This article looks at the recent announcement that Square, Inc. has acquired the Australian financial technology company Afterpay to be settled by March 2022. We will use this case as a platform to discuss the topic of strategic acquisition. We will also share the five ways you can position your company to be bought by a strategic buyer.
5 “strategic” ways to sell your company
If you follow financial and business news, I’m sure you’ve seen the reports that the US based Square, a financial services and digital payments company, has recently acquired Afterpay for A$39 billion? It represents the largest-ever acquisition of an online payment company in history.
Afterpay is best known for its “pay later” service that allows in-store and online customers to purchase a product immediately and pay for it later with four equal repayments. The repayments are interest-free, but if they are not paid every two weeks as required, late fees are accrued.
As of June 2021, Afterpay was recorded to have 4 million active customers in Australia, 5.1 million active customers in the US, and New Zealand, and 900,000 active customers in the UK.
Millennials are Afterpay’s main customer demographic, comprising 75% of all users. Another significant segment of Afterpay’s customer base is university students, of which one third have been found to use short-term borrowing. Afterpay has been ‘extremely popular among young women’ and has garnered a loyal customer base, as shown through a Facebook group titled “We love Afterpay” which has over 124,000 members.
Nobody knows for sure what is in the management’s head of Square and Afterpay, but we can only assume that at least part of the potential they see is the opportunity to utilize the acquisition as an opportunity for both Square and Afterpay to scale a two-sided, multichannel payments, commerce and financial services ecosystem that also leverages Square’s integrated POS platform and merchant services capabilities to keep and grow an expanded merchant base.
And therein lies the definition of a strategic acquisition. Most acquisitions run a predictable pattern of industry norms, but a strategic can pay a significant premium for your business because they are looking at your business for what it is worth in their hands. Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic is calculating the economic benefit of grafting your business onto theirs.
There can be many strategic reasons why a big company might want to buy yours. Here are a few to consider:
1. To control their supply chain
In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million. Now Starbucks is no longer beholden to one of its suppliers.
2. To give their salespeople something else in their briefcase to sell!
Also in 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPo had just turned its first modest profit on paper. AOL wanted to give its advertising salespeople more inventory to sell and HuffPo had 26 million unique visitors a month.
3. To make their cash cow product look sexier
Microsoft bought Skype for $8.5 billion dollars even though Skype was losing money. The good folks in Redmond must have assumed they could sell more Windows, Office and Xbox by integrating Skype into everything they already sell.
4. To enter a new geographic market
Herman Miller paid $50 million to acquire China’s POSH Office Systems in order to get a beachhead into the world’s fastest growing market for office furniture.
5. To get a hold of talented staff
Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.
Most acquisitions are done for rational reasons where an acquirer agrees to pay today for the rights to your future stream of cash. You may, however, be able to get a significant premium for your company if you can figure out how much it is worth in someone else’s hands.
Curious to discover how you might improve your business’ value to both strategic and financial buyers? Contact us today and let us work together on making your business a strategic buyer and investor attractive.
Co-Founder & CEO
Award-winning business advisor with broad experience helping businesses to achieve breakthrough results.
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