Strategy, Not Price Tag In MoneyGram Lovefest

A billion here, a half a billion there, and at some point you are talking about real money.

Even for juggernauts like Ant Financial and Euronet Worldwide.

We’re talking, of course, about the triangle that exists in the payments space — a love triangle that has its rivalry like any good love triangle. But this rivalry is being played out in dollars.

The latest wrinkle as of Tuesday morning (March 21) is that a bidding war is in the offing. Ant Financial, carved out from Alibaba, is on the cusp of a bidding war, even as executives from that company have said that they remain confident that their initial $880 million deal to buy MoneyGram, which was announced in January, will go through.

One wonders if that is likely, given the fact that rival Euronet has offered $1 billion. The price tag differential also has an important issue attached to it. How much would you pay to jump through regulatory hoops and scrutiny à la the Trump administration? As is well known by now, the “America First” policy that has been the hallmark of the Trump administration has been taking root.

This means that any cross-border deals that involve the acquisition of U.S. firms, such as this one, will get an extra helping of scrutiny. Trump has said he wants to see firms (and individuals) hire and buy American, and a Chinese firm buying a U.S. entity puts a fly in the ointment. The deal is no slam dunk, and Ant has said that it has been talking to the panel that would be examining the deal here in the U.S., which is part of the Treasury Department.

The central question as to why a bidding war may an erupt — and why, even, Euronet would be revisiting a takeout of MoneyGram, where it had made offers years ago — rests with a classic dilemma in technology: Build or buy?

In other words, spend the money and time to build a platform, or capture a customer base or, in this case, boost the geographic reach of a money transfer business through home-grown methods? Or spend the money to gobble up someone else who has done the heavy lifting in the first place? Then, of course, there is the lifting of a different sort that comes with integration, from assimilating a new corporate culture and staff, to technology integration to any number of unforeseen issues … and those issues almost always pop up.

Here, the answer is “buy” for both would-be suitors.

For Ant Financial, the buy impetus may come down to the desire to expand beyond China geographically, which is no surprise given the slowing of that country’s once white-hot GDP growth (and with GDP growth comes the desire to spend more and transact more, and thus a clear benefit accrues to Ant).

The U.S. has been eyed for a while by Ant chairman Jack Ma, and, by buying MoneyGram, it gains incremental global scale, with seemingly one regulatory hurdle to clear rather than consistent hurdle jumping on a country-by-country basis (as MoneyGram already has those allowances in place). The technological and regulatory “pipes” need to be there for Ant to push Alipay and the mobile wallet model to far-flung corners of the globe.

That would allow current and future Ant users to transfer money across borders and, of course, bring their buying power in new locales, with the option to extend fund flows abroad (i.e., beyond Asia and India), even as anti-money laundering and other money movement scrutiny is bound to increase.

If Ant wants to do this and scale dominates its thinking, as it likely does, the choice comes down to MoneyGram, which has a presence in 200 countries, or Western Union, also in more than 200 countries. MoneyGram at a $1 billion market cap (oh, and the $900 million in debt on the books which must be serviced, pared or retired) or more, even significantly more, is rather palatable on an absolute basis, more so than Western Union’s $9.6 billion market cap, should Ant get the go-ahead. It’s been reported in the last month that Ant is looking to raise a few billion dollars in debt, and presumably this would be dry kindling for deal-making (or refilling coffers after deal-making). Yes, eyebrows may pop at the 67-times multiple on earnings for MoneyGram at its current traded-through-the-offer $16.40, plus a share. But Ant is focusing on strategic value rather than incremental additions to operating profits or even sales now. Oh, and recall that Ant has been valued in the not-too-distant past at $60 billion, so it does indeed dwarf its target.

As for Euronet, the headlines and new stories trumpet the fact that the firm will not have to go through the regulatory process that is going to be levied by the Committee on Foreign Investment in the United States. So we can rest assured the company will not be questioned or examined as a potential risk to U.S. security. That’s what may be in it for investors: a price tag to be paid that is higher than Ant’s (for now) and absence of the gimlet eye of regulators. What’s in it for Euronet? The same scale across the U.S. and elsewhere, but keep in mind that the agent model (i.e., 350,000 physical locations) amid MoneyGram’s network is the lure, as cash still reigns locally in so many places. The company, at last quarter, had a bit more than $100 million in net cash, so based on net cash alone as a metric there is less room to up its offer, should it feel compelled to do so.

As with any deal, especially when the decision is one to buy, one wonders what the result may be. Not just who gets the brass ring or, in this case, the money transfer giant — but rather how consumers will fare in the end.

The ultimate goal of any business decision is to bring more customers into the fold or keep the existing ones spending. Oh, and loyalty is always to be desired. Is innovation in the cards once the deal gets done, no matter the acquirer? Ant (and Alipay) is a highly innovative company with a record of introducing new innovations on their digital rails. A MoneyGram/Ant Financial combo will introduce an innovative new way for Chinese consumers to pay merchants in the U.S. and every other part of the world — who are eager to welcome new, incremental customers with money to spend and a mobile wallet to use to spend it. For Euronet, a MoneyGram buy is about making their existing operation bigger — so scale may trump  innovation, at least initially.

The China question brings with it the specter of debate that at least touches on the fact that Chinese firms have been able to buy rivals or targets in the U.S., but no reciprocal ease of transactions has worked the reverse way, from the U.S. to China. MoneyGram, for its part, has said that the unsolicited proposal from Euronet could be a “company superior proposal,” as noted in its previous agreement with Ant, meaning that the firm is looking seriously at the new bid (and indeed MoneyGram has started giving “confidential info” to Euronet as a normal part of the process).

The politics that may bedevil Ant’s push into the U.S., at least for this deal, may swamp any initial innovation that may be in the offing. Ant is likely to have to prove that its current business model poses no threat to the U.S. (and will not result in unfair competition), while each new iteration of technology must be explained in detail, possibly to mollify those who worry about data and its security. The Trump administration could decide that this will be no deal to wave on through, the commander-in-chief’s past praise of Jack Ma notwithstanding. Or it could be used as a bargaining chip to open access to tech companies in a market that they’ve found increasingly difficult to navigate.

Well-armed, clear-eyed suitors, for now, at least, are circling MoneyGram. But bidding wars sometimes become frenzied affairs. We’re not there yet, but perhaps we might be.