On a mixed day for the ASX, Xero Ltd [ASX:XRO] share price is trading down 2.71% at time of writing.
It comes as CEO Steve Vamos unveils what may be his most ambitious deal yet, committing $285 million to acquire a Danish business known as Planday.
However, what makes this acquisition particularly interesting is the fact that Planday doesn’t really fit into Xero’s typical business model.
As a cloud-based accounting platform, Xero’s focus is mainly on bookkeeping.
Planday is a little more unique. It operates in the emerging field of HRtech, which is aiming to disrupt the human resources sector with new technological advances.
So, let’s dig into the details of what Xero plans to do with this pivot…
Homing in on workforce management
Planday is yet another player in the small but expanding HRtech scene.
It runs a digital platform that enables businesses to better manage their workforces by tracking staffing, payroll costs, and key business metrics. All of which allow an employer to optimise their labour costs and rosters.
Vamos, however, has bigger ambitions, as he plans to incorporate this platform and its valuable data into Xero’s broader bookkeeping operations. A goal that Xero believes will provide immense value:
‘When combined with an accounting solution, such as Xero, Planday is able to provide insights to a business or its advisor that help them to adjust staffing levels to match trading conditions and control labour costs, which are often an employer’s largest expense.’
So, with that in mind, it is clear what kind of synergies Xero hopes to achieve with this deal, adding further capabilities to its ever-expanding platform.
But with a price tag of $285 million, Planday doesn’t come cheap. Especially with 55% of the deal paid out in cash.
Plus, with no mention of whether or not Planday is profitable, it seems likely that the company’s balance sheet is in the red. A factor that could be behind the rather tepid investor response to today’s news.
But Vamos certainly believes in Planday’s long-term potential, noting:
‘The acquisition of Planday aligns with our purpose to make life better for people in small businesses and their advisors. Planday’s workforce management platform helps small businesses to respond to the rapidly changing nature of work. Planday also addresses the growing need for flexibility and rising compliance demands within the workplace.’
Where to from here for Xero share price?
The question for Xero shareholders, then, is: When will all of these long-term plans pay off?
After all, Xero is part of the infamous WAAAX group (the other stocks are WiseTech, Afterpay, Appen and Altium). This is a cohort of the most well-known ASX tech stocks, trading at some insane P/E multiples.
For this reason, investors may have reason to be a little nervous. Especially after the two-day rout that the NASDAQ has endured.
However, I personally believe that HRtech is a fascinating sector. One that could become the next big investing trend, just like fintech (and particularly ‘buy now, pay later’ service providers) has done in recent years.
And if you’re looking for some of our favourite fintech stocks, well, we’ve got the perfect report for you. It takes an earnest look at the sector, and what may be in store for it, as well as three of the most promising companies worth checking out today.
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For Money Morning