Deal Dissection: Afterpay (ASX: APY) and Square (NYSE: SQ)

Deal Dissection - SQ + APT


You’ve all seen the news - the largest M&A deal in Australian history was announced this week. Square is acquiring Afterpay for $39bn (all stock purchase). In our emergency podcast we dissected the acquisition and spoilers: we think this is a great deal.

Why do we love it?

Square’s acquisition of Afterpay uniquely positions the company as one of the clear front-runners in the future of financial services. The addition of a Buy Now Pay Later (BNPL) offering to Square’s arsenal of merchant and consumer services has a number of implications for Square that we discuss in this week’s episode. But just for you, here’s a quick recap:

  • For Square’s merchant customers - they’re going to become even stickier for Square. Merchants are already using Square across the entirety of their finance and payments value chain (with the exception of BNPL). With this acquisition, Square has added one of the last remaining services it was missing for vendors and increasing the value it provides as part of its services
  • For consumer customers - they can now leverage Square’s Cash App to not only transfer and pay for products, but the newly formed Square + Afterpay business could offer BNPL through the Cash App. More features in the Cash App will further entrench its as ‘the app’ for consumer transactions
  • For investors - Square has positioned itself to capture the growing payments market across both enterprise and mid-market merchants (think $250K annual turnover and up) with this acquisition
  • For anyone who is looking to understand inorganic growth strategy - this acquisition could be the perfect case study for synergistic M&A. In the table below, you can see that Afterpay and Square play in different channels, Seller Size, Verticals and Geographies. This means combining the two could deliver tremendous value.
  • Source: Afterpay


Square Deep Dive

Source: Square


What is Square?

Square is a commerce and payments platform that enables merchants to start, run and grow their businesses. They started as a hardware and payments gateway that enabled customers to pay for transactions effortless using the ‘Square Card Reader’ but has now evolved to become a full-service financial services business.

What does Square do?

Square can be best described as a platform business that offers products and services across two significant ecosystems:

  • Seller Ecosystem - Offers businesses a combination of software, hardware, and financial services to help start, run, and grow including Payments, Hardware, Risk Management (transaction disputes), Business Tools (i.e. Payroll, Employee Management) and Financial Services (banking, financing)
  • Cash App Ecosystem - Provides customers with financial products and services through Cash App. Individuals can quickly store, send, receive, spend, and invest their money in stocks and bitcoin

How has Square performed?

Currently a $9.5bn USD business (FY20), growing at 54% CAGR since 2016, Square has performed incredibly well in the last 12 months and has doubled in revenue ($4.7bn USD in 2019).

Square currently generates a 28% Gross Margin, and a 2.2% Net Incoming Margin. Although it’s profitable, these margins are razor thin (for now). Square has lots of potential to continue to improve its unit economics to improve on this margin.

Where does Square play?

For it’s Seller Ecosystem, Square’s target sweet spot are companies generating $250k - $100m in turnover (Square call this ‘mid-market merchants’). This is obviously a huge part of the market to focus on, but Square is increasing its focus on larger merchant customers in the $100m+ turnover part of the market.

For the Cash App, Square is targeting millennials, particularly those with a strong social media presence. The ‘Cash App’ has become a culture icon in the US, with rapper writing songs about it, the Cash App twitter constantly publishing memes and philanthropists sending people money through the app.

How does Square win?

We generally look at three things when assessing tech companies on Fresh Capital - networks effects, customer acquisition and branding:

  • Network effects
    • For the Seller ecosystem, Square has an amazing reinforcing flywheel - all the services and products support companies to become more successful, which in turn, increases the revenue that Square gets from its merchant customers
    • For the Cash App, there are over 40m monthly active users. Users then attract other users because they either want to get their funds transferred, or need to transfer funds to another user
  • Customer acquisition - Square has shown it can efficiently acquire customers across both its ecosystems, even as it pushes into larger enterprise customers. It has held Customer Acquisition Cost (CAC) payback steady, and cohort revenue has grown every year
  • Brand - Undoubtedly Square has an amazing brand. It has a stellar reputation in market for making merchants’ lives easier, its hardware is sleek and their social media presence highlights the Cash App’s reputation amongst its users.

What is Square’s future?

It may be bullish of us at Fresh Capital to say we believe Square could stand amongst the giants of tech with Amazon and Facebook but we firmly believe Square is positioned to do so.

🎙️ Want to hear more about Square and why we think it’s positioned to capture future growth? You can find the latest episode of Fresh Capital right here!

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