What happened

Brazilian payments company StoneCo (STNE -1.84%) and Brazilian technology company Linx S.A. (LINX) are considering combining operations. StoneCo's investor-relations website was mum on the topic, but Linx's website informed investors of the potential business combination.

Investors sent both stocks higher on the news. StoneCo stock finished the day 11% higher, while Linx stock went up 35%. Both have recovered sharply from 2020 lows, with StoneCo stock touching all-time highs.

STNE Chart

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So what

With financial technology, it's easy to think too small. There are many addressable layers, including point-of-sales devices, payment networks, back-end software, and more. StoneCo and Linx each offer a variety of products and services. However, both companies primarily serve brick-and-mortar retail businesses in Brazil.

Therefore, it might be best to think about the potential combination between StoneCo and Linx as consolidation -- not an expansion of the addressable market. This is nonetheless important. Competition in fintech is stiff, especially in ripening markets like Brazil. Combining operations could make this a more competitive company against strengthening players like MercadoLibre.

Two businessmen about to shake hands.

Image source: Getty Images.

Now what

Since Linx provided scant details on the potential combination, it's hard to analyze the merits of this deal. One might assume StoneCo would outright acquire Linx, given their disparate market capitalizations. StoneCo's market cap is $15 billion, while Linx's market cap is only $1 billion. However, the two weren't that far apart in 2019 revenue. StoneCo generated R$2.6 billion. Linx generated R$788 million. 

Therefore, this could actually be a merger. With StoneCo's stock at all-time highs, it might use shares to complete the deal, similar to the fresh merger agreement between Teladoc and Livongo. But for now, investors will just have to wait for the companies to provide further details.