By Adil Amlaiky, Anish Umasuthan, Greta Horn, and Blake Dal Santo (McGill University), and Jonathan Fuchs and Thushara Kantimahanti (London School of Economics)
Photo: Christiann Koepke (Unsplash)
Overview of the deal
Acquirer: Square, Inc.
Target: Afterpay Limited
Total Transaction Size: $29 billion
Closed date: Pending
Acquirer advisor: Morgan Stanley
Target advisor: Goldman Sachs, Qatalyst Partners
Jack Dorsey’s Square plans to acquire Australian fintech Afterpay in an all-stock deal, in an effort to capitalize on the growing popularity of buy now, pay later (BNPL) among consumers worldwide. Particularly popular among younger demographics, these plans typically allow users to circumvent cumbersome credit checks and spread the cost of their purchases over a series of interest-free installments. The demand for these plans has prompted competitors such as Monzo, PayPal, and Revolut to explore expansion opportunities into the rapidly-growing BNPL market.
Afterpay is a trailblazer in the BNPL trend, with over 16.2 million global users, easily making it a leader among pure-pay BNPL providers. With Square’s sights set strategically on Afterpay, this move could prove to be highly effective in a $10 trillion global online payments market, within which BNPL technology has only managed to capture 2% of the total industry. Square plans to introduce Afterpay to its CashApp, which already has over 70 million active users annually. The transaction is subject to customary regulatory compliance as well as shareholder approval of both companies. If successful, this transaction has the potential to shake up the online payments industry and make BNPL a household name.
“The combined investment expertise and scale will enhance the service offering to NN Investment Partners’ clients, including NN Group” - David Knibbe, CEO (NNIP)
Company Details: (Acquirer - Square Inc.)
The Goldman Sachs Group, Inc., is an American multinational investment bank and financial services company. It offers services in investment management, securities, asset management, prime brokerage, and securities underwriting across its 20 divisions.
Square, Inc, headquartered in San Francisco, California, is an American financial services and digital payments firm founded in 2009 by Jim McKelvey and Twitter founder Jack Dorsey. The company launched its first platform in 2010, enabling its sellers to accept credit card payments. There are two key segments to Square, Inc: Seller and Cash App. Seller provided various managed payment services, software solutions, hardware and financial services products to vendors for use within their businesses, while Cash App allows for peer-to-peer payments, Cash Card transactions, bitcoin, and stock investing that simplifies the sending, spending and storing of money.
Founded in 2009, headquartered in St. Louis, Missouri
Number of employees: 5477 (2020)
Market Cap: $112.90B (as of 10/09/2021)
EV: $114.54B
LTM Revenue: $15.93B
LTM EBITDA: $433.27M
LTM EV/Revenue: 7.19
LTM EV/EBITDA:264.37
Company Details: (Target - Afterpay Limited)
Afterpay is an online installment payment program which has been operating in the United Kingdom, New Zealand, and the United States over the last few years. It was also officially launched in Canada as of August 2020. It is particularly popular with millennial consumers, who seem to appreciate the use of debit cards to pay for purchases to avoid credit card debt, in addition to the ease of use and simple payment process without additional interest or fees beyond the initial price of the product. Afterpay also reported that they are currently working with over 64,000 retailers worldwide, as of January 2021.
Founded in 2014, headquartered in Melbourne, Australia
CEO: Anthony Eisen
Number of employees: 696
Market Cap: $36.833B (as of dd/mm/yyyy)
EV: 36.83B
LTM Revenue: $836.05M
LTM EBITDA: $-42.468
LTM EV/Revenue: 44.05
LTM EV/EBITDA: -867.24
Projections and Assumptions
Short-term consequences
In the short term, both shareholders and the company structure is greatly impacted. Each of Afterpay’s shareholders will receive 0.375 Square Class A shares and will also be given the option to pay for up to 1% of the transaction in cash. Afterpay’s two founders, Nick Molnar and Anthony Eisen, will be joining Square and continue to run the brand through its integrations with CashApp and Seller. Further, Afterpay will be given a seat on Square’s board post-closing.
Additionally, both companies’ consumer bases will be strengthened—both via consumers and merchants. Afterpay will have access to Cash App’s 70 million customers as well in addition to Square’s merchant base. On the other hand, Square will be able to attract new sellers with BNPL as an acquisition tool. Both companies will be able to grow in new geographies.
Finally, this acquisition will allow both companies to strengthen their product offerings and build connections. For example, Afterpay consumers will be able to receive the benefits of Cash App’s ecosystem, including P2P, stock brokerage, Bitcoin, taxes, and more. Likewise, Square’s Cash App ecosystem will benefit from the addition of Afterpay BNPL, which can help attract a new category of users.
Essentially, through this acquisition, Square and Afterpay utilize each other’s competitive advantages to attract new consumers, enter new markets, and send shockwaves through the global payments industry. This strategic move is bringing major changes to both companies in the short-run, proving itself to be a successful strategy in making Square even larger within the market.
Long-term Upsides
Square hopes to achieve revenue synergies by cross-selling its 30+ products to Afterpay’s merchant and consumer ecosystems. Afterpay’s BNPL product will help smooth sales for Square merchants and consumption of customers. Thus, Square envisions Afterpay to strengthen the bridge between its Seller and Cash-App ecosystems in order to drive commerce between sellers and customers.
Afterpay is also expected to boost the combined company’s growth. Afterpay’s YoY gross profit growth of 96% in the 12 months ending July 2021 exceeded that of Square (71%) so that the transaction is expected to be accretive to gross profit in the first year after closing even excluding any synergies. Excluding synergies, the combined company’s Adjusted EBITDA is expected to dent slightly in the first year post closing. Nevertheless synergies and investments in strong unit economics are expected to drive EBITDA higher in the longer term.
Risks and Uncertainties
While the Square-Afterpay deal may seem like an attempt to introduce Buy Now, Pay Later (BNPL) services to the one-stop personal finances manager that is Cash App, one may question if it really takes a $29bn all-stock transaction to do so. Taking a closer look at the demographics of Afterpay users, we see that BNPL users are in a better financial position than Square Cash App Users. According to Cornerstone’s research, 66% of Cash App users earn less than $50,000 a year, compared to just 43% in the BNPL community. On the other hand, just 13% of Cash App users earn over $100,000 a year, compared to 31% of BNPL users. The success of this acquisition will be contingent on the flow of customers from the Afterpay platform to its Cash App ecosystem. As Square integrates Afterpay in its Seller and Cash App, it remains to be seen how many Afterpay customers will download Cash App and remain loyal to the platform. For Square merchants, having more sticky customers who have the ability to spend means more revenue and reliance on the Square platform. Like most of the fast moving consumer goods world, the network effect, if triggered, will be self-reinforcing. Taking a step back, the first hurdle to clear will be the completion of the deal itself, which remains to be seen given that ‘speed dating’ between BNPL platforms and potential partners is picking up and a competitor may just surprise everyone with a better offer.
“Together, we can better connect our Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.” - Jack Dorsey, Founder and CEO of Square