Despite already having more than $4 billion in cash on its balance sheet, fintech giant Square (SQ 4.79%) recently completed a $2 billion debt offering. What exactly is Square planning to do with this windfall of cash? In this Fool Live video clip, recorded on May 24, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss what Square says it plans to use the money for and why investors might not be thrilled with the move.
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Jason Moser: Speaking of Square, we've got some interesting news here. Recently, Square is going to be raising some money here. It looks like they are issuing some debt to the tune of $2 billion, Matt, taking advantage of what is still a very low interest rate environment. I think if I see this correctly, senior notes, 2.75% stretched out to 2026, that's one tranche. Then in the other tranche, a 3.5% stretched out to 2030 or 2031. $2 billion. To me, they offer up just the standard "we can use this for general corporate purposes, which may include potential acquisitions, transactions." This is something I feel they are going to be investing a lot here into the Square Capital side of the business. I mean, this is the next act for this business, don't you think?
Matt Frankel: In a way, this move left me with more questions than answers, I will tell you why. Square already had $4.3 billion unrestricted cash just sitting on its balance sheet. Why do they need another $2 billion? I feel like if you already have over $4 billion in cash and you decide to raise another $2 billion in cash, you need to give me something more than "we're going to use this for general corporate purposes." You're right, it's a very low cost of capital. That's never really been a problem for Square. I think their last offering, correct me if I'm wrong, was convertible notes at 0% interest. That could just be converted to stock sometime in the future. They've never had a problem accessing low cost capital and this was a private placement to institutional investors. I know they are going to be building up the Square Capital. I mentioned SoFi as a bank, they are putting, I think $700 million of their own capital behind to build out their bank. Square will conceivably be bigger as a bank just because they're a bigger business right now. They could need more capital for Square Capital. I would like some more guidance. Apparently investors agree, by the way, the stock was down 5% right after they announced that. So the market reacted negatively to this and normally if someone's raising low-cost, if Square was raising capital with those interest rates, you said so an average of about 3% and we knew they were going to turn that into something that was going to be at 10% return or something to that effect, of course, the market would be cheering that. When real estate stocks raise low-cost capital, it's often cheered by the market. So I think it was the question of why are you raising this? If Berkshire Hathaway is one we talk about has $140 billion or whatever on the balance sheet. If they came out tomorrow and say we're going to raise $20 billion of fresh debt. Wouldn't your reaction be, why?
Moser: Well, I mean, normally I'd like to know at least what they are trying to do with it and I mean, it's good point there.
Frankel: I feel like general corporate purposes just doesn't cut it when you already have that much, you want more.
Moser: No, it's a cop out and it's obviously just the cut and paste statement. But now, you made me think about it a little bit more. I wonder if, I mean, you can't help but wonder if maybe they've got a target or two in across areas for potential acquisition here.
Frankel: That's thought and maybe latest can't say.
Frankel: I wouldn't be surprised to see Square go after like and SoFi or something like that?
Moser: Yeah. Well, I mean, after everything you just said about SoFi it actually wouldn't shock. Maybe they seem to be very in line with, with leadership. I mean, clearly, Jack and Anthony have a history. I mean, they know each other. I mean, they had a good relationships. So yes, that will be interesting to see.
Frankel: There are a lot of I mean, Square recently acquired Tidal, which I didn't see that coming. Honesty. But there are a lot that I could see them going out. Even like Robinhood, I could see Square doing that because it would bring tens of millions of new customers into their ecosystem.
Moser: Yes. Yes it would.
Frankel: I could see that. I mean, just the customer acquisition alone would be worth that acquisition.
Moser: I would imagine, Matt imagine they'd be like hey listen guys, we just want your customers, we really don't want your business or any of your policies. You can keep all that stuff, we just want to customers.
Frankel: Or maybe one of the smaller crypto exchanges to help better compete with Coinbase or something to that, like a Gemini. I could definitely see them going after a company like that.
Frankel: I mean, I hope they are building a war chest to really build out their ecosystem. It's my hope. But the market was not happy with the general corporate purposes type thing because what do you need that for? Come on.