An important milestone towards a long-needed market equalization…

Well, that was kind of unexpected! At least for me, my fellow SaaSholics… As you might already know now, yesterday StoneCo Ltd. (STNE), a leading fintech from Brazil just announced it’s acquiring Linx S/A (LKSAF) (B3: LINX3; NYSE: LINX), a leading provider of ERP/POS/retail management software in Brazil. Consideration price: $1.1 billion dollars.

As a huge fan of both companies (and a humble tiny investor), I am super bullish that this combination will accelerate both companies and that there are clearly huge synergies between the businesses, as you can see in the document shared by Stone IR team today:

The deal is bold, exciting and brings a visionary combination, in my opinion.

A “win-win” for both:

  1. For Linx shareholders: The consideration price was paid 90% cash and 10% stock at Stone’s August 7th close price. That’s a ˜28% premium versus the company’s market cap. But given that a meaningful part of the consideration amount was paid in StoneCo stock, and it’s Aug 7th price per share was at $45, there’s an additional upside for Linx shareholders of almost 15% on the stock consideration piece, as yesterday shares closed at $52. If I could give only one word of advice to the Linx shareholders, it would be, HOLD! Look back at the Datasul example above and take a glimpse at the future 😉
  2. For Stone Co shareholders: The shares popped on with the announcement bringing 11% gains in price. This means going from $13b to $14.5n, creating $1.5b in shareholder value and making the transaction accretive. Personally, I believe there’s still a long way to go. StoneCo is a company with a great culture and management, and although it might seem challenging to integrate a “legacy” 35 years old player into a 8-year-old startup, I deeply believe this team has the skills to do so. Same advice, HOLD!

Why Did Berkshire Hathaway Invest in StoneCo Ltd.?When billionaire investment guru Warren Buffett acts, other investors pay attention. So when his multinational…

Crystal Clear Strategic Synergies:

From a growth standpoint, it’s very clear to me that the 70k+ Linx customers have the demand for StoneCo’s products, thus bringing lower customer acquisition costs for expanding into a core segment of the Brazilian economy. I guess Cielo (CIEL3), Getnet, Rede, and Pagseguro (PAGS) are gonna be least a little more concerned for a while. TOTVS another key and the largest SaaS player in Brazil, who is betting heavily into the SaaS + Fintech formula (Techfin), should expect increased competition on the “fin-side” of the business. From a strategic standpoint, this deal reminds me of the TOTVS/Datasul deal in 2008 (except for the size, things are way bigger these days, huh?). Why? Let me play it back to you: A newly listed company, with a very bold vision, an aggressive growth strategy, makes a big bold acquisition with a clear vision for the future of its industry. Expectations? Accelerated growth caused by the combination, pricing power and profitability/gross margins improvements. Back then, it worked very well. Here’s how it looked like, exactly two years after the close:

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Totvs + Datasul: 1+1=3


  • Growth acceleration of ˜16% CAGR;
  • EBITDA improvement of ˜28% CAGR, +4% EBITDA margins;
  • Net Profit: +30% CAGR

So, before moving forward…

I’d like to stop here and send my shout out for Linx and Stone’s leadership. Exciting, bold, strategic. Congrats guys!

Ok! But beyond the deal, there are some second-order effects that it brings to the Brazilian/Latam SaaS industry that excites me even more.

A Poster Deal for Br/Latam…

For emerging markets, “poster deals” are meaningful because they educate local investors, inspire the entrepreneurial ecosystem, and set a new standard of what’s possible. These deals break the artificial”10-second barrier.

For those who never heard of it, the 10-second barrier isthe physical and psychological barrier of completing a 100 meters sprint in under ten seconds. Before this was accomplished for the first time by Jim Hines, everyone thought it was impossible. Once broken for the first time, several other (top notch) sprinters were able to accomplish the same feat. This deal means something similar to Brazilian SaaS companies. Before jumping into it, a few poster deals that come to mind:

Brazil Poster Deals Timeline:

  • 2009 — Buscapé Sold to NaspersIn a young ecosystem with almost zero venture capital and very few, young tech startups, this was the deal that showed the local market that there was room for “venture scale” business in Brazil. Almost immediately, an investment ecosystem is born:
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The Buscapé effect in BR Venture Capital
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7 unicorns and counting…
  • 2017 -Netshoes IPO on Nasdaq/PagSeguro on NYSEBrazilian tech startups listing in the US? Unheard of… Netshoes was the first, very soon came PAGS… Since then, XP, Stone, Arco, list goes on. It’s reasonable and even natural now for Brazilian tech startups to consider listing abroad.

The Rise Of Brazilian Technology:

That’s the name of a report Morgan Stanley released a few weeks ago. The main argument is something that I believe and deeply care about: Brazilian tech companies are growing, and the local public & private markets are yet to learn how to appreciate/value these assets. That’s why I’m bullish on our SaaS players on IBOV. They’ll eventually correct. Players such as Locaweb, Sinqia, TOTVS, Linx, especially, are all, in my modest opinion “super cheap” and poised for meaningful improvements in their stock prices. I’m buying it ;)

Straight from the report:

“Brazil means a a large opportunity in tech, not yet priced in. IBOV trades at a -20% discount to S&P500, but the discount for tech-related industries is much greater. Brazilian SaaS companies are:

– 60% cheaper on EV/ NTM revenues;

– 60% cheaper on a 2020–22 growth-adjusted basis

– 50% cheaper on EV/TAM. ”

I couldn’t agree more. When we look at US-based SaaS, the NTM revenue multiples for public markets trade between 8–28x. The Median is ˜12x.

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NTM Revenue Multiples for SaaS / US
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And when we look at the most iconic SaaS players in Brazil, such as TOTVS and Linx, the multiples are insane. 60% discount? How crazy is that? These companies have local, natural monopolies and huge price defensibility. How could they be so cheap?

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TOTVS is trading at˜6x NTM Revenues. Linx trades at ˜5x. Initially, I thought that when Linx decided to go with a dual listing in Brazilian Bovespa and Nasdaq, it would see a correction in it’s “clearly cheap” stock price. Unfortunately, that didn’t happen. At the same time, Stone, who chose to list abroad is trading at 23x. These global, US-like multiples are what companies such as XP, Vasta, Afya, Arco have been seeing lately, making it a no brainer for a Brazilian company to list abroad.

It’s Getting Started… And it’s a Trend…

Recently we’ve seen successful IPOs from Brazilian companies in the US and they’re being priced fairly. XP, Afya, Arco, Vasta… All these are strong, profitable and fast-growth companies that decided to list abroad because the local stock/capital markets didn’t seem able to value them properly.

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That’s the main reason why I believe the Stone/Linx deal, a poster deal. The StoneCo acquisition paid Linx shareholders a way more reasonable˜7x multiple, (still low end, but significantly better than the trading in Brazil), showing that BR SaaS investors can have great returns. At the same time, StoneCo shareholders will incorporate Linx’s revenues into its MASSIVE multiple of ˜60x, making the deal accretive and executing a brilliant value creation. I am eager to see what the future brings for both the Brazilian SaaS landscape and for the exciting new phase StoneCo is starting.

I’d like to stop here now and THANK Linx and Stone’s leadership. It’s a great deal not only for you guys, but for our whole ecosystem. THANK YOU!

Full Disclosures:

Views expressed in this article are mine and mine alone. They do not represent any entity I’m affiliated to. This information is for general informational purposes only and should not be construed as investment advice or other professional advice. I own a little bit of almost every stock listed in this article, thus I am very biased. I truly believe they’re cheap and I’m buying/holding, waiting for a correction that is starting to happen 😉

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