Latin America Advisor
According to Brazil’s national association of investment banks, mergers and acquisitions activity in the South American country is set to reach at least $38 billion this year, down from a record in 2006 but still considered high. What is driving M&A activity in Brazil this year? What kinds of reforms are needed to spur additional growth in M&A activity in Brazil?
Antonio Aires, Partner at Demarest Almeida Advogados in Sao Paulo: Low interest rates, economic stability, and international liquidity are the major drivers for Brazil's M&A activity in 2006 and 2007. The stock exchange and recent IPOs have also been an important driver, as they channel IPO funds, not only to organic growth but also to the acquisition by the newly listed companies of competitors or strategic businesses. According to a periodic report on M&A issued by KPMG, M&A transactions in 2007 so far are concentrated in shopping centers; food, beverages, and tobacco; chemical and petrochemical products; metallurgy and steel; information technology; company services; electrical and electronic equipment; telecommunications and media; sugar and ethanol; financial institutions; and real estate. According to the same study, of 182 transactions in the first semester of 2007, 83 were domestic (Brazilian-controlled company buying control of a Brazilian-controlled company) and 32 were cross border (foreign-controlled company buying control of a Brazilian-controlled company). The remainder included other types, such as the acquisition by Brazilian-controlled companies of foreign companies abroad and of foreign-controlled companies located in Brazil. In the short term, the increase in M&A transactions depends on the maintenance and improvement of the macroeconomic situation, with low inflation, high liquidity, and lower interest rates. Also, the effects of the recent international financial crisis must not be steep and immediate, reducing export prospects and thus negatively impacting Brazil. Improvements in infrastructure (roads, ports, airports, water and sewage, and energy) are also required, and privatization programs and studies for this purpose are under way. Finally, Brazil still needs to revamp its heavy tax structure and reform its labor laws, not to speak of eliminating bureaucracy. Education and training are also an important issue. These are medium- and long-term changes that will increase Brazil's investment attractiveness.
Roberto Teixeira da Costa, a member of the boards of Banco Itau and SulAmerica in Brazil: From the lowest point during the beginning of the audit crisis up to October 1, Brazil's Bovespa stock index has shown an increase of more than 35 percent. But even the optimists are considering that reaction was perhaps too fast and prices are at their highest level. For M&A activities, the stock market indicators are certainly good, but are not the only ones to be considered for buyers or sellers of corporations. Among other aspects, the concession of investment grade to Brazil, which for stock market purposes is perhaps being reflected in the prices of shares traded on the stock exchange for new corporate entrants in the Brazilian market, could very well be a relevant factor. Certain guidelines of the government's Growth Acceleration Program, which are not yet very clear from the investor perspective, could be an additional factor stimulating the undecided. For sellers or potential partners, an obvious question mark is always the price. Nobody wants to feel they have not made the best deal because they did not have the patience to wait. Obviously, certain structural macroeconomic reforms would be helpful, but they are not the decisive factor in the present circumstances to foster the growth of such activity.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.