US payments giant Square, owned by Twitter co-founder Jack Dorsey, has announced a $29 billion ($AU39 billion) takeover of Australian buy now pay later (BNPL) pioneer Afterpay, in a deal that both companies say will expand Afterpay’s reach in the United States.

The landmark agreement, set to make history as Australia’s largest corporate buyout, will see all Afterpay shares acquired via a “court-approved scheme of arrangement”.

The transaction is expected to close in the first quarter of 2022.

When the deal is complete, the Afterpay brand will be integrated into Square’s Seller and Cash App ecosystems.

Afterpay co-founders Anthony Eisen and Nick Molnar are also set to join Square, heading up its merchant and consumer lines. An Afterpay director will also be appointed to the Square board.

In a statement, Afterpay said would benefit from Square’s “large and growing customer base of more than 70 million annual transacting active Cash App customers and millions of sellers”.

Square, founded in San Francisco in 2010, employs more than 5,000 workers globally and has grown to offer merchant services including Point of Sale terminals and cashflow management tools in North America, Japan, Australia, Republic of Ireland and the United Kingdom.

Square’s consumer-focused Cash App, meanwhile, boasts more than 36 million users in US and the UK. The app allows customers to transfer money, search for discounts, and manage investments in both stocks and bitcoin.

Once Afterpay’s capabilities are embedded within the Cash App, additional features will be made available, including the ability for consumers to manage instalment payments and discover new merchants.

In its latest trading update, Afterpay, which employs 600 workers globally, revealed a 90 per cent increase in underlying sales over FY21, with active customers growing by 63 per cent to 16.2 million. Of this new cohort, 10.5 million were from the United States.

Of Afterpay’s 100,000 active merchant customers – many of which view the BNPL specialist fintech as a customer acquisition vehicle – more than 28,400 are from the United States, representing mostly larger retailers.

With access to Square’s extensive merchant network, however, “even the smallest of merchants” could be opened up to Afterpay, the companies said.

A ‘significant moment’ for Australia’s tech sector

To Eisen and Molnar, the transaction marks “an important recognition” of Australia’s technology sector as homegrown innovation begins to see global uptake.

On LinkedIn, Molnar described the deal with Square as a “significant moment” which will “further connect our [Australia’s] emerging tech sector to Silicon Valley”.

The landmark buyout follows a Parliamentary hearing in February, in which co-founder Eisen warned that Australia risked lagging other developed markets in its capacity for fintech innovation, without clearer guidance from regulators.

“Australia has made some great progress, but so has everyone else. Many studies indicate that our competitiveness as a location to base a fintech business has actually declined over the past decade, which means that other countries are moving quickly to take up these opportunities,” Eisen told the hearing.

To stay competitive, he argued, Australia needed a regulatory culture that provided “more certainty and support for emerging fintech businesses”, giving confidence to start-ups like his own.

He also flagged difficulties faced by Australian start-ups in attracting capital, as well as “using that capital for entrepreneurial activities”.

“The providers of that capital are more hesitant to give it unless there are reasonable paths to navigate environments that haven’t been illustrated previously… so, having that regulatory symmetry with those new business models is really important,” Eisen said.

BNPL competition heats up, Square’s opportunity

Afterpay’s takeover comes as the United States’ BNPL battleground escalates, with the likes of Paypal, Apple, Mastercard, American Express, Citi and J.P. Morgan Chase offering similar pay-in-four loan products.

Square co-founder Dorsey said that acquiring Afterpay would drive more e-commerce activity across both merchant and consumer portfolios by linking retailers with younger shoppers.

While the transaction remains subject to shareholder approval, Afterpay’s board “unanimously” recommended voting in favour of the bid, highlighting an “attractive” 30.6 per cent premium attached to the fintech’s latest closing share price of $96.66.

For every Afterpay share, shareholders are set to receive 0.375 shares of Square Class A common stock; they can opt to receive Square shares listed either on the ASX or in the US.

“Square has agreed to establish a secondary listing on the ASX to allow Afterpay shareholders to trade Square shares via CHESS Depositary Interests on the ASX,” the companies said.