Why PayPal bought a European start-up with IPO plans for $2.2 billion

Financial technology titan PayPal made its biggest ever acquisition on Thursday.

The firm bought Stockholm, Sweden-based payments start-up iZettle for $2.2 billion. That’s double the valuation it was reported to be looking to fetch with a listing on the Nasdaq in Stockholm later this year.

IZettle is a rival to Square, the U.S. fintech firm led by Twitter CEO Jack Dorsey, but only competes directly with the $21 billion company in the U.K.

The company makes small, wireless chip readers along with a number of other payment processing products. It recently launched a new product that lets small businesses build their own online stores.

The acquisition means that iZettle will no longer be seeking a listing of its own, something it “spent roughly a year” trying to achieve, according to Jacob de Geer, the firm’s chief executive.

“I think it’s important to clarify that since we started the company in 2010 we’ve been doing a lot of work with PayPal and the team at various capacities in terms of cooperation and partnerships,” De Geer said in a phone interview with CNBC on Friday.

“We’ve been struggling all along to get to the vision we’re aiming for in terms of helping small businesses and competing with the giants, and PayPal has in the area of 20 million merchants whereas iZettle has 500,000,” he added.

The company has so far failed to make a profit, but has said it wants to achieve positive consolidated earnings before interest, taxes, depreciation and amortization by 2020. De Geer said at the time of iZettle’s IPO announcement that it would look to draw in some slightly larger merchants.

For PayPal’s Chief Operating Officer Bill Ready, the move is about increasing its payments presence among physical retailers.

“This phenomenon of in-store payments via mobile for small businesses, it’s a global phenomenon and there have been many players in the space,” Ready told CNBC. “Most of them though have been constrained to one or only a few countries.”

IZettle is currently present in 12 countries in Europe and Latin America, while PayPal operates in more than 200.

Ready said that, following the deal, PayPal would look to expand iZettle’s international presence further. “What I think is quite distinctive about this team is their ability to go serve small businesses on a multinational basis,” he said.

PayPal, a company worth almost $94 billion, is used by major retailers around the world, including Walmart and Best Buy. IZettle’s focus, on the other hand, is more on small-to-medium-sized firms.

E-commerce giant eBay dealt PayPal a blow earlier this year when it decided it would drop PayPal as its primary payments provider. The online shopping site chose a European start-up of its own, Adyen, to replace PayPal. Adyen is also reportedly seeking to list its shares.

PayPal’s Ready said that the investment in iZettle would give PayPal more of a “technical” presence in Europe.

“Europe contains many of our most important markets, we have huge presence in Europe already from a commercial perspective,” he said. “But one of the things that we think is fantastic is that his is going to create a European center of excellence for us on a technical perspective.”

He added: “We’ll now have an amazing team of engineers and product development and builders here in Stockholm to increase our presence in Europe from a technical perspective and help us build out many more capabilities.”