What’s going on?

Square (US payments giant) announced their plan to buy Afterpay (Australian fintech) for $29bn.

What does this mean?

Afterpay

• Afterpay is a buy-now-pay-later company that lets customers spread the cost of an online purchase over a period of time. If customers make payments on time, they don’t have to pay interests on them;
• This is an area that’s gone viral recently, which had more than tripled since the start of the pandemic (according to Adobe Analytics);
• Afterpay now has over 16 million customers and its 2020 revenue was $693m.

Square

• Square hopes the deal will boost both its consumer and business segments.
  • Customer segment: there’ll be more people in the network who Square could induce to use its money transfer service – Cash App.
  • Business segment: since Square’s business customers will have more customers to offer payment options, its business-segment revenue will increase too.

Why should I care?

For markets: Market reaction is as expected

• The transaction is 100% made with stock at 0.375 Square per Afterpay share;
• That might’ve made sense to Square’s leadership, given that its stock has doubled in the last year. However, as expected, the acquirer’s stock actually fell after the announcement.

The bigger picture: The industry’s proving its unfulfilled potential

• The transaction represents a 42x P/S multiple, which might seem high in comparison with some deals:
  • Klarna (Swedish rival) was valued at 38x multiple (valuation of $46b in June with 2020 revenue of around $1.2m).
  • America’s Affirm was recently valued at roughly 20x multiple.
• Investors have noticed this to send Afterpay’s shares up 6% following the announcement.

Content source: Finimize (2021) Happily Ever Afterpay. Available at: https://www.finimize.com/wp/news/happily-ever-afterpay/ [Accessed on Aug 08, 2021]