SoFi to Acquire Technisys: Does the Deal Make Sense?

Shares of SoFi Technologies (NASDAQ:SOFI) closed about 10% lower on Tuesday after it announced the acquisition of Technisys, a cloud-based multi-product core banking platform. However, the stock recovered slightly in the extended trading session. 

What’s Behind the Decline?

The market’s immediate response to the deal was negative. Taking note of the acquisition and the selling in SoFi stock, Sean Horgan of Rosenblatt Securities stated that investors fear that the Technisys acquisition will lead to equity dilution. 

For context, the deal is valued at $1.1 billion, which SoFi will finance through issuing new shares. SoFi stated that it would issue about 84 million shares for the transaction. 

Horgan added that the deal price “implies a valuation >15x ‘21E revenue which is notable in the current environment.” It simply means that market participants’ initial reaction indicates that they see this deal as expensive. 

Does the Deal Make Sense?

Per SoFi’s management, the Technisys deal will likely expand and accelerate its revenues, generate cost-savings, and are margin accretive. 

SoFi expects the deal to add $500 million to $800 million in revenues through 2025 with higher incremental margins. Further, it expects to generate cost savings of $75 million to $85 million from 2023 to 2025, and $60 million to $70 million per annum after 2025. 

Echoing a similar sentiment, Horgan believes that the Technisys deal has strategic importance for SoFi and makes sense. While the analyst waits for more details on the agreement during the Q4 conference call, he stated that the deal “provides revenue expansion opportunities for Galileo’s existing clients and cost savings within SoFi’s own business.”

Overall, Horgan expects equity dilution and valuation concerns to weigh on SoFi stock. However, he sees the transaction as “strategically sound and a net positive” to SoFi’s financials in the coming years.   

Horgan keeps a Buy rating on SoFi stock but reduced his price target to $22 from $25, citing sector-wide valuation compression.

Wall Street’s Take 

Wall Street remains cautiously optimistic outlook on SoFi stock due to increased competitive activity, concerns over credit risk, and regulatory uncertainty. SoFi stock has received 8 Buys and 3 Holds for a Moderate Buy consensus rating. 

Further, the average SoFi price target of $18.59 implies 81.2% upside potential to current levels.

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