What: Shares of money transfer company Xoom (NASDAQ:XOOM) rose 18% during the month of July, according to S&P Capital IQ data, driven by the announcement that PayPal (NASDAQ:PYPL) offered to acquire the company for $25 per share. This is slightly below where Xoom traded after its first day as a public company in early 2013.
So what: PayPal split from parent company eBay in July, allowing the company to focus solely on payment processing. Xoom, which competes against Western Union in the remittance market, has failed to truly disrupt its larger competitor. While Xoom has been growing fast, it swung to a loss during 2014 after turning a profit in 2013. Meanwhile, Western Union has largely maintained its exceptional profit margins.
Scale is critical in the remittance market, and Xoom becoming part of PayPal could potentially create a real competitor for Western Union. Having PayPal's resources behind it could help Xoom accelerate its entry into new markets, and PayPal's large customer base should allow the company to cross-sell Xoom's services.
Now what: While investors who bought shares of Xoom soon after its IPO are likely disappointed, given that the offer price is well below Xoom's all-time high, this acquisition is likely the best chance Xoom has at becoming a major player in the remittance market. It's a market that's ripe for disruption, but it will take a company with deep pockets to be able to take on Western Union.
There's still a chance that another company could offer a higher price for Xoom, but PayPal looks like a good strategic fit for the company. While the story of a small upstart like Xoom taking on the entrenched Western Union on its own sounds compelling, the company has a much better chance at success as part of PayPal.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends and owns shares of eBay, PayPal Holdings, and Xoom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.