said, “The federal investigation was one of a few reasons that the Intuit transaction did not close. The others involved outstanding closing conditions such as obtaining third-party consents and pre-closing covenants of an administrative nature that are typical of this type of a transaction.” When pressed by a hedge-fund manager during a question-and-answer session, however, Barry said the federal investigation and settlement “was a primary contributing factor to today's news in reference to and our decision to mutually terminate.” In its release, Intuit president and chief executive Steve Bennett said his company's “overall strategy for growth in the payments market has not changed. The payments market continues to be an important part of our business strategy.” Intuit owns a big independent sales organization, Innovative Merchant Services, and wanted ECHO primarily for its ACH processing capabilities. ECHO said the $2.3 million payment along with other expenses related to the investigation, as well as the aborted merger, would have a negative impact on its near-term financial results. Barry, however, said in the call that ECHO has adequate resources and is well-positioned for future growth as an independent company. ECHO's stock closed Tuesday at $12.23 per share, down 34% from Monday's close.