payment service company
is being acquired by a private equity player, pushing its stock higher on Tuesday. The acquisition is not the story however. Instead, it’s a story of technological disruption, in this case by the likes of Block (SQ) and
Moneygram (ticker: MGI) announced Tuesday morning that Madison Dearborn Partners would acquire the company for $11 a share. Moneygram stock closed Monday at $8.95 per share.
The stock rose 18% to $10.59 premarket, a sign that investors believe the deal will be done and there won’t be a better offer.
Dow Jones Industrial Average
futures are up about 1.2% and 0.9%, respectively.
The deal values Moneygram shares at around $1 billion or 21 times estimated 2022 earnings of around 52 cents per share. Including debt, the deal values MoneyGram at $1.8 billion.
The purchase price is a bargain because MoneyGram is small. It also decreases. Sales peaked in 2016 at around $1.6 billion. Sales this year are expected to reach $1.3 billion.
Wire Transfer Peer
(WU) shows a similar pattern, although it resists better. Western sales in 2016 were $5.4 billion. Western sales peaked in 2018 at around $5.6 billion. Wall Street expected 2022 sales to be around $5.2 billion. This was before Western agreed to sell part of its business to a group of investors. Now, the sales forecast is $4.8 billion, with some of its business cut.
Both companies are still generating cash flow and profits, but both seem to have been left behind by new payment processing technologies.
(SQ), for example, were worth around $3 billion when the company raised funds in an initial public offering in late 2015. Shares of Moneygram and Western Union were worth around $10 billion at the time.
Today, Square has a market capitalization of around $64 billion. Moneygram and Western Union are worth around $9 billion.
Square is just one example of a booming new payment technology.
(PYPL), owner of Venmo, has a market cap of $133 billion. It was purchased by
(EBAY) in 2002 for $1.5 billion before being sold to
shareholders in 2015.
The lesson for investors: it is very difficult for existing industry players to adopt the latest technologies, especially when companies are in profitable business. This is the innovator’s dilemma described by Harvard professor Clayton Christensen in the 1990s.
The dilemma is still there today. It’s a risk for banks competing with Square, PayPal and others, as well as automakers, such as
(F), competing with people like
Every situation is different. Banks and cars both have regulatory and capital barriers to entry. Nonetheless, existing players should consider what happened to wire transfers when considering the trade-offs between investing for growth and generating cash flow.
Write to Al Root at [email protected]