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US tech giant Square’s $39 billion takeover of Afterpay has sparked predictions of more merger and acquisition activity in the booming buy now, pay later (BNPL) sector, as smaller rivals brace for an even more daunting competitor.
In the aftermath of Afterpay’s record-breaking deal announced on Monday, analysts and fund managers said smaller players such as Zip Co and Sezzle could potentially become more attractive takeover targets.
Afterpay founders Nick Molnar and Anthony Eisen. Credit:Eamon Gallagher
That is because Square’s willingness to snap up Afterpay was seen as validation of the wider BNPL sector, which is attempting to disrupt credit cards. Joining forces with Square will also make Afterpay a tougher competitor to smaller rivals as they race to roll out BNPL products around the world.
Portfolio manager at Tribeca Investment Partners Jun Bei Liu highlighted the need for smaller players to secure capital as the payments businesses engage in a global land-grab.
“We will see a huge amount of M&A picking up,” Ms Liu said. “Capital is important, partnering is important, and a pathway to scalability in all of these markets is important,” Ms Liu said.
Portfolio manager at Ophir Asset Management Steven Ng, a long-time Afterpay shareholder, said: “The largest player in the industry with a lot of cash on the balance sheet is now merging with an even bigger partner.”
BNPL providers, such as Afterpay, offer consumers short-term loans paid back in interest-free instalments and the products have proven a hit with younger customers in particular.
Domestically, some of the key ASX-listed BNPL operators include Zip, Sezzle, and Splitit. Shares in Zip, the second largest domestic player behind Afterpay, rose 7.5 per cent at $7.78 on Tuesday after a strong rise on Monday. Sezzle shares closed 2.8 per cent higher at $7.69 and Splitit shares ended the session 4 per cent stronger at 52c.
Citi analyst Siraj Ahmed said the Afterpay deal could make Zip more appealing as a takeover target, pointing out it also has a substantial United States business, Quadpay. At the same time, Mr Ahmed said the Afterpay merger underlined the importance of scale, and teaming up with Square would give Afterpay a further advantage in the crucial US market.