Mercado Libre bought the rest of De Remate paying USD40B and if it keeps its P/E not only it will be free of charge but it will make money out of it.

BY aarrieta

Today 5 different people came to tell me that Mercado Libre had just bought the remaining of DeRemate.com. Then I started to see its impact on the blogsphere.

Public companies have a higher value than the private companies, due to the liquidity that the stock market offers.

It is another example of the Holistic conception where the whole is more than the addition of the parts. In this case the decision of merging or acquiring, is a economic decision, specifically it consists of an investment decision, understanding that this is the allocation of resources with the hope of obtaining future returns that allow you to recover the invested funds and obtain a certain benefit. Therefore a merge or acquisition will be successful if the purchase price is lower to the actual value of the incrementing cash flow associated to the transaction. If being like this, the investment decision creates value for the shareholder and it can be considered successful, otherwise it is said the value is destroyed and is considered as a failure.

According to the books this is a clear case of Horizontal Integration, where the purchase or merge of a company to another that competes in its same activity sector. The basic goal of looking for such integration, consist of looking for scales economies that allow reducing the unit cost of the media. They are also looking to obtain higher “market power”, I mean, increasing the capacity of pricing in a way that it captures a higher portion of the consumer surplus, by reducing the number of existing competitors of an industry.

Finally it is used to obtain the necessary resources to enter into new lines of business or new markets. Here the term “resources” must be understood widely, including: brands, managerial skills, access to specialized know how, R&D, etc.

My conclusion is that Mercado Libre is betting that the add of the current revenue of DeRemate (USD 95B of annual gross merchandise only in Chile and Argentina), will allow it to increase it value by improving its P/E (today 33.31), making that the 40b paid in the transaction reports an improvement on its value higher to USD 40b (ideally the double of the valuation figure) that will be decide by the market.

The outstanding thing is that the first reactions of the market today took the action to the falling (almost 3% now) instead of an increase. The ones who are shareholders of MELI hope that this throws back.

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