The all-stock offer values Afterpay shares at A$126.21 ($92.71) each, 31 per cent higher than Friday’s closing price of A$96.66, the companies said. Still, that is less than Afterpay’s February high of A$158.47. The stock jumped as much as 29 per cent to A$125 in Sydney trading on Monday.
Square said the "buy now, pay later" concept represents a chance to capitalise on a shift away from traditional credit, especially among younger consumers, who may not have a credit card.
The plan is for Square to integrate Afterpay into its consumer Cash App and its Seller product for small businesses, chief financial officer Amrita Ahuja said.
“It is very different from the traditional consumer-financing business model,” Ms Ahuja said, describing “buy now, pay later” as an “alternative” to traditional credit.
“Since our founding days, we have seen it as a key priority for our customers, whether merchants or consumers, to get fast access to funds.”
She declined to say whether Square would offer other traditional finance options such as a credit card.
Afterpay allows consumers to purchase items on credit and pay later in a series of instalments. It is particularly popular with younger consumers who use it buy clothes, beauty products and homewares.
There are no fees or interest on the loan as long as people pay on time, according to Afterpay’s website.
The deal should add Afterpay’s 16 million users to Cash App’s existing user base of 70 million annual users, Ms Ahuja said.
Larger competitors have pushed into the market recently, adding to the challenges for Afterpay and its peers. Apple is teaming up with Goldman Sachs on a "buy now, pay later" service that would be tied to Apple Pay, Bloomberg News reported in July.
Afterpay's shares fell by 10 per cent the day after the report.
Afterpay shareholders may reject the proposed Square offer, Bloomberg Intelligence analysts Matt Ingram and Regan Burrows wrote. They pointed out the offer is below the stock’s peak earlier this year while its growth is much faster than that of the US company.
Under the proposed agreement, Afterpay co-founders and co-chief executives Anthony Eisen and Nick Molnar would join Square and help to lead Afterpay’s merchant and consumer businesses as part of Square’s Seller and Cash App division.
The acquisition would easily be the biggest deal for an Australian company, eclipsing the $16.6bn bid for Sydney Airport by a group of pension funds last month, only to have the offer rejected as too low.
Square recently set up its banking operations, including checking and savings accounts for small businesses, and offers loans. The addition of Afterpay also gives the digital payments company a chance to expand into consumer lending, which it does not currently offer.
“Square and Afterpay have a shared purpose,” Mr Dorsey said. “We built our business to make the financial system more fair, accessible and inclusive, and Afterpay has built a trusted brand aligned with those principles.”
Square also reported a second-quarter gross profit of $1.14bn, up 91 per cent from the same period last year. Gross payment volume, or the total amount of payments processed on Square’s platform, increased by 88 per cent to $42.8bn, the company said.
Analysts, on average, projected $36.8bn, according to data compiled by Bloomberg. Square had been scheduled to release its financial results on Thursday.
Total revenue, including Bitcoin, was $4.68bn. Bitcoin revenue alone was $2.72bn, below the $3.4bn estimate by analysts. Square said Bitcoin revenue declined because of “relative stability in the price of Bitcoin, which affected trading activity compared to prior quarters”.
Afterpay was founded in 2015 and now has more than 1,300 employees globally, according to Molnar. Its board unanimously recommended that shareholders accept the deal, which the company said is expected to close in the first quarter of 2022.