Why are there so few mergers and acquisitions in Mexico?

Companies open to a sale and companies willing to buy have different views of the advantages and goals of the M&A process.

Why are there so few mergers and acquisitions in Mexico?
Different views of the advantages and goals of the M&A process. Image by Gerd Altmann from Pixabay

Mexico is far behind Brazil in terms of mergers and acquisitions. Buyers and sellers in the Mexican mergers and acquisitions (M&A) market have different priorities, which has made it difficult to close deals. According to the report "Mergers and Acquisitions in the New Reality" by advisory, audit, and tax firm KPMG, 56% of companies in Mexico, both potential sellers, and likely buyers, said they are more interested than before in mergers and acquisitions.

Among companies willing to sell, the most important thing about M&A for 53% of cases is seeing palpable growth in their business, even becoming partners with the buyer to maintain a percentage stake in the new company. But for companies that are open to making a purchase, the renewed interest in M&A responds, in 32% of cases, to the desire to "take advantage of deals" at the current juncture, or simply to expand their brand portfolio. In other words, there does not seem to be the same immediate openness to collaboration that ready-to-sell brands do want.

The value of M&A for sellers and buyers

This difference in willingness to seek (or not) strategic partners through M&A processes seems to respond to the view that companies, both those looking to sell and those looking to buy, have of their own businesses and of the ultimate goal of a merger or acquisition.

For half of the companies considering buying, the most important thing about an M&A process is that it "creates value" for the company. For 29% of those surveyed by KPMG, it is also crucial that the brand to be acquired "is in line with the business strategy" already defined in the short or medium term. A third believe that the objective of these deals is to expand their business into more profitable areas in the same market.

In other words, it seems that the expectation of the acquiring companies is to integrate a new cell into an organization they already have organized, without (at least immediately) intending to radically change the way they operate with the input they receive from this new member.

But 48% of companies that are considering selling their business to larger players do so because they perceive an opportunity to strengthen financial capabilities. Their ultimate goal in an M&A process, in 42% of cases, is to escape from businesses that have not been profitable or are not in their core. Another 42% seek a partnership (a term that implies a relationship between peers, not subordination) with a larger strategic player.

In other words, sell-side companies seem to view M&A as an opportunity to focus their skills on specific problems, leaving elements of the business where they have struggled to succeed to larger, more experienced companies. And, of course, to leave behind potential business mistakes that have become an economic burden.

These differences could even be explained by the way new businesses emerge in Mexico. Since 2016, the Fund for Social Development (Fondeso) of Mexico City pointed out that, in 77% of the cases of entrepreