A Square Deal? (April 24, 2014)
First the Wall Street Journal reported in November that Square Inc. was considering an IPO. Then acquisition rumors swirled after the newspaper reported this week that Square had been in M&A talks with companies including Google, Apple and PayPal. Whichever move Square makes, if either, how will it affect the payments industry? If we’re talking M&A, it largely depends on the buyer.
“If the acquisition turns out to be a good ‘fit,’ then it could be a big accelerant toward widespread integrated mobile marketing and payments solutions—imagine what Apple and Square could do together if they did it ‘right,’” says Rick Oglesby, senior research analyst and consultant, Double Diamond Group. “However, if the acquisition turns out to be a bad fit, then it could lead to the dismantling of Square as we know it.” And of course, Oglesby adds, there are many potential outcomes in between.
Although the m-POS pioneer was quick to categorically deny any acquisition talks on Twitter, Square’s nearly 1 million-strong merchant footprint certainly could be a tantalizing asset for buyers looking to grow their merchant acceptance. An acquisition could be good news for Square as well as the company seeks to move out of startup mode into a more established player.
Based on Square’s current valuation and its impressive growth numbers, an acquisition likely would fetch billions of dollars. Last year, the company reportedly processed more than $20 billion in transactions, for revenue of $550 million, according to reports. But the company’s margins are razor-thin; the 2.75 percent fee Square charges for each swipe on its card reader is eaten up largely by fees to payment networks and other intermediaries. And the high-profile acceptance deal the company signed with Starbucks, while a major boost for Square’s visibility and footprint, actually led to a $20 million loss in 2013.
Still, that merchant footprint—and Square’s primacy in the m-POS arena—could outweigh any concerns over financial viability, says Matt Witheiler, a principal with Flybridge Capital Partners, which invests in emerging payment companies. “[Square] probably has a larger physical footprint than almost any other merchant acquirer out there,” he tells Paybefore. “On the consumer side, Square has card and email data across a reasonable set of users at this point. Those are the assets a strategic acquirer will value on top of the core revenue and margin characteristics of the business.”
For those reasons, Witheiler says it’s more likely Square would be purchased by a company that doesn’t already have wide physical merchant reach—like, say, Google—than by an established payments player, such as a payment card network.
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