@upside_down Yes the end of an era. I am still gathering my thoughts- suffice to say, it was unexpected for me and I still haven't properly analysed Square to figure out what to do.
I had sold down my afterpay position somewhat last year (about 55% of my pre-Covid position now), having not sold a single share prior to Covid, selling XRO and doubling down in March, then offloading APT steadily over the last 9 months or so and moving into ADH, CTT, NTD mainly. As a result my afterpay holding is only c10% of my portfolio currently and I haven't put the requisite effort into this particular analysis just yet to have any good differential insight. That being said my initial thoughts are:
1) qualitative
- I think this very substantially reduces downside and competitive risks
- the combination seems good from an operational (as opposed to financial) synergy and culture fit
- this will have ramifications for the industry structure- how it plays out is anyone's guess. Consolidation this early on, however, in my opinion reflects the fact that there is a very large moat to this type of business. The moat is actually based on ability to fund receivables for growth and strongly favours larger players. The endgame is some combination of Square, Paypal, Klarna, Affirm and then the others. My guess is that Shop will take out affirm at some stage and Klarna may take out Z1p any many of the others will go bankrupt. Mastercard and Visa are in trouble as they will be distermediated and also due to their size are not able to successfully take out nascent businesses.
- the end result is going to look a lot like a bank- immediately you can see how deposits in the cash app could fund Afterpay's receivables...
2) quantitative
- this is a very interesting deal structure. It is quite uncommon for two disruptors to be involved in M&A and the only things this brings to mind are the FB acquisitions of instagram (and to a lesser extent whatsapp).
- Afterpay holders are getting a good deal at 18.5% of the combined company on most analyses. However, if you look at price/book, Afterpay will be contributing 31% of the book value to the new entity. So the effective book value multiple is much higher for Square than Afterpay. A logical follow-through of the mathematics of that entails that Square has a higher ROA than Afterpay (which is hard to imagine), but also reflects the fact that Afterpay is actually pretty robust in terms of its balance sheet strength. I also noticed that Afterpay seems to be getting lower interest corporate debt and I strongly hope that Anthony Eisen is allowed to continue to manage these aspects of the combined entity.
- Overall this strikes me as most importantly a fair deal.
3) A lot will end up coming down to execution. If they can execute the opportunity flawlessly, as they had done in the past- the possibilities are crazy. In terms of omni presence at the interface between merchant/customer, this would probably be the best placed business in the world (Paypal doesn't have the physical presence).
I will probably sell down at least some of my holding but am waiting for the financials to come out (for all the various stocks I own) before deciding. A part of me wants to keep some until $180 equivalent when it becomes a 100x for me! How are you doing?
