Industry consolidation | Xero Blog

Big news yesterday as MYOB announced they have finally acquired BankLink.

There will be lots of industry banter about what this means. Here are our thoughts.

Why did MYOB buy?

This acquisition makes sense for MYOB. Under their second Private Equity owner, US based Bain capital, they continue to load the business up with debt, which is now over 700m. Bain is now looking to exit out of MYOB and is signaling an IPO.

Bain probably did not foresee how the cloud is so quickly changing the economics of accounting software. Both MYOB and Reckon ?double dip? by charging accountants for accountant side software to process the same set of books originated in the small business software the owner has already paid for. In the cloud this goes away with Xero not charging for accountant tools.

MYOB do not report their detailed numbers. Actually neither has Reckon but with our increased market share it?s very likely that their NZ based accountant revenues are under pressure. With so much debt, if revenues are soft then MYOB would be under enormous pressure from its bankers. When we started Xero MYOB claimed 70,000 NZ customers of small business accounting. Xero now has over 70,000 customers in New Zealand on monthly billing so unless the market has doubled Xero is likely number 1 in our home market.

MYOB is also under pressure as its cloud sync model, which moves data between the installed desktop software and the cloud, has now been shipped and seems?to be having issues. All these factors are probably accelerating the Bain?s desire to exit.

So if an IPO exit is planned then the MYOB acquisition of BankLink, which presumably carries little debt, makes sense to top up any revenue gaps.

Why did BankLink sell?

So why did BankLink sell after rejecting MYOB for so long? With the cloud accounting industry just taking off why would anyone in the space sell now?

BankLink is an admired New Zealand company. And over the last two decades has been a stable supplier that has earned the trust of the accounting software industry. As Xero entered the market and rapidly innovated, especially linking banks directly to accounting software, BankLink didn?t respond. I don?t know why they didn?t move.

So over the last few years Xero has been catching up on the direct bank connections, partnered with Yodlee to provide access to banks without feeds and integrated feeds into a full accounting system. We have been migrating thousands of Banklink customers to Xero. BankFeeds have simply become a feature.

Accountants have woken up to the change. If they run customers on BankLink, those customers are likely using other software for invoicing, payables and accounting and that customer is at risk of adopting their own software. With cloud accounting smart accountants are providing accounting software to their clients which provides a degree of lock in and the clients are happier.

Xero has also announced it?s working with a number of Banks (like the ASB) on the next generation of banking connectivity.

So the writing was on the wall for BankLink, and it makes sense for the founders to exit the business after 25 years.

What does this mean for Xero?

While we have been moving thousands of Banklink customers, there has been residual loyalty to the Banklink brand as they have provided excellent service for many years. That loyalty does not extend to MYOB so it probably accelerates the transition to Xero.

Paul Pettit, a partner of Wellington based accounting firm Curtis McLean, says MYOB needs to be focusing on its own software. ?It?s great to see MYOB taking steps with bank feeds but usability is their real issue. The bank feeds are only the start of the accounting system. The benefit of Xero is that it is just nice to use and has an entire ecosystem of apps around it. With updating an old system it?s a lot harder.?

Active Chartered Accountants director Ben Shaw agrees and says ?MYOB has taken too long to embrace the technology behind bank feeds and to recognise the need for making them more client-focused rather than accountant-focused.?

Who are the remaining big players?

• Last year CCH (owned by European listed company Wolters Kluwer) acquired Christchurch based Acclipse
• US Owned MYOB now owns BankLink
• Reckon (ASX) and Xero (NZX/ASX) remain the last locally owned players

Accountants now have to think long and hard about who they invest in as their long term partner. We believe Xero, a listed company with no debt, 100%+ growth, largest ecosystem, $75m in the bank and a history of innovation and operational excellence has become the low risk partner. Considering we only got going 6 years ago it?s been an amazing change.

Who said accounting was dull and boring!

As always welcome your thoughts below.

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Source: http://blog.xero.com/2013/05/industry-consolidation/

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