Why the Xero Limited (ASX:XRO) acquisition of UK-based Instafile is a good tactic

Source: Xero half-year results presentation

Yesterday, Xero Limited (ASX: XRO) announced that it was acquiring UK-based Instafile for £3.25 million, which I think is a good tactic.

Xero didn’t classify the acquisition as market-sensitive. An acquisition for a few million generally isn’t.

However, I think that the acquisition could be key to unlocking more of the UK market for Xero. Instafile is a cloud-based accounts preparation and tax filing solution that connects UK accountants, bookkeepers and small businesses to UK compliance bodies such as HMRC.

Instafile links directly to the underlying Xero data to allow preparation and filing of Corporation Tax returns and statutory accounts.

Xero said that this acquisition, combined with Xero’s ‘Making Tax Digital for VAT’ which was announced at Xerocon London, will provide direct tax filing functionality.

I believe this is a key point for Xero because bookkeepers & accountants were key to spreading the message about Xero in Australia and New Zealand.

If accountants can go from A to Z of the accounts and tax return process using Xero then they will encourage their clients to use it as the preferred bookkeeping software. Xero is the most efficient software for users if both the accountant and client is using it.

There are many Xero-only accountant firms in Australia and the Instafile acquisition could see this happen in the UK too.

Xero Managing Director, UK & EMEA Gary Turner commented “The acquisition of Instafile will connect the ‘last mile’ between the Xero platform in the UK and HMRC for accountants and bookkeepers. Tax filing functionality has driven significant Xero partner market penetration in Australia and New Zealand, and we anticipate a similar boost in the UK given our sizeable addressable market.”

Clearly, Xero are pleased with the acquisition.

Xero also announced that it is registered with the UK Financial Conduct Authority as an Account Information Services Provider, enabling it to take advantage of the UK opening banking regime. Xero said this rounds out its bank feed coverage with the UK’s ‘CMA 9’ big banks.

Foolish takeaway

Xero’s share price has fallen 22% since the end of August, despite revealing a 37% rise in revenue.

Xero appears to have an excellent long-term future with high profit margins. However, if you invest at today’s price you should probably expect major volatility due to rising interest rates and Xero’s high valuation.

A better-valued growth option could be this top stock which grew profit by around 30% last 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.

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