Square Reportedly Talks to Tech Giants about a Buyout

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Square has reportedly talked with several tech giants about a possible buyout, though all parties concerned have denied that such talks are taking place. Citing unnamed sources, The Wall Street Journal reported that Square has had informal talks with the likes of Google, PayPal, and even Apple, and that talks recently resumed with Google.

Square for Sale?

Square has revolutionized the payment industry for small businesses, particularly very small businesses, by making it possible for them to accept credit and debit cards from an iPhone, iPad, or Android smartphone. The company did so by charging modest fees compared to the traditional credit card industry and offering next-day deposits, a killer feature for companies operating on tight margins and low budgets.

It has used this formula to sweep up enough merchants to conduct $20 billion in transactions in 2013, which translates to revenues of $550 million. In the world of tech startups, that's more than all the money ever owned in all the world, but the problem is that Square's own margins are even thinner than its merchants'.

Which is why, according to The Journal, Square lost some $110 million last year, even more than it lost the year before. Worse, Square is running through the hundreds of millions of dollars the company has already raised through venture capitalists.

Square's fees are typically 2.75 percent to process a transaction, but roughly 80 percent of that fee goes to right to Visa and MasterCard. Square also got a sweet deal with Starbucks to handle the coffee giant's credit card transactions in 2012, but that deal has even thinner margins for Square. The company lost $20 million on Starbucks in 2013 alone.

All of which is why, according to the story's unnamed sources, Square has held and is holding informal talks with the big boys in tech about buying the company. Someone with deep pockets could absorb Square's losses without batting an eye and grow the business to become profitable.

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Of all potential suitors, Google makes the most sense. The company has Google Wallet, which in many ways is a Square competitor, but few merchants have signed on. Marrying Square's infrastructure with Google Wallet's goal—which is to add everything you buy to the company's vast, vast profile on you—makes a lot of sense for Google.

PayPal would also make sense to me. That company has significant ambitions beyond being Ebay's corporate gopher (Ebay owns PayPal), and buying its way onto the iPads sitting next to the cash registers of tens of thousands of small businesses would give the company even more weight in the world of transactions.

Apple makes less sense to me. It's no secret that Apple has ambitions of launching a mobile payment system, but I don't think Apple needs what Square has. Apple doesn't need to start at the bottom with small businesses, and it's hard to imagine Apple being willing to take a loss with a company as large as Starbucks.

My understanding is that Apple wants its devices to be the transaction vehicles for consumer transactions. This contrasts with Square's goal of supplying the hardware and engine for merchants to accept traditional credit cards. The two have little synergy, as they say in MBA land.

Nonetheless, Square has its own ambitions. "We don't see ourselves building a payments company," Mr. Dorsey told Bloomberg TV last fall. "We see ourselves building a commerce company."

Perhaps because of that, both Square and Google deny being in talks, but I wouldn't bet on that being the case.

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