It is not news that the buy-now-pay-later space is the hottest vertical in fintech. With three companies, Afterpay, Klarna and Affirm all valued well into ten figures, albeit at monstrous multiples, you can’t argue with the huge growth the sector has seen over the last 18 months. Square CEO Jack Dorsey thinks that growth has a long way to run.
Late yesterday (Monday morning Sydney time) Square announced they are planning to acquire Afterpay in an all-stock deal that values the BNPL leader at $29 billion, a 39% premium over its last closing price on the Australian Stock Exchange. Afterpay is the most valuable tech company in Australia and the deal, assuming it closes, will be the largest M&A transaction in Australian history.
It is hard to overstate how dominant Afterpay is in Australia. I have visited my hometown of Sydney pretty much every year over the last decade (I missed 2020, obviously) and I have seen the growth of Afterpay firsthand. From a fringe product a few years ago it is now ubiquitous in retail stores and the word “Afterpay” has become a verb among the Gen-Z crowd. In Australia and New Zealand one in seven adults have an Afterpay account. Globally, the company has 16 million customers and 100,000 merchants.
In my interview with CEO Nick Molnar at LendIt Fintech USA in April he talked about the shift from the credit economy to the debit economy as consumers look to move away from credit cards to more responsible spending. It is that shift that Square is looking to capitalize on. Square CFO Amrita Ahuja said that online payments will hit $10 trillion by 2024, so when viewed through that lens the BNPL space has a long way to run. The entire industry represents around 2% of payment volume right now.
This will be the biggest acquisition in Square history. With a market capitalization of around $115 billion, $29 billion represents a big chunk of the company. Afterpay shareholders will receive 0.375 shares of Square stock for each Afterpay share they own that will result in around 18.5% of the combined company.
How Square Views This Opportunity
Jack Dorsey made the following official statement on the acquisition of Afterpay:
Square and Afterpay have a shared purpose. We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles. 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.
Square started as a tool for merchants to accept credit cards but in recent years their consumer offering, Cash App, has been the fastest growing part of their business. They reportedly have 70 million Cash App users that use the app for debit card purchases, sending money as well as investing in stocks and cryptocurrencies. But they had no BNPL option for these users and they clearly saw this as a hole in their offerings.
Afterpay gives them a way to better integrate the two sides of their business. The millions of Square merchants will now be able to offer a seamless BNPL option that has been shown to increase conversion rates. Afterpay will “enable customers to manage their repayments, and help customers discover new merchants when the Afterpay App is integrated into Cash App.”
Early this morning Square conducted their Q2 earnings call with Nick Molnar joining the call. Nick addressed the acquisition saying that in many ways the Square and Afterpay teams have led parallel journeys with a focus on building greater financial wellbeing. Nick said the more they talked with the Square team they were struck by how similar their values and culture were. There was a unique alignment with their customer bases with both companies having a deep understanding of Gen-Z and Millennial consumers.
Nick and co-founder Anthony Eisen will be staying on to run Afterpay post acquisition and when asked directly about his plans Nick said he is looking forward to “taking the partnership long into the future”.
When Jack was asked about the synergies in this acquisition he pointed to the integration between Square’s merchants and Cash App users. He has said for a while now they wanted to do more to connect the two and he sees Afterpay as a way to do just that. He also said that the Square team appreciated the entrepreneurial and innovative culture within Afterpay and the fact that this will give Cash App customers a new payment capability. Nick added that the merger will bring 70 million new customers to Afterpay merchants.
Much was made about the engagement of Afterpay users. The top 10% of customers use Afterpay 30 times a year in the US and in Australia that number is 60 times. This strong engagement is another reason Square was attracted to Afterpay.
My Take
When I first heard about this deal last night, I just thought, “Wow! This is a monstrous deal”. Not only is this the first ten figure deal in fintech it is the first fintech-fintech megadeal. I have been thinking for some time that these BNPL companies were too highly valued for an acquisition. But with Afterpay down over 40% from its all time high in February it became a more attractive target.
This deal makes perfect sense for both companies. Square gets a fully baked BNPL offering and a business with strong growth serving a complementary consumer. Afterpay gets access to not just the huge Cash App customer base but also to the huge merchant base of Square many of which will be very receptive to offering a BNPL option for their customers.
While the credit card companies are all doing very well right now I wonder if we have reached “peak credit card”. So many consumers are looking to rein in their credit card spending and moving to more responsible alternatives. Afterpay’s simple four-installments payment option is an attractive option for consumers. I could easily see this becoming a much bigger part of the payments ecosystem in the coming years with 20% or more of payments being done this way. This will really eat into the credit card industry.
It was curious to me that I didn’t hear a whisper about this deal happening, both Square and Afterpay were very tight lipped about this massive deal. Of course, the acquisition has to pass regulatory approval but I don’t expect that this to be a major hurdle as both companies operate in competitive spaces. The deal is expect to close in Q1 2022.
