Food for Thought #17

Most people overrate their own abilities and exaggerate their capacity to shape the future. Honestly, that's cool.

Optimistic people rise in this world. The problem comes when these optimists don’t look at themselves objectively from the outside perspective.

As a result, the planning fallacy fails to think realistically about where you fit in the distribution of people like you, and underestimate external how external events might have influence on the outcome.

“People who have information about an individual case rarely feel the need to know the statistics of the class to which the case belongs.” (Kahneman)

The truth is that people suck at evaluating themselves. Usually, they embrace an inside view that lures decision-making. That happens for a few reasons.

First, we’re optimistic by nature. Second is the “illusion of optimism” (we see our future as brighter than others). Finally, it is an illusion of control.

People are too fixated on achieving their goals. Think about it as someone trying to climb Everest. The closer they got to their destination, he reasons, the harder it would be to turn around.

This isn’t just an external goal. It’s an internal one. The more we see ourselves as accomplished climbers or guides, the harder it is to turn around, even though external evidence says otherwise.

Our inside view considers a problem by focusing on the specific task and using information that is close at hand, making predictions based on that narrow and unique set of inputs.

“Victorious warriors win first and then go to war, while defeated warriors go to war first then seek to win” (Sun Tzu)

So, in our mind, the closest we are to the top of the mountain, the more significant are the chances we'll get there, even though these inputs may include anecdotal evidence and fallacious perceptions.

This approach that most people use in building future models is typical for all forms of planning.

The same happens to companies. In many cases, companies make decisions based on their internal view of the business, ignoring how external events could affect them, which could risk the business itself.

I've discussed Stone, what happened to the business, and what could happen to it. Today, I'll present my view on questions I received on Twitter. If you haven't, I suggest reading our last post about Stone. It'll help.

Also, consider becoming a subscriber. Giro's Newsletter is an independent publication and relies on its supporter to keep bringing high-quality content first-hand.

Today’s outline

• BTG Pactual + Stone?
• What is in there for BTG Pactual?
• What is in there for Stone?
• Our Take
• BoD Changes…
• …Followed by More Changes
• Message is Clear

This Week Posts

• Today's Post, 9 Pages
• Stone's Biggest Moat ($), May 14th, 14 pages
• You Should Know $VTEX, May 13th, 6 pages
• Quality vs. Quantity ($XP), May 12th, 8 pages
• Thoughts On Shopify ($SHOP), May 11th, 10 pages
• Brazil April Wrap-Up, May 10th, 6 pages
• Portfolio Updates ($), May 9th, 3 pages
• Food for Thought #16, May 8th, 9 pages

Deep Dives

• MercadoLibre ($MELI) (Pinned), 29 pages

→ 160 Pages, 85% Without a Paywall, 9h Expert Channel-Check Calls in May.

→ 958 Pages In 2022, 1,500+ Hours Researching, 85 Issues Published.

BTG, Pactual + Stone?

Since Thursday, the market has been speculating that BTG Pactual and Stone would be negotiating an M&A — actually, BTG Pactual would be the buyer. Stone's gossip began in Dec of 2021 when the company hired JP Morgan to assess strategic options.

In the local market, however, the gossip about Stone looking for a potential buyer since March of 2021, when the company was supposedly negotiating with XP.

As the deal didn't prevail, Stone would have turned to Inter since both have an NDA agreement, but soon the sell-off began, and the deal was shut down.

The market spreads the news that Stone has been negotiating with BTG Pactual, even though the deal would not be close to being concluded.

What is in there for BTG Pactual?

Stone is one of the top five players in the industry, with a considerable capillarity, good tech resources for scaling its operations, and top-notch logistic capabilities.

Honestly, I believe that Andre Esteves (BTG Chairman) also observes that Andre Street (Stone Chairman) is back to the game.

After losing money in its credit operation, local investors sold their shares quickly because of Stone's naivety in jumping the gun, especially about lending money in Brazil.

Nevertheless, the market still has a high consideration for Street, so he returned and joined meetings with crucial investors — we had access to a person who joined one of those meetings and took a few notes.

We believe Esteves knows that his name associated with Street's would fully restore investors’ confidence in management and probably would use this to convince Street.

What is in there for Stone?

Even though Stone isn't facing a liquidity issue, the company could use more resources to accelerate its strategy and resume its credit operation.

With BTG, Stone could strengthen its position as a payment gateway for merchants using BTG's capital to leverage the existing operation.

Also, we wrote yesterday about a new player gaining market share in the Brazilian Payment Industry that faces a new threat to market participants.

Stone could leverage its platform to gain stickiness with its clients by offering complex products, such as lending, insurance, investment, etc.Our take

Between XP, Inter, and BTG Pactual, we believe that BTG Pactual has a corporate culture similar to Stone, unlike the other institutions.

Also, we are deeply admirers (and shareholders) of BTG Pactual. It's imposing what the bank could achieve in these few years.

With that said, we believe that would be a superb acquisition for BTG Pactual. They are smart enough to realize how hard it is to set the right group of people to build the logistic distribution Stone has.

Also, BTG Pactual could help Stone boost the investment in its registrar business, TAG. Considering that BTG Pactual has a considerable stake in its payment solution developed in-house, several optionalities are relatively easy to implement.

At least, in my last channel check on payments, when BTG decided on credit cards, they changed their mind about hiring third-party service providers for the payment solution. However, I stop investigating the subject after that.

