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PayPal’s $2.2 billion Acquisition of iZettle


Overview of the deal

  • Acquirer: PayPal

  • Target: iZettle

  • Estimated value: $2.2 bn

  • Announcement date: 05/18

  • PayPal Advisors: Evercore

  • - iZettle Advisors: J.P. Morgan

Several nights before iZettle was primed and prepped to list on Nasdaq Stockholm Stock Exchange, which would give the company a valuation of $1.1 bn, PayPal, who has been in contact with iZettle for many years, came in with an offer double of that valuation.

PayPal’s offer was all cash and is expected to close in Q3 2018. This acquisition has confirmed that PayPal is looking to expand into an increasing number of markets, predominantly Northern Europe and Mexico. iZettle’s flagship card-reading dongle is the centre of its point-of-sale business which PayPal are looking to exploit to break into the market for offering services to small and medium sized merchants – which make up the majority of iZettle’s point-of-sale service customers.

The move signals consolidation in a market with some competition, with the likes of Square and Stripe. iZettle is added to a list of recent acquisitions by PayPal including Xoom and Braintree’s Venmo business, which aim to augment the current product offerings of PayPal across the globe.

“iZettle and PayPal are a strategic fit, with a shared mission, values and culture -- and complementary product offerings and geographies.” -Dan Schulman PayPal CEO

Company details (PayPal)

PayPal is a pioneer in online money transfers, operating worldwide. The firm primarily operates a payments processor for online vendors, auctions sites and other commercial users.

- Founded in 1998, headquartered in San Jose, California

- CEO: Dan Schulman

- Number of employees: 18,700

- Market Cap: $96.9 bn - EV: $92.8 bn

- LTM Revenue: $13.8 bn - LTM EBITDA: $3.0 bn

- LTM EV/Revenue: 6.7x - LTM EV/EBITDA: 31.1x

Company details (iZettle)

iZettle is a Swedish payments start-up specialising in small businesses. They offer several financial products including point of sales and funding applications but are known primarily for their portable credit card readers.

- Founded in 2010, headquartered in Stockholm, Sweden

- CEO and co-founder: Jacob de Geer

- Number of employees: 230

- Market Cap: N/A - EV: $2.2 bn (Assumed from deal value)

- LTM Revenue: $113 m - LTM EBITDA: -$27 m

- LTM EV/Revenue: 19.5x - LTM EV/EBITDA: -81.5x

Projections and assumptions

  • Short-term consequences

iZettle operates in Northern Europe, Mexico and Brazil (12 countries in total) where PayPal does not have an extensive presence, not to mention that the deal will give PayPal access to an estimated 500,000 businesses who are currently using iZettle.

Further, in 2012 PayPal launched PayPal Here, a payment system for small businesses including a small card-reader that plugs into a smart phone. iZettle offers a similar but more successful business, their flagship point-of-sale card reader. The integration of these systems could provide significant back-end synergies for cost saving on the expensive and comprehensive back-end infrastructure that support these currently independent services. We would expect to see the integration of these services to quickly feed through to reducing iZettle’s operating loss (-$26 m in 2017).

Jacob De Geer, current iZettle CEO, will to head up the company under PayPal, which facilitates minimal disruption which will be integral to this deal not hurting iZettle’s existing strong brand recognition.

The deal is expected to be dilutive to PayPal’s full year 2018 non-GAAP earnings by $0.01 per share. Moreover, iZettle’s revenue in 2018 is expected to be $165 million and total payment volume to be $6 bn. Despite not yet returning a profit, iZettle projects positive EBITDA by 2020.

  • Long-term upsides

In the longer term PayPal must position itself to fight its competitors Stripe and Square, and by expanding its services through iZettle it looks in a better position to do so. Stripe offers a similar service to PayPal's primary product, an online payment service, whereas Square offers an integrated online and point-of-sales payment system. With the acquisition of iZettle PayPal will finally have a successful point-of-sales system that can compete with the likes of Square and Stripe (who are likely to also expand into the online service space to create integrated services).

The only market which Square and iZettle directly compete in for point-of-sales customers is the UK. iZettle has a dominant position in much of Western Europe, Brazil and Mexico, and Square only in Canada, Japan and Australia in addition to their UK presence.

Because of the lack of market overlap between Square and iZettle this will allow PayPal to leverage market power to further expand into Europe, especially in those countries where PayPal has a strong presence. More importantly, because of PayPal’s strong position in other large markets like the Americas and Asia, iZettle will be able to penetrate and expand into them much more efficiently using this established infrastructure. Establishing presence in these regions is key to squashing competition from Square and Stripe.

Risks and uncertainties

Unlike many transactions with abnormally high premiums paid (this implied premium was 100% vs. an average in tech acquisitions last year of 33%) integration does not seem like and issue as both parties have come out to say the deal brings value to both companies and they have an aligned vision, plus communications between the two firms have been ongoing for a number of years.

The risk here lies wholly in further product integration. Currently, Square has integration between its offline card processing service and its online payments service (essential for businesses with online and offline presence). If PayPal cannot offer a competing service it will be alienating a large part of the commercial market that requires this integration. This is worrisome as PayPal has thus far failed to develop sufficient traction for PayPal Here, its own brand in-store payment service. Moving forward the integration of these two products, or the reallocation of resources to iZettle, is key to stymie the widespread adoption of Square’s integrated service.

Do also note that there should be no unforeseen regulatory hurdles because PayPal is not acquiring a competitor for its main product space, but expanding into product offerings that multiple other companies currently offer.

“The deal is likely to fuel anxiety over how few of the prospects in European technology resist the urge to sell out and instead try to develop into big companies to rival their US competitors” -The Financial Times

© The MergerSight Group. 2018. All rights reserved.


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