The announcement that Sweden’s iZettle was going to go public just 10 days ago provoked cheers among European tech boosters that proved to be short-lived. Rather than watching the rise of an independent tech company, yet another local startup was being gobbled up by a U.S. tech giant.
In this case, PayPal which announced it is paying $2.2 billion for the Swedish fintech company. That price tag is the first clue as to why iZettle took the money rather than the IPO. The latter was expected to give the payment company a valuation just north of $1.1 billion.
iZettle co-founder Jacob de Geer penned a note explaining the decision, ticking off the usual boxes about how the companies had similar cultures, visions, and being able to go further even faster.
“By joining the PayPal family we’ll become iZettle with superpowers and jump on a fast track to realise our vision,” he wrote. “The opportunity to become part of PayPal was too good to pass up. Not only because of what it means for iZettle and for iZettle’s employees, but because of what we can offer to our merchants.”
That all may turn out to be true, though tech mergers as a whole typically tend to start off with such optimistic sentiments only to eventually run into the realities of a long history of failures. There’s always the chance that the iZettle-PayPal hookup will be an exception, but success is far from guaranteed.
Given that iZettle is in 12 countries compared to 200 for PayPal, certainly the latter can help it deal more quickly with the various regulatory issues needed to expand into new geographies. But just how iZettle will be integrated (or not integrated) with PayPal’s own competing point-of-sale payment services remains to be seen.
Still, the IPO likely posed even greater risks for iZettle. On May 8, the company announced its intention to list on the Swedish stock exchange, but had only provided preliminary financial details. The company had not published a more detailed prospectus before the PayPal deal.
Naturally, the numbers iZettle disclosed were bullish. The company is on track for $165 million in revenue this year, up 60 percent from a year ago, while showing losses that appeared to be narrowing.
With that momentum, the company said it hoped to raise about $227 million with the IPO. But it hadn’t gotten around to detailing, for instance, how much of that might go to insiders who were selling shares, and how much would go to the corporate treasury.
Speaking of which, iZettle has raised a total of $150 million in venture capital over the years, including a round of $47 million just last December. But at least $83 million of that was debt funding. Between paying off that debt, and possibly watching some money to go insiders, suddenly the IPO seems less like a possible corporate windfall.
Of course, the company was itching for that money having watched another U.S. competitor, Square, enter the U.K. market last year and talk up its European ambitions. With a market cap of about $22 billion, Square likely had brand awareness and financial resources to give iZettle a good run at its core point-of-sale market.
The prospect of battling Square and PayPal for the hearts and minds and wallets of retailers, with far less financial resources, was going to require iZettle executives to do one hell of a selling job to make its IPO a success, let alone continue growing and reaching profitability.
Big news – iZettle to join forces with PayPal. Becoming a part of the PayPal family will give us and our merchants an amazing opportunity to grow and expand. We’re so excited! Read Jacob’s thoughts on the news here: https://t.co/6Pc9eKOTKx pic.twitter.com/881a9TtzGq
— iZettle (@iZettle) May 17, 2018
So when PayPal came knocking, it’s no surprise iZettle was willing to listen. The $2.2 billion price tag certainly will make this one of the biggest European deals, though PayPal has still not detailed how much of that figure is cash or stock, or whether it includes assumptions of iZettle’s existing debts.
For the part of iZettle, the company appears to be retaining some independence and de Geer will continue to run its operations in Stockholm. But European tech boosters will have be content with another signficant branch of a U.S. tech company.
“iZettle will become a center of excellence for PayPal’s in-store product and services offerings for small businesses going forward, which I’m really excited about,” de Geer wrote. “Creating a center of excellence in Stockholm with a global reach means a lot to me.”