Finally, using Stone as a payment and web payment gateway (through Pagar.me), BTG Pactual could build an extraordinary lending machine leveraging Open Finance capabilities.

However, for Stone's shareholders, this is tricky. On one side, the stock is cheap, and the core business is gaining market share, even though the scenario has become much more challenging.

On the other hand, Stone will face tougher competitors in the following years with a broader product offering, so the company will prioritize resources in a challenging macro environment.

We remember that higher rates imply less available capital for the core operation, affecting its growth prospects. So in that sense, having BTG Pactual backing the lending operation could be handy.

Finally, as shareholders of both companies, we would welcome an M&A movement between the two companies. We believe it would be extraordinary for BTG Pactual and reduce the vast burden cost of re-building the credit operation for Stone.

Also, for Stone, we highlight that competition will increase a lot in the following years. If you haven't yet, read out the latest deep dive on the company.

BoD Changes…

On Apr 26th, Stone announced the Board of Directors (“BoD”) has approved the appointment of two new Directors, Conrado Engel and Pedro Zinner.

Both new Directors bring extensive knowledge in financial services and the leadership of large companies in Brazil, which are critical to Stone’s next growth phase.

Mr. Engel, a former Senior Executive Vice President at Banco Santander Brasil, CEO of HBSC Brazil, CEO of Losango Consumer Finance, and Senior Advisor at General Atlantic.

Mr. Zinner is currently CEO of Eneva, a leading power-generation company in Brazil, and has more than 25 years of experience in strategy, risk management, and finance. Eneva has BTG Pactual as one of its biggest shareholders.

As part of this evolution, Eduardo Pontes (Co-Founder), Ali Mazanderani (Chairman Salt Pay), and Thomas A. Patterson (Madrone Capital) have agreed to retire from the Stone Board after many years of service that began before the Company’s IPO.

We believe that all these BoD members were genuinely engaged in their own personal agendas. Especially, Pontes and Ali are trying to build a “new Stone” in the UK called Salt Pay.

…Followed by More Changes

On Apr 26th, the Stone BoD approved the appointment of two new Directors, Mauricio Luchetti and Patricia Verderesi.

Mr. Luchetti has been a member of the Board of Directors of several companies and has extensive experience with People and Management. Mrs. Verderesi has over 30 years of experience in the financial markets, with a strong focus on risk management.

Mr. Luchetti worked for almost 20 years at Ambev (3G Group) as HR Director, helped Stone from 2015 to 2018 build its incentive plan and corporate governance, and we believe he'll help find gaps in Stone's corporate governance.

Mrs. Patricia Verderesi has 30 years of experience in the financial markets, primarily in senior risk management, control, and governance positions.

She was a Managing Director at J.P. Morgan over the last 10 years with regional functions and Chief Risk Officer “CRO” for Brazil.

Honestly, this nominee was a surprise for us, especially with the M&A speculation, and she is an independent member. So, perhaps, Stone will re-build its underwriting structure. We don't know, and indeed we'll go after the info.

At the same time, Mateus Scherer Schwening has agreed to retire from the Stone Board and was appointed VP of Finance at StoneCo Group.

I don't know Mateus personally, but a former colleague was in the same class with him, and we shared views about the companies a few times before the company decided to go public and about Mateus. So, hopefully, I can help.

In 2013, Mateus was approved in the Selection Process for Undergraduate Scholarship from Fundação Estudar 2013 to join the most prestigious Economics BS in the country.

In the same year, he was hired by one of the top equity funds in the country as an intern, then an equity analyst (remember, he was ~18 years old).

In 2015, joined Stone, just a year after the company started operating the POS business,  in the financial department, working close to Street and Pontes (CEO at that time).

Mateus helped build Stone's core business and participated in discussions that also helped that company grow in the following years.

Despite working full time at Stone, working in a senior position, he undergraduate ranked top during all semesters (Summa Cum Laude) at Insper's Economics BS. Finished 1st of the class. Remember, he was ~22 years old here.

After the company went public, he left the day-to-day operation and joined the board as an independent member, contributing to the company's core business.

Stone recently announced that Mateus was leaving the Board for the VP of Finance position. Why did that happen?

Honestly, I believe Street wants to work with people he knows and fully trusts. I have no doubt that Street relies on Mateus for the position, even though he's probably 27/28 years old.

Message is Clear

In our view, the message could not sound louder. As a result of the changes, Stone's Board of Directors will now be composed of ten Directors, nine independent.

Street is trying to reconquer the market confidence in Stone by appointing as many independent members as possible, providing transparency about Stone's decisions.

This is the primary reason we believe the M&A story isn't a done deal. Street doesn't look like someone looking for an outside partner, considering the recent nominations.

With that in mind, we believeStone is focused on its core business, even though we recognize there might be a deal being discussed, and it may pose a significant upside for BTG Pactual.

Disclosure

All posts on Giro’s Newsletter are for informational purposes only. This post is NOT a recommendation to buy or sell securities discussed. So please, do your work before investing your money. Giro’s Newsletter makes no representation, warranty, or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained in the piece. Any assumptions, opinions, and estimates expressed in the article constitute the author’s judgments as of the date hereof and are subject to change without notice. Any projections contained in the information are based on several assumptions about market conditions, and there can be no guarantee that any projected outcomes will be achieved. Giro’s Newsletter does not accept any liability for any direct, consequential, or other loss arising from reliance on the contents of this presentation. Giro’s Newsletter is not acting as your financial, legal, accounting, tax, or other adviser or in any fiduciary capacity.