The last several weeks have been pretty wild for banking stocks. Investors witnessed the collapse of SVB Financial and Signature Bank, and saw Swiss behemoth Credit Suisse get acquired. Amidst all of the hoopla, neo-bank SoFi Technologies (SOFI 3.69%) quietly made an acquisition of its own.
SoFi is no stranger to mergers and acquisitions. After all, the company's chief executive, Anthony Noto, is a former Goldman Sachs technology banker. Let's dig into SoFi's latest deal.
The Amazon Web Services of banking
A few years ago, SoFi acquired a company called Galileo, a tech-heavy platform which helped fuel SoFi's digital product suite. The rationale behind the deal was to create the Amazon Web Services (AWS) of fintech.
Like AWS, SoFi and Galileo were building a growing consumer business on one side, while the other side provided consumers with a robust technology stack. Stated differently, SoFi was in the early stages of building its one-stop banking ecosystem for its users.
Post Galileo, SoFi has made a number of other strategic acquisitions. Namely, the company acquired cloud-based banking platform Technisys for $1.1 billion. Now, in the midst of a potential banking contagion, SoFi announced that it is acquiring Wyndham Capital Mortgage.
Image source: Getty Images.
How was the deal structured?
Although SoFi did not disclose the official deal terms or purchase price, the company's press release noted that the acquisition of Wyndham Capital Mortgage was an all-cash transaction.
Frankly, this is probably the best deal structure. Since its initial public offering in 2020, SoFi stock is down over 42%. As a reminder, SoFi went public through a SPAC that was sponsored by media darling Chamath Palihapitiya.
According to the company's latest 10K, SoFi ended the year with $1.4 billion of cash on the balance sheet as of Dec. 31. Despite its core lending business being affected by the student loan moratorium, thereby making cash flow a potential issue, management made the right call by doing an all-cash deal for Wyndham. Should the company have done an all-stock deal, or a combination of cash and equity, SoFi would have to issue more shares, which would dilute current investors.
Does this deal make sense?
If you look too closely, you may be spooked by this deal. Recession fears seem to be accelerating, and the Federal Reserve is making it clear that more interest rate hikes are on the way. Let's zoom out a bit.
Generally speaking, given the rise in interest rates, demand for mortgage applications is dropping. Simply put, a 30-year fixed mortgage payment will cost more today than it did just a few years ago because interest rates are rising. For this reason, mortgage companies, like Wyndham, are likely experiencing a drawback in business.
However, as long-term investors, it's crucial to think about the future. The Federal Reserve will not raise rates forever. Eventually, interest rates will come back down. When this inevitably happens, housing demand should bounce back. In this case, SoFi's deal for Wyndham looks pretty savvy.
As part of its announcement of the deal, SoFi's leadership stated:
While the transaction is not expected to be material to the company's 2023 financial outlook, it is expected to be accretive within six months. The acquisition – which includes the integration of both talent and technology from Wyndham Capital – will allow SoFi to broaden its suite of mortgage products available to members, enhance unit economics, and take ownership of an intelligent and scalable platform that has set the industry standard for a fully digital mortgage experience. This "full stack" approach is also intended to minimize SoFi's reliance on third-party partners and processes.
Investors should be jumping for joy here. While the purchase remains an unknown variable, SoFi explicitly states that this deal will be accretive. This means that the company has identified ways to ensure the combination of SoFi and Wyndham is profitable. Typically, these synergies come in the form of reduced expenses due to overlapping technology instances and headcount. Moreover, by illustrating that it will not need to rely as heavily on third-party partners, SoFi is making it clear that it has the capabilities to bring more services in-house, which will likely further reduce outsourced costs. In essence, these efforts will contribute to SoFi's bottom line, and thereby positively impact earnings per share (EPS) and create value for investors.
Although it is difficult to quantify how meaningful Wyndham will contriibute to SoFi's top and bottom lines, the company believes the acquisition will create value within six months of closing. More importantly, the addition of Wyndham and its products likely will help SoFi attract even more users in the near and intermediate term. SoFi is doing a terrific job expanding its product suite and differentiating itself from the competition. Long-term investors should be bullish about the future prospects of SoFi and could use this as an opportunity to lower their cost basis.
