On Friday January 7, XP Inc. a Brazilian investment management company, announced an agreement that would make it acquire Banco Modal, a Brazilian investment banking firm. XP stated that it is purchasing a stake of up to 100% of Modal in a deal that will see Modal’s shareholders receive up to 19.5 million in XP shares. The transaction is set to make Modal’s valuation stand at $528.5 million.
XP expects that the deal would enable it to improve its banking credentials through Modal, which operates as an investment banking firm, including its investment platform combined with banking and digital services. Additionally, Modal has more than 500,000 brokerage clients. Together, XP and Modal have more 3.8 million clients and a 12-month net revenue of more than $2.08 billion as of September 2021, XP mentioned in a statement. As part of the deal, Modal will remain independent, keep its branding and will be able to access XP’s technology and infrastructure services. However, the deal is still awaiting regulatory approval. The firms hope to complete the merger , which also needs to go through regulators, within the next 15 months.
The Chief Financial Officer of XP, Bruno Constantino, stated: "Given the immaterial overlap between XP and Modal's clients, we expect that interesting revenue synergies and client experience enhancements will be captured.”
Meanwhile, the CEO of XP, Thiago Maffra, commented: “Brazil has one of the most concentrated financial sectors globally and together we’ll be able to be even more competitive against the traditional banks. Our priority is to constantly improve the value proposition for Brazilian consumers.”
How Firms Are Adapting during Difficult Economic Conditions
The development by XP to buy Modal comes at a time when competition for strategic market advantage is continuing to influence merger and acquisition activities across the financial services industry. In the first half of 2021, deals for technology and innovation continued to trigger such activities. Acquisition and divestitures are expected to continue in the upcoming months, as asset managers, insurance companies, banks and brokerage firms seek to increase margins and efficiency, optimize cost structures and improve top-line growth. As such, the transformation is in the mind of dealmakers’ overall strategic goals. On the one hand, there is pressure from regulators and persistently low-interest rates, while on the other hand disruption from fintech, platforms and continued digitalization and financial companies need to evolve to meet such challenges. A key aspect of M&A activity is likely to be the continued formation of strategic partnerships and ongoing consolidations.
