Xero's moon shot
Xero throws US$3B at Melio in a high-stakes gamble that may blow up spectacularly.
You have to look far back into Australian corporate history to find a takeover as audacious as this week's deal whereby Xero, an accounting software business, is spending up to US$3 billion ($4.6 billion) to buy Melio, a US small business payments services provider which is very small itself.
No matter how the accountants dress it up, Xero boss Sukhinder Singh Cassidy is spending US$3 billion in pure goodwill for a six-year old business that has so far torched at least US$400 million, parted ways with its single-largest referral partner just months ago, and could have another US$1 billion in losses ahead before it breaks even.
Even better, the venture capital funds that backed Melio's Tel Aviv tech bros in its amazing adventure walk away with virtually all of the takeover consideration in cold hard cash – although those that bought in during the US$250 September 2021 funding round (which valued Melio at US$3.8 billion) will make a small loss on their investment.
For sheer chutzpah, Suki Singh's Melio is approaching Robert Holmes à Court's famous takeover bid for BHP using a tiny company called Wigmores as the bidding vehicle. "It looks like a flea trying to copulate with an elephant," one broker quipped.
The Melio deal also flips the Xero investment thesis on its head. Until this week, Xero was a play on the growing global market for small business software. Suddenly, Xero is a bet on consolidation in the US small-and-medium business (SMB) payments sector, a huge industry but one in the grip of a vicious market share battle.