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Square, Facing a Chilly Market, Persists in Pursuing I.P.O.


Jack Dorsey, the chief executive of both Square and Twitter. Credit Justin Tallis/Agence France-Presse — Getty Images

With the odds stacked against it — a chief executive who is splitting his time between two companies, a lack of profitability and an untenable market for new equity offerings — Square on Friday set a conservative valuation to market its I.P.O.

Square said it was asking investors to value the payments provider at $ 3.9 billion, the midpoint of the price range in its initial public offering. Even at the high end of the range set by Square, the valuation would be $ 4.2 billion, representing a 30 percent discount to the $ 6 billion that Square was valued at privately.

The discount may assuage some concerns by investors as Square heads into its road show to promote the offering. Jack Dorsey is the chief executive of Square and said in October that he would also be the chief executive of Twitter, the microblogging service that he also co-founded. The dual role, combined with Square’s lack of profitability, are two notches that become magnified in the current I.P.O. environment, where new companies — especially tech ones — have faltered in their debuts or decided to stay private.

Square plans to raise $ 324 million in the offering. The Silicon Valley Community Foundation, with $ 6 billion in assets to manage philanthropy in the region, is the only current investor selling shares in the I.P.O. Combined, Square and the nonprofit organization are offering 27 million shares for $ 11 to $ 13 apiece.

Founded in 2009 by Jack Dorsey and a small group of friends, Square broke new ground for mom-and-pop merchant services by offering a compact, square-shaped card reader that works with smartphones and tablets. The product was aimed at small and medium-size businesses that did not previously accept credit cards.

The company says more than 2 million merchants use Square to process transactions every month, and over the last year it has processed more than $ 32.4 billion in total payments volume. The company has also struck deals with major retailers, like Starbucks, though is better known for its long tail of small merchants across the United States, Canada and Japan.

Critics have long described Square’s revenue structure as problematic: The company takes a small percentage of every credit card transaction it processes, but must split that with banks, credit card networks and other financial intermediaries. That splitting of fees, detractors say, makes Square’s core business a difficult one to scale to highly profitable heights over time.

But Square has persevered where others have long since failed. Last week, Amazon closed its credit card reader program for small and midsize businesses. PayPal offers a similar card reader, though has put less attention into the project in recent years.

Square said it would sell 2.3 million shares currently held by Starbucks to a third party by the time all of Square’s shares are free to trade — about six months after its I.P.O. If these shares are sold at an amount less than $ 37 million, Square would have to pay Starbucks to make up the difference. At an I.P.O. price of $ 12 a share, this amounts to $ 27 million.

In recent years, Square has expanded its business to move beyond payments processing, an attempt to capture additional revenue from the millions of merchants the company serves. Square offers Square Capital, a cash advance program for businesses, as well as subscription-based appointments and payroll services.

Goldman Sachs, Morgan Stanley and JPMorgan are managing the offering. The shares will be listed on the New York Stock Exchange under the symbol SQ.


NYT > Technology

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