Square Agrees To Acquire Afterpay For $39 Billion
Becoming the largest acquisition in Australian history.
Becoming the largest acquisition in Australian history.
Square Inc. has agreed to an all-stock deal worth around $39 billion to acquire Afterpay Ltd., an instalment-payment company that positions its service as a cheaper and more responsible alternative to a credit card.
The deal illustrates how financial technology companies want to challenge big banks by using scale to offer more products and take advantage of shifts in consumer behaviour that have been accelerated by the Covid-19 pandemic.
Square said a key attraction of the deal was a growing wariness toward traditional credit among younger consumers, a group that has been particularly hard hit by the pandemic as lockdowns to contain the spread of the coronavirus crushed many hospitality and casual jobs.
Afterpay’s technology allows users to pay for goods in four, interest-free instalments, while receiving the goods immediately. Customers pay a fee only if they miss an automated payment, a transgression that also locks their account until the balance is repaid. Australia-based Afterpay, which is yet to turn a profit, says this limits bad debts, particularly in a downturn when job security is shaky and household finances are stretched.
Most of Afterpay’s revenue comes from retail merchants, which pay a percentage of the value of each order placed by customers, plus a fixed fee.
“Square and Afterpay have a shared purpose,” said Jack Dorsey, Square’s chief executive. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”
U.S. consumers flocked to buy-now-pay-later services like Afterpay during the pandemic and shunned credit cards. But credit cards appear to be coming back in favor. Demand for general-purpose credit cards rose sharply in April compared with the same period last year, according to credit-reporting firm Equifax Inc. Lenders issued more general-purpose credit cards than any other March going back to at least 2010, Equifax said.
The Afterpay deal is Square’s biggest ever. Square has been looking for ways to tie its Cash App and seller ecosystems more closely together, Mr. Dorsey said on a call with analysts earlier this year.
The Afterpay deal is a big step in that direction. Square, best known for its signature white card reader that plugs into phones and tablets, plans to add Afterpay as a financing option through the smaller merchants it serves. Afterpay customers will be able to make payments on their instalment loans through Cash App, Square’s digital payment services that allows people to store and transfer money like they would at a bank. And Cash App customers, Square said, will be able to use the app to find merchants that offer Afterpay’s buy-now-pay-later financing.
Cash App’s growth exploded over the past year, largely the result of a flood of pandemic stimulus payments. Users deposited their stimulus checks with Cash App, and then used the service to send money to friends and family, make purchases online with their Cash App debit cards and buy bitcoin and stocks through Cash App Investing.
In June, Cash App reached 40 million monthly transacting active customers. The Cash App business had gross profit of US$546 million in the second quarter, the company said in an earnings report released ahead of schedule Sunday. That is a 94% increase over the second quarter of 2020 and just shy of the $585 million gross profit Square’s bread-and-butter seller business recorded in the second quarter. (Gross profit is revenue minus the cost of goods or services sold, excluding taxes and other fixed costs.)
Instalment lending isn’t an entirely new business for Square. In 2017, the company began offering financing options to consumers through its business clients that also used Square to send and manage their invoices. But the service never really took off.
Afterpay, Australia’s largest tech company by market capitalization, said the deal implies a value of around 126.21 Australian dollars, equivalent to $92.66, for each of its shares, representing a 31% premium to its closing price on Friday.
Afterpay said its shareholders will receive 0.375 share of Square Class A common stock for each Afterpay share that they own. It expects Afterpay shareholders will own around 18.5% of the combined company when the deal completes.
“The Square-Afterpay transaction looks close to a done deal, in the absence of a superior proposal,” said Phillip Chippindale, an analyst at Ord Minnett, an Australian investment bank. “The strategic rationale for the business combination is sound in our view.”
Afterpay was co-founded in 2014 by Nick Molnar, a jeweller’s son who wanted to break a cycle that involved some people getting deeper into debt with credit cards that they later struggled to pay off.
“I had just turned 18 and I was told, ‘Don’t spend money you don’t have,’” Mr. Molnar told The Wall Street Journal last year, recalling an era of bank bailouts, company collapses and residential repossessions.
