Shares of money transfer company MoneyGram (NASDAQ:MGI) rose as much as 50% at the start of trading on June 2. Although they cooled off some after that initial spike, they remained up by an impressive 33% or so by 10 a.m. EDT. Peer Western Union (NYSE:WU), meanwhile, was higher by around 12% by 10 a.m., only slightly off of its early trading high of a 15% gain. This is actually an odd occurrence when you take a look at what's going on.
After the close on June 1, Bloomberg reported that Western Union was looking to buy smaller rival MoneyGram. This is the second time MoneyGram has been in play in recent years. Chinese firm Ant Financial, having agreed to buy the company for $1.2 billion, ended up abandoning its bid in 2018 after facing U.S. regulatory and political pushback. Western Union will have to get any deal approved by regulators, too, but shouldn't have quite as hard a time. The biggest hangup is likely to be over questions of industry scale. However, with online payments gaining importance, the position of Western Union and MoneyGram in the money transfer business isn't as sizable as it once was.
Notably, even after the big price gain on June 2, MoneyGram's market cap is only around $200 million. And while a "person familiar with the matter" declined to disclose any pricing details, Western Union will clearly be paying less for the company than what Ant Financial had been offering just a few years ago. That, meanwhile, brings up the odd thing about the stock moves here.
Normally, the target company's price rises in an acquisition while the acquiring company's stock falls. That hasn't happened, which means investors think this is a very good deal for Western Union. The biggest benefit is likely to be increased scale to compete with the online options that are siphoning business away. That said, the timing is pretty opportunistic, too, since COVID-19 related economic shutdowns have materially reduced international money transfers and, thus, revenue in the industry. It does seem like a net positive for all involved.
Although Wall Street appears to like the idea of Western Union buying MoneyGram, no deal is done until, well, it's done. And this one is, at best, in the early stages. Long-term investors shouldn't really be buying stocks based on acquisition rumors, anyway. Moreover, a deal here could easily be viewed as two older competitors linking up in an industry that's facing structural change -- that often doesn't work out as well as hoped.