Why did Sofi buy Galileo?

Given the current gloomy economic environment and outlook, why did Sofi buy Galileo and at a markup?

One of the biggest fintech news these days has got to be Sofi buying Galileo for $1.2 billion. Some are finding the news surprising because they thought that the funding for fintech has dried up due to the global pandemic. Here is my take regarding the timing, rationale and valuation:

Timing

Certainly, the timing is interesting. The news hit the wire on April 7th, 2020 in the middle of the global pandemic and the inevitable recession, and possible depression (god forbid no!). The talk was definitely in motion before the pandemic, and the pandemic actually helped to seal the deal. The merged company will be one of the strongest fintech company in the US (more on that in the rationale section), and will certainly help to better weather through the incoming gloomy economy. What did change is probably the cash portion of the deal. Of the $1.2 billion, only $75 million is in cash, a mere 6.25%. The other parts are mostly made of stocks, $875 million in stock, and some debts, $250 million in seller financing debt. I think this is a clear move to preserve cash for the turbulence ahead.

Rationale

So why the acquisition? Let’s start by look from Sofi’s perspective:

1. Sofi is looking to own the entire technology stack to offer distinguishing products in the future.
2. Soif has the capital. In its latest round of funding, Sofi raised $500 million in May 2019. Its looking for investment opportunity in fintech, and Galileo is a good candidate. It’s profitable and payment is one of the biggest area in fintech.
3. Cross sell. Sofi can now offer competitive solution to any company looking to add financial services, which is a trend now with the most notable example Uber.
4. Payment and lending are two of the biggest area and opportunity in fintech. The acquisition make Sofi one of the strongest company in fintech in US.

As for Galileo, I will sum it up to two simple reason:

1. The combination is complementary, and makes the combined company much stronger, 1+1 > 2.
2. Valuation. $1.2 billion is a very very nice mark up to its valuation from the last round of financing. In October 2019, Galileo went through its series A financing and raised $77 million. Though no valuation is revealed, using a very rough and conservative estimate, $77million for 10% of the company, the company’s value increased 56% in 5 month. In reality, it’s probably a lot more. So, it’s a very very nice jump.

Valuation

Already covered in the previous section.

Conclusion

Overall, I think the timing actually helped the acquisition as the 2 together are much stronger, though lowered the cash portion of the deal. I am hopeful and excited to see what two great companies together can create and further enrich and strengthen the fintech industry.