Now that Ant Financial Services Group's planned acquisition of MoneyGram International Inc. has been shot down, it seems like Euronet Worldwide Inc. has the potential to swoop back in and possibly pick up MoneyGram at a lower price than what Ant was going to pay. But it raises the question: Why not go after one of the hot tech startups in the remittance space instead?
Euronet still seems interested in acquiring MoneyGram, saying Jan. 2 that it "continues to believe there is compelling commercial logic to a combination [with MoneyGram]." In a March 2017 presentation, Euronet laid out a series of strategic benefits it sees from a merger with MoneyGram, including how the combined organization would be better able to compete with startups through enhanced digital investments. But if this is a concern already, one wonders why Euronet did not look to acquire one of these new entrants instead (assuming they are willing to sell).
By snatching up a relatively young company, an acquirer can gain access to cutting-edge technology developed by a mobile-focused company, without having to do all the work in-house. PayPal Holdings Inc., for instance, did just that when it acquired Xoom Corp. in November 2015. PayPal reported a total price tag of $1.06 billion for Xoom, after accounting for things like goodwill and other intangibles. PayPal said Xoom offered a "compelling and reliable technology platform" along with "excellent customer service," among other strategic rationales.
But at $25 per share, the Xoom deal represented about 4x Xoom's book value per share at closing. Such a multiple could scare away some would-be buyers. It is indeed on the high side relative to other deals involving U.S. consumer finance targets in recent years. The median multiple for such deals, going back five years, was about 1.6x. But the Xoom multiple is on par with U.S. software and services deals, which had a median of 4.5x. These figures are based on S&P Global Market Intelligence data and calculations for deals announced between Jan. 12, 2013, and Jan. 12, 2018.
Another possible reason that other startups have not been acquired is that they are not yet on the same scale as Xoom. In 2014, the full year prior to being bought, Xoom processed 12.8 million transactions. In the first three quarters of 2015, it processed another 11.7 million, putting it on pace to end 2015 at 16 million transactions, assuming a linear trendline based on the seven preceding quarters.
By comparison, Remitly Inc., a U.S.-based startup that was founded in 2011, disclosed in July 2017 that it processes over 4 million transactions a year. U.K.-based TransferWise, another startup that has been gaining some attention, processed around 800,000 transactions in March 2017, according to its latest annual report, which would imply an annualized run-rate of 9.6 million. WorldRemit, another U.K.-based company, is likely somewhere in the middle; in 2016 it recorded 5.4 million transactions, per its annual filing.

The U.K. companies are particularly useful for analyzing the financial performance of startups, as private companies like TransferWise and WorldRemit submit filings with their financial results to the government-sponsored Companies House.
As the data shows, the four companies we selected produce just a small fraction of MoneyGram's revenue. Two of the four were also unprofitable, which could be another cause for hesitation among potential buyers. This is part of the gamble in buying recently founded companies, however. Xoom, for instance, generated net losses of $48 million in the 12 months ended Sept. 30, 2015.
The data also illustrates how a significant chunk of MoneyGram's revenue goes to operating and interest expenses. In 2016, net income totaled about $16.3 million, off revenues of $1.63 billion. In the periods considered for this analysis, TransferWise and World First U.K. Ltd., actually had better net profit margins. The data is not exactly comparable, however, since TransferWise has a different year-end.
Earnings stability is another factor to take into consideration. While TransferWise showed a profit in its latest annual filing, it reported losses of $25.3 million and $16.9 million, respectively, in the prior two annual periods. But TransferWise likely has ample resources to absorb these losses, as it has disclosed roughly $400 million in funding. Notably, World First U.K. Ltd. is a rare beast among startups, as it has reported net profits in each of the years since its founding.
Buying MoneyGram would offer other traditional M&A advantages for Euronet as well, including cost synergies, cross-selling opportunities and the ability to remove one of its long-standing competitors. While Euronet has been growing its money transfer revenues over the past few years, the addition of MoneyGram would turbocharge its market share. It is tough to get exact market share figures, but in March 2016, MoneyGram CFO Lawrence Angelilli estimated that his company's share of the global remittance market was around 5% to 5.5%, whereas Western Union Co.'s was approximately 15%.

For incumbents like Western Union, maintaining retail locations still makes sense at the moment, despite the growing usage of mobile phones. As CFO Rajesh Agrawal explained during an industry conference in September 2017, the majority of Western Union's money transfers are still paid out in cash even if they are sent initially using a mobile device. And where Western Union earns most of its revenues, he said, is at those retail locations, according to a transcript.
MoneyGram is making strides to become more tech-focused. In the past few years, it has been breaking out revenues from digital solutions, which includes the company's moneygram.com, mobile solutions, account deposit and kiosk-based services. As this data shows, digital solutions revenue has grown from $45.2 million in the first quarter of 2016 to $52.7 million in the third quarter of 2017, and went from making up around 13% of money transfer revenues in the former period to nearly 15% in the latter.

Additionally, MoneyGram announced Jan. 11 that it is exploring blockchain technology, commencing a pilot program with Ripple to use XRP, a digital asset, in payment flows. S&P Global Market Intelligence recently published a research report on XRP, which illustrates how it could drastically lower transaction fees, but also how there might be some challenges ahead for it to gain wider adoption by the market.
