Brazil’s Second M&A Wave: Best Practices for Approaching Acquisitions in Brazil

Multinationals’ interest in mergers and acquisitions (M&A) in Brazil is increasing as valuations fall and the real depreciates. Additionally, the divestment of non-core assets by other companies and the need for growth capital in the SME space is generating new strategic acquisition targets for multinationals in Brazil.

However, M&A is a very time-consuming and resource-intensive activity, and many acquisitions fail to deliver expected returns to shareholders (see chart). In Brazil, M&A failure can stem from a multitude of factors, including not having a structured process for mapping and screening potential targets; failure to assess tax, labor and environmental contingencies correctly; not including price adjustment mechanisms; failure to retain key employees; and conducting a poorly-structured post-acquisition integration process.

Chart: Brazil M&AFSG recently published a report specifically addressing ways to overcome common pitfalls in the execution of an M&A deal in Brazil. In our research we focused on best practices in the following areas:

1. How to determine whether an acquisition is the right strategy for growth in Brazil

Not all companies are suited for a strategic acquisition in Brazil, and even if they feel they are, it might not be the right moment to embark on such a time- and resource-consuming endeavor. Before you decide on an acquisition in Brazil ask yourself whether growing inorganically fits your company’s culture and strategy, and whether your company is ready for an acquisition in Brazil.

Finally, even if the answers to the questions above in “Yes”, there is a final question you should be asking yourself, which is whether an acquisition is a better alternative than growing organically. The decision between organic and inorganic growth will depend on the capabilities you need to grow in Brazil, on whether or not you will be able to find an appropriate target that has those capabilities, and ultimately on the time and cost of building up those capabilities organically versus the time and cost of acquiring them through an acquisition.

2. Tactics for tackling key challenges that arise during the execution of a strategic acquisition in Brazil: 

Conducting a strategic acquisition in Brazil can prove a long and challenging road. From the first phase of an acquisition – mapping and screening potential targets, to the final step – post-acquisition integration, multinationals should be equipped with the tools and best practices to successfully navigate the acquisition process.Just to give an example, since observing tax, labor and environmental laws is so challenging for most SMEs in Brazil, many of them choose not to be fully compliant with those laws in order to gain cost advantages and stay profitable. As such, most companies in Brazil have learned to coexist with pending litigations, however a multinational is likely to attract more attention from regulators and tax authorities, which could result in significant contingencies were the multinational to acquire a non-compliant SME. Therefore, when conducting due diligence, multinationals should be very diligent in finding all the “skeletons in the closet”, which also implies getting external help from local lawyers and tax advisors.

3. Assessing the pros and cons of partnering with a private equity fund as an overarching risk mitigation strategy: 

The rise of private equity in Brazil and entry of foreign funds present interesting alternatives to standard acquisitions. Acquiring a company from a private equity fund is the most effective way to find a target that is already compliant with multinational corporate standards in areas such as governance, accounting or systems, as well as with local tax, labor and environmental standards.

Some private equity funds have specialized in investment opportunities that they can later exit selling to multinationals via strategic acquisitions. However, buying from a private equity fund comes at a price. Therefore, multinationals will need to assess whether they can generate enough additional value from the PE fund’s asset to still achieve the desired return on investment on that acquisition. This is especially crucial in Brazil, where payback periods tend to be longer than in other emerging markets as a consequence of “custo Brasil”, or the high cost of doing business in the country.

For more on best practices when approaching mergers and acquisitions in Brazil, FSG clients can access reports on the client portal.

Ensuring a Successful Post-Merger Integration in Emerging Markets

Postmerger IntegrationAlthough identifying and finalizing an M&A deal can be challenging in emerging markets, the subsequent integration of the acquisition is extremely vital to the success of the entire process.  As interest in M&A in emerging markets heats back up, former FSG expert advisor, who has just become the CFO of an Italian Fashion Group based in NYC, Alberto Elli recently joined SVP of Global Research Joel Whitaker and AVP of FSG’s Strategic Research Dan Kornfield to discuss post-merger integration – both its perils and potential. You can download the podcast by clicking here, or read further for key takeaways from the conversation.  You may also access the FSG iTunes podcast library here.

