PayPal Holdings (PYPL 0.72%) recently announced its largest acquisition ever, that of Honey Science Corporation, to the tune of $4 billion. Honey offers an expansive suite of products and services that helps users score savings and deals as they shop online. In the press release, PayPal stated that the agreement "will transform the shopping experience for PayPal's consumers while increasing sales and customer engagement for its merchants." Honey will remain headquartered in Los Angeles, and its co-founders, George Ruan and Ryan Hudson, are expected to continue to lead its team.

As consumers shop online, Honey scours promo codes and better deals elsewhere for the same products, ensuring its users always find the best prices. On average, Honey's users save $126 per year due to its platform, or about 17.9% per purchase. The company sports 17 million monthly active users and works across 30,000 participating merchants' websites. Since it was founded in 2012, Honey has found its members more than $1 billion in savings and given back $8 million through its loyalty program.

Front of PayPal corporate headquarters showing a large sign bearing PayPal's logo.

PayPal acquired Honey Science Corporation for $4 billion, its largest acquisition in company history. Image source: PayPal Holdings.

Honey's business model

Honey earns its commission from stores when customers use its platform to make a purchase. Merchants don't mind paying this fee, because Honey can demonstrate that its platform increases sales conversion rates. Interestingly, PayPal management hinted that Honey's business model might change post acquisition as the company thinks through different ways to monetize personalized offers and user engagement.

This latest deal seems to fit well within PayPal's growing payments platform. As the press release stated, "The acquisition supports PayPal and Honey's shared mission to simplify and personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants."

Honey's customer base also matches up nicely with Venmo users. On the conference call, management noted that Honey's users were "predominantly" U.S. based, 70% were millennials, and 79% were females. These demographics overlap not only with Venmo but also with PayPal's core platform.

A high price

While Honey's latest metrics were not provided to investors, PayPal management did state Honey's full-year 2018 revenue was more than $100 million, representing a growth rate of more than 100% while also being profitable. PayPal said it expected Honey to be accretive to its non-GAAP earnings by 2021, and while it's hard to project Honey's 2019 revenue total from this information, it's safe to say that PayPal paid a steep premium to acquire the company.

Slide breaking down key facts about Honey Science Corporation.

Honey was founded in 2012 and headquartered in Los Angeles. Image source: PayPal Holdings.

While shares dropped a few percentage points in the days following the announcement as investors questioned the acquisition, here are four possible reasons PayPal management believes this deal is worth the high price tag.

1. Rising competition

Since being spun off from eBay in 2015, PayPal has been striving to fill a niche by providing a platform-agnostic digital wallet, making online and mobile payments frictionless for its users. The strategy has clearly worked, as PayPal now boasts more than 300 million active accounts that use its platforms to make about 40 transactions per year. Yet more players continue to crowd the space, most notably from Apple Pay, Square's Cash App, and Zelle. If frictionless payments become commoditized, essentially available from nearly every merchant and financial platform, then a large part of PayPal's value proposition to consumers and merchants simply disappears.

Honey paves the way for PayPal to offer more value to its account holders and differentiate itself from competitors.

2. User engagement

Schulman states that almost 40% of all e-commerce transactions are triggered by an outside event, such as a personalized offer or limited-time deal. After looking over the online competitive landscape, "We think that Honey actually has the leading platform and set of capabilities around that. That adds a tremendous amount of relevance to consumers." Honey gives PayPal the capability, through its various price-tracking and coupon-aggregation tools, to give consumers notifications when items they are watching go on sale or when they receive a personalized offer from one of their favorite sellers. This would incentivize users to check their app more often, increasing user engagement on PayPal's platforms.

3. Data

Honey also collects data from its users that might prove to be valuable to PayPal. First of all, it should be noted that as privacy and security processes go in today's digital age, Honey's policies appear to be better than most. The company does not sell users' data and does not track search engine or browser history or email usage on sites that are not retail-related. This shopping data, even anonymized, could provide valuable insights into consumer behavior and would seemingly fit nicely with Jetlore, an AI-powered platform that takes customer data points, analyzes them, and gives merchants actionable steps to capture more sales.

4. Super e-commerce app

Many shoppers are familiar with Honey's browser extension, which was launched when the company was founded. The extension essentially travels with shoppers as they browse different shopping sites. Before checking out, Honey checks the retailer for any coupons or promo codes and applies them to the sale. More unfamiliar is Honey's mobile app, which launched earlier this year. With Honey's Smart Shopping Assistant, users can add products and merchandise to the app from all participating merchants, essentially creating a one-stop online store.

This convenience with Honey's price-tracking and discount-finding capabilities already formed a potent combination for shoppers. Now that it can be combined with PayPal's ease-of-payment capabilities and exposed to the latter's 275 million consumer accounts, it could become one of the most valuable e-commerce properties today.

Final takeaway

PayPal's management has proven to be adept at deal-making in the past. While it paid a high price for Honey Science, the potential created from the two entities' synergies is clear and feasible. If PayPal is successful in cross-promoting Honey to its huge network of consumer accounts, Honey can help PayPal fend off competition, increase user engagement, and make Honey's mobile shopping assistant the next big thing in mobile commerce.