Banks on Notice: Afterpay Acquisition by Square

In today’s Money Morning…why APT acquisition by SQ is a match made in heaven…SQ to list on ASX means CBA, WBC, NAB, and ANZ are sweating…invest accordingly…and more…

Wow, what a bombshell on Monday morning. Afterpay Ltd [ASX:APT] is set to be acquired by Jack Dorsey-run Square Inc [NYSE:SQ].
Here are the details of the acquisition:

  • All stock acquisition
  • Based on Square’s closing price of US$247.26 on 30 July 2021, an implied transaction price of approximately AU$126.21 per Afterpay share, a premium of approximately 30.6% to Afterpay’s latest closing price of AU$96.66
  • Afterpay shareholders receive a fixed exchange ratio of 0.375 shares of Square Class A common stock for each Afterpay share
  • Meaning APT shareholders will own 18.5% of SQ shares

Dorsey said of the acquisition:

Square and Afterpay have a shared purpose. We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.

Beyond the payout for APT shareholders and the public messaging about fairness and inclusion, something far, far bigger is afoot.

In fact, in a few years’ time, we may look back at this acquisition as the death knell of the big banks.

Here’s why that’s the case.

Why APT acquisition by SQ is a match made in heaven

In the announcement today, you’ll see a lot of language around merchants, ecosystems, and synergies.

At the end of the day, these are fancy words that mask a much more serious claim APT and SQ could make.

You see, SQ and APT can’t exactly come out and say, ‘Together we’re going to eat up the entire traditional banking sector.’

But that’s what’s at stake here.

Value investors have had their noses turned up at APT shares since around the $40 mark.

This is an entirely new paradigm though — where the race is simply to get customers in the door.

Even if you can’t manage to get EBITDA or NPAT from a horde of customers, it doesn’t matter.

The simple act of stealing a younger demographic from the banking dinosaurs is enough.

And the big banks are now on notice.

Without these customers, the traditional banking sector will wither and die in a world of squeezed margins due to low rates and less and less ways to milk older customers for their hard-earned dosh.

Meanwhile, the small fish like Zip Co Ltd [ASX:Z1P] and the rest of the ASX-listed BNPL crew will be licking their lips at the new model for success.

Throw caution to the wind and go full bore at gobbling up new customers, and you can look forward to a juicy payout from a much bigger fintech or even a traditional bank desperate to buy back their customer base.

This is what’s super-intriguing about the deal, though, and why the Big Four banks in Australia might be about to have an involuntary bowel movement…

SQ to list on ASX means CBA, WBC, NAB, and ANZ are sweating

Here’s the kicker in the announcement:

Square has agreed to establish a secondary listing on the Australian Securities Exchange (ASX) to allow Afterpay shareholders to trade Square shares via CHESS Depositary Interests (CDIs) on the ASX. Afterpay shareholders will be able to elect whether to receive the Consideration in NYSE listed Square Class A common stock or CDIs. The CDIs listed on the ASX are expected to be eligible for S&P index inclusion in Australia.

Square shares on the ASX — you read that correctly.

Liked APT shares? Buy SQ shares on the ASX.

The barrier to taking a punt on bank killers from the US like SQ is no more.

The same retail crowd that loved APT can now plough their capital into SQ shares.

The forward-thinking retail types may eventually be followed by the big boys at the funds too.

Meaning, over time, we may see a shift away from Big Four shares as the big funds realise that the banking oligopoly isn’t a safe proposition.

And herein lies the larger narrative.

The huge ruptures we are seeing in the world of finance will only get bigger. Younger people have a taste for crypto and fintechs and want better ways of moving their money around.

SQ users already know it’s super-easy to buy bitcoin on the platform. So when will a dinosaur like CBA allow its users to buy bitcoin?

Probably never, or if they do, it’ll be way too late.

And with the advent of central bank-backed digital currencies (CBDCs) on the horizon as well, I’ve got a message for the Big Four:

You’re done. It’s over.

Invest accordingly.

Regards,


Lachlann Tierney Signature

Lachlann Tierney,
For Money Morning

PS: Lachlann is also the Editorial Analyst at Exponential Stock Investor, a stock tipping newsletter that hunts for promising small-cap stocks. For information on how to subscribe and see what Lachy’s telling subscribers right now, please click here.


Lachlann Tierney is an Analyst for Money Morning and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. Recently he has been working with Ryan Dinse. Lachlann is involved in two publications:


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