On Sunday, August 1st, Square announced plans to acquire Afterpay, unifying two of the industry’s fastest-growing financial technology platforms. The announcement was the latest in a noteworthy year for Square. Prior to last Sunday’s announcement, Square established itself as a bank, announced plans to acquire Tidal, and invested $170 million in Bitcoin.Afterpay is an Australian-based company specializing in buy-now pay-later (BNPL) offerings. Square’s move to acquire Afterpay is its second big-ticket acquisition of 2021 after its definitive agreement to acquire Tidal, a global music and entertainment platform. The $297 million acquisition price of Tidal is dwarfed by Afterpay’s $29 billion purchase price. As of August 1st, the acquisition price places a 21.9% premium over Afterpay’s ten-day weighted average share price and is indicative of a 25X, 2021 run-rate revenue multiple. Afterpay allows Square to efficiently integrate consumer and merchant-facing payments and banking, accelerating growth in the U.S. and globally. The acquisition is deeply synergistic, providing substantial cross-selling upside due to minimal geographic overlap between the two companies’ customers. Presently, Cash App, another offering in Square’s ecosystem, has a strong footprint in southern portions of the U.S., while Afterpay’s customer base is largely concentrated in the coastal regions. Regardless of the geographic differences, Square’s CEO Jack Dorsey believes both companies have a common purpose: to democratize access to financial services. The deal is anticipated to close in the first quarter of 2022.The acquisition announcement coincided with an earlier than expected release of Square’s Q2 earnings. The company’s earnings report highlighted continued strength in Cash App, with the platform achieving 40 million active monthly customers. Square beat analyst estimates on earnings per share but failed to meet revenue targets, which was attributable, in part, to a decrease in bitcoin (BTC) related revenue. Compared to Q1, Q2 BTC revenue fell 23% to $2.72 billion. Square also took a required $45 million impairment loss on their existing BTC holdings, given the cryptocurrency’s significant price decline from this year’s earlier all-time high. The company’s reliance on and investment in bitcoin has been called into question throughout the past year. Given the cryptocurrency’s volatility, and the imminent regulatory scheme being pushed from the Department of Treasury and the SEC, Square’s BTC investment can be reasonably viewed as a headwind to its go-forward financial performance. It’s worthy of note that the market’s positive reaction to the Afterpay acquisition follows a warm reception for Apple’s recent BNPL news of Apple Pay Later. The recent “land grab for [BNPL] market share” noted by Klarna’s CEO Sebastian Siemiatkowski highlights the appeal of BNPL as both public and private capital continues to chase the major players. Apple followed up on Apple Pay Later by announcing a partnership with PayBright, a subsidiary of Affirm company, on a BNPL solution for Canadian customers purchasing Apple products. Apple is planning a rapid rollout of the partnership beginning August 11, 2021. Competition within the BNPL space will continue to intensify as the short-term consumer loans are normalized, and demand for BNPL services grows. At this writing, the service represents only 2% of all payments transactions.
