PayPal Spins Up a Smart Deal for Xoom (PYPL, XOOM)

EBay (EBAY) will finally complete the long-talked-about spinoff of PayPal (PYPL) on July 20, its PayPal division … but PayPal isn’t exactly waiting for its unshackling to make some moves.

PayPal Spins Up a Smart Deal for Xoom (PYPL, XOOM)On Wednesday, PYPL announced an $890 million, all-cash deal for Xoom (XOOM), a major provider of online money transfer services that will operate as a separate unit.

Xoom operates a cloud platform that allows people to easily send money to friends and family in other countries. The company boasts solid growth — 2014 revenues jumped 30% year-over-year to $159 million.

That’s mostly been driven by Xoom’s strong focus on mobile. During the first quarter, about 60% of all transactions were sent via mobile devices, up from 45% in the same period a year ago.

The app itself is actually very easy to use, letting people execute a money transfer with just “one tap and one swipe.”

Still, while the technology sounds great and the growth sounds right, XOOM hasn’t been without its problems.

For one, even including Thursday’s 23% jump, the return on XOOM has been absolutely flat since its first day of trading in February 2013.

You can blame heavy growth costs, which makes sense considering the infrastructure needed for XOOM to operate as it does across numerous countries.

Customer acquisition and support costs have been high, too. Part of this can be chalked up to the complexities of dealing with the nuances of foreign countries. And Xoom also has to compete against entrenched rivals like Western Union (WU) and Moneygram International (MGI), plus a smattering of local operators.

Also, earlier in the year, XOOM revealed that it “had been the victim of a criminal fraud” amounting to $30.8 million, and it will now undergo both federal and internal investigations. Xoom also revealed in the same filing that its chief financial officer was resigning after just one month, though the company said his departure was “not the result of any disagreement or dispute with the company.”

Nonetheless, the episode does point to clear weaknesses in the Xoom’s internal controls, which certainly is cause for concern for any kind of payments company.

In light of all this, it is understandable why XOOM decided to sell out. Luckily, PayPal is an ideal partner.

PayPal-XOOM Is a Win-Win

PYPL has the scale and international footprint to accelerate the expansion of Xoom’s operations. For example, PayPal already operates in more than 200 countries and sports a U.S. customer base of 68 million, compared to a mere 1.34 million for XOOM. Xoom also should gain an advantage by joining the highly secure PYPL platform, which is renowned for its anti-fraud systems.

So this looks like a classic win-win.

Also, the XOOM deal is just one in a string of acquisitions by PayPal. Earlier this year, PYPL bought security provider CyActive, as well as Paydiant, which provides technology for digital wallets, rewards programs and other commerce services. These are the kinds of deals PayPal will need to remain competitive with tough rivals like Apple (AAPL) and Stripe.

One thing to note: The XOOM deal isn’t a foregone conclusion; another bidder, such as Google (GOOG, GOOGL) or even Facebook (FB), could jump into the fray. But if PayPal can close this deal, it should be a nice boost for the upcoming spinoff. The acquisition will open PYPL to a market opportunity estimated at $600 billion.

And if it doesn’t go through? PayPal still is an exciting prospect as a pure play on the rapidly growing online/mobile payments space.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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