Mercadolibre’s IPO, eBay, Argentina and the Internet Auction Market
Mercadolibre is the Latin American eBay. It went public last Friday on the Nasdaq (Ticker: MELI) and the stock increased 58%. Its path to IPO is interesting.
While I was working at Aucland, a McKinsey friend of mine introduced me to a Latin American team of smart, passionate people looking to do something on the Internet. We decided to partner to conquer online auctions in Latin America. Deremate was born. As an aside, Alec Oxenford, my co-conspirator in OLX, was the heart and brains of the project and led Deremate from inception to its sale in November 2005. He is a witty, intelligent, worldly Argentine who spent his formative years at BCG and HBS.
Numerous companies launched at the same time to go after the Latin American online auction market, including Mercadolibre. As the best managed and funded companies, Mercadolibre and Deremate largely split the auction market in Latin America, except in Brazil where Mercadolibre was the clear leader. Interestingly enough, when eBay bought iBazar, Aucland’s largest competitor in Europe, they sold the Brazilian entity to Mercadolibre in exchange for a 20% stake in the company. It’s that transaction that made Mercadolibre so dominant in Brazil – arguably a transaction eBay should not have done given the value it created for Mercadolibre.
The Internet auction market is usually a winner take all business. If you are selling a unique good, you can only sell it on one site given the obligation to sell to the winning bidder if only to avoid a negative rating. Rapidly sellers flock to the site with the most buyers and vice versa. In Latin America, Deremate and Mercadolibre could not tilt the balance enough to become the clear leader. They exhausted their teams, venture capital money and limited their potential by competing on price.
La Nacion, one of Argentina’s leading papers, bought Deremate in November 2005 and sold most of it, except the Argentinean and Chilean operations, to Mercadolibre. The merger increased the liquidity for users, stopped the destructive competition and set the company on its path to IPO. This was a clear case of 1+1=10!
What is interesting is that at various points in the past few years, eBay could have bought either company, or both for much less than $100 million. Even after the merger was complete, it could have bought Mercadolibre for much less than $500 million. eBay management thought it was too high a price to pay. At the current market capitalization, it would cost at least $1.4 billion.
If I remember correctly, something similar happened with Paypal. eBay could have bought the company for much less than it ended up paying for it, but could not get comfortable with the valuation so they waited until Paypal went public. Paypal is the best acquisition eBay ever made, but they probably could have paid much less for it.
I would argue the same thing happened with QXL Ricardo. QXL Ricardo is the leading auction site in Poland and Switzerland. eBay could have bought it for less than $200 million a few years ago but is now worth over $1 billion. It’s also worth noting that QXL bought Aucland and the entire QXL platform runs on the Aucland technology.
Of course, hindsight is 20/20 – we now know those companies are successful. Nonetheless it seems that the benefits of acquiring the market leaders in yet undeveloped but relevant markets should have exceeded the potential costs.
That brief non-sequitur on eBay aside, I am happy to note that Buenos Aires is now emerging as a successful hub for running an Internet company. It’s only 1 hour ahead of New York from a time zone perspective. There is still a decent pool of available labor. Costs are low.