Is Afterpay Worth Block (Square) $29 Billion M&A?

Afterpay

What happened?

On August 1, 2021, Block (ticker: SQ) announced a 30% premium to acquire BNPL’s vendor Afterpay (Australian stock code APT, ticker: AFTPY) at a sky-high price of US$ 29 billion. On that day, Block’s stock price soared by more than 11% in response. This is a rare anomaly that is different from common sense; because most corporate mergers and acquisitions will end in failure, and there are few successful cases. Wall Street will stage mergers and acquisitions of large and small companies every day. Generally speaking (there are few counter-examples), as long as the purchaser’s share price must fall sharply on the day the merger is announced, the acquired party’s share price must rise to close. Offer price (for corporate mergers and acquisitions, please see my discussion in section 4-1 and section 5-1 of my book “The Rules of Super Growth Stocks Investing”). Two weeks have passed since this matter, and this matter is still a highly discussed case on Wall Street, and it still occupies the global financial media. Even if you are not familiar with Block and Afterpay, you should pay attention to the meaning behind this merger.

BNPL is a new generation of payment trend

In order to attract end consumers who cannot afford their products or services, merchants must provide BNPL (Buy Now, Pay Later) installment payment methods. This is a way that people who do not have a bank account or who are not eligible for credit card applications can easily obtain loans and enjoy the benefits of buying things first and paying later. This is even more attractive to young people who are not paid, or young people who have just entered the job market. For example, students want to buy iPhones, young people want buyers to use treadmills; they can’t pay, they can only use BNPL. To learn more about BNPL, please refer to my blog “The most popular news credit method BNPL“.

The picture below is the 2020 Standard & Poor’s (ticker: SPGI) survey report on consumers of all age groups in Australia: light blue is the proportion of Australian population, dark blue is the proportion of the population using BNPL, and orange is the proportion of the population with credit cards.

Afterpay is the top three BNPL providers in the world. Although it is an Australian company, its main source of revenue is in the United States. Its main competitors are Affirm (ticker: AFRM), Klarna (not yet listed), QuadPay (not yet listed); it also has another rival ZipPay in Australia. According to a report by Techcrunch, the market share of these four major manufacturers is Afterpay 10%, Affirm 6%, Klarna 5%, and QuadPay 2%.

Similar services have been available in mainland China for a long time. The most famous ones are Huabei and JieBai of Ant Group under Alibaba (ticker: BABA), Baitiao of JD Technology under JD.com (ticker: JD), and Tencent (ticker: TCEHY) Financial’s FenFu.

As BNPL is the future payment trend, Apple (ticker: AAPL), Shopify (ticker: SHOP), Visa (ticker: V), Master (ticker: MA), PayPal (ticker: PYPL) have all entered this field.

Expansion of multinational business

Block has now entered Europe through mergers and acquisitions and expansion last year. But for the Asia Pacific countries that are the engines of future world economic growth, they have no operations at all. Using Afterpay’s operating points in Europe, Australia, and Asia Pacific countries, Block can expand and strengthen its existing European business, but can also immediately step into Asia Pacific countries, share this most important growth area in the future, and greatly expand Block’s operating scale.

Highly complementary to Block

Block’s main financial landscape is consumer finance and small and medium-sized enterprises, and few large-scale enterprises operate. The main customers and revenue of Afterpay are large-scale operating customers (Afterpay has 100,000 corporate customers and 16.2 million user accounts). Large-scale customers are in order to attract end consumers who cannot afford their products or services, must provide BNPL installment payment method. Using Afterpay’s existing customers, Block can immediately have a large number of large enterprise customer groups, which is an immediate source of revenue.

In addition, Block can integrate the BNPL installment payment method provided by Afterpay into its existing Cash mobile application platform and Seller’s ecosystem to expand existing services and increase customer stickiness.

In line with Block’s development direction

The main target group of BNPL is young people, which is exactly the same as the target group of the Cash mobile program. Afterpay’s corporate culture is similar to Block. The bigger advantage is that merchants in Block’s Seller ecosystem can integrate Afterpay’s BNPL service into their systems, POS machines, and even online e-commerce transactions, providing customers with more payment options and greatly increasing the percentage of successful transactions.

Afterpay

Afterpay concept image, from Afterpay

Flaws in the fly

All parties praised this transaction. But the only thing that has been most criticized by Wall Street is that Block obviously paid Afterpay too high a premium, which is too expensive. Afterpay’s annual revenue is only 700 million U.S. dollars, but Block paid a super high U.S. $29 billion, which is equivalent to a P/S value of 41.43 for Afterpay; Wall Street has almost never happened in similar mergers and acquisitions in the same industry (Imagine, Among the most popular listed companies in the U.S. stock market, only a handful of companies can enjoy a P/S valuation of 41.43 or more). In addition, because it is an all-stock transaction, the earnings per share (EPS) will of course be diluted in the future, resulting in damage to shareholders’ equity and the company’s financial performance.

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