At $4 billion, did PayPal overpay for Honey?

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When PayPal decided to commit to spending $4 billion for Honey, a startup with revenue of just $100 million a year, the size of the deal raised many eyebrows.

After all, this is PayPal's largest acquisition ever by price, and it far eclipses the $800 million PayPal spent in 2013 for Braintree, which owned Venmo — a highlight of PayPal's portfolio, even though Venmo has yet to generate a profit. It also eclipses the $32 million in VC funding Honey has raised to date.

With only 17 million users, compared to PayPal’s 300 million, Honey seems minuscule. But Honey has already conditioned its base of mostly female users to use the service to hunt for deals and price-drops on e-commerce items, creating the effect of checking in before the purchase, an action PayPal wants.

PayPal CEO Dan Schulman told analysts last week when announcing the deal that Honey's power to deepen engagement with PayPal customers at the earliest stages of the e-commerce journey justifies the cost.

Payment and marketing industry experts say the deal could live up to PayPal's expectations, assuming due diligence conducted before the transaction closes in the first quarter of 2020 bears out Honey’s ability to deliver valuable connections to consumers and merchants.

For PayPal — battling the rise of other e-commerce marketplace giants like Amazon and the threat posed by the card networks’ new Secure Remote Commerce-powered “click to pay” — connecting its customer base to Honey could provide exponential value.

Unlike older deal fads like Groupon, which required users to take action on each offer, Honey’s browser extension and app scan the internet for promotion codes and automatically applies them at the checkout.

The hands-off nature of this interaction is an important way to bring in new and repeat users.

“People who typically don’t look for deals will start once coupons are integrated with something as seamless as PayPal that’s effortless and operates as a sort of ambient financial tool in the background,” said David Poole, head of the financial services center for excellence at Publicis Sapient, which guides global brands.

PayPal is betting that once consumers can see and track their savings, they’ll stick with PayPal for checkout and be less likely to dive away to other deals at the last minute, according to Poole.

“One of the big potential values to merchants working with Honey is in reducing the proportion of e-commerce shopping carts abandoned by shoppers who see a coupon field, head off to coupon sites and never come back to complete the purchase,” Poole said.

Rival deal site RetailMeNot operates in a similar fashion to Honey, and the two companies’ deal platforms even share many of the same merchants, including Amazon, Walmart, Target, Best Buy, H&M and Adidas.

Austin, Texas-based RetailMeNot, founded in 2007, was acquired by check printing company Harland Clarke Holdings Corp. in 2017 for $630 million.

Poole didn't speculate much about why PayPal chose Honey over RetailMeNot and a handful of other deal platforms.

“In assessing which service to acquire, PayPal would have considered which is the most accessible, secure and flexible,” Poole said.

While it’s true that PayPal paid a multiple of 40 times Honey’s $100,000 2018 annual revenue, the deal ultimately hinges on the data and connections it presents, said Bryan Routledge, associate professor of finance at Carnegie Mellon University’s Tepper School of Business.

“The advantage of data is increased when it’s combined with other data, and small changes in the assumptions can mean big changes in the value of the deal,” Routledge said.

The challenge is whether PayPal can efficiently integrate with Honey so that PayPal users experience a cycle of incentives that make it worthwhile to continuously shop and purchase using PayPal to maximize its investment, he said.

“If PayPal can get Honey users to migrate to PayPal for online purchases to maximize deals, and begin to reward routine PayPal users with automatic Honey’s discounts, they will pull a lot of consumers into the PayPal checkout,” said Richard Crone, a principal with Crone Consulting LLC.

The key will be the power of the merchant deals PayPal can leverage with Honey, Crone said.

It’s difficult to directly compare PayPal’s Honey deal with other fintech platforms that deliver merchant deals, because the funnel and technologies vary. But one that stands out is Cardlytics, which offers a merchant-funded marketing service to more than 2,000 U.S. financial institutions through online and mobile banking channels.

Bank of America, Chase and Wells Fargo are among Cardlytics’ partners, and by the middle of next year when Wells Fargo fully migrates to the platform, Atlanta-based Cardlytics said it will have 150 million users on its platform. To earn deals of up to 15% cash back, bank customers must scan available deals and click on them. These rewards are delivered to customers’ bank accounts within 30 days of the purchase.

In addition to the different mechanism for collecting deals, Cardlytics’ merchant partners appear to have little overlap with Honey or RetailMeNot. Cardlytics concentrates on national restaurant chains like Starbucks and Olive Garden and an array of independent retailers including Michael’s and Supercuts.

“Cardlytics is starved for merchants compared to broader web-scanning tools like Honey and RetailMeNot, and there is no ability to search for specific products, which is a major limitation,” said Crone.

The process of using Cardlytics deals also requires a few more specific actions from consumers, and the process is not directly linked to e-commerce browsing.

“In the case of Cardlytics, the user checks in with the bank before they make a purchase, but they’re several steps removed from actually making the purchase," Crone said. "With Honey, the consumer checks in before they make the purchase, and the check-in is during search or right before and integrated with checkout, capturing the highest promotional value from the sponsor.”

Cardlytics declined to comment on what PayPal's Honey purchase could mean for the merchant-funded e-commerce rewards ecosystem.

Marketers ultimately are funding both Honey and Cardlytics, and their performance is based on a variety of metrics including impressions, clicks and purchase, according to Crone.

Another way of analyzing Honey’s value to PayPal is the market value per user for PayPal, Honey and Cardlytics.

Considering PayPal's market cap of $122 billion, with 300 million users, there's a market value per user of about $400 for each PayPal user. Honey's market value per user works out to $235, and Cardlytics--with a market cap of $1.4 billion--comes in at about $9 market value per user, estimates.

“Based on the market capitalization of these companies and their total users, we can arrive at a market value per user and we estimate PayPal could increase the gross revenue per active user with the active use of Honey by two to five times per user,” Crone said.

If a substantial number of Honey users select PayPal during checkout — depending on PayPal’s successful integration of the two systems — it will make the combination of the two platforms more valuable than what they could have separately achieved on their own, Crone said.

Market researchers have long noted that many deal platforms tout inaccurate or out-of-date deals. If that’s discovered with Honey’s system, it could have a chilling effect on the deal.

“PayPal must perform deep due diligence as a condition of purchase before closing the deal. If PayPal finds any discrepancies during this phase of the deal, it could walk or dramatically reduce the price they ultimately pay,” Crone said.

In addition to the advantages Honey brings PayPal, Honey will gain additional momentum from PayPal, a PayPal spokesperson said.

“PayPal’s assets provide numerous opportunities to turbocharge Honey’s business—consumer acquisition (PayPal and Venmo), merchant access, geographic expansion and financial product initiatives, to name a few,” the spokesperson said.

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