A highly competitive market with its main contenders increasingly capitalized — and attracting record figures from international VCs. It is in this scenario that mergers and acquisitions (M&As) are now consolidated as a growth strategy for both startups and large conglomerates from Latin America.
Data from Inside Venture Capital Report, by the innovation platform Distrito, estimates that until November, $ 8.85 billion were invested in Brazilian startups at all stages. That is three times the amount of capital received in 2020.
By November, 227 merger and acquisition deals had been signed in the Brazilian market. And the “M&A champions” in 2021 are companies in the financial services category — which also received the most capital from investors. Negotiations involving fintechs accounted for 21.5% of mergers and acquisitions in the Brazilian innovation ecosystem in 2021.
In absolute numbers, 49 transactions of this kind were carried out between fintechs. A recent highlight is the purchase of digital bank Linker by the SaaS management platform (ERP) Omie for BRL 120 million. In December, EBANX, a fintech that processes payments for global companies in Latin America, and LABS’ parent company, also went to the market and announced the acquisition of Remessa Online. The deal was closed for US$ 229 million (BRL 1.2 billion).
The report from Distrito also points out another two promising sectors for mergers and acquisitions: marketing (martech) and retail (retailtech) with 29 and 25 transactions, respectively, until November 2021.
Mergers and acquisitions are not a new instrument for corporations. However, for Gustavo Araujo, co-founder, and CEO of Distrito, the so-called new economy gave a different look to this type of strategy, which, in 2021, had a year of consolidation in the Brazilian innovation ecosystem.
“From 2020 onwards, we had a new pattern to venture capital and acquisition of startups. And 2021 is a year of validation of these trends: of corporations’ appetite for open innovation, for investment and acquisition of startups. And also the appetite of international and national investors for new economy companies. The market is growing in all directions”, explains Araujo.
Araujo signals that the amount already raised by national and international investment funds exceeds the US$ 10 billion mark. With more capital arriving in Brazil and Latin America, Araujo believes the market should continue to expand.
“When we look over the last ten years, we see that last year ‘raised the bar’ for investments and 2021 confirms the growth trend. Even though next year is an election year, the technology [sector] should grow. We don’t see any retraction data in this area”, explains Distrito’s CEO.
With positive perspectives, the reasons for the merger and acquisition of startups are not lacking. Adam Patterson, economist and partner at Redirection International, explains that companies have different goals when looking for acquisitions. Among them: access to technology, acquisition of talents and brands, expansion of their markets, increasing their value assessment.
Furthermore, in the founders’ side of business this exit guarantees financial gains and a chance of survival for their startups in a fast-growing market.
With the domestic market attracting global investors, there is yet another phenomenon: the increase in mergers and acquisitions of companies between countries (cross-border). This type of business grew 98% on a global scale between January and October this year, compared to the same period last year, according to Retivit, a financial market research platform.
In Latin America and, especially in Brazil, this trend can already be detected as well. Patterson explains that cross-border transactions represent around 30% of all transactions registered in the country and should grow 20% by the year’s end.
“This movement started with companies that received their first relevant investments, some even became unicorns, and had many resources in cash — one way to ensure growth is to buy smaller companies. For most companies, this strategy helps to maintain relevance, grow in other areas and expand their footprint. More and more scale-ups and giant companies are adopting M&A as a way to grow faster and faster”, points out Patterson.
For Renato Stuart, partner at RGS Partners, the 2022 scenario should continue to be positive for this type of transaction. “Today startups are used to trading in high multiples. This merger movement between startups is natural, the disruption will continue”, bets Stuart.
On the side of large companies, the specialist says that a clear strategy is needed when opening the portfolio for the acquisition of startups. “Those who take on a reactive method will be left behind. More and more, these companies are putting together a clear thesis for the acquisition of startups”, says the partner at RGS Partners.
With the possibility of raising funds more accessible and predictable than the initial opening of shares on the stock exchange, some specialists are betting on more M&As than IPOs in 2022 for Brazilian startups. Another path for expansion is to carry out the IPO abroad. Fast-growing Latin American companies that are already looking to list on a stock exchange can reach new investors by targeting more developed and robust markets.
With Nubank’s arrival on the New York Stock Exchange (NYSE) in December, it is expected that other Brazilian companies will take the same path in the first half of 2022. In an interview with Reuters, the head of international markets at NYSE, Alex Ibrahim, reveals that there are negotiations for the listing of fintechs and consumer and health companies. “We are looking for companies that are changing the world,” says Ibrahim.