Stripe has teamed up with private equity firm Advent International to acquire PayPal. Stripe and Advent are offering $60.50 per share in a deal that would value the payments firm at more than $53 billion. The acquisition would give Stripe and Advent each a 50% stake in the company and the offer, which is currently under consideration by the PayPal board, is supported by $50 billion in committed bank financing.
The acquisition would be a major development in e-commerce and payments, creating an entity with approximately $3.7 trillion in annual processing volume. But the deal isn’t done yet. Here’s a look at three reasons why the Stripe acquisition will (or should) go through, followed by three reasons why it won’t (or shouldn’t).
Deal!
Solid Strategic and Financial Sense
It’s easy to see why Stripe might want to do the deal. The acquisition would provide access to more than 430 million consumer accounts, as well as popular consumer-facing solutions like Venmo and PayPal Wallet. This would represent a major addition to Stripe’s current, merchant-focused business model. For its part, PayPal would gain access to Stripe’s modern technology infrastructure and merchant relationships. Combined, the company would process approximately $3.7 trillion a year.
PayPal’s Poor Position
PayPal is in an interesting position. The company’s stock is far off its pandemic highs, and the business itself faces slowing growth and intensifying competition from both fintech and Big Tech. Additionally, the company just appointed a new CEO in March who will be under pressure to make things happen. While there is some concern that the current offering price is too low (more about that in the “No Deal” section), the offer of $60.50 provides a premium of 28% over the stock’s price, pre-announcement. For some shareholders, this might be attractive enough to want to see the deal go through.
Private Equity Piloting the Mission
One potentially underrated aspect of this proposed acquisition is the participation of private equity firm Advent International. Working with Stripe as a 50/50 partner, Advent will be well-positioned to help navigate regulatory challenges and complex financial transactions—including managing divestitures if required. It also means that, should it be necessary to raise the bid (more on that below), Advent will be there to potentially provide additional capital. It is true that a deal of this size is larger than anything Advent has been involved with in its 42-year history. Nevertheless, the firm’s expertise, experience—and the sizable commitment of billions in equity capital—are meaningful factors in favor of the deal.
No Deal!
Antitrust
The biggest danger to the deal is regulatory. Combined, Stripe and PayPal would be a dominant digital payments player with an estimated $3.7 trillion in annual processing volume. While the Trump administration is likely to be far more permissive with regard to big mergers than the Biden administration was, a move of this size would still draw exceptional amounts of scrutiny from the Federal Trade Commission and the Department of Justice, as well as from regulators in the European Union. There’s also the potential that regulators might require conditions on the deal that would make the acquisition less strategically valuable.
Culture Clash
I’m old enough to remember when PayPal was the scrappy, technology-first company that was helping drive the emerging industry of e-commerce. Today, however, PayPal is a huge legacy firm with upwards of 25,000 employees, significant technical debt, complex infrastructure, and a well-established corporate culture. Incorporating PayPal’s legacy systems and operational complexity could prove to be more of a burden than a boon for a company like Stripe that still sees itself largely as an agile, engineering-driven firm.
Valuation
One concern is that the current price on offer of $60.50 per share is too low. Analysts have given PayPal a “sum-of-the-parts” valuation of anywhere from $46 to $80 per share, which suggests that the price on the table is in the lower-to-middle range. Observers such as prominent investor Michael Burry (of The Big Short fame) have said that “the bid will have to rise” (note that Burry is an investor in PayPal). William Blair analyst Andrew Jeffrey doubted that PayPal’s new CEO would accept “what could be viewed as a low-ball offer.”
Another possibility is that other buyers appear. JPMorgan Chase is one potential acquirer that has been mentioned by some. It is also possible that Stripe determines that it would rather try to purchase specific assets from PayPal (such as Braintree or Venmo) instead of acquiring the entire firm.
Photo by AbsolutVision on Unsplash
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