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Investor Highlights: Square's Acquisition of Afterpay

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Was the acquisition worth it for the fintech leader?

Square, now Block (SQ 4.28%), has gone through its fair share of changes lately -- its name change being the most obvious. But the company is also taking another huge step in the form of a $29 billion acquisition of Australian fintech company Afterpay (AFTP.F). The purchase is expected to close later this quarter.

In this segment of Backstage Pass, recorded on Dec. 17, Fool contributors Toby Bordelon, Travis Hoium, Jason Hall, and Lou Whiteman discuss. 

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Toby Bordelon: I like this one, Travis, because it's in the news today, or not the deal itself, but the industry we're talking about. You've got Square and Afterpay, what's going on here?

Travis Hoium: This was one of the biggest deals that we're going to talk about. I think Lou beat me by a little bit, but Square acquiring Afterpay. This page in their presentation announcing the deal really sums it all up to me. What Square's business has really become was the Square app for businesses for processing payments, and the Cash App, which was primarily for consumers, for individuals.

Started out as transferring money to pay for pizza or something like that five, six years ago. Now, you can trade Bitcoin, you can buy and sell stocks, you can do all kinds of financial. It's become really a financial app for consumers more than anything else. But they really lived separately.

It's been really interesting watching Square's business grow over the last few years is, you could have this Cash App and not even realize that it's a Square product because it doesn't really say it anywhere.

When they acquired Afterpay, the idea was really to have a bridge between those two products. This is, I think, a precursor to not only what I think Square's trying to build in the payments business, I think they're trying to effectively cut out the middleman, meaning Visa, MasterCard, American Express, and all the banks, and have people pay directly with the Cash App.

You can now pay with the Cash App on Square devices for some sellers. I think we're going to keep pushing that forward. Ironically then a little bit later, they renamed themselves Block, [laughs] and I had to write this down because they said they're going to keep Square, the Cash App title and TBD54566975, which is their Bitcoin something or other business, are all going to keep their own brands.

Now, I don't know if that TBD brand [laughs] is a great brand right now. The idea for them, I think, is we've got all these really strong businesses and how are we going to pull them together? Afterpay was at least one thesis on how to do that.

Now, whether or not that succeeds long-term is maybe another story, but I think if we see Square trying to find ways to cut out the credit card business and go directly from, I should say, Block product to another Block product where they're doing the transaction in the middle. I think that could be a really interesting and really disruptive thing for the company long term.

Jason Hall: I want to address the naming. I have to.

Hoium: [laughs] It's a mess.

Hall: Alphabet got it right. I think actually Facebook may have gotten it right too, we'll find out depending on their execution. But Jack just Charlie Browned this one, he really did. It's terrible. [laughs]

Hoium: It's is their website.

Hall: He's embracing the Block chain a little bit too tight.

Lou Whiteman: Square's CEO could learn something from the Twitter CEO and what he did recently in my humble opinion. [laughs]

Bordelon: Step down?

Whiteman: Look, just real quick on this because I don't doubt that Square is a great company. I would not bet against them, I wouldn't short them, but I personally decided to buy PayPal instead of Square, and this, Afterpay, to me, it backs up that decision.

They paid $29 billion for this, which is a very attractive feature, but it's a feature. PayPal has the same technology because looking forward, back in 2008, they bought Bill Me Later for $945 million. They were proactive, not reactive.

PayPal in their history, going back 15 years, has bought a couple of dozen companies for a grand total of $13 billion. Jack spent $29 billion to play catch-up on a feature. It's such a huge market, there's multiple winners.

I don't doubt Square will be a winner, but I don't trust Jack and I don't trust Square and Afterpay. The price they're paying for it, that confirms my bias.

Bordelon: You're saying $945 million to you is a better deal than $29 billion?

Whiteman: Also, the foresight to buy it in 2008 versus, "Oh, shoot. We're playing catch-up in 2020."

Bordelon: That's fair. That's fair.

Whiteman: I don't know. I'm over-simplifying terribly, but I don't know.

Hall: I'm so happy to be on a show with you, Lou. [laughs]

Whiteman: Jack, you can look at me up on Twitter, if you'd like. I think you're still a user on there.

Bordelon: Maybe he'll put you on his Christmas card list.

Whiteman: I'll be the shadow guy.

Bordelon: Actually, take advice to retire from his second company, right?

Hoium: This is one of those things though that I think, one of the things with Jack Dorsey, we don't really know what he's thinking necessarily with some of these things until maybe five years later. We know that he is obsessed with Bitcoin.

There's something going on here with their payments app, the Cash App, Bitcoin, Afterpay, there's some sort of, I don't know, I can see.

Hall: Misunderstood genius here, right Travis?

Whiteman: You didn't mention the music app.

Hoium: I'm drinking the Kool-Aid on some of the stuff. Crypto is here to stay. I think that's pretty clear. If you've ever done transactions in some of the -- not necessarily Bitcoin, but -- some of the faster cryptos, there's no reason that I can't just connect my crypto wallet to pay for dinner or whatever, and effectively have a fee that's a fraction of a penny as opposed to paying almost three percent, which is what you're paying Square, and Square doesn't keep most of that money.

There's something potentially interesting here. To Lou's point, I don't know if Afterpay was really needed [laughs] in that vision of the future, but I want to withhold judgment too much because I think there's some integration and disruption going on here in Jack's mind, we just don't know quite what it looks like yet.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. American Express is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jason Hall owns Alphabet (C shares), Bitcoin, Block, Inc., Mastercard, and Visa. Lou Whiteman owns PayPal Holdings. Rachel Warren owns Alphabet (A shares). Toby Bordelon owns Alphabet (A shares), Block, Inc., Mastercard, PayPal Holdings, and Visa. Travis Hoium owns Block, Inc., Mastercard, PayPal Holdings, and Visa. The Motley Fool owns and recommends Afterpay Limited, Alphabet (A shares), Alphabet (C shares), Bitcoin, Block, Inc., Mastercard, Meta Platforms, Inc., PayPal Holdings, Twitter, and Visa. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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