Mergers and acquisitions in Brazil
Brazil is the biggest and fastest-growing mergers and acquisitions (M&A) market in Latin America, attracting 53% of the total activity in the region
Brazil’s GDP has increased from less than US$ 1 trillion in 2006 to close to US$2.5 trillion in 2012. This impressive growth has been boosted by a combination of factors including soaring commodity prices in the international markets, public expenditure aimed at eliminating extreme poverty, and significant private and public investment in the manufacturing, real estate and infrastructure sectors.
As a result, Brazil has come to feature in many companies’ lists of priority markets. It is, for example, the biggest and fastest-growing mergers and acquisitions (M&A) market in Latin America, attracting 53% of the total activity in the region. After a decrease in 2009, M&A activity has been increasing strongly over the last two years: the volume of announced transactions rose by 40% in 2010 and by 26% in 2011.
This positive trend has recently been interrupted due to the uncertainties facing the markets in Europe, the slow recovery of the US, a slowdown in growth in China, and mounting concern regarding the levels of public and private outstanding debt. However, provided we don’t witness a catastrophic scenario unfolding in the eurozone, a hard landing for the Chinese economy or a credit crunch-style crisis in Brazil, we remain optimistic about the long-term trend.
What has been attracting UK companies to invest in Brazil?
Brazil represents a significant opportunity for UK companies for a wide range of reasons, including the following:
- Political stability, with a strong democracy, an independent judicial system, and respect for legal agreements.
- Relatively stable macroeconomic environment, supported by significant foreign currency reserves, an independent Central Bank responsible for controlling inflation and foreign exchange-rate movements, and constitutional limits on the public debt/GBP ratios (Brazil’s public debt/GDP ratio in 2012 is 66%, down from 80% in 2003).
- Excellent growth prospects deriving from the consumption patterns among the expanding middle and upper class, which together now constitute almost two-thirds of the population; demand for infrastructure investment associated with the renewal of the country’s transportation systems and the preparations for the FIFA 2014 World Cup and Rio 2016 Olympic Games; and continuing Chinese demand for commodities.
- A perception of reduced risk with regard to the country’s economy, especially in comparison with many other developing and developed countries
- Strong domestic consumption and increased purchasing power deriving from the expansion of the Brazilian middle class. Forty-eight million Brazilians have moved up into the middle or upper classes since 2003. Private consumption per head in Brazil is four times higher than in China, and nine times higher than in India.
- The significant number of medium- sized and large privately/family- owned businesses where sellers are looking either for liquidity or diversification for their investments, or for additional investment to capture growth opportunities.
- The Brazilian investment-management sector has grown rapidly over the last 10 years, with cumulative annual growth of over 20%, and is dominated by the in-house asset-management operations of domestic banks, followed by a tier of foreign-owned participants. Distribution of institutional assets under management (AUM ) is typically via advisers, whilst retail products are predominantly sold through bank branch networks. The growing GDP and population demographics are lending themselves to a rising middle class, greater disposable income and financial sophistication, and therefore an expected increase in demand for savings and investment products. These trends have driven a number of cross-border transactions as European, Asian and North American firms seek to establish a presence to capitalise on the plentiful opportunities.
However, doing businesses in Brazil is not without its challenges. The following are some of the areas UK businesses might need to adapt to:
- Access to markets and identifying the right opportunities. The Brazilian market is fast-moving; it needs constant monitoring and a permanent presence on the ground, either in-house or through experienced advisors. Personal relationships are an important aspect of Brazilian business culture, so building relationships and trust will increase the chances of successfully doing business in Brazil.
- Although the market is developing rapidly there are still different expectations to be carefully managed around important aspects of the deal, such as pricing and valuations, process and level of due diligence required.
- Potentially significant tax and labour contingencies are a fact of life for many Brazilian companies given the complexity and perceived “unfairness” of the laws and regulations in these areas. The legislation is complex, so cross-border experience and some local insight into how Brazilian companies manage these risks and are important in order to be able to operate successfully.
To manage these risks it is essential to spend time getting to know the Brazilian market and your Brazilian counterparts. Local insight and crossborder experience both are valuable. Also, flexibility around process and structure of investments are key to increase the chance of successfully doing business in Brazil.
- Brazilians are still liable to worry about the possibility of a return to the high inflation and economic volatility of 1980s, but the positive consequence of this is that they seek to keep risks at a sensible level. The risks themselves should not be underestimated – not least the foreign currency risk.
- The rapid growth of the economy has inevitably resulted in the demand for talented professionals outweighing supply. Although Brazil’s population is predominantly young, the proportion of young people with a university degree is quite small. As a result the government has made it easier for foreign professionals to work in the country in areas such as engineering. As part of an investment strategy, investors must take into account the need to pay relatively high premiums in order to attract qualified professionals, as well as the possibility of bringing in expertise from other countries.
Overall, the significant growth in investment flows from the UK to Brazil demonstrates that the above challenges can be overcome. The key is simply to be aware of them and to deal with them appropriately.
By Luis Oroval & Leo Ferreira
M&A Latin America specialist / Lead Partner, Brazil Services Group – Deloitte LLP, London
This article is taken from Brazil Business Brief, January 2013.
Topics: Business Development and Market Research