When considering mergers and acquisitions in Latin America, companies better have a well-thought-out strategy before proceeding, a panel of experts agreed at LendIt Fintech LatAm 2021, held Dec. 7-8 in Miami, Fla.
Plurall co-founder Glenn Goldman led the discussion. Participating panelists were Leila Search, head of Latin America fintech investments at the International Finance Corporation; Alejandro Perez, the managing director at Monocular, a provider of specialist corporate finance; Wagner Ruiz, the co-founder and CRO at EBANX; and Russell Weiss, the head of decision science at Banco BS2.
Weiss founded WEEL, a fintech acquired by BS2, along with a second company earlier in his career. He said the paradigm was banks had an unfair advantage at the beginning, especially in Latin America.
Using Brazil as an example, he said the top four banks in that country hold more than 80 percent of all deposits. A monoline lender would either need to become a bank or team up with one eventually.
The COVID-19 pandemic only accelerated that process, he explained. In Banco BS2, he said he found the right-sized medium bank where he could still influence while working toward the goal of creating the bundle of services Brazil’s small businesses need.
Ruiz sees the same challenge of fintechs either becoming a bank or joining one. While the two sectors were more opposed in the past, they are now closer. He sees the two working together, as fintechs can do some things banks cannot, but at the end of the day, fintechs need banks.
“We are still learning how to move forward with M&A,” Ruiz said. “There are so many opportunities, so many things going on.”
Valuations expensive
Ruiz said his team brought him 300 prospective acquisition targets worldwide. He sees current valuations as expensive.
Search sees acquisitions and the reconsolidation of financial services, though they happen for various purposes.
“What is the intent of the acquisition? What is the strategy going ahead of that business model?” She asked. “It could be an extension of services. It could be an extension of product. It could be technology. It could be that it’s about market share, or it could be it’s about regulatory licenses.”
She added that companies have to ask themselves what they can buy and what they should build. Spend time analyzing opportunities, strategies, the teams, and their products. What stage is the target company at? Is there the management capacity to absorb it?
Search said your target won’t likely be a Series A company as they are still executing their core product. She is seeing plenty of activity at the Series B and C stages.
Perez sees more fintechs and traditional banks becoming comfortable discussing valuations and acquisitions. As those entities discuss a potential union, he suggests looking at some critical issues early in the process.
“It’s better to have a difficult discussion at the beginning of an engagement, determine if there is a cultural fit, determine if there’s a right price range, determine if we want to work together rather than postpone until due diligence,” Perez advised. “It comes at a very high cost to have those discussions two, three months down the line.”
Having been directly involved in an acquisition, Weiss was asked to share some advice with entrepreneurs considering whether they should develop their company through organic growth or an acquisition.
Rebellious streak
He said most fintech entrepreneurs have a rebellious streak and want to change the landscape, but once a company is in growth mode, it begins to look like a bank anyway.
It’s simply a fact you will cross paths with a more prominent player, so he had to coach his team that they could still have that rebellious streak. It’s just that they’re applying it from within a bank now.
EBANX takes a comprehensive approach to its acquisitions, Ruiz said. As they develop their five-year strategic plan, a thesis emerges.
That makes it easier to put everything on a spreadsheet for comparison purposes. That saved him some stress as what initially looked like great fits revealed themselves to be less than ideal. In one case, instead of acquiring a company, he invested in it, deployed some people into the company, and acquired it five years later after it grew.
Search said rarely is the early-stage entrepreneur who never envisions leaving their market, often because they believe investors want them to grow beyond their country of origin. Such an attitude gives her pause.
“I’d argue that as investors at that particular stage, we’re actually looking for the opposite first,” she countered.
Be careful before you expand into another Latin American country, Search added. Closely scrutinize your team and theirs. Be honest about your core competencies and how good you are at them.
Business model matters
Your business model also matters, as growing a neobank in Peru and repeating the feat in Colombia are two different matters due to the distinctly different environments. Make sure it fits your strategy. Payments companies lend themselves better to acquisitions due to the cross-border nature of their businesses.
Perez said in fintech acquisitions. He sees less of a tendency to use bankers in the process. Still, they can often create incremental value, such as helping to bridge cultural gaps and advising on payout structures.
He also sees many companies wanting to grow before they are ready.
“It sounds like its too evident to be true but what I see is frequently transactions fail to materialize because there’s no actionability and no readiness,” Perez said. He advised working with your board and advisors to become more ready, so you can be part of a more meaningful discussion should an opportunity arise.
Goldman concluded the discussion by asking the panel what they see five years down the road. Weiss says he sees the digital revolution continuing and more banks closing.
That makes the online experience more important, so companies have to raise their tech game. Cool isn’t enough; only the best tech will win. Companies also need to think globally and consider incorporating technology from different markets.
If you want to see where countries who are early in their fintech paths are headed, look to those further down the track, Ruiz advised. Once you understand Brazil, you can forecast where Mexico, Colombia, and Chile could be headed next.
While agreeing with her fellow panelists, Search envisions a different future from many. She sees the number of incumbent banks declining and expects the fintechs to buy banks and the insurtechs to purchase insurance companies.
Operating efficiently
“They’re operating them much more efficiently,” Search said.
Perez is excited about the potential offered by digital assets and their ability to transform rewards by converting them into tokens and storing them in a wallet from where they can be spent.
Goldman awaits a company that can genuinely bridge between Latin America and the United States.
