Latin America boasts great investment opportunities with attractive risk levels, higher returns than home markets, and access to a large population base with growing income. Foreign investors are no longer pursuing deals in Latin America because of a dearth of investment opportunity in their home country—now, it’s because the region is experiencing rapid consumer growth, urbanization, and digitization. In fact, returns from Latin American investments as measured by the MSCI Emerging Markets Index have long outperformed returns from emerging markets as a whole. However, Latin American acquisitions do require special attention and come with a number of difficulties unique to the region.
In 2018-20, M&A activity in Latin America was driven by privatization of state-owned companies, rise in consumption, reforms undertaken by governments, and decrease in benchmark rates in Latin American countries. The Energy, Resources, and Industrials (ER&I) industry attracted a large portion of the investment by value (USD58 billion), followed by Financial Services Industry (FSI) with USD49 billion. Brazil witnessed the highest number of deals (984), worth USD64 billion, among all the countries in Latin America.
M&A trends in Latin America
M&A activity in Latin America is expected to be influenced by privatization of state-owned companies in Brazil, reforms undertaken by the government and decrease in benchmark rates.
In addition, increase in remittances to Mexico, competitive plan unveiled by government in Peru, and estimated rise in private consumption in Colombia might also attract the investors.
The new pension reform in Chile is expected to increase the pension amount by levying a new employer contribution.
Colombia is advancing its relations with many Asian countries, including China, to attract investments in a variety of sectors.
In 2018-20, ER&I registered the highest M&A activity with deals worth USD 58 billion.
FSI recorded 447 deals worth USD 49 billion over the same period.
In Consumer (CNSR), Brazil and Chile recorded the highest M&A activity in 2018-20, contributing to more than 50% of the deals by value.
In TMT, Software and IT consulting witnessed the majority of the deals at about 43%.
In Life Sciences Health Care (LSHC), the M&A volume was driven by Health care Provider & Services and Pharmaceuticals.
In 2018-20, the majority of M&A activity in Latin America was intra-regional both in terms of value and volume, with economies such as Brazil, Chile, and Mexico being the top investor countries.
Outside the region, North America (United States), Europe (France and Italy), and Asia (China and Japan) were the top investors by value. Contribution from countries in Africa / Middle East was about 1.0%.
Resignation of finance minister of Mexico over differences with the current president may have an adverse effect on investor sentiments.
Ratings downgrade for Mexico, policy paralysis in Chile and Colombia, and increased awareness of political effects on mining may affect the investment climate.
The upcoming elections in Argentina, may keep the potential investors at bay due to political instability.
Latin America is a region where a lot of interesting opportunities to acquire companies and expand activities can be found. However, the market is completely different than in fully developed markets. When companies expand in this region, they need to be aware that both language and cultural differences need to be addressed. While Latin American countries may appear to be westernized in many ways, conducting business is still different. Due diligence is a key success factor in a Latin American M&A. Results from the due diligence process should always be incorporated into the final acquisition valuation before the sale and purchase agreement is signed.
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