Yesterday it was announced Afterpay Ltd (ASX: APT) would be acquired by Square Inc (NYSE: SQ) for $39 billion or roughly $126 per share.
For most shareholders, this came out of the blue. Who is Square? Why would they acquire Afterpay?
More importantly, what should I do with my Afterpay shares? Let’s unpack the range of outcomes.
Who is Square?
Like Afterpay, Square is a payments company disrupting the status quo. Its located in the United States and has a market capitalisation of $168 billion. For context, Afterpay’s market capitalisation prior to the takeover announcement was $30 billion.
The company offers user-friendly merchant hardware and software for accepting payments. You may have seen a Square terminal at your local deli or cafe.
Additionally, Square provides software for managing invoices, inventory and sales. Think of it similar to Australian fintech Tyro Payments Ltd (ASX: TYR).
The business also operates a Cash App for mobile payments. Customers can send and receive money, invest in equities and cryptocurrencies, and make purchases online or in-store.
Square does not currently have a buy-now-pay-later (BNPL) offering, unlike its competitors Paypal Holdings Inc (NASDAQ: PYPL), Affirm Holdings Inc (NASDAQ: AFRM) and Swedish Fintech Klarna.
Purchasing Afterpay solves this problem. Afterpay will integrate into Cash App as a new customer feature. Moreover, Square can leverage Afterpay’s network to bring its existing merchants and customers together.
What does the takeover mean for my Afterpay shares?
This takeover is different to most. Rather than receiving cash, Afterpay shareholders will receive shares in Square as consideration for the sale.
Afterpay shareholders will receive a fixed ratio of 0.375 shares of Square shares for every 1 Afterpay share held.
For example, if you own 400 shares in Afterpay you will receive 150 shares in Square. It is expected the conversion of shares from Afterpay to Square will not trigger a capital gains event.
Afterpay will be removed as a company from the Australian Stock Exchange (ASX). However, Square will establish a secondary listing on the ASX via CHESS Depositary Interests (CDIs) to allow Afterpay shareholders to trade Square shares on the local market.
You will be able to choose if you want to receive Square shares in the United States or the CDIs on the ASX.
Effectively, you will go from owning shares in Afterpay to owning shares in Square, pending all the required regulatory and shareholder approvals.
The transaction is expected to be completed by the first quarter of 2022.
Should I sell my Afterpay shares?
As a current shareholder of Afterpay, you have two options:
- Hold onto your Afterpay shares and wait until they are converted to Square shares
- Sell your Afterpay shares and redeploy the sale proceeds elsewhere
By choosing number 1, you retain exposure to digital payments and the evolving financial ecosystem. You believe in Square’s mission and that the company will continue to grow and take market share from incumbents. You believe there may be a competing offer and want to retain exposure to Afterpay. You’re happy with a part-time CEO (Jack Dorsey is also CEO of Twitter). Importantly you think shares in Square offer market-beating returns (otherwise you may as well be in an index fund or redeploy the proceeds elsewhere).
Number two is for investors who believe there won’t be a competing offer or Afterpay shares are already fully valued. You believe the opportunity cost of holding onto Afterpay shares and/or receiving Square shares is not in your favour. You think Square is overvalued and won’t provide market-beating returns.
Ultimately, it comes down to your opinion of Square.
If you think it offers market-beating returns, hold on. If you’d rather deploy the capital elsewhere, sell your Afterpay shares.