Post-merger integrations can fail for many reasons. M&A deals often look great at the target phase but if they lack the proper ability to execute they will end up failing.  M&A by definition is a growth strategy, the basis for acquisitions.  It doesn’t matter how little was paid for a new business, subsidy, or division because if you lack a proper integration strategy the investment will not pay off.  According to Alberto, if the proper time and resources are not allocated to properly build an integration strategy, the entire M&A deal becomes a value-destroyer.  Therefore, it’s important to note the following four building blocks of a successful post-merger integration strategy:

1)      Nature of the Transaction

One of the most important determinations to make is whether or not the acquired business unit or subsidiary is structured to assist the integration process.  Resource strapped business units are often left to deal with the integration on their own which is a pain point that many FSG clients express.  It’s important to assess the local competency and bandwidth of newly acquired staff and ascertain whether or not to send in additional change management staff.

2)      Complexity Upfront

As a natural progression from the first building block, it’s vital to know and identify any complexities upfront.  If local staff are deemed unable to handle the integration on their own then it’s evident ahead of time that additional staff is needed, either internal staffing from other locations, new hires or external consultants.

3)      Customer-facing or front office

Post-merger integration has a large impact on top line projections thus it’s vital to immediately adjust the forecasting and projections from a regional perspective.  Are there current agreements or distribution contracts in place that the company can no longer deliver upon?  Ensure to extract any verbal agreements from local sales, marketing, and management during the due diligence process to identify which customers are retainable and which customers are not.

4)      Back office

Back office includes supply chain, or essentially the delivery mechanism for products and services to customers. It’s important to decide how to serve your customers. Know whether or not CRM integration or any IT services are required to keep the business running.

Again, none of these building blocks matter without the proper people in place.  It’s vital to compile the best teams to assist during post-merger integration.  In many cases, especially for larger multinationals that are executing upon more than 5 M&A transactions annually, building an internal M&A team will likely pay off and give current employees great opportunities.

Alternatively, leaving the integration process to the local staff can be viable, but be sure to properly allocate resources to empower local teams to execute.  And lastly, regardless if local staff, relocated staff, or even external consultants are assigned to the integration process, passion and ability is fundamental for a successful integration.


Alberto Elli is CFO of an Italian Fashion Group based in NYC and also President and Founder of Pever LLC, a consultancy firm specialized in post-acquisition integration.  Alberto was formerly a member of FSG’s expert advisory network advising clients on post-merger integration strategy. Prior to founding Pever LLC, Alberto was Vice President and Controller of Sherwin-Williams Global Finishes Group from 2008 to 2013 and was responsible for nearly $5bb in sales. Since inception, the group grew sales 70% both organic and with several acquisitions. Alberto has held various senior financial positions throughout his career including Vice President of Schering-Plough’s international division and SCA, a Swedish multinational in paper and packaging.  Mr. Elli holds his degree of Dottore in Economia e Commercio from the Universita’ L.Bocconi, Milano, Italy.

PODCAST: Integrating Acquisitions in Emerging Markets

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In this podcast, Frontier Strategy Group Expert Advisor, David Hodge, shares his experiences and best practices in the realm of post-merger integration. David was a key member of the transaction team for Amcor’s 3 largest acquisitions, and has completed M&A transactions in 10 separate countries. He highlights four of the most common pitfalls to avoid, and shares a “strategic growth framework” for capturing the most value.

To listen to or download the podcast, click on this link to access the iTunes store.

Organizational Structure Best Practices in Asia Pacific from Valmont


In one of the most diverse and varied marketplaces, senior executives in the Asia Pacific region face complex challenges in developing an efficient organizational structure.  Should companies group their business units geographically?  By function?  How decentralized should decision-making be? In order to gain insight into the unique strategies for confronting these questions, I sought out the expertise of Valmont’s Asia Pacific senior management team, who has successfully navigated a large acquisition to meet growth and profitability targets in Asia.  In a recent interview, Vik Bansal, Group President of Asia Pacific, and John Fehon, VP – Finance, shared their best practices for successfully creating a matrix organizational structure in Asia Pacific.

The Valmont APAC executives are firm believers that business unit leaders need to be empowered to run their businesses. However, Valmont is able to maintain control over this decentralization by thinking of their matrix organizational structure uniquely.  “Our business is a necklace with individual pearls, the threads that go through all of those pearls are the functions that should be common across each unit”. For Valmont, they selected three key common threads that link each disparate business unit together.

