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The use of stocks to fund acquisitions is a form of buy-and-pay.Square, the financial technology company of American entrepreneur Jack Dorsey, announced that it will spend $29 billion of shares in Postpaid. Consumers use the Australian app to purchase goods on a credit sale with monthly installments. Afterpay shareholders will eventually own nearly one-fifth of the shares of its acquirer.
Square has become one of the big winners of the pandemic. Due to wider land payments, its stock price has nearly tripled in the past two years. New entrants with new technologies are taking market share from traditional banks, currency agents, and point-of-sale experts. The expanded Square will lead many challengers.
“Buy first, pay later” is the most hyped sub-industry of payment fintech. Here, Afterpay competes with competitors Klarna and Affirm. The brand names and networks of existing companies no longer constitute barriers to competition as before.
Square is known for its payment hardware system for mid-sized retailers. But its consumer-oriented Cash App quickly gained attention, allowing users to transfer funds, purchase stocks and cryptocurrencies, and set up bank transactions. Square stated that it can integrate Afterpay into its merchant and consumer sectors to further enhance its own network effect.
In the year that ended in June, Afterpay generated $700 million in revenue, which meant that the transaction multiple was more than 40 times. Square’s own market value is 110 billion U.S. dollars, which is close to the market value of Citigroup. The sharp increase in its stock price eased the dilution of the issued shares.
The dirty little secret of most upstarts in financial services is that they inevitably depend on the bank they are trying to usurp. Credit fintech companies such as Afterpay are an example. They rely on wholesale lenders to obtain the funds they need from wholesale lenders.
The real advantage that such fintech companies can provide is better applications that allow them to connect with a new generation of people who have little loyalty to JPMorgan Chase.
Square’s valuation is meaningless to mature companies-its price is 150 times the estimated earnings in 2021. This represents a belief of investors that Square can grab more and more money from incumbents. The stronger this belief, the greater the value Square can be used to realize this vision.
Lex recommends the “Due Diligence” newsletter of the Financial Times, which is a well-planned briefing on mergers and acquisitions.Click on here register.