Apple of the eyes

A challenging economic environment, complex tax regimes and companies that often have a low degree of governance and compliance. None of this seems to reduce the appetite of international corporations for Latin America. The region continues to be the scene of an increasing number of mergers and acquisitions, which proves that, in spite of the economic cycles, countries such as Brazil, Mexico, Chile and Argentina are attractive for investments. This is one of the main findings of the report “Latin America Mergers & Acquisitions Study – Integration and divestiture best practices throughout the region”, conducted by Deloitte in 2017.

The study is an update of a 2015 survey on the main mergers and acquisitions (M&A) activities in Latin America, covering deals from 2014 to 2017. Executives from 67 companies with average revenues of US$500 million, being three quarters privately-held companies and a quarter public companies, were interviewed. More than half of the participating companies represent manufacturing, technology, financial services and life science & health care industries.

For companies that decide to go for an integration process, there are many challenges to ensure that it occurs in a satisfactory manner, and this was rightly a priority focus of Deloitte’s study.

 

 

For Venus Kennedy, Deloitte Latin America Integration & Divestiture Consulting Practice leader, the data reinforce the perception that currently integrations outweigh divestitures, and that there is an interest from international groups to continue investing in Latin America, especially in Brazil. “In a recent past, we observed a greater focus on companies leaving Latin America countries, but now we see just the opposite, which is a sign of confidence in the returns that the region can deliver to companies’ business and to investors with global operations” says the executive.

In recent years, doing business in Latin America was complex on account of economic and political uncertainties. Therefore, we have seen some divestitures occur. The resumption of investment in the region is a reflection of the increased confidence in this market., Venus Kennedy, Deloitte Latin America Integration & Divestiture Consulting practice leader.

Not that the countries’ macroeconomic situation does not influence, for good and for bad, the volume of deals in the region. According to Deloitte’s study, the challenges to invest in Latin America continue to be uncountable.

In some cases, macroeconomic factors, such as exchange rates, even help in the deals – with the high dollar against real, for example, the price of the assets to the foreign investor can become much more attractive. The shrinkage in consumption, due to the unemployment and high inflation, is also an aspect of the economic scenario that influences the companies’ strategies, especially between the sectors most susceptible to the consumers’ income level. However, more than the macroeconomic aspects, it is on day-to-day routine of executives that the first difficulties in M&A operations appear.

 

Matter of time

In this context, Brazil is seen as an attractive country for global operation companies, since it has a large territory, vast potential in the consumer market, presents a good balance of risk and return and has highly competent regulatory institutions. However, it is a country where companies face difficulties in completing merger and acquisition operations within the estimated time. “In the United States, 75% of acquisitions perceive results within the first six months after the deal. In Brazil, this percentage drops to 25%. It takes approximately two years to obtain a complete synergy in the country” explains Renata Muramoto, Deloitte Consulting partner.

There are many steps until the conclusion of a merger process. The success of the operation depends on the companies’ degree of preparation to interact with the tax complexity, legal and regulatory obligations and the integration planning., Renata Muramoto, Deloitte Consulting partner.

Both integration and divestitures takes a longer time to accomplish the expected outcomes when compared to global statistics. This is due to bureaucracy and lack of speed in the issuance of licenses and also because of the lack of governance and compliance from the companies involved in operations – many are family companies, managed in a less professionalized manner and that do not go through audits. “It is crucial for business success that the transaction and post-merger process be conducted in a structured way with the proper support of subject matter experts” says Renata.

Intervalor, a Brazilian financial services company specializing in credit and collection, experienced this longer process when it had 40% of its share capital acquired in 2015 by Arvato Financial Solutions, a company of the German group Bertelsmann. Two and a half years was the time needed for both the buyer and the acquired company to “know each other better” and consolidate the acquisition process. In March 2017, the German company acquired a larger interest and today owns 81.5% of the Intervalor’s capital.

The integration did not bring great changes in the executive board: Luiz Carlos Bento, Intervalor’s founder, remains ahead of the company, as Chief Executive Officer (CEO). The staff of about 3,000, has gone through changes arising from the increasing digitalization in the collection operations – now part of them is done by robots. “The first 40% investment followed a pattern that underwent a company’s analysis, including governance, customer base and tax aspects. The process was well executed and paved the way for increased interest, which is also being successful” says Bento. With headquarters in São Paulo, Intervalor performs credit analysis of about R$ 1.5 million annually and has a database with over 15 million debts.

