Afterpay co-founders Anthony Eisen (left) and Nick Molnar. Photo / Supplied
Afterpay co-founders Anthony Eisen (left) and Nick Molnar. Photo / Supplied
Opinion
OPINION:
In 2014, Nick Molnar and Anthony Eisen, neighbours in Sydney's ritzy harbourside suburb of Vaucluse, joined forces to work on a new business idea.
They wanted to cater to millennials' aversion to credit card debt and interest repayments by building an app that allowed consumers to pay for purchaseswith four interest-free repayments.
Thus was born Afterpay, the buy now pay later app that last week sold to US payments company Square for A$39 billion ($40.8b).
From zero to A$39b in shareholder value in just seven years is an extraordinary feat and demonstrates Molnar and Eisen's good timing in tapping into an emerging consumer trend, pairing it up with marketing and a user experience targeting millennials.
It's an extraordinary price. Afterpay has never made a profit and never paid a dividend.
The deal is pitched at 42 times current sales – a record sale price for a top 20 Australian company.
Selling the company to Square is the second example of good timing by the founding pair.
Afterpay was a pioneer of the buy now pay later phenomenon, and had the market largely to itself for several years. But its success in attracting millennial customers over the past couple of years has prompted others to join the market, namely Apple and PayPal. These companies have a scale that Afterpay simply couldn't compete with, particularly in the US, where it had made impressive but only modest inroads.
So selling now makes sense for the founders, who each walk away with A$2.7b worth of shares in Square.
It also makes sense for Afterpay itself. With a market capitalisation of US$130b ($184.4b), Square has the heft to see off challenges from tech and payment behemoths.
The company, founded by Twitter founder Jack Dorsey, started as a facilitator of payments for retailers. Australians and New Zealanders would be most familiar with the company through the little white square boxes that small retailers or local markets plug into their cellphones to take credit card payments.
But Square also has a consumer business, its Cash App, which lets consumers pay, send and store money. This is where Afterpay will slot in.
Afterpay currently has about 16 million customers. Once it is incorporated into Square's Cash App, it will have access to another 70 million. Additionally, the number of retailers offering the service will grow from about 100,000 to potentially millions.
The deal needs shareholders' support, but this shouldn't be a problem.
The sale is pitched at A$126.21 per share, a 30.6 per cent premium to Afterpay's closing price on Friday of A$96.66, although the A$160 a share the stock reached in February.
Afterpay was a pioneer of the buy now pay later phenomenon. Photo / Afterpay
Importantly, however, it's an all-scrip deal, meaning Afterpay shareholders will receive shares in US-listed Square in exchange for their Afterpay shares. Those who want out can sell their Square shares – or even sell their Afterpay shares before the deal is consummated.
But those who believe the global buy now pay later trend is just getting started – and why wouldn't you when you see Afterpay currently has just 16 million customers – can hold onto their Square shares, secure in the knowledge Afterpay will now have the resources and scale to expand on a massive scale.
And Square itself still has a lot of potential expansion left in it.
Excluding China, PayPal controls 11 per cent of the world's payment systems; payments architecture company Stripe has 4 per cent, while Square has just 0.5 per cent.
Molnar and Eisen clearly remain committed to the business they founded. They will both stay on to lead Afterpay inside Square, which should give investors comfort, given their deep knowledge of the business and the success they have had thus far.
Deal bonanza
The Afterpay takeover is the latest deal in an M&A bonanza that is lining the pockets of investment bankers and corporate lawyers.
With interest rates likely to stay at all time lows for the foreseeable future, investment funds around the world are looking for better returns than the near zero yields that cash and bonds are paying.
Additionally, many Australian companies have a lot of cash sitting on their balance sheets and a lot of borrowing capacity, increasing their firepower to launch takeovers. They went into the Covid-19 pandemic with strong balance sheets, raising more cash from investors and securing their lines of credit to help see them through the pandemic. In most cases, the pandemic didn't affect them as badly as affected as they had anticipated, leaving them flush with funds.
Attention is now turning to which companies in the tech space might next be in investors' sights.
In the buy now pay later market, smaller players Zip Co and Sezzle could become more attractive takeover targets in the wake of the Afterpay deal, the biggest takeover in Australian history.
