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.
FSG 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.