The Xero Limited (ASX: XRO) share price has fallen despite the accounting software stock’s Canadian acquisition called TaxCycle.
TaxCycle acquisition
Xero is buying TaxCycle, which is the trading name of Trilogy Software Inc), which the ASX share described as a leading Canadian tax preparation software company for accountants and bookkeepers, to support Xero’s strategy for growth in this strategically important market.
TaxCycle is based in Calgary. Its software provides ‘full local market jurisdictional’ tax coverage, with almost 4,000 tax firms and over 16,000 individual accountants, bookkeepers and tax preparers using its software.
The total consideration is C$75 million, including subsequent employee incentive payments. The completion payment of C$70 million is expected to be settled 71% in cash and 29% in shares of Xero.
Transaction, integration and operating costs are expected to have a minimal impact on Xero’s FY22 EBITDA (EBITDA explained).
Why is Xero buying another software provider?
The ASX tech share said that it will provide the opportunity to reach a larger Canadian customer base, offer accountants and bookkeepers deeper capability to better serve and advise small business and provide greater access for existing customers to use the Xero platform.
This acquisition will also extend Xero’s Canadian value proposition as Xero plans to also use TaxCycle’s expertise and tax management capabilities to enhance its localised cloud offering over time.
It will increase Xero’s presence in Calgary, an important location in Canada for its growth plans, in addition to the Toronto office.
Will TaxCycle keep operating?
Xero told the market that TaxCycle will continue to operate as a standalone brand under founder Cameron Peters’ leadership.
The customers of Xero and TaxCycle customers can benefit from a newly available Xero integration with TaxCycle’s desktop tax solution.
My summary thoughts on the deal and Xero share price
Whilst the deal and price may not be material for Xero, I think it could an important part of unlocking the Canadian market. It’s a large market – bigger than Australia in population terms – and it has its own tax requirements.
Getting in front of more businesses and accountants could be key for driving cloud accounting adoption, particularly when trying to promote the merits of a new system.
Xero is a great business, one of the best on the ASX in my opinion. It still has plenty of business development potential from here. With rising interest rates on the cards, it’s hard to say how the Xero share price is going to perform over the next few years. But I’d be happy if I were a shareholder of Xero with this deal.
