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Is PayPal on Target as Square Builds a War Chest?

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Aug. 18 2020, Updated 5:24 a.m. ET

Square raised more than $860 million

In the second quarter, Square (SQ), whose earnings report is due for release on August 1, raised additional capital of more than $860 million through the sale of convertible notes, adding to its more than $1.0 billion in cash holdings as of the end of the first quarter.

In May, Square sold convertible notes worth $862.5 million. These notes mature in five years. The company said that it would use the funds to pay certain costs tied to previous warrant transactions and for general corporate purposes, which may include strategic acquisitions.

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Square and PayPal are strategically acquiring companies

Square had cash holdings of $1.2 billion at the end of the first quarter. Combined with its recently raised capital, the company has nearly $2.0 billion in cash. Its rival PayPal (PYPL) exited the first quarter with $7.8 billion in cash. PayPal is also getting ~$6.9 billion from the sale of its US consumer lending business to Synchrony Financial (SYF).

Keen to stimulate growth and diversify their operations, Square and PayPal have both been active in the deals market in recent months. Square inked three merger and acquisition deals in the first half of the year, keeping the pace with PayPal, which inked four acquisition deals in the same period, according to Crunchbase data.

PayPal particularly ratcheted up its acquisitions after it became apparent that eBay (EBAY) was replacing it with Adyen as its main payment partner. Adyen also processes payments for Spotify (SPOT), the online music company that exited the first quarter with over 75 million paying subscribers.

Building a war chest to keep the pressure on

In turning to investors to raise additional capital through the sale of convertible notes, Square may be trying to build a larger war chest to allow it to continue making strategic acquisitions as it battles PayPal to expand online and diversify its business and customer base. Merchants that make more than $125,000 in annual sales now account for 47% of Square’s merchant customer base, up from 39% a year ago.

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