Digital payments giant PayPal is reportedly contemplating an acquisition of social media and shopping platform Pinterest, potentially creating a marketplace juggernaut.

The $45 billion deal turns on San Jose, California-based PayPal offering $70 a share for Pinterest, ladling about a 26% premium on Pinterest's Tuesday closing price, according to a report from Bloomberg, citing unnamed sources. A spokesperson for San Francisco-based Pinterest declined to comment. A spokesperson for PayPal didn't respond to a request for comment.

"The key to garnering more transactions and more payments is to make it as frictionless as possible," said Daniela Hawkins, a payments analyst with research firm Capco, calling the combination a good fit.

One-click sales on Pinterest that move through PayPal channels, putting goods instantly on the way to a consumer's house, makes good business sense, Hawkins said in an interview. Such a combination would also allow PayPal access to shopping data that would enable more targeted marketing, she added.

On the negative side, Hawkins said PayPal's growth, and particularly its increasing financial services scope, has attracted surprisingly limited regulatory attention to this point, but a deal like this draws attention to its dominance.

Pinterest's shares surged on the news reports, leading to a New York trading halt for that stock Wednesday, but PayPal's stock slumped.

Biggest PayPal purchase

The purchase, if completed, would cap a year in which payments companies have ramped up spending for a record amount of acquisitions, driven in part by venture capital flowing to the industry and driving competition. With fintechs, including payment startups, sprouting like weeds on the financial services landscape, legacy players and new entrants alike have been eager to buy up growth and protect their turf by grafting on more businesses.

Pinterest would be by far PayPal's biggest ever acquisition, the Wall Street Journal reported, noting that, to date, the payment company's largest purchase was of Honey Science in 2019 for about $4 billion. With some $19 billion in available cash and cash equivalents, the Pinterest price tag wouldn't be an obstacle, the paper said.

Pinterest grew up as a social media website for consumers "pinning" up information and ideas on their interests, swapping home decor advice and cooking recipes, among other things. It has earned income from advertising on the site. More recently Pinterest pivoted, like so many of its peers, to incorporate shopping as well, developing new revenue streams. Earlier this year, it expanded a global partnership with Shopify, broadening retailer access for selling through the site.  

"In order for [PayPal] to capitalize on this opportunity, [Pinterest] still needs executional improvements including: improved merchant onboard through SHOP, SKU availability onto the platform, integration of purchasable items into the core user offering, faster ad product development to improve targeting/performance, and a reorganization/development of a sales force," Morgan Stanley analysts said in a report Wednesday. "We are not sure how [PayPal] would materially improve [Pinterest's] ability to execute on these factors more quickly."

PayPal ambitions

For its part, PayPal has been courting more channels for commerce as it broke away this year from a long-time relationship with former owner EBay. The two agreed to part ways in 2015 through a spinoff, but have been involved in a multi-year separation of their commercial ties.

Speaking at a Bank of America conference in June, PayPal CEO Dan Schulman discussed cultivating new merchant and consumer users. "We're seeing consistent demand for our services, maybe even growing demand," Schulman said in the conversation with a Bank of America analyst. "Our marketing is finally starting to kick in in ways that we can really measure."

A PayPal move into the social shopping space would complement its ambitions. It would also increase PayPal's rivalry with e-commerce behemoth Amazon, which has its own payments system and doesn't let customers use PayPal to buy goods.

"We are initially surprised by the proposed [PayPal-Pinterest] acquisition given the size and note the transaction could put [PayPal] in more competition with existing and potential partners," Cowen Equity Research analysts said in a report Wednesday, commenting on the PayPal-Pinterest news reports.

Like other fintechs, PayPal this year has also been focused on creating a "SuperApp," that seeks to offer consumers a package of shopping, payment and financial tools through their phones. Schulman has also embraced cryptocurrencies and QR codes as avenues for increasing transactions that flow through PayPal.

In discussing the app at an investor day earlier tihs year, Schulman talked about its "shopping tab," where consumers can build wish lists for purchases and also receive promotions from merchants, the Cowen report said. Schulman expressed aspirations to reach 1 billion users through the platform, according to the report.

Pinterest has about 459 million monthly active users, about two-thirds of whom are female, the company said in its annual regulatory filing earlier this year.

"We believe a potential acquisition of [Pinterest] dovetails with the Super App expansion strategy to boost users and engagement," the Cowen report said.

COVID boosts PayPal's business

PayPal's shares have more than doubled since before the COVID-19 pandemic emerged in March, soaring on the e-commerce craze that ensued when consumers largely quarantined at home and shifted en masse to internet shopping. Increased e-commerce translated into more consumers using PayPal's digital payment system for more purchasing and more of them using its peer-to-peer payments tool Venmo for transferring funds.

PayPal's momentum has continued this year, with the company's net revenue jumping 24% year over year to $12.2 billion for the first half of 2021, and net income climbing 41% to $2.3 billion for the period, compared to last year, according to a quarterly regulatory filing.

"We believe in the permanent pull toward e-commerce," PayPal Chief Financial Officer John Rainey said on an earnings call in July. "We believe in the ubiquity of digital payments. And we want to help shape that outcome. We want to be a leader in that space." 

The talk of a transaction comes at a challenging time for Pinterest, with the company's co-founder and board director Evan Sharp, who also is its chief design and creative officer, announcing earlier this month that he would exit the company, Bloomberg reported. The company, which is profitable, has also been grappling with allegations, including legal claims, from former employees that Pinterest discriminated against female workers. 

Deal-making fueled by payments

If the deal goes through, it would make 2021 the busiest year ever for mergers and acquisitions, despite the overhang of the deadliest pandemic in more than a century. The volume of global deal-making currently stands at $4.07 trillion so far this year, and a PayPal-Pinterest merger would catapult that sum past the previous record of $4.11 trillion set in 2007, according to data compiled by Bloomberg.

Payment industry acquisitions, including PayPal's $2.7 billion purchase of Japanese payments business Paidy last month and rival Square's $29 billion purchase of buy now, pay later company Afterpay in August, have bolstered the deal-making figures this year.

A PayPal-Pinterest transaction would also be one of the biggest consumer internet deals in recent years, exceeding Salesforce's $27.7 billion acquisition of Slack last year, the New York Times reported. 

Still, it's not a done deal, and if it does materialize, the terms could still change, the news reports said.