Why Square’s $39bn bid is only the beginning for Afterpay

The following article featured on Livewire on August 2, 2021.

Buy Now Pay Later darling Afterpay (ASX:APT) has seen its share price soar today on news of an international takeover by US payments giant Square (NYSE:SQ), with the bid expected to close in the first quarter of calendar year 2022.

The company’s co-founders and co-CEO’s Anthony Eisen and Nick Molnar are supportive of the acquisition, and say it marks “an important recognition of the Australian technology sector”. While Square’s founder and CEO (who is also the CEO and co-founder of Twitter) Jack Dorsey said the partnership will see the companies “deliver even more compelling products and services for merchants and consumers, putting the power back in their hands”.

So how are fund managers reacting to the $126.21 per share bid? And could this put other BNPL darlings in play? We spoke to long-term investor Joe Magyer of Lakehouse Capital to find out.

Do you support Square’s bid for Afterpay?

We’re supportive and think the deal makes a lot of sense. Square brings scale, distribution, and a structurally lower cost of capital that Afterpay would never be able to match on its own, while Square will benefit greatly from leveraging those strengths to enhance the value of Afterpay. That’s why, in addition to being a lot of cheddar, it’s an all-stock deal and not all-cash.

No doubt Nick and Anthony, who along with the rest of the board supports the deal, would have spent considerable time discussing strategy and what a Square-owned Afterpay looks like.

I also think it’s a nice touch that Afterpay made sure that there would be an Australian listing so that the company’s longtime supporters wouldn’t have to deal with a foreign listing.

Is it likely that any other bidders will come out of the woodwork?

It’s possible but unlikely given the size of the deal and that Afterpay is such a natural strategic fit with Square. We had long viewed PayPal and Square as natural owners for Afterpay but after PayPal began to press hard on their own BNPL solution it struck us as unlikely.

Does this bid put other Aussie BNPL companies in play? Could we see further M&A activity within the sector over the coming months and years?

I think the deal validates that BNPL is here to stay. But if I was a smaller rival I wouldn’t necessarily be thrilled to hear this news.

First, Square’s sticking its neck out this far validates that Afterpay was the clear BNPL leader, no doubt to the disappointment of Zip, Affirm, Sezzle, and the myriad also-rans that have popped up.

Second, from a competitive standpoint, Afterpay is about to push even harder than before thanks to Square’s deep pockets and enthusiasm to prove this deal makes sense.

I wouldn’t be surprised if there was some consolidation among second-and third-tier players in BNPL but I think it would be done from a point of weakness rather than strength. If PayPal is going hard on BNPL and Square just bought Afterpay, it’s not obvious to me who would step up and write a big check for a far weaker competitor.

Lakehouse invested in Afterpay in early 2017. Are there any big lessons worth highlighting during your time as a shareholder?

There’s a lot to unpack with this one but I think there are two big takeaways for investors.

The first is the value of patience. Afterpay has sold down by more than 25% from its all-time high 6 times since its merger with Touchcorp closed back in 2017, which no doubt shook out many traders and investors who lacked patience.

Since the merger, though, the shares have returned around 43-fold. It was a wild ride but investors who kept their heads did very well.

The second is that you don’t have to be a professional investor to spot some winning ideas early.

In fact, some of the investors I know who did best in Afterpay weren’t pros but rather just smart, observant individual investors who took note of the company’s rising brand, popularity among shoppers and merchants, and the rapid sales growth that followed.

As fellow long-term holders, we couldn’t be any happier for them today.

Disclosure: The Lakehouse Small Companies Fund owns Afterpay. The Lakehouse Global Growth Fund owns PayPal.

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