Role of Technology in 2018 and the First Brazilian “Unicorn”

COUNTRY UPDATE ON BRAZIL

A report published by KPMG in January 2018[1]  indicated that internet and information technology were the leading economic sectors of M&A transactions by volume in 2017, representing approximately 23% of all the M&A transactions in Brazil. Internet companies were targets in 104 transactions, while entities belonging to the IT industry were parties to 88 deals in 2017. Those sectors surpassed traditional industries in Brazil such as food, beverage and oil & gas.

However, KPMG’s report of transactions ranked by sector shows that the relevance of technology companies in the Brazilian M&A market has been solid for at least 10 years. Since 2008, transactions involving IT companies have been leading the rankings in Brazil – except for last year, when internet companies led in terms of number of deals.

Although transaction volume is significantly high compared to other industries, monetary amounts involved in transactions with technology companies are usually low, according to a statement made by Luis Motta (KPMG’s partner responsible for this report) to Valor Econômico, a renowned Brazilian news agency specialized in economy and financial markets.

 

New Scenario

Technology companies have recently been getting more attention in the M&A market in Brazil. Besides the noted steady large transaction volume, the value of these transactions has rapidly been increasing, and has included billion-dollar transactions involving technology startup companies.

In early 2018, this trend led to the first Brazilian “unicorns” – meaning, startup companies whose valuations exceeded USD 1 billion. The first Brazilian unicorn was the developer of 99, an urban mobility app similar to Uber, whose controlling interest was acquired on January 2, 2018 by Didi Chuxing, a Chinese company which had developed a similar app, in a deal that valued the app 99 in excess of USD 1 billion.

Before 99, another Brazilian startup attempted to reach unicorn status—Netshoes, an e-commerce startup focused on sports items. Netshoes was the first Brazilian startup to do an IPO on the NYSE, with a value of USD 560 million. Although Netshoes has not yet become a unicorn, its IPO may be considered as a remarkable milestone for all Brazilian startup companies.

Following the 99 deal, PagSeguro, a technology company active in credit card payment devices, went public on January 25, 2018, reaching a market value of USD 2.7 billion. This was Brazil’s second official unicorn (PagSeguro’s shares are also listed and traded in NYSE, like Netshoes’).

Brazil’s third unicorn emerged on March 1, 2018. After a private round of investments from its current shareholders – including DST Global, a private equity fund with Russian capital – Nubank, a fintech focused on creating disruptive technological alternatives to provide financial services with competitive advantages with respect to traditional banks, reached a valuation of around USD 2 billion based on the latest private investment round, as announced by its CEO, David Vélez.

 

Economy Recovery and Future Expectations

The emergence of unicorns and the increase in number and value of M&A transactions coincide with the recovery of economic growth in Brazil. Brazilian GDP increased 1% in 2017, after two years of decline. As a consequence, the number of M&A transactions increased 12% compared to 2016, achieving a new record, with Q4 2017 being the best quarter in history.

We expect that Brazil’s economy will grow even faster in 2018 and that internet and IT sectors will continue to lead M&A transactions. This trend will most likely lead Brazil to spawn more unicorns. Strong candidates are already identified by the market, Movile – the developer of famous apps such as iFood (a food delivery app) and PlayKids (a learn-through-play app for kids) – being one of the most notable. Movile has already entered into partnership agreements with global giants like Disney.

 

Conclusion

Considering the current positive trends in the Brazilian economy and the availability of global financial sources with an appetite for investments in riskier markets, professionals in the Brazilian M&A sector can be optimistic about 2018. Moreover, internet and IT companies have a great potential to remain under the spotlight, attracting more local and foreign investments and generating profits to shareholders.

 

By Maria Cibele Crepaldi Affonso dos Santos, Marcelo Freitas Pereira and André Gomes Leão

Publication: ABA SIL M&A and Joint Ventures Committee Newsletter – issue 1/2018

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[1] https://assets.kpmg.com/content/dam/kpmg/br/pdf/2018/01/br-fusoes-e-aquisicoes-4o-trim-2017.pdf