Rumors Suggest Xero to Announce Acquisitions at Xerocon

Update 2 – Well, it seems I was right – as I predicted Xero did not acquire Vend and did acquire a practice management vendors (Spotlight Workpapers whom I referred to in a previous post). This gives Xero a more credible practice management suite and should stand them in good stead to deliver on their promise to practitioners. Well done to the Spotlight team. After my initial predicition was covered by The National Business Review, Xero released an early announcement to the NZX detailing the acquisition. 

Update – as expected, Xero CEO Rod Drury would not comment on particular acquisitions to be announced but did make a comment in response to an email I sent him about the CCH/Acclipse deal saying;

On the Acclipse deal if you were us you’d see it as a good sign if a competitor decides to be acquired rather than go it alone. Means you’ve hit max value. So that’s a good sign what we are doing Is working. Congrats to Mike though. Not many people successfully exit businesses and he has done it multiple times.

Xero is holding it’s annual Australian conference in Melbourne this week and in keeping with the norm for tech companies, we can expect some important announcements to be made at the event. I’ve received multiple notes from people speculating about potential news including acquisitions – some likely, some less so. here’s a round up of what I’ve heard an my assessment. (Disclaimer – I am co-founder of LiveMigrate, a service that helps businesses migrate from MYOB or QuickBooks to Xero and hence have multiple interests in Xero’s moves).

At the time of publication I hadn’t received any response from Xero about these rumors  – if I do so I’ll update this post with their comment.

Xero to Buy Vend?

A couple of sources have suggested that Xero will be announcing an acquisition of cloud POS provider Vend. I reached out to Vend CEO and founder Vaughan Rowsell for his comment. Recently landed from a holiday in Fiji, Rowsell denied the rumors, but did so in a typical relaxed manner;

Not us, Bula! It’s cold

While any CEO with his salt will deny rumors (or at least refuse to comment upon them) regardless of their veracity. In this case I’m tending to dismiss the chances of this being a legitimate deal. Here’s my reasoning;

  • Vend has been spectacularly successful and is gaining customers at a fairly astonishing rate. The investors behind Xero Vend (in particular Point Nine Capital out of Berlin), having invested in other high growth SaaS plays (Zendesk, FreeAgent) will be well aware of the worth of such growth and hence any purchase price could be expected to be very high. Add to that the fact that given their shareholding in FreeAgent, Point Nine would be unlikely to accept a deal that involved stock, and you have a deal that would likely be mainly cash-based. That would be a big ask for Xero, they’re well capitalized, but with profitability still aways off, shareholders might balk at using up free cash to fund a big acquisition
  • Making a big acquisition like Vend would be a risk for Xero in terms of shareholder perception. Until now Xero shareholders have been remarkably patient with the company in terms of growth and profitability forecasts. A purchase of a rapidly growing SaaS vendor could be seen as an admission that Xero’s growth projections were a little too positive and could spark a move in that sentiment. Already some people are questioning Xero’s half billion dollar market cap
  • Admittedly Xero and Vend share some major shareholders (Rowan Simpson and Sam Morgan) which makes a deal a fairly natural move. My feeling however is that both Simpson and Morgan realize the potential that Vend has and will be unwilling to exit on that potential too early – Vend is only beginning to ramp up on its massive potential and, most importantly, is still an incredibly nimble business – an acquisition by Xero would likely negatively impact on their ability to innovate quickly
  • Final word on this topic goes to someone who is very much “inside the tent” with both these companies. That person told me the telling fact that within Vend there is a longstanding joke that Vend is the only Xero partner of the year that Xero CEO Rod Drury can’t actually buy

Xero to Acquire in the Practice Management Space

Sources also tell me that Xero will announce an acquisition in the general practice management space. I’m aware of details but to protect my sources will keep the specifics under wraps. Suffice it to say that the acquisition of practice management and client side vendor Acclipse last week by CCH will have sent some shock waves throughout Xero HQ. Sources tell me that Xero themselves had been courting CCH and the decision of the company to acquire a competitor outright will be seen as a blow.

Xero’s acquisition of WorkFlowMax last year went some of the way to providing accountant practices with a credible end-to-end solution but there are still significant holes in that story, made all the more evident by the sort of product integration that Acclipse CEO Mike Chisholm is talking about. As I said after speaking with him last week;

The final leg in the story of the modern practice however is that of documentation – accountants need to utilize providers of case law, precedents, best practices and standard forms and CCH is a major provider of these sorts of services – a practice solution that ties client and practice-side solutions, and delivers them alongside relevant documentation is a significantly valuable proposition for firms.

When the deal with WorkFlowMax was announced, it was spun as the final part of the practice-side solution. The reality however is somewhat different and while practices I talk to are generally positive about WorkFlowMax as a project management tool, it really doesn’t meet their needs in terms of preparing workpapers, managing documentation and the like. Xero has for a few years now been evangelizing the “modern practice” message. While this is a great aspirational story, practitioners want to see some concrete evidence of a compelling and complete solution for their clients, their practice management, their document management and their actual workpaper requirements. With CCH/Acclipse getting close to being able to deliver this post integration, Xero needs to build up its proposition, and they realize that this is one area in which they need to execute by acquisition or development rather than simply third party integration.

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