After separating from eBay (EBAY, Financial), PayPal Holdings Inc. (PYPL, Financial) is on track to complete its acquisition of Xoom (XOOM, Financial) and expand its business in the payments market. The acquisition of Xoom was first announced on July 1 following the approval of the boards of directors for PayPal, Xoom and eBay. On Sept. 4, Xoom's shareholders approved the acquisition, and the final closing is now expected for the fourth quarter of 2015.
PayPal
PayPal began operating as its own entity after divesting from eBay on July 17. Its shares are now listed on the NASDAQ under the symbol PYPL. According to the firm's most recent 10-Q, PayPal had independent revenue of $2.3 billion in the second quarter, with earnings of $305 million and earnings per share of $0.25.
Revenue and earnings have been growing considerably for PayPal, which is one of the main reasons shareholder activists advocated that the company divest from eBay. In the second quarter, revenue for the company grew 15.8% from the comparable quarter. Revenue for the first half of the year was also higher at $4.4 billion, an increase of 15% from the first half of 2014. Net income for PayPal was 8.5% higher in the second quarter when compared to the second quarter of 2014. Net income resulted in earnings per share of $0.25 in the second quarter, which was also up from the comparable quarter by 8.7%. In the first half of the year, net income increased $661 million from the first half of 2014 to $560 million. Earnings per share in the first half of the year were also considerably higher, up $0.54 to $0.46.
Xoom
On July 1, PayPal announced, prior to its divestiture from eBay, that it would be acquiring international payment processing firm Xoom. Xoom's business is closely aligned with the current business of PayPal and will add expanded international money transferring capabilities for PayPal. Xoom currently has payment transaction capabilities in 37 countries, which will help to greatly enhance PayPal's international capabilities overall. Upon final closing in the fourth quarter of 2015, Xoom will bring revenue of approximately $46.3 million per quarter to PayPal.
In the second quarter, Xoom's $46.3 million in revenue resulted in adjusted earnings of $2.4 million and earnings per share of $0.06. Xoom has been significantly growing top line revenue with a comparable quarter growth rate of 16% in the second quarter. For the first half of the year, Xoom generated revenue of $90.75 million, an increase of 20% from the first half of 2014. Earnings, however, have struggled slightly. In the second quarter, earnings were down 38% from the comparable quarter to $2.4 million. Earnings per share for the second quarter were also lower at $0.06, down 33% from the comparable quarter. Earnings for the first half of the year were down 28% from the first half of 2014 at $4.6 million. In the first half of the year earnings per share were also lower, down 27% to $0.11.
Given the expense saving synergies associated with the PayPal merger, Xoom's bottom line will greatly benefit from the integration of the two businesses. The majority of Xoom's revenue will fall under the international segment of PayPal's business. In the second quarter, PayPal's international revenue accounted for 49% of sales at $1.1 billion.
Other PayPal Acquisitions
In addition to Xoom, PayPal has also reported three other acquisitions this year. In August, the firm bought Modest, which will be integrated with its merchant ecommerce business Braintree. The amount of the transaction was undisclosed. In March, PayPal reported the acquisition of cybersecurity firm CyActive for $60 million. CyActive is expected to help improve the security of online transactions for PayPal. Also in March, PayPal bought Paydiant, a technology company similar to Modest in that it is focused on mobile apps for retail ecommerce. PayPal paid $280 million for Paydiant.
Conclusion
Overall, PayPal is a stronger company as a separate entity from eBay and will continue to grow significantly. The acquisition of Xoom is the key focus for the firm, as it will bring approximately $46.3 million in quarterly revenue to PayPal upon completion of the transaction. The expansion of international payments will broadly enhance PayPal's portfolio and the integration of the Xoom business will begin to show increased cost reduction synergies primarily following the first year after the transaction is completed.
The firm will acquire Xoom with cash and pay $25 per share for a total value of $890 million. While the acquisition is one of four for PayPal this year, its free cash flow and cash equivalent levels continue to remain high. As of June 30, the firm had free cash flow of $741 million and cash equivalents of $6.6 billion from which it could fund the transaction. By utilizing cash and cash equivalents, the firm will not incur financing charges which will keep its cost of capital unchanged.
Additionally on Aug. 4, PayPal announced the hire of John Rainey as chief financial officer. Rainey's previous experience includes financial management at United Continental Holdings. Rainey served as the chief financial officer for United Continental Holdings and United Airlines. He has 20 years of financial management experience, most of which was at United Continental. The hire of John Rainey at PayPal will only help to further strengthen the firm's financial positioning and expense management.
Overall, given the full completion of the Xoom transaction, the firm has a conservative discounted cash flow value of $38.25 versus its current market price of $34.29. Given a smooth transition of the Xoom business in a steady state environment, it is likely that the firm could realize upside potential of greater than 7%, with the greatest potential for gains occurring in the second half of 2016. Analysts target expectations for the stock price are consistent with this analysis. Analysts currently have an average target price for PayPal of $43.56 with a high target of $50.
