When journalists James Eyers and Jonathan Shapiro set about writing a book on Australian payments phenomenon Afterpay, they recognized there was a danger of being overtaken by events.
“We knew writing a book about such a rapidly evolving subject was always going to leave us exposed to the risk that we’d be caught out by a dramatic plot twist,” they wrote on Saturday to mark the launch of their book this week.
They got that right.
On Monday morning, Afterpay announced it was being acquired by Square, the US payments business founded by Twitter’s Jack Dorsey, in a A$39 billion ($29 billion) deal, the largest transaction in Australian M&A history. Forty-eight hours is a long time in the world of fintech biographies, it seems.
Afterpay was launched by Anthony Eisen and Nick Molnar in 2015, backed by some – now very wealthy – early investors, many of them non-professional friends and associates, who were really just supporting a broad idea around try-before-you-buy customer empowerment.
Over time, that evolved into a simple business structure: buying things in four instalments, interest-free, with Afterpay making its money from merchants who use the company’s e-commerce platform.
Buying now and paying later – on the lay-by, as Australians say – is nothing new, in Australia or anywhere else, but it caught several converging waves.
There was the surging growth of e-commerce, supported by Covid-19 keeping people out of physical shops; the sense that younger consumers don’t want or need credit cards, but are quite happy to transact on their smartphones; and a period of belt-tightening that meant more young people were living paycheque to paycheque, but could be confident that money would be coming in. They were therefore quite happy to pay in phases if they wouldn’t be charged interest on their instalments.
In June, European buy-now pay-later fintech Klarna raised a further $639 million in a funding round led by Softbank’s Vision Fund 2 that valued the company at a staggering $45.6 billion.
Cultural zeitgeist
In Australia, Afterpay’s dramatic success became quite the cultural zeitgeist. Many people dislike it and what it represents. Financial planners and consumer advocates believe it encourages a culture of unsustainable personal indebtedness. Many institutional investors have avoided it because they couldn’t see a path to profitability, couldn’t live with the multiples the stock traded on after its 2016 ASX listing, and couldn’t stomach the fact that they then missed out on vast gains by ignoring it.
Dorsey does not appear to be squeamish about the multiples. Monday’s announcement implies a 23-times multiple of enterprise value to forward sales, or 41 times based on current sales. The deal will be paid in stock, according to the announcement, and should close in the first quarter of calendar 2022.
Afterpay stopped being a domestic Australian story some time ago. As of June 30, it served 16 million consumers and almost 100,000 merchants globally, and had already achieved considerable and somewhat unlikely success in the US.
Its system will now be merged with Square’s equivalent businesses, the Seller and Cash App products. Square has a customer base of 70 million annual transacting active Cash App customers and “millions” of sellers, it says. Eisen and Molnar will join Square.
Aside from the scale of the deal, it is useful to take some lessons from all of this. One is that venture capital is apparently not the only way to get started: the VC industry largely missed out on this opportunity.
Tech and ASX
Another is that it is no longer fair to think of the ASX as a market that doesn’t have a tech sector. ASX wants to be a global hub for listed tech stocks, which still looks like a reach, but a deal such as this is a huge plus for the Australian exchange. The S&P/ASX All Tech Index, which had a rocky and ill-timed start to life in February 2020, is becoming a closely followed benchmark, and Afterpay’s valuation and fate will have a useful demonstration effect for other listed tech companies.
A third is that simplicity really is a key to fintech success and there is absolutely no point in over-complicating anything. The story of Afterpay is of the refinement of an already simple idea into an even more simple conceit. Somehow this idea, which is neither new nor innovative, but just well-executed and popular, has taken off worldwide. Afterpay didn’t need blockchain, crypto or any reinvention of finance for its founders to become multi-billionaires.
A fourth is that the Australian advisory landscape is starting to look somewhat American. Goldman Sachs is advising Afterpay and Morgan Stanley is advising Square. There was a time when one would have considered UBS and Macquarie shoe-ins for advisory roles on a deal of this scale, but not now.
