Bloomberg Línea — High interest rates and geopolitical uncertainty were an obstacle for mergers and acquisitions (M&As) in Latin America during 2022, with a 35.9% drop in the number of deals compared to 2021, in a period analyzed between January 2 and December 26.
Between those dates, there were deals in the region totaling $106.9 billion in value, while in 2021 the figure was $168.3 billion, according to data compiled by Bloomberg and which refer to deals whose values were made public.
During 2023 the outlook is not far off, as the slowdown of the economy, again geopolitical uncertainty and capital flow problems hit these business operations, which have suffered a “standstill” in the year, which could recover just in 2024, according to a recent survey by LLYC in collaboration with iDeals and M&A Community.
“Nearly 50% of respondents believe the recovery could come in 2024 and that it could be a record year for investment, and the other 50% believe it could come earlier in the third and fourth quarters of this same year. However, experts agree that the pause in this activity is related to a greater difficulty in accessing financing and its impact on prices,” Alejandra Aljure, director of operations at LLYC Colombia told Bloomberg Línea.
For most industry players and experts, 2024 could again be another record year for investment however, although there is a consensus that the recovery will not start at the same time in all countries, nor will it progress at the same pace across sectors and market segments.
However, 78% of those surveyed acknowledged having closed at least one M&A deal in the last 12 months, which would denote a “positive trend”.
Where are the biggest complexities for M&As in Latin America?
One of the conclusions reached by those surveyed is that the “current investment standstill” may be due to the fact that in the last 12 months the forecasts have been considerably more pessimistic than the reality, following dialogue and participation with industry professionals in Spain, Brazil, Chile, Argentina, Colombia, Panama, Mexico and the United States.
According to Aljure, “Mexico is one of the most challenging countries at the moment [for mergers and acquisitions], especially in terms of foreign investment, since financing problems have affected the capital markets. In this sense, it is important to encourage and promote more global operations, without neglecting the Mexican industry”.
Regarding this market, he points out that M&A cannot be strengthened without public policies that are effective for this type of business, since Mexico is a country that is linked to the expansion of the US.
Regarding Brazil, which is the other country in Latin America with the greatest current complexities for M&A, Aljure told Bloomberg Línea that the country’s economy has faced a number of changes this year, not only in M&As, but also due to the uncertainty generated by the change of government for investors, in addition to the reduction in the financing of some companies.
“In Brazil, large companies represent the majority of the mergers and acquisitions market, so this affected a lot companies and industries that operate in this way. Despite these challenges, Brazil continues to be one of the most attractive countries for investment, and after two years of great uncertainty, there are great opportunities for growth and expansion,” Aljure said.
Globally, the main reasons for this type of transaction to be on hold are, for 40% of those surveyed, the difference in valuations between buyers, while 23% argued that it is the volatility and the worsening of macro conditions, while 19% speak of the increase in the cost of financing, and 9% refer to the lack of transparency.
What will the recovery depend on?
Regarding the recovery of M&A activity, “all the funds have a very similar pipeline in mind. A special interest is beginning to emerge in those counter-cyclical companies capable of growing without the need for heavy capex investments and that are also leaders in their sector,” explained Aljure.
This is how the recovery of M&A in Latin America will be seen, with less investment by specific sectors, and more by specific opportunities, which will allow better selection and risk reduction, he said, adding that it will also be positive factors such as corporate sales being sufficiently diversified, and that technology is used in a differential way with respect to end customers.
Likewise, “it will be essential to select the optimal deal for each rational investor and to communicate it to the markets as a whole in a well-argued and transparent manner,” he concluded.
Which are the most attractive Latin American countries for M&As?
Against the above results, a report by consulting firm KPMG published in June noted that despite the strains in the global economy, Latin America has taken advantage in the field of M&AS, to the point that it has never been more attractive to invest in through this route.
“The region has long been viewed with caution due to political, social and economic complexities in key markets. But against a backdrop of global turmoil and disruption in other major regions, Latin America’s star is rising,” says KPMG’s 2023 M&A in Latin America Survey report.
The most attractive countries in Latin America in terms of M&A in the next two years are Mexico, with 79% of companies and investors considering this destination an ideal place to do business, followed by Brazil (69%), Costa Rica (54%), Chile (53%), Colombia (51%), Peru and Uruguay (both 47%), Argentina (44%) and Panama (43%).
“We could be witnessing a change in trend as Mexico snatches the top spot from Brazil, which has traditionally been the most attractive country for M&A due to the size and stability of the market, its natural resources and its strategic location,” says KPMG.
KPMG surveyed 400 executives as buyers, sellers or advisors behind M&A deals in Latin America worth over $50 million in the last five years.
One rung lower are Honduras (41%), Guyana (38%), Dominican Republic (37%), El Salvador (35%), Guatemala (34%), Nicaragua (33%), Bolivia (30%), Venezuela (26%).
