PayPal buys iZettle for $2.2 billion as it gears up against Square

PayPal Holdings Inc. is buying iZettle, a European financial-technology company that’s expected to help the online-payments giant deepen its footprint in Europe and gain more of a presence in offline commerce.

IZettle got its start enabling small businesses in Europe to accept credit-card payments through their smartphones. The company now also offers point-of-sale systems, invoicing products and business loans.

“IZettle and PayPal are a strategic fit,” PayPal Chief Executive Dan Schulman said in a statement, as the two companies have “complementary product offerings and geographies.” Schulman added that he believes the acquisition will help PayPal become “a global one-stop solution for omni-channel commerce.”

PayPal PYPL, +1.76%   shares were up almost 2% in after-hours trading following the announcement late Thursday, while rival Square Inc. SQ, -3.13%   shares dropped more than 3%.

The $2.2 billion deal is the largest is PayPal’s history and is expected to close in the third quarter of this year. Once the acquisition is complete, PayPal will compete with fast-growing payments rival Square on more fronts. Square offers payment processing and other tools for small businesses, and the company has recently tried to expand its business into international markets including the United Kingdom.

Executives at PayPal have been talking for several quarters about their openness to a major acquisition if they could find one that met their criteria, and the company has more cash to play around with after agreeing to sell its consumer-loan business to Synchrony Financial SYF, +0.98%   late last year. CEO Schulman has said that the company was looking for a deal that either helped PayPal accelerate one of its verticals or expand geographically, or one that could be bolted onto an existing business line.

“We view it as an interesting and good acquisition for PayPal allowing them to enter brick/mortar,” Baird analyst David Koning wrote of the deal. “We consider it possible that PayPal would bring this asset to the U.S. as a relevant competitor to Square.”

Omnichannel commerce has become a key focus for payments companies that want to offer businesses all-in-one tools for online and offline operations. Square recently announced the acquisition of Weebly, a website-creation platform, in a bid to enhance its e-commerce capabilities.

“The deal allows PayPal to offer an increasingly critical omnichannel solution to merchants in those markets,” wrote Jefferies analyst Ramsey El-Assal, who rates the stock a buy with a $98 price target. “We are not surprised to see PayPal put its impressive balance sheet to work for strategic M&A.”

PayPal said that it expects the acquisition to be one-cent dilutive to its non-GAAP earnings-per-share forecast for the full year. The company projects that iZettle will bring in gross revenue of $165 million in 2018 and process $6 billion in total payment volume.

Through the deal, PayPal said it will pick up in-store capabilities in 11 new markets including Mexico, Brazil and France.

PayPal shares are up 61% over the past 12 months, while the S&P 500 SPX, -0.09%   has gained 15%.

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