Friday, November 7, 2014

Why XERO bought Monchilla....and now. Follow The Money. The Importance of XERO's IPO

We've received a few emails asking the following, "Why would Xero buy Monchilla for  $US 4,127,688 in cash + 238,490 Xero shares"?    We'll answer that!

a.  Xero has payroll for California, Texas, Utah, Virginia, Florida, New York, & New Jersey.  Xero's already serving the 4 largest State economies (and majority of the U.S. Economy) and not serving Ohio, Pennsylvania and Illinois with payroll for example is not what has kept Xero from gaining traction in the U.S.

b.  In September CEO & Founder Rod Drury said  "We're [Xero] really focusing on the California Market" -  @ 10:50 into the interview (in describing Xero's revised approach to the U.S. Market). [end].    Xero understands it was a misstep to approach the U.S. market as they did Australia and the U.K..   I believe Rod Drury when he says this above and that Xero wants to "get California right" and only then really push on to the other States.   

c."ZenPayroll and Xero form cloud-based accounting partnership to rival the likes of ADP and QuickBooks" - TheNextWeb.com April 2013

d. Jamie Sutherland Xero President of U.S. Operations. “Accounting and payroll go hand-in-hand, which is why finding the right partners is so important. In ZenPayroll, we found a company that truly saw the value of a simple, intuitive, and scalable financial solution.”  April 18, 2013 CPA Practice Advisor


e. Xero reported obtaining only 4000 new clients in the U.S. in the six months prior to September 30, 2014 and fired their U.S. CEO Peter Kapras.   We don't believe acquiring Monchilla resolves any of Xero's challenges (short or long term) in gaining traction in the U.S. Not having payroll for 43 U.S. States is not what has produced Xero's sales malaise in the U.S. market.

f. Be mindful, it was predictable months ago what we learned today, Nov. 7, that  Xero dropped from the MSCI Standard Index, to join the small cap   This is a significant setback for Xero as a potential U.S. IPO candidate and means their path to U.S. IPO is even more of a 'balancing act' and must have every detail in place (in Xero's profile).

Why did Xero make this move, and now?

Our thinking is as follows, if Xero wanted Monchilla and or their technology, they wanted it prior to November 2014 and could have bought Monchilla when Xero was in a more leveraged position last Summer or Spring. We don't believe the timing or stated foundation of this acquisition is coherent with the facts stated above (a, b, c, d, e, or f). For example we see minimal to no value added for Xero in this acquisition for what Rod Drury said is Xero's revised approach to the U.S. "focusing on the California Market".    

In October The Australian Financial Review reported Xero was working with Morgan Stanley and was in talks with Credit Suisse over its proposed US initial public offering (IPO), which it expected would be worth between $500 million and $1B. We believe the timing and purpose of this acquisition is driven by those meetings [Xero's IPO goals]. We're thinking it (offering payroll in all 50 States - not just in 7) was determined to be an essential box that needed to be checked - critical in the Investment Bank's packaging & presentation of Xero in the U.S. as an investment.   Call it essential "Window Dressing" in selling the narrative of Xero (for the U.S. investment bank).

Yes, the U.S. IPO is that important to Xero. Why? Be mindful Xero CEO Rod Drury has recently said Xero expected to hire at least another 500 staff over the coming year....to which New Zealand analyst Woodward Partners forecast that, "given its newly-stated hiring intentions, Xero would chew through its $170m in cash reserves by early 2016 unless it raised fresh capital or cut costs".

Xero knows every detail must be in place for Xero to pull off this U.S. IPO - including how they are packaged and presented in serving all 50 US States with payroll. Acquiring Monchilla checks that box...... the IPO plans can move forward... and now. Bravo Xero and we wish you well in realizing a U.S. IPO.

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