PayPal Holdings Inc. PYPL 1.76% has agreed to buy European financial-technology startup iZettle AB for about $2.2 billion, a move that would catapult the U.S. digital-payments giant into hundreds of thousands of brick-and-mortar retailers around the world.
The acquisition, the largest in PayPal’s history, sets up a showdown between the San Jose, Calif., company and Jack Dorsey’s Square Inc., which has built a big payments business catering to coffee shops, flea-market vendors and millions of other small businesses with physical locations that PayPal historically overlooked.
Stockholm-based iZettle, which has been called the “Square of Europe,” builds devices and technology that nearly 500,000 businesses in around a dozen European countries, Mexico and Brazil use to accept credit cards. Most of those countries are ones where PayPal has a small presence already, and it plans to roll out iZettle devices in some of its biggest markets, including the U.S.
PayPal’s goal is to give a more comprehensive offering to retailers that want to sell products in stores and across digital platforms, Chief Executive Dan Schulman said in an interview Thursday, at a time when competition from Amazon.com Inc. and traditional retailers is fierce.
“Helping small businesses compete with the giants in the market really resonated for both of us,” Mr. Schulman said. Combining PayPal’s services with iZettle’s would allow the company to offer a “full-service, one-stop-shop solution” to current and prospective customers, he said.
The deal also would help PayPal offset the loss of one of its largest sources of customers:eBay Inc., EBAY 0.13% the online marketplace that owned the payments firm until it was spun out as a separate company in 2015. PayPal shares fell more than 12% earlier this year when eBay, which had accounted for around one-fifth of PayPal’s 2017 revenue, said it would start managing the payments flow of buyers and sellers transacting on its website.
The shares have recovered much of that drop, and after they soared last year, PayPal has a market value of more than $90 billion.
Meanwhile, Square has been moving into PayPal’s turf. Square Cash, a smartphone app that lets people send money and buy things online, has amassed more than seven million users. Last month, Square agreed to buy website builder Weebly Inc. for about $365 million in a deal that would give it a bigger footprint in e-commerce. Square also counts former PayPal finance chief Roelof Botha as a board member.
PayPal, which is around twice as old as Square, still has a big size advantage. It processed $132 billion in total payment volume in the first quarter of 2018, or more than seven times Square’s $17.8 billion of volume in the same period. iZettle, which had been preparing an initial public offering, expects its 2018 payments volume to be roughly $6 billion.
The rapid growth of cross-border commerce and the blurring of the lines between online and offline sales has led to a frenzy of deal making in the payments industry. Last year,Vantiv Inc. agreed to acquire U.K. payments processor Worldpay Group PLC for $10.4 billion, while two private-equity firms agreed to buy U.K. online-payments processorPaysafe Group PLC for $3.89 billion.
PayPal and eBay have had a mixed record when it comes to payments deals. The 2013 acquisition of Braintree Payments Solutions LLC for $800 million turbocharged PayPal’s mobile-payments acceptance tools and brought it popular digital money-transfer service Venmo.
But last year’s $238 million deal to buy bill-payments company TIO Networks became a “black eye” for PayPal, its finance chief, John Rainey, said at an investor conference this week. The company decided to wind down TIO after discovering a data breach in TIO’s systems that potentially compromised the personal information of up to 1.6 million users. TIO’s systems were never integrated to PayPal’s.
Jacob de Geer, chief executive of iZettle, will continue to lead that business and report to Bill Ready, PayPal’s chief operating officer. Mr. Ready joined PayPal as part of its Braintree acquisition.
Mr. de Geer said in an interview that he decided to sell to PayPal rather than pursue an IPO after “realizing that combining forces was effectively giving my company superpowers.”
The price is a lofty one at roughly 13 times iZettle’s projected 2018 revenue of $165 million. Mr. de Geer and iZettle co-founder Magnus Nilsson will receive a windfall when the deal closes as each owned a nearly 9% stake in the company as of the end of 2016, according to iZettle’s most recent corporate filing. iZettle’s largest shareholder at that time was venture-capital firm Index Ventures, which had a 12.5% stake, according to the filing.
Evercore advised PayPal on the transaction. JPMorgan Chase & Co. advised iZettle.