Brazil’s TOTVS sells hardware business unit, Bematech, to Elgin

Contxto – To either make the most out of its software business or ride the fintech wave, Brazil’s TOTVS sold its hardware arm, Bematech, to Elgin. In the end, the Brazilian tech company aims to scrap “non-essential” business units through the transaction.

In Summary

The Brazilian ERP company is restructuring its operations and radically shifting its strategy. Allegedly, TOTVS only wants to focus on software while leaving the physical gadgets and screws for somebody else to operate. This is where Elgin comes into the picture.

TOTVS selling Bematech to Elgin may be one of the worst deals in the Brazilian tech industry’s history. The transaction concluded at a value of US$6.25 million. Surprisingly enough, it had been acquired by TOTVS back in 2015 for US$137 million. You do the math.

Okay, we’ll do the math for you. Elgin, a commercial automation company, acquired Bemetech for one-twentieth of the price that TOTVS paid four years ago.

“We have a long history of successful M&As with much value created over the years, but clearly, we didn’t get it right 100 percent of the time,” said Dennis Herszkowicz during an analyst call. “The purchase of Bematech hardware was one such case.”

In-Depth

Calling the transaction “a pretty bad deal” would be an understatement. Nonetheless, it has a valid reason behind it.

In fact, 90 percent of TOTVS business comes from software, which resulted in an average EBITDA margin of 14.6 percent. Hardware, on the contrary, brought around 10 percent remaining, resulting in a negative profit margin of 3.9 percent.

This arrangement will enable TOTVS to focus on other key areas, such as fintech. Last month, the firm launched a new department to exclusively develop and integrate its own ERP software with other fintech startups’ products.

This new division will enable companies from an array of sectors to use a full corporate ERP system with new innovative solutions. They include retail, education, health and manufacturing players.

For example, one of these solutions includes a platform for SMEs to capture and process debit and credit card payment data.

All of this is meant to “simplify, extend and lower customer access to credit and financial services in general,” said Eduardo Neubern, executive director of the new division.

In the coming weeks, TOTVS will likely announce an offer of new shares on the stock exchange to raise between US$175 million and US$250 million.

The company closed the first quarter of the year with net revenue of around US$141 million. Ultimately, this represents a growth of 8.6 percent over the same period of 2018, signaling the return to the pace of the pre-economic crisis growth.

-VC