This morning Xero Limited (ASX: XRO) announced to the market the acquisition of Hubdoc for a total of US$70 million.
Hubdoc is a leading data capture solution for accountants, bookkeepers and small businesses to streamline administrative tasks like financial document collection and data entry. It’s based in Toronto, Canada and has customers in the US, Canada, UK and Australia.
The initial purchase price is US$60 million comprising 35% as cash and 65% as Xero shares. Xero said that it has arranged new debt to fund the cash part of the acquisition. The second and final tranche payment will be an initial US$10 million of Xero shares in 18 months time, subject to operational targets and conditions.
I think this is a clever move by Xero to pay a lot of this acquisition price as shares considering the share price has gone up by 70% over the past year.
The transaction is expected to complete in August 2018. However, the transaction costs, integration costs and continued investment in Hubdoc’s growth is expected to reduce Xero’s earnings before interest, tax, depreciation and amortisation (EBITDA) by NZ$7 million in FY19.
Hubdoc has been a Xero ecosystem partner since 2014 and its capabilities are a key part of Xero’s code-free accounting strategy.
It will continue to be sold separately and be available to non-Xero customers and the current management team will remain. Over the long-term Hubdoc will be integrated more deeply with the Xero platform and service customers globally.
Xero said that it remains committed to achieving break-even cashflow within its current cash balance without drawing on its debt facility, except for acquisitions like this one.
New CEO Steve Vamos said “The acquisition of Hubdoc enables us to take the next step in delivering a platform that seamlessly connects small businesses with their financial data, and their accountants and bookkeepers.
“This acquisition accelerates our ability to streamline the collection and classification of the data small businesses and their advisors need in order to focus on driving better business outcomes.”
This seems like a good acquisition to integrate with the current Xero system. Hopefully the shift from ecosystem partner to Xero subsidiary creates enough additional value for subscribers to make the acquisition worth it in the long-term for Xero.
Xero is a great business but the current price seems too expensive to buy today, there’s a good chance it could fall back to the $30s at some point during the next year.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.