PayPal to Acquire Xoom for $890M, Xoom Shares Surge

eBay Inc. EBAY and its payments division PayPal will complete their separation by Jul 17, following which both the companies will become independent and start trading publicly.

PayPal is just gearing up to sustain itself in the fast growing digital payments market. So its definitive agreement to buy Xoom Corporation XOOM, a service for international money transfers, for $890 million in cash seems like a first step in the right direction.

The purchase price has been fixed at $25 a share in cash, which represents a premium of 21% over Xoom's closing price of $20.70 on Wednesday.

Meanwhile, PayPal will begin trading on Jul 20 on the Nasdaq stock exchange under the stock symbol PYPL while eBay's ticker will remain unchanged. Following the separation, one company will focus on online commerce and the other on digital payments. This is an opportunity for both companies to have a sharper focus and greater flexibility to chase success in their respective markets.

What Exactly Does Xoom Do?

Xoom, based in San Francisco and founded in 2001, is a digital money transfer firm. Its technology enables U.S. customers to transfer money to and pay bills for family and friends worldwide through their mobile phones, tablets and computers. Customers can pay as much as $3,000 in a single transaction.

Xoom went public in Feb 2013 at $16 per share. The announcement of its acquisition deal sent shares soaring 21.26% to $25.10 in afterhours trading.

Xoom's services are available in 37 countries including main markets like Mexico, India, the Philippines, China and Brazil.  Its 1.3 million customers sent $7 billion to these 37 countries in the 12 months ended in Mar 2015. Xoom's first-quarter revenues gained 24% to $44.4 million.

Is It A Good Deal?

The deal, subject to approval by Xoom shareholders, antitrust regulators and other closing conditions, is expected to close in the fourth quarter. Xoom will operate as a separate service within PayPal after the completion.

The acquisition will enable PayPal to sell international transfers to its U.S. customer base of nearly 68 million, by cross-selling Xoom's services. It will also accelerate expansion of PayPal services into the overseas money transfers market. But the transaction is expected to be slightly dilutive to PayPal's earnings per share for fiscal 2016.

Let's Take A Look At The Market

International peer-to-peer money transfer is an attractive field for financial technology start-ups. London-based Azimo raised $20 million on a valuation of $100 million earlier this month, WorldRemit raised $100 million on a valuation of $500 million in February while TransferWise received $58 million in venture capital funding in January. Then there is Western Union, which is already a dominant player.

The prospects are enticing companies outside financial services as well. Social networking site Facebook FB has launched a feature to send money to friends through its Messenger app across the U.S.  It will enable PayPal to offer a huge range of services to its customers worldwide, boost user growth and expand in adjacent international markets, given Xoom's strong presence in Mexico, India, the Philippines, China and Brazil.

To Conclude

PayPal has been the fastest growing division for eBay for quite some time now and has been surpassing eBay's marketplace revenues. Though things were rosy for PayPal, it is important to remember that the online payments business is moving rapidly to the mobile devices platform, where PayPal does not have a dominant presence.

It already faces increasing competition from rivals like Stripe and Square, which are popular with smaller businesses, and also Apple Inc.'s AAPL Apple Pay.

But PayPal has several growth opportunities including peer-to-peer payments, lending transactions, and money transfers. With the acquisition, it seems to be taking the right steps to bolster its capabilities.

eBay currently has a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
APPLE INC AAPL: Free Stock Analysis Report
 
EBAY INC EBAY: Free Stock Analysis Report
 
FACEBOOK INC-A FB: Free Stock Analysis Report
 
XOOM CORP XOOM: Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research