The Morning Afterpay

Block acquired Afterpay in 2022 for about $39bn[1] and recently announced that they are retiring the brand in the US and the global expansion of Afterpay has faltered[2]. Block is obfuscating Afterpay’s growth (or decline) and rumours are that the integration efforts were far more complicated than expected, and that has constrained the post acquisition growth plans, including pulling out of existing markets[3]. This is coupled with several rounds of layoffs, with the latest being 10% of Block’s staff globally[4].

While there are certainly larger market factors at play, like the tightening of credit markets, challenges in the macro buy-now-pay-later space, and the complexity of the regulation of multi-country financial services products, some of the post-acquisition indicators point to some common risks and growth constraints we identify as part of a technical due diligence process.

When investing or acquiring an organisation where technology is material to the business activities of the company, technology due diligence brings clarity to post-transaction challenges. Just as commercial due diligence validates assumptions about the target’s potential, technical due diligence, for many companies, validates assumptions about the target’s ability to execute on the investment thesis.

Traditionally, the due diligence on “technology” is what we would call IT due diligence, where there is the validation of technical aspects of the organisation: do they manage their suppliers well; have they purchased enough licenses to cover their employees; do they have industry standard policies and procedures in place to manage technology; the list goes on. We find for many organisations that are “tech native”, traditional IT due diligence is not sufficient to give commercial confidence.

In technology due diligence, we go much further, and look across many aspects of the target:

• Value Alignment - how effective and efficient is technology in delivering value and commercial outcomes

• Architecture - how is the technology currently put together to support growth, scalability and efficient change

• Capability - how is the technology developed and evolved and what are the hard and soft skills present in the technology organisation

• Operations - can the organisation effectively operate their technology and do they have appropriate levels of compliance and assurance

• Technical Debt - quantification of areas of latent technical remediation and assessment of how well the organisation balances the trade-offs of growth versus remediation

• Cybersecurity - assessment of the overall fit-for-purpose nature of cybersecurity at the target, but also looking at the security aspects of the software development lifecycle.

Back to Block and afterpay, our arm chair observations are that there were material risks around the architecture that complicated the ability to integrate the two organisations. In addition, there also appears to have been people aspects at play, with reports of culture clashes between Afterpay and Block[3] which have been growth constraints. We often find significant people aspects material in technical diligence and integration planning. It is common, and can be identified and planned for.

While having clarity about these risks wouldn’t have made them go away, going into an investment, merger or acquisition with these risks known and quantified can not only be a factor in your threshold risks, but also how you manage the asset once it takes a seat within your portfolio. Far better to shore up conditions for long term growth in value than risk retracting as the business underperforms.

Like to explore further? Contact Kit.

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