A key point for the success of the operation, says Intervalor’s CEO, was to identify synergies – the main one was in the company’s business unit responsible for the development of solutions in the credit recovery area. The automated service technology developed by the Brazilian company allows robots to interact with the customer through 16 types of social media, without losing the service flow. The service automation allows a more competitive cost, so that the company can make more than 100 million customer interactions per year. This has contributed for the company to grow at an annual average rate of 15%.

In addition to developing its own technology solutions, the company is also present in Colombia, Argentina and Peru, through partnerships with local companies, which was another factor of interest to the Bertelsmann group. “The current economic period is a factor for concern, but in the segment in which we operate, we have benefited from the increase in the volume of collections,” says Bento.

Who accompanies the economic news realizes that the scenario is bustling in Brazil, where company acquisitions have been frequent. At the beginning of 2017, BM&F Bovespa joined Cetip to form B3 (Brazil, Bolsa e Balcão), today the fifth largest capital and financial market stock exchanges in the world in terms of market value, with assets amounting to US$13 billion. In June, the cosmetics manufacturer Natura surprised the market by making an offer of €1 billion to acquire the British company The Body Shop, a transaction already approved by the CADE (Brazilian Antitrust Agency). In July, the retail sector has witnessed the agreement of Livraria Cultura to buy Fnac’s Brazil operations.

These examples show very distinct company acquisition scenarios in Brazil, but have in common the fact of being the result of a companies’ strategies review, whether by difficulties in the consumer market, or by the desire of expanding borders and gain strength.

“The crisis requires companies to rethink strategies, redefine the focus, cut costs and be more efficient. Expand international operations is also another way to circumvent the mishaps of a more retracted domestic scenario” says Margaret Gutierrez, PhD in Economics and professor at COPPEAD/UFRJ, the business school of the Federal University of Rio de Janeiro.

 

Expanding without losing focus

Focus on core business and opportunity to leverage capital are the main reasons that lead a company to divest business units, as demonstrated by the Deloitte’s study. Most of the respondents (69%) divested because those were non-core business units, or because of financial needs.

Deloitte’s study indicated that, in addition to the value of the transaction, factors such as speed and certainty to close, ability of buyer in exploring current customer or supplier relationship, and ease of transaction are the most important factors when choosing a partner in a divestiture.

hese examples show very distinct company acquisition scenarios in Brazil, but have in common the fact of being the result of a companies’ strategies review, whether by difficulties in the consumer market, or by the desire of expanding borders and gain strength.

The American group Bemis, which operates in the packaging supply for several industries, divested, in May 2017, its division of agricultural tarpaulins, Lonas Carreteiro, to focus on the food, beverages, cosmetics, pharmaceuticals, medical-hospital materials and pet food markets. The news are that the tarpaulins division was bought by Boomera, a waste management and recycling startup, which saw in the company an opportunity to expand their business.

With the acquisition, the small Boomera jumped from 20 to 121 employees, and added the industrial unit located in Cambé, Paraná, which, beyond the production of tarpaulins, is equipped with plastic recycling technologies. This will allow the company to gain scale in solutions for recycled materials which, while as a startup, they had already created. The expectation is that Boomera’s revenue will jump from the current forecast of R$ 20 million per year to R$ 100 million until 2020.

The startup is specialized in difficult waste recycling solutions, such as BOPP (a type of plastic film coated with aluminum, widely used for packing biscuits) packaging, espresso coffee capsules and even disposable diapers. Among customers, are PepsiCo, Braskem, Nestlé and Adidas. “Bemis was already decided to divest its agricultural tarpaulins unit and, after a good negotiation, we realized that it was a business complement to what we already did” says Gui Brammer, Boomera’s founding partner.

Regardless of the economic scenario, mergers and acquisitions are complex processes, which require planning, teams’ direct involvement, capital, time and resource investments. To ensure that this journey is as smooth as possible for both parties, it takes more than a good execution project. Being attentive to market nuances, employees’ feelings and the regulatory environment are some elements that can contribute to a successful integration. Even in face of the market challenges, the world does not stop and the business wheel keeps on turning at full steam.