  1. Standardized financial systems – this is non-negotiable across business units.
  2. Applying the Valmont way – with a focus on continuous improvement, individual business units are able to apply this concept in the most relevant manner for their market.
  3. Talent identification and succession planning – In order to ensure a healthy pipeline of future managers, Valmont leadership spend significant time identifying leaders from compatibility and capability perspective.

Multinationals that have their strategic plans jointly owned by both regional executives as well as local teams have an opportunity to promote alignment throughout their organization.  Valmont has been able to leverage their internal collaboration into a strong, autonomous, and agile workforce that is capable of succeeding in the diverse and fast-paced Asia Pacific business environment.

Companies can Improve Profitability in Turkey through M&A

While Turkey is one of EMEA’s most attractive growth markets, MNCs face significant challenges in building a profitable business there. According to Frontier Strategy Group’s clients, strong local competition is one of the biggest obstacles to growth in Turkey. MNCs can improve their profitability and boost their performance in Turkey by leveraging increased scale to cut costs and create economies of scale.

FSG’s research shows that scale leads to improved profitability in Turkey at a higher rate than it does in the BRIC markets. One way in which MNCs can take advantage of this is through M&A. The M&A market in Turkey is particularly favorable due to the weak lira, the slowdown of the economy which is depressing valuations for export-oriented local players, as well as the upcoming introduction of Turkey’s new commercial code which will improve transparency and strengthen shareholders rights. As competition for the best assets from private equity funds intensifies, MNCs will have a limited opportunity to take advantage of this favorable environment and reap the benefits of improved profitability in Turkey.


Avoid ‘Premium Market Captivity’: 8 Strategies to Capture the EM Middle Class

Product Localization

Despite the uncertainty surrounding the European debt crisis, geopolitical tensions in the Middle East, slowdowns in China and Brazil, and other external headwinds, multinational executives face aggressive 2012 emerging markets growth targets.  Frontier Strategy Group’s clients tell us that their 2012 targets are in line with 2011 performance, despite the fact that 2011 enjoyed more favorable tailwinds.

In the past, Western consumer products companies have been able to rely on higher-income consumers to drive growth.  These consumers often have tastes and preferences in line with those of Western consumers, and place a premium on the cachet of Western brands.  And, given the relatively early stage of market maturity, there was plenty of white space for first-movers to take advantage of.

Looking into the future, Western companies will face a new paradigm characterized by more competitors fighting for share of a decelerating premium market.  White space will shrink as more companies enter and expand in emerging markets in search of growth to offset the slowdown in the West.  Concurrently, growth of the premium segment in key markets such as China will plateau.  To achieve their targets in such an environment, executives will need to consider more innovative and aggressive strategies.

A new paradigm in emerging market customer dynamics

The changing dynamics of a softening and increasingly competitive premium market demand a new approach in how executives should think about emerging markets.   Aggregated across the BRICs, middle tier households (as measured by annual household income) will actually surpass lower-tier households in sheer quantity by 2014.  What this means is that the traditional market segmentation of the market pyramid will soon morph into what we like to refer to as the “Market Diamond”.  As executives are thinking about emerging markets, the Market Diamond represents the idea that the middle market will be so compelling that both local competitors and multinational companies cannot afford to ignore such a large market opportunity.

A race to the middle

The only way to fight the inevitable market squeeze (competition and lower growth at the top-end, and increased local competition from the bottom-end) is to prioritize product localization strategies and move down the diamond into this huge opportunity.  Growing into new market segments is not an easy task, and choosing the right strategies depends in part on executive tolerance for risk.

FSG has identified two key root challenges that are preventing companies and executives from implementing these eight middle market strategies: 1) corporate risk aversion, and 2) organizational misalignment.  To provide a framework for overcoming these challenges, FSG has defined eight steps that represent increasingly aggressive strategies for penetrating the middle market, and profiled the strategies and tactics leading companies have used to mitigate the risks associated with each strategy:

  1. Redefine metrics of success
  2. Operational efficiency
  3. Adjusting price
  4. Distribution strategy
  5. Branding strategy
  6. Adapting products
  7. M&A
  8. Reverse innovation

The best companies are acting now

Mounting evidence suggests that emerging market based companies will continue to develop new capabilities and increase in levels of sophistication.  Local competitors are increasingly following their current low-income customers into the middle market as those customers’ tastes and preferences evolve, and if multinationals fail to act now, they may find that they are arriving to the game too late.  As the world economy continues to globalize, sophisticated emerging market based companies are no longer anomalies, but are more frequently becoming the norm.  This trend illustrates that companies we now consider “local competitors”, might soon in the future become just “competitors”.

