Square / Afterpay: the emergence of a clear competitor to the major banks | World Weekly
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Using stock to fund an acquisition is a form of buying now, paying later. Square, the fintech of American entrepreneur Jack Dorsey, has announced that it is spending $29 billion of its shares in Afterpay. Consumers use the Australian app to purchase merchandise with credit repaid in monthly instalments. Pay-as-you-go shareholders will end up owning roughly a fifth of the company you’re acquiring.
Square has emerged as one of the pandemic’s biggest winners. Its share price has nearly tripled in the past two years thanks to a larger-scale land grab in payments. New entrants using new technology are taking market share away from traditional banks, money agents and point-of-sale specialists. The expanded arena will lead the group of competitors.
“Buy now, pay later” is the most popular sub-sector in the payments fintech space. Here, Afterpay competes alongside rivals Klarna and Affirm. Existing brand names and networks of companies are no longer barriers to competition as they once did.
Square is best known for its payment hardware systems for mid-size retailers. But the consumer cash app is quickly gaining traction allowing users to move money, buy stocks and cryptocurrencies, and set up banking transactions. Square says it can integrate Afterpay into both its merchant and consumer segments, enhancing the impact of its own network.
In the year that ended in June, Afterpay generated $700 million in profits, which means a transaction multiplier of more than 40 times. Square’s market value of $110 billion is close to that of Citigroup. The dilution of its share issuance is mitigated by the massive rise in its share price.
The dirty little secret of most financial services startups is that they are inextricably dependent on the banks they are trying to usurp. An example is financial credit companies such as Afterpay. They rely on wholesale lenders to obtain the necessary funds from wholesale lenders.
The real advantage that such financial technologies can provide are better applications that allow them to connect with new generations that have little loyalty to the likes of JPMorgan.
Square is asking for a no-nonsense valuation for a mature company — its price tag to 2021 estimated earnings is 150x. This represents the belief among investors that Square can get an increasing portion of payments from incumbents. The stronger this belief, the more valuable the equity box can be used to realize this vision.
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