On July 2, eBay Inc (NASDAQ:EBAY) announced a clear-cut agreement in which Paypal, Inc. will acquire Xoom Corp (NASDAQ:XOOM) for $25 per share, or $890 million in cash. eBay’s shares have since increased, but some analysts argue that eBay’s shares will level off.
PayPal’s $890 million transaction represents a premium of 32% over Xoom’s three-month volume-weighted average price and was unanimously approved by the Board of Directors of both companies, as well as the Board of eBay Inc., PayPal’s parent company.
These companies have a niche presence in the digital money transfer market, and make a strong union together.
Launched in 2001, Xoom is known as a pioneer in digital money transfer, allowing consumers to send money and pay bills from the United States to 33 other countries. Founded in 1998, PayPal is a worldwide online payment system and has become one of the world’s largest Internet payment companies.
In July 2002 shortly after PayPal’s IPO, the company was acquired by eBay for $1.5 billion. After the companies merged, more than 70% of all eBay auctions accepted PayPal payments, and roughly 1 in 4 closed auction via PayPal.
It was announced in September 2014 that eBay would spin off PayPal into a separate publicly traded company. The spin-off is expected to be completed sometime in the second half of 2015.
PayPal’s president, Dan Schulman, said, “Expanding into international money transfer and remittances aligns with our strategic vision to democratize the movement and management of money.” He continues, “Acquiring Xoom allows PayPal to offer a broader range of services to our global customer base, increase customer engagement and enter an important and growing adjacent marketplace.” He goes on to explain that Xoom’s presence in 37 countries will help PayPal’s expansion into important markets like Mexico, China, India, Brazil, and more.
However, the PayPal-Xoom combination is not as exciting for everyone as the merger poses a serious competitive threat to Western Union. Both PayPal and Xoom have large presence in the digital money transfer market where Western Union is still developing.
Western Union’s shares took a serious hit after the news, plunging 6.9% to $18.99.
There are many expected strategic benefits from the Xoom acquisition. For one, the merger broadens PayPal’s consumer offering to its 68 million active U.S. customers by cross-selling Xoom’s service. Furthermore, Xoom’s proprietary and fast “funds-out” network enables PayPal to enter this growing marketplace with a leading technology solution and a strong presence in key international markets. Finally, Xoom delivers a strong technology platform coupled with excellent customer service.
The announcement sent eBay’s shares up 40 cents to $60.82, and is currently trading at $61.85.
SunTrust analyst Robert Peck reiterated a Hold rating on eBay on July 2, observing that this merger is part of the PayPal’s strategy of growth-by-acquisition. Referring to the long-term rationale for the deal, Peck cited that there were “synergies/opportunity between Xoom and Venmo inside the PayPal ecosystem enabling lower cost (ACH, or debit worse-case) wallet funding (PayPal, Paydiant) and in-market and cross-border [Consumer to consumer] and [consumer to business] transactions.” He continued, “This could serve to sustain relevance on the consumer side and (interrelated) preserve/lower funding cost and strengthen the value proposition on the merchant side.”
Robert Peck has a 59% success rate recommending stocks, earning an +11.2% average return per recommendation. He has rated eBay 16 times total with no success and a -6.4% average loss per recommendation.
KWB analyst Sanjay Sakhrani felt more bullish on eBay, reiterating a Buy rating with a $70 price target on July 2. The analyst explains that the acquisition will allow PayPal to offer an additional product to existing customers and “broaden its appeal to new customers, while also heightening customer engagement with a focus on Key regions (more [specifically], Mexico, India, the Philippines, China and Brazil.” Sakrani adds that enhancing PayPals consumer value proposition is “the right thing” to do.
Sanjay Sakrani has a 72% success rate recommending stocks, earning an +8.35% average return per recommendation. He has rated eBay a total of five times, earning a 60% success rate recommending the stock and a +9.9% average return per recommendation.
Out of the 20 analysts polled by TipRanks, 6 analysts are bullish on eBay, 13 are neutral, and 1 is bearish. The average 12-month price target for eBay is $64.24, marking a 3.86% potential upside from where the stock is currently trading. On average, the all-analyst consensus for eBay is a HOLD.