*Sam Osborn, Senior Analyst at Frontier  Strategy Group contributed to this piece.

Turkey set to slow down in 2012, but ripe for investment

Turkey GDP

Turkey had a strong 2011, with GDP growth exceeding 8% for the year. However, we expect a noticeable slowdown in 2012 to 1.7% YoY. The main drivers of the slowdown are weakening industrial production as eurozone demand for Turkish exports slows, tightening credit conditions in the eurozone, and rising inflation in Turkey. These factors will come together to put downward pressure both on business and consumer demand and will affect multinational companies across a wide variety of sectors.

However, Turkey has consistently surprised on the upside over the past several months, and a very gradual slowdown of the economy in 2012 is becoming increasingly likely. What is more, as the Turkish lira remains relatively weak, the exchange rate will favor companies exporting from Turkey and will partly offset the declin in export demand from the eurozone. We expect Turkish growth to accelerate once again in 2013 as the effect of the eurozone crisis wears off and Turkey’s current account deficit narrows, improving market confidence in the country’s economic stability.

Meanwhile, 2012 is a year of opportunity for companies looking to invest on the Turkish market. With tighter credit conditions and low export demand putting pressure on the local companies’ financial stability, a weak currency, and lower investment from the eurozone, MNCs will have more targets to choose from for M&A this year, at a lower cost of investment, and facing weaker external competition for priority targets. With the market expected to rebound next year, companies that invest in Turkey this year will find themselves positioned for stronger growth in 2013 and beyond.

What are your top emerging market priorities in 2012?

During the final weeks of 2011, Frontier Strategy Group spent a great deal of time speaking with emerging markets executives to understand their top priorities for 2012.  The chief concern for nearly every executive we spoke with largely boils down to, “How can I maintain growth in the face of market deceleration?”  Corporate expectations are roughly in line with the performance achieved in 2011, despite increasing external headwinds, uncertainty, and volatility.

As we began to unpackage and dig a bit deeper into these concerns, we identified four very common issue sets that we will address in our quarterly global business analysis and executive forums in 2012:

Responding to Local Competitors

  • What are the most successful Western MNCs doing to counter the threat of local and emerging markets-based rivals?
  • What are the most successful tactics for responding to price competition while preserving margins?
  • How can multinationals best leverage their strengths and mitigate their weaknesses to beat local companies in the war for talent?

Streamlining the Strategic Planning Process

  • How can I accelerate processes and ensure that time spent on strategic planning yields strong returns?
  • What are the best mechanisms for collecting local market insight from my team?
  • How can I more effectively make my case to the corporate center?

Walking the Channel Management Tightrope: Direct vs. Indirect

  • What is the right balance between direct and indirect sales?
  • How have leading companies managed the transition from indirect to direct, or vice versa?
  • When is the right time to terminate a distributor relationship, and how can I minimize disruption through the transition?

Managing the M&A Lifecycle

  • When is inorganic growth preferable to organic growth?
  • What are the best (and worst) practices for identifying and screening potential targets?
  • How can I more seamlessly integrate the new team and infuse my “corporate DNA?”

What do you think will be the most important challenge facing emerging markets executives in 2012?  Give us your feedback by clicking on this link.

Exclusive Teleconference – M&A in Emerging Markets November 30

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M&A In Emerging Markets – The Time is Now

The economic environment is full of uncertainties for companies operating in both developed and emerging markets. However, uncertainty can be the best environment for stimulation of long-term growth. To make the best investment decisions in this climate, managers will require reliable, up-to-date data and best practices and must learn from those who have succeeded and failed ahead of them. Companies that move first to pursue growth during this downturn will become the market leaders when the global economy inevitably recovers.

Prioritizing markets and thoroughly performing due diligence are essential pre-integration procedures that need to be carefully considered. An estimated 50-70% of acquisitions fail to deliver on their expected value. The information presented in this paper aims at significantly reducing the likelihood that your acquisition will fail to deliver on its expected value.

Frontier Strategy Group recently released an exclusive white paper titled, Opportunistic M&A – Upside Potential in a Downturn Environment.

For a copy of the complete white paper in addition to an invitation to an expert led teleconference please fill in your contact details using the form below:

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