PayPal Holdings Inc.'s $2.2 billion purchase of iZettle AB is its largest ever deal, and could mark the start of a series of acquisitions.
The San Jose, Calif.-based payments processor announced May 17 that it will buy Sweden-based iZettle, which develops and sells payment processing tools including credit card chip readers for small businesses. The deal sets up digital-driven PayPal to take on Square Inc. as it extends its presence into brick-and-mortar stores across Europe and Latin America, where iZettle primarily operates.
PayPal could be positioning itself to strike a number of similar deals in the near future, Credit Suisse analyst Paul Condra said.
"Think of the way that Facebook would acquire Instagram or WhatsApp, you're building the portfolio of brands," Condra said in an interview. "For PayPal, the optionality now has just gotten a lot bigger."
The iZettle acquisition will allow PayPal to continue its foray into a space dominated by just a few players. PayPal has previously expressed interest in servicing in-store purchases. In October 2017, 2 million U.S. retailers began facilitating in-store payments through mobile payment servicing platform Venmo, which PayPal acquired in its 2013 purchase of Braintree Payment Solutions LLC.
"PayPal has a strong market position within e-commerce and mobile payments, but has yet to successfully penetrate the offline market in a material way," William Blair analyst Robert Napoli wrote in a May 18 research report.
PayPal emerged as a pioneering digital payment processor since its founding in 1998. But the company has faced intense pressure in recent years as coffee shops, farmers markets and other small businesses increasingly look to provide customers with digital payment alternatives.
By adding iZettle, PayPal taps into a merchant base of nearly half a million, stretching across Brazil, Denmark, Finland, France, Germany, Italy, Mexico, Netherlands, Norway, Spain and Sweden. That merchant base could serve as an immediate revenue source for PayPal, as the company could cross sell e-commerce and digital products to those iZettle merchants, said Wedbush analyst Moshe Katri, who called the transaction a "no-brainer" in an interview.
Executing such a plan could take time though, possibly causing PayPal to hold off on any other acquisitions as it looks to gauge the success of the iZettle deal, Katri said.
But PayPal is also set to see a massive influx of cash over the next several months, swelling its balance sheet and possibly fueling a flurry of deals in the next several years.
The nearly $7 billion sale of its U.S. consumer credit receivables portfolio and participation interests in receivables to Synchrony Financial is expected to close in the third quarter. Those profits, combined with the company's cash on hand, could expand PayPal's cash balance to as much as $15 billion, CFO John Rainey said just days before the iZettle deal was announced.
"I think of our balance sheet as a strategic weapon and a competitive advantage," Rainey said at the J.P. Morgan Global Technology, Media and Communications Conference. "That [cash] gives us a war chest to go out and acquire companies for growth."
If PayPal also took on some debt, the balance sheet could possibly reach $20 billion, Credit Suisse's Condra said. That size would likely lead PayPal to pursue one or two deals valued between $1 billion and $2 billion every year in the short-term future, making the company a sizable consolidator in the financial technology space, he said.
It remains unclear what businesses PayPal might target next. Square dominates the U.S. market and iZettle serves as the primary transaction facilitator for merchants in Europe and Latin America. But Condra said PayPal and similar companies may still have room to expand as merchants continue looking to facilitate digital payments online and in store.
"There's still a pretty large opportunity," he said. "We're still at the really early stages of growth."