Afterpay Update: 5 Big Questions from the Recent Merger

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Big news for our stock of the week pick Afterpay. As a quick refresher – Afterpay is a online payments company that partners with online retailers and allows shoppers to pay purchases off in installments without incurring any interest payments. By way of an example –  want to buy a $1000 jacket? With Afterpay that jacket is now $250 a month over four months.

Afterpay recently announced a merger with Touchcorp and together they have created the new company Afterpay Touch Group. With that, the stock ticker has changed from AFY to APT. This is an exciting development for the company and a great opportunity for us to explain what happens to shareholders when mergers like this take place. We thought we’d address this by asking five key questions about this merger.

 

1. So, we were shareholder in Afterpay, and that company doesn’t exist anymore…. What happened to our shares?

Good news to start with, whenever a merger like this takes place your stake in the business cannot up and vanish. Remember – when you own a stock you own part of the business. So in general, mergers (when two companies combine) or acquisition (when one company buys another) will either be for cash or for stock. If it is for cash then as a shareholder you will receive X amount for every share you own. Essentially you’ll be bought out of your ownership of the company. However, in the case of this Afterpay merger all shareholders received stock in the new company.

For Afterpay shareholders this stock was distributed on a 1-to-1 basis. So for every Afterpay share we held in our hypothetical portfolio, we now hold a share in Afterpay Touch Group. For Touchcorp shareholders they received 0.64 shares in Afterpay Touch Group for every Touchcorp share they held.

So before the merger we owned 388 shares of Afterpay, now our hypothetical portfolio owns 388 shares of Afterpay Touch Group.

 

2. If you keep saying that shareholders are part owners of the company how come you didn’t have a say in this merger decision?

Firstly, this is a hypothetical portfolio, we don’t actually own the shares… Perhaps we should’ve been clearer…

But for arguments sake, if we did own the shares then technically we did have a say. For any proposed merger or acquisition of this kind all shareholders get to vote. The company will release information about the proposed merger or acquisition, and will release information on how shareholders can vote on the proposal. Generally, if a company’s board is supportive of a proposal it will pass, however, mergers and acquisitions are voted down by shareholders from time to time. So if you own shares and you feel strongly about a proposal you have the right to exercise your voice as a part owner of the company.

 

3. So why did Afterpay and Touchcorp merge?

Afterpay and Touchcorp have had a strong relationship for a while now. Touchcorp developed Afterpay’s software and processed Afterpay’s payments for them. From this the boards of Afterpay and Touchcorp decided there was significant opportunity for the two companies to grow their businesses together. Importantly, Touchcorp’s software developer talent will allow Afterpay to continue innovating and improving their product offering while Afterpay’s existing clients will improve Touchcorp’s recurring revenue streams.

 

4. Do you think this merger was a good idea?

At this stage it is too early to make a call either way. We like the fact that Afterpay are looking to build on their first mover advantages in this market. With 6,000 retailers using their service, there may have been the desire to be complacent and rest on their laurels. Instead they are talking about using the software developer talent in Touchcorp to continue to improve their product offering and to sign up more retailers. So we like that.

We’re also extremely aware that Afterpay is at a critical time in its development. Now that it has proved the concept works, big players in the payments space may try and replicate their business model. There are whispers PayPal may move into this space with PayPal Credit, and in what can only be seen as a sincere form of flattery an Australian start up, OpenPay, has sprung up with a near-identical business model. So the move to continue innovating in the face of this competition is a welcome one.

However, investors must always be wary of mergers or acquisitions. KPMG did a study in 2015 and found that 83% of mergers do not boost shareholder returns. More personally, we’ve seen up close and personal how mergers may look great in theory but don’t always turn out that way. One of Alec’s first investments – Slater and Gordon – was a market darling when it purchased the British professional services firm Quindell. What followed was a horrorshow though, as it quickly became apparent they overpaid and seriously underdelivered. More recently, Bellamy’s, the infant formula company, purchased a canning facility to secure a licence to sell into China. However, the Chinese government then pulled the licence leaving Bellamy’s scrambling and currently in a trading halt (A trading halt is where the company asks the ASX to not let people buy or sell it’s shares for a short period).

So while investors should generally be wary of growth by mergers or acquisitions, we’re interested to see what happens here.

 

5. So the biggest question of all…. What’s happened to the share price?

Back in early May we added 388 shares of Afterpay to our hypothetical portfolio at $2.55. At the time we write this on the 18th of July the new company is trading at $3.09. So we can’t complain so far.

We’ll be interested to see where the share price goes from here. As more competitors enter the space we’re going to be watching the growth in retailers Afterpay Touch Corp can sign up, and we will also be watching their ability to keep the retailers they have signed up from moving to their rivals. It seems unlikely that consumers would have a preference for which payments system they use (Afterpay, Overpay, PayPal Credit etc.) what consumers will want is the functionality (i.e. paying in instalments with no interest). So we want to see Afterpay continue to build on its strong head start in signing up retailers and become the obvious market leader in this space.

All in all, this merger is an exciting development. However, it is still far too early to start calling it one way or the other.

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