Courtesy Moneygram
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Payment service company
Moneygram International
is being acquired by a private equity player, sending its stock higher Tuesday. The acquisition isn’t the story though. Instead, it’s a tale of technological disruption, in this case by the likes of Block (SQ) and
PayPal
(PYPL).
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 a share.
The stock was up 18% to $10.59 in premarket trading, a sign that investors believe the deal will get done and that there won’t be a better bid.
S&P 500
and
Dow Jones Industrial Average
futures are up about 1.2% and 0.9%, respectively.
The deal values Moneygram stock at about $1 billion or 21 times estimated 2022 earnings of about 52 cents a share. Including debt, the deal values MoneyGram at $1.8 billion.
The purchase price is a small deal because MoneyGram is small. It’s also shrinking. Sales peaked in 2016 at about $1.6 billion. Sales this year are projected to be $1.3 billion.
Wire transfer peer
Western Union
(WU) shows a similar pattern, though it is holding up better. Western sales in 2016 came in at $5.4 billion. Western sales peaked in 2018 at about $5.6 billion. Wall Street expected 2022 sales to come in at about $5.2 billion. That was before Western agreed to sell a portion of its business to a group of investors. Now sales expectations are $4.8 billion, with the portion of its business removed.
Both companies still generate cash flow and earnings, but both appear to have been left in the dust by new payment processing technologies.
Block
(SQ) shares, for instance, were worth about $3 billion when the company raised money in an initial public offering in late 2015. Moneygram and Western Union shares were worth about $10 billion at the time.
Today, Square has a market capitalization of about $64 billion. Moneygram and Western Union are worth roughly $9 billion.
Square is only one example of a new payment technology rocketing higher.
PayPal
(PYPL), which owns Venmo, has a market cap of $133 billion. It was bought by
eBay
(EBAY) back in 2002 for $1.5 billion before being spun off to
eBay
shareholders in 2015.
The lesson for investors: It’s very hard for existing industry players to adopt the latest technology, especially when companies have a profitable business. That’s the innovator’s dilemma described by Harvard professor Clayton Christensen back in the 1990s.
The dilemma is still around today. It’s a risk for banks competing with the likes of Square, PayPal, and others, as well as car companies, such as
General Motors
(GM) or
Ford Motor
(F), competing with the likes of
Tesla
(TSLA).
Every situation is different. Banks and cars both have regulatory and capital barriers to entry. Still, the existing players should consider what’s happened to wire transfers when they think about the trade-offs between investing for growth and generating cash flow.
Write to Al Root at allen.root@dowjones.com
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