Afterpay is Mr. Molnar’s second business foray. The 31-year-old first sold jewellery to school friends, learning lessons he later used to launch U.S. online jeweller known then as Ice.com in Australia.
Afterpay has been expanding across the U.S. through deals with retailers including Anthropologie and Free People. In Australia and New Zealand, 3.6 million people—more than one in seven adults—have an Afterpay account.
Mr. Molnar and co-founder Anthony Eisen said combining with Square will accelerate Afterpay’s growth in the U.S. and globally. The company’s growth has attracted larger payments companies to push into the buy-now, pay-later sector. PayPal Holdings Inc.’’s so-called Pay-in-4 product mimics Afterpay in that it allows shoppers to pay in four, interest-free instalments, but it is cheaper for merchants than Afterpay.
Heightened competition could give merchants more bargaining power over fees, while many analysts think Afterpay’s growth will start to attract more scrutiny from regulators.
Afterpay skirts the definition of a loan under some U.S. laws so it isn’t subject to the same regulation. The state of California reached a settlement with Afterpay in April last year, however, over what it said were illegal practices, requiring the company to refund $900,000 to consumers.
Rising competition has led Afterpay to trial new products that it hopes will prevent merchants and customers from switching providers. In June, Afterpay introduced a loyalty program and said it will launch an Afterpay-labeled bank account in October in partnership with Westpac Banking Corp., Australia’s second-largest bank. Analysts say linking repayments to a bank account will reduce the slice of transactions collected by credit and debit card companies, supporting margins.
Mr. Molnar said he got to know Mr. Dorsey through his philanthropic activities, while Square’s chief financial officer, Amrita Ahuja, was an early contact after he moved to San Francisco. Talks began over a partnership with Square, but later progressed to a takeover, he said.
“I feel we’ve lived parallel lives as entrepreneurs,” Mr. Molnar told The Wall Street Journal after the deal was announced. “To see an opportunity of millions of Square sellers as well as 70 million active Cash app consumers to be added to the portfolio of how we drive growth together, it’s an incredibly exciting opportunity.”
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: August 2, 2021.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Supplier Foxconn plans to build more factories and give India a production role once limited mostly to China
Apple and its suppliers aim to build more than 50 million iPhones in India annually within the next two to three years, with additional tens of millions of units planned after that, according to people involved.
If the plans are achieved, India would account for a quarter of global iPhone production and take further share toward the end of the decade. China will remain the largest iPhone producer.
Apple has gradually boosted its reliance on India in recent years despite challenges including rickety infrastructure and restrictive labor rules that often make doing business harder than in China. Among other issues, labor unions retain clout even in business-friendly states and are pushing back on an effort by companies to get permission for 12-hour work days, which Apple suppliers find helpful during crunch periods.
Apple and its suppliers, led by Taiwan-based Foxconn Technology Group, generally believe the initial push into India has gone well and are laying the groundwork for a bigger expansion, say people involved in the supply chain.
Apple is emblematic of a move among companies worried about over dependence on China to move parts of their supply chains elsewhere, most often to Southeast Asia and South Asia. Diplomatic efforts by the U.S. and its allies to block Beijing’s access to advanced technology and strengthen ties with New Delhi have accelerated the trend.
The first phase of a Foxconn plant under construction in the southern state of Karnataka is expected to start operating in April, and the plant aims to make 20 million mobile handsets annually, mainly iPhones, within the next two to three years, said people with direct knowledge of the construction plans.
A further iPhone-producing mega plant is on Foxconn’s drawing board with capacity similar to the one in Karnataka, although the plans are still in a nascent stage, the people said.
Apple has also chosen India as its site for a manufacturing stage for lower-end iPhones to be sold in 2025. In this stage, known as new product introduction, Apple’s teams work with contractors in translating product blueprints and prototypes into a detailed manufacturing plan. Until now, that work was done only in China.
