Hot for M&A: A Fired-Up Brazilian IT Market Attracts Big Spenders

Brazil, the world’s seventh largest IT market, is attracting the interest of multinationals and foreign private equity firms, which search for mergers and acquisitions opportunities with local companies in order to enter the Brazilian market.

This year, up until October, there have been 124 M&A transactions in Brazil’s IT sector. This accounts for 17.3% of the total number of deals announced in Brazil in the period. It represents an increase of 67.6% compared to the 74 transactions which were closed in the same period last year, and there is an upward trend for the coming years in the light of the increasing interest from foreign investors in the Brazilian market and further room for consolidation in the IT sector.

Of the 124 transactions announced, 41 were held by foreign companies. “After the elections, and with less uncertainty regarding the Brazilian economy, an increase in foreign investor interest in the IT sector in Brazil is expected over the next two years,” said Rogério Gollo, a partner at PricewaterhouseCoopers Brazil and leader in Mergers and Acquisitions.

As part of its growth strategy in Brazil, the Chilean group Sonda IT, a services company that totalted revenues of US$1.2 billion in 2013, acquired the Brazilian company CTIS Technology, which provides outsourcing services, focusing on business processes, application management, infrastructure support, service desk and print outsourcing.

Sonda IT paid around $170 million for CTIS and the value of the deal could rise by up to $36 million, depending on the results that CTIS produces over the period 2014 to 2018. With this acquisition, the group Sonda IT, which has already acquired seven Brazilian companies in recent years, has expanded its presence in Brazil, which accounted for 48% of Sonda’s consolidated revenue in the third quarter. “This acquisition allowed it to incorporate a customer base with long-term contracts, providing complementary services and allowing us to increase our presence in certain locations in Brazil such as the capital Brasilia and in the Northeast,” said Rafael Osorio, CFO of Sonda Latam.

Currently, Sonda IT has operations in 10 countries in the Latin America. “Sonda considered, in its investment plan for 2012-2015, making acquisitions in the main markets in the region, such as Brazil, Mexico and Colombia, but does not rule out any opportunities that may eventually arise in other countries where the group is located,” Osorio said.

The growth potential of the Brazilian IT market was decisive for Equinix, a U.S.-based data center firm, buying 47% that it still didn’t hold in Brazilian data company Alog for $225 million. The company was valued at $478 million, 3.5 times more than the amount paid for the initial agreement between the companies, signed in early 2011 – which included an option to purchase 37% held by Riverwood Capital and 10% of founding partners Sidney Breyer and Eduardo Carvalho. “The transaction with Equinix brought international visibility to Alog,” Carvalho said.

The Alog acquisition was the first Equinix deal in Latin America. The priority now is to expand operations in Brazil through organic growth. Alog has four data centers in Brazil, two in Rio de Janeiro, one in São Paulo and another in Tamboré, in the city of Barueri.

Alog’s operation has already been completely integrated with the Equinix platform. One of the Equinix products that Alog offers in Brazil is the Cloud Exchange service, a solution that allows direct, integrated and on-demand access to multi-clouds and multi-networks around the world.

Private Equity Transactions

The estimated growth of 16% for the data center industry in Latin America over the coming years has attracted private equity firms to this region. Of 124 M&A transactions announced this year, 43 were held by private equity firms.

This year, the global investment firm KKR bought the General Atlantic stake in the Aceco IT, which provides customized data centers, implementation and maintenance solutions in Brazil and Latin America, in what was its first direct investment in Brazil.
The value of the deal was not disclosed, but market estimates indicate that Aceco IT was valued at around R$1.5 billion (US$579 million). “The partnership with KKR brought financial strength and access to the financial market and to new customers, which will help our internationalization process,” said Aceco CFO Eduardo Marini.

The company has its headquarters in Sao Paulo city, with branches in Brasilia, Rio de Janeiro, Sao Paulo State, Argentina, Chile, Colombia, Costa Rica, Mexico, Peru and Spain. Aceco also has projects in other Latin American and Caribbean countries such as Trinidad and Tobago, Uruguay and Paraguay. “We have a joint venture with a company in Casablanca, Morocco, and we are looking for opportunities in Africa and Europe,” Marini added.

The company has expanded its operations through organic growth and also through acquisitions. In July, Aceco acquired Innovative Engenharia in Brazil, a company specialized in tests that guarantee data center quality.

A few months ago, Aceco bought Quark, a Spanish company specialized in data center design. In Mexico, the company decided to open its own office this year, which has 15 employees. “In Brazil, we focus on organic growth, but we don’t rule out new acquisitions of firms that offer complementary business,” Marini said.

Heated Market 

Specialists expect M&A transactions in the IT market to remain heated in the forthcoming years in light of the space for consolidation in this segment. According to the Brazilian Association of Software Companies (ABES), which has about 1,600 associates, more than 85% of these companies are small or medium-sized. “These companies need to go through a consolidation process to grow,” said ABES CEO Jorge Sukarie.

“We expect an acceleration of the consolidation process, mainly due to higher workforce costs in Brazil, which will further pressure company profit margins, and also, due to a continuing interest from the foreign investor in the Brazilian IT market,” said Gollo from PwC.

Furthermore, many Brazilian companies are looking for acquisitions to expand their operations abroad. One of these companies is Tivit. The Brazilian company, which focuses on IT management integrated services (ITM) and Business Process (BPM), acquired Synapsis this year, a Latin American company specialized in IT services, in its first transaction abroad. The deal may reach R$450 million (US$ 173.4 million), depending on the company’s results for 2014.

Synapsis has its headquarters in Chile and it has operations in Colombia, Brazil, Argentina, Peru, Panama and Ecuador. “This acquisition will allow us to have an important presence in the Latin America,” said André Frederico, director of corporate development at Tivit.
Synapsis operates four service lines: IT infrastructure outsourcing, development and support of applications, SAP solutions and Smart Systems. The latter is focused on the Utilities sector, which involves the management and monitoring of energy networks.

By absorbing Synapsis’ structure, Tivit will now have nine data centers in Latin America. In addition to international expansion, this operation will allow Tivit to further expand its presence in the northeast region of Brazil.

In March, Tivit acquired Work Image, a Brazilian company based in the south of the country which specializes in electronic document management. “We are always evaluating opportunities which offer a complementary business to the Tivit’s portfolio or which allows us to expand our operations to other regions,” said Figueiredo, from Tivit.