Square CEO Jack Dorsey says acquiring Afterpay will drive more e-commerce activity across both services by more tightly connecting retailers with young shoppers, as he kicked off a pitch to encourage the US fintech’s shareholders to support the blockbuster $39 billion deal.
Mr Dorsey said Afterpay had a first-mover advantage in the crowded buy now, pay later sector and he had been drawn to co-founders Anthony Eisen and Nick Molnar’s ambition and “authentic” management style. Their leadership would help Square expand internationally and attract larger merchants, he added.
In a Square quarterly earnings call, which was delayed for 30 minutes due to technical difficulties, Mr Dorsey, who co-founded Twitter, pointed to Afterpay’s network effect.
“They were extremely early in this space and helped define a lot of it, and really raised the bar for what everyone else was doing. We were impressed by the vision, the ambition and the entrepreneurship,” Mr Dorsey said.
He told investors on the call that Square is “seeing strong demand for buy now, pay later from merchants and consumers and rapid adoption amongst both, especially younger consumers.”
Shares in Square surged 10 per cent overnight to $US272.38, taking the company’s market value to $US125 billion ($170 billion), as its second quarterly beat expectations.
Afterpay jumped 19 per cent yesterday to $114.80, a market value of $33.2 billion.
Many of the participants on the call wanted more detail on synergies, given concerns Square has failed to gel together the two sides of its business, which serves merchants and retail users. They wanted to know how Afterpay would create more value for the Square Cash App and its series of Seller services, which include offering credit.
Mr Dorsey said Afterpay would add to the “suite of tools for the merchant to allow them to focus on running the business”. That’s “pretty magical because it saves them a lot of time”.
Square shareholders also heard from Nick Molnar, who returned to the United States last month to finalise what would become Australia’s largest M&A deal at a record multiple for a significant company.
He was asked about rising competition and how Afterpay would help Square to take on Apple and PayPal.
Mr Molnar pointed to Afterpay’s ability to drive new business for retailers as a customer acquisition channel and said it made 1 million referrals a day with 16 million customers. It had done this by building trust after offering an alternative to traditional credit cards, “flipping the traditional credit model on its head”. Given Square’s 70 million Cash App users, he said he expected referrals to lift.
Square’s chief financial officer Amrita Ahuja referred to Afterpay’s “cohort economics”, where longer-term users pay via the platform more regularly, pointing to growing engagement with consumers.
The call was delayed due to technical difficulties due to an earlier time change, an announcer declared. It started 30 minutes late; during the wait, investors were played the music of Jay-Z, who is on the Square board.
Square released its second-quarter earnings on Sunday and reported it had processed $US43 billion in payments through Seller, which was up 86 per cent year-on-year and around 16 per cent above consensus estimates.
Its gross profit of $US1.14 billion was up 91 per cent. The Cash App generated gross profit of $546 million, up 94 per cent year-on-year.
Citi analyst Siraj Ahmed said the investment bank would not be surprised if another bidder emerged.
Square’s offer price is a 43 per cent premium to global payment/fintech peers on enterprise value to earnings multiples for 2022, with Afterpay growing at a faster rate. Citi is also pointing to the early stage of structural trends towards buy now, pay later/ instalment payments with Afterpay the market leader.
“Given that backdrop, while we would not be surprised at another bidder, especially from other fintechs and shopping/e-commerce platforms, we see the list of potential suitors as limited,” Mr Ahmed wrote in a note.
And looking at Afterpay’s fourth-quarter trading update, which was released at the same time as the blockbuster deal before the ASX opened on Monday, Mr Ahmed said US customer growth was softer than expectations, leading to a 12 per cent miss on consensus forecasts.
Among the biggest winners of the deal were shareholders of UK-listed Thinksmart, which sold Clearpay to Afterpay in 2019. Thinksmart retained a 10 per cent stake in Afterpay’s UK operation, which had not been fully valued by the market.
But the Square deal triggered the right for Afterpay to buy out those shares.
As a result Thinksmart, which was viewed as an arbitrage situation, popped 46 per cent on the London Stock Exchange in Monday trading.
This story originally appeared in the Australian Financial Review. Read the original story here.