Combined with plans for expanded production at an existing Foxconn plant near Chennai and at another existing plant recently bought by Indian conglomerate Tata, these developments signify that Apple intends to have the capacity to make at least 50 million to 60 million iPhones in India annually within two to three years, said people involved in the planning.
Annual capacity could grow by tens of millions of units after that.
Foxconn indicated its commitment to India by announcing on Nov. 27 that it was investing the equivalent of more than $1.5 billion in the country, money that people familiar with the matter said would include production for Apple. The announcement didn’t mention the iPhone or name specific locations.
Global iPhone shipments last year totalled more than 220 million, according to research firm Counterpoint, a number that has remained steady in recent years. Because almost all iPhones are made in either China or India, China will continue to account for well over half of iPhone output.
Apple has faced challenges in China this year beyond trade tensions with the U.S., including the Chinese government instructing some officials not to use iPhones at work.
“India’s trust factor is very high,” said Ashwini Vaishnaw, India’s information technology minister.
This year, for the first time, India-made iPhones were introduced on the first day of global sales of the latest model, eliminating the lag with China-made phones.
Supply-chain executives say hourly wages are now significantly lower in India than in China, but other costs such as transport remain higher, and labor unions sometimes resist rule changes sought by manufacturers.
In May, the chief minister of Tamil Nadu state, where Foxconn’s flagship Chennai plant is located, said he would withdraw regulations allowing a 12-hour workday, weeks after the state passed an amendment authorising the longer hours. The chief minister, M.K. Stalin, attributed the decision to opposition from labor activists.
Karnataka state has stood by a decision earlier this year to extend the workday to 12 hours, up from a previous limit of nine hours, though companies must seek approval to do so. A state labor official, G. Manjunath, said new rules also allow companies to employ women on overnight shifts without seeking government approval.
After years of battling local-content rules and other red tape, Apple this year opened its first retail stores in India. Abhilash Kumar, an India-based analyst at TechInsights, said the top-of-the-line iPhone 15 Pro Max was selling well in the country, though it costs about $700 more than in the U.S.
Apple is also making progress in India toward building a network of core suppliers, long a strength of Chinese manufacturing. Officials said this week that Japanese battery maker TDK would build a new factory in India’s Haryana state to manufacture battery cells to power Indian-made iPhones. A TDK spokesman declined to comment.
The moves don’t mean Apple and its suppliers are leaving China. Apple Chief Executive Tim Cook has traveled to China twice this year, stressing the country’s importance as a production hub and consumer market. He visited Luxshare, a China-based assembler that is taking a bigger role in the China portion of iPhone assembly.
On social media, Apple has assured Chinese consumers that iPhones selling in authorised channels are made in China. At an industry event in Beijing that Chinese premier Li Qiang attended in late November, Apple’s booth stressed the company’s business with Chinese suppliers.
Foxconn Chairman Young Liu said in November that China would continue to account for the largest share of Foxconn’s capital investment next year.
Liu has visited India at least three times in the past year and a half, meeting Prime Minister Narendra Modi and other officials. People involved in the planning said Modi’s home state of Gujarat in the west was one possible site of a future Foxconn plant. Meanwhile, the company has other projects in the works in the southern half of the country for electronic components and a plant likely to focus on making AirPods for Apple.
The plant in Karnataka state is under construction on 300 acres of land near the airport in Bengaluru, a southern city that is considered India’s tech hub. Officials involved in the planning said Foxconn has secured approval to invest nearly $1 billion in the plant and is seeking the go-ahead to put in an additional $600 million or so.
Combined with other projects, Foxconn’s investments in the state are likely to reach around $2.7 billion, they said.
Some iPhones are also made at a plant near Bengaluru that India’s Tata Electronics agreed in October to buy from Taiwan’s Wistron. Tata Group is the first local company to take on manufacturing iPhones.
“Apple has created an additional spoke in its India strategy by roping in the country’s largest business group—Tata—to be a part of its manufacturing system in addition to Foxconn,” said India’s junior information-technology minister, Rajeev Chandrasekhar.
—Shan Li in New Delhi and Selina Cheng in Hong Kong contributed to this article.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’