Square and Afterpay: A Different Kind of Takeover That Places 2 Disruptors Under the Same Roof (ANALYSIS)

Last Updated on August 6, 2021

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Square Inc has announced that it is buying Afterpay Ltd for $29 billion.  Square (NYSE: SQ), created by Jack Dorsey and James McKelvey in 2009 to provide merchants with magnetic stripe card readers, expanded with the launch of its Cash App in 2013, allowing person-to-person transfer via the app or website. Early in 2018, the company modified the app to allow users to send and receive bitcoin.

The older line of business, centering on the readers, is referred to internally as the “Seller ecosystem.” 

McKelvey served as chairman of the board until 2010, and is still on the board, though Dorsey is now its chairman, as well as the chief executive. 

Square’s New Venture

Square has been the buyer of many target firms in its brief tumultuous life. In April 2018 alone it made two strategic purchases: one of a food delivery service catering to corporate offices, the other of a website building service.

But the new announcement, on August 1, represents a different sort of takeover for Square. It brings two distinct disruptors of consumer payments under the same corporate roof.     

The U.S. $29 billion (A$ 39 billion) is the estimated value of the all-stock transaction, one which the parties expect will close by March 2022. Afterpay shareholders will receive Share common stock, leaving then with 18.5% of the combined business. 

The target, Afterpay Ltd. (AX: APT) is a Melbourne, Australia based concern, founded in 2014,  that  expanded into the U.S. retail world in 2019. This brought it into competition with Affirm. 

Afterpay’s Business Model

The business model that Afterpay and Affirm pioneered appeals to younger consumers because it is smartphone based, simple, and requires no credit check. The payments firms offer point-of-sale loans to shoppers. The merchants pay Afterpay a percentage of the value of each order placed, and a fixed fee. 

This buy-now-pay-later business has been fueled by the pandemic. Tech savvy consumers have been stuck at home and shopping has become one of their preferred at-home pastimes.

If a shopper misses a payment, there is a penalty fee and the account is locked (no more BNPL purchases) until payments are caught up. Afterpay says that this has been effective in limiting bad debts. 

The Afterpay acquisition does not constitute Square’s first-ever move into the installment-credit business. It experimented with offering financial options to consumers in 2017. But that service never caught on. 

In a social media post, Dorsey said that after the closing, “Afterpay will not operate as a separate business unit, but rather will be integrated into Seller, Cash App, and foundational teams. [This] mirrors the customer experience we want to build together: a simple tool for sellers to increase omnidirectional sales and discovery and new payment options for individuals right in cash app.”  

Square, in buying what it could not itself build, raises the question: is this a real synergy, valuable to the shareholders? Or is it empire building, value chiefly to the egos of managers of the acquiring firm? 

Synergy or Dilution?

Critics will say (already have suggested) that the deal offers the owners of Afterpay shares too much of the equity of the combined concern, diluting the holdings of the existing shareholders. 

Grist for that argument may be found in the stock chart Afterpay’s US rival, Affirm. Affirm went public in January, and started trading right out of the gate at $117. Over the following four months it floated steadily downward. It has been on the southern side of $70 since May 3. 

Afterpay has been in the public markets longer than Affirm. But its stock chart for this year shows that, at least until just before the announcement, until the July 30 close, Afterpay too has been trending downward. It opened the year at $91.16 and ended July at $70.84. 

It would be far too hasty to leap from such stock prices to assume that the business model has passed its prime. But it isn’t too much to suppose that the easiest pickings have been picked.