Why Jack Dorsey’s Square Paid USD 29B for Afterpay

Lien Duong, Senior Lecturer in School Accounting of Accounting, Economics and Finance, Curtin University, Sonny Pham, Senior Lecturer in Computer Science, Curtin University.


The AUD 39bn (USD 29bn) that Twitter founder Jack Dorsey’s digital payments company Square is paying to acquire Australian upstart payments outfit Afterpay is the biggest takeover deal in Australian corporate history.

It surpasses the AUD 32bn European commercial real estate giant Unibail-Rodamco agreed to pay for Frank Lowy’s Westfield Corporation in 2017.

The deal marks an extraordinarily successful journey for Afterpay, a company founded in 2014 and listed on the Australian Stock Exchange in May 2016 at $1 a share.

At the close of last week, before this deal was announced, its share price was AUD 96.66, giving it a market capitalization of about AUD 27.5bn.

Square, which at the end of last week had a market cap of about USD 123bn, may pay 1% of its buyout offer in cash, but the rest will be in stock, giving Afterpay shareholders 0.375 shares of Square for each Afterpay ordinary share.

The stock swap means the implied price Square is paying for Afterpay share is about AUD 126.21 — a premium of about 30.6% to its closing price last Friday.

Why so valuable?

That’s to do with the profitability of the “Buy Now Pay Later” (BNPL) market, in which Afterpay has been a pioneer. The market has become even more profitable due to the COVID-19 pandemic, which has accelerated the use of online and cashless payments as well as leaving more people short of money.

How Afterpay works
BNPL companies are so-called because they work differently to traditional credit companies. The reason they emerged first in Australia can be attributed both to “the inventiveness of Australia’s retail and finance sectors” as well as a quirk in Australia’s credit regulation laws.

Under Australia’s National Consumer Credit Protection Act, credit is defined (in line with the dictionary definition) as a method of paying for goods with the credit provider making their profit through charging interest.

Afterpay does not charge consumers interest. The majority of its revenue instead comes from merchant fees, charging a commission of 4%-6% on the value of the transaction plus 30 cents for every purchase. The rest of its revenue comes from charging late fees when customers fail to make repayments on time.

Afterpay’s standard repayment plan is four equal installments every fortnight over two months. A missed payment incurs an initial $10 penalty. If you still have an outstanding balance after one week a further $7 is charged.

It could be argued these late fees are the equivalent of charging interest — and a hefty interest payment at that. One $10 late fee on a debt of $150 translates to an effective interest charge of 6.67% per fortnight.

But because they don’t explicitly charge interest, Afterpay and other BNPL companies are not covered by credit laws.

This has led to concerns about BNPL providers profiting at the expense of the most financially vulnerable consumers. In 2018 the Australian Securities and Investments Commission called for reform to close the legal loophole. It wanted BNPL providers to operate under the same rules as credit providers — including the same responsible lending obligations to perform a credit check and verify that customers could afford to take on the debt.

However, this has not happened. A Senate inquiry decided last year no regulation was necessary, instead endorsing self-regulation. Afterpay and its rivals signed a voluntary code of conduct earlier this year.

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