Business founders and CEOs are often lionised or condemned based on their share price rather than their managerial performance. This is unfortunate, because executives have minimal control over a share price that remains at the whim of the madness of the crowd.
As Benjamin Graham observed (and his protégé Warren Buffet reiterated): in the short term, the market is a voting machine; in the long term, it’s a weighing machine.
Last August, Afterpay founders and co-CEOs Nick Molnar and Anthony Eisen announced what was almost the greatest Australian corporate transaction, the sale of their global buy now, pay later business for $39 billion.
Just to put into perspective how incredible the deal was, Afterpay was briefly worth more than Telstra, Australia’s dominant telecommunications business, and Woolworths, the largest employer in Australia and founded 98 years ago.
With the deal receiving the final approval needed from Spanish regulators this week, the business media is still trumpeting the $39 billion triumph.
There’s a problem, though. Afterpay is worth about $22 billion, almost half its original price. (Almost every business journalist has missed that fairly important point, still referring to the deal as a $39 billion sale.)
The reason for the drop is that the merger was an all-scrip deal — that is, Afterpay shareholders would receive Square (now Block) shares rather than cash. This meant that the Block share price became a proxy for the value of Afterpay, and the Block share price has fallen by 50% since the deal was announced on August 1, 2021. (It dropped another 6% overnight.)
The share price fall was the result of the tech sector in the United States (and to an extent Australia) falling from its bubble-level highs (which was always an inevitability). If anything, it shows just how smart Molnar and Eisen were in selling to Square/Block last August. Had the bubble stayed inflated a few more months they would have collected more than $2.5 billion each, with neither appearing to have escrow restrictions.
Other BNPL businesses have also seen their share prices hit since August: Zip (down 41%); Openpay (down 39%); Splitit (down 46%).
Given Square/Block’s trajectory, the near certainty that the US Federal Reserve will increase interest rates and general popping of the tech bubble, it’s likely the value of the combined entity will continue to fall, with Afterpay’s eventual value potentially dropping well below $10 billion.
But don’t confuse speculator irrationality with good management. Molnar and Eisen created one of Australia’s most impressive businesses. The fact that idiotic day traders and speculators bid up its share price before they were completely able to sell it shouldn’t tarnish that legacy.
What are the social benefits of Afterpay?
Rhetorical question?
Still a good question. For some users it could be just a useful tool for managing cash flow. For users who are not so disciplined or less lucky it could be anything from extra but inconsequential expense to ruinous life-wrecking debt. For retailers it is a cost they have to bear if they want to retain the customers who insist on using it. That cost must get passed on, so other customers likely end up paying. The truly astronomical valuation of Afterpay (and its clones) suggests investors believe the charges the system inflicts on retailers and all their customers is now or will be equally astronomical. Therefore, taken overall, Afterpay (and its clones) create a huge flow of wealth extracted from retail business and its customers to the investors and managers of Afterpay (and its clones), whoever they are. But let’s not forget credit cards have been operating in a similar way for a lot longer.
Social benefits? Your guess is as good as mine. But we have been told there is no such thing as society, and if so it can neither be benefitted or harmed. I’m fairly sure nobody in the current government would understand the question, and I’ve got my doubts about Labor.
Perhaps you need to look up the phrase – a rhetorical question plays the role of a statement in that it is not meant to be answered.
Not a ‘rhetorical question’ to me – I’d appreciate knowing the answer as I struggle see any benefit to man or beast.
This necessarily excludes the commercial cargo cult – buy, consume, shut up and die.
Would be interested to know what the actual innovation, technical or otherwise, merited the high share price of a glorified form of ‘lay buy’ type co.? It would also be useful if real examples of innovation were featured in media rather than spruiking a ‘transaction’ aka property market news?
Especially important to inform Australians, on economic and business development to include innovation, value added and high quality; many either look back pining for subsidised US auto assembly lines etc. or staying with primary and extraction industries e.g. mining and fossil fuels.
Australia’s corporate innovation and high value globally can be found in the likes of Cochlear, ResMed, Atlassian, Canva, CSL etc. However, the education and innovation required for success do not realy gel with LNP’s (radical right) libertarian socio-economic ideology supporting fossil fuels, mining, corporate agriculture and avoiding (the promotion of) innovation through ‘elites’, because too many older voters and MPs or Ministers don’t like it?
I can see the attraction to retailers, who simply pass on the fees in higher prices for all, including non users as SSR notes above.
The old “layby” (not ‘lay buy’) – a similar impost, similarly recouped – was the first stirring of buying on credit,a century before hoi polloi had credit cards.
It required the retailer to allocate storage space (a modern no-no, according to neolib nutbaggery about ‘just in time’ stock control) and staff time to manage the paperwork as the penurious made many micro payments when they could, due to a soundly based horror of debt instilled by the Great Depression.
The point was that the populace once were familiar with the concept of delayed gratification and the goods were not available until the final payment was made.
The demand for instant gratification is common in childhood and learning to wait is a sign of maturity…which is why it’s a dead concept today with an infantile population who are equally susceptible to the same toddler behaviour when it comes to voting.
Yes- idiotic indeed. I hope they weren’t trading with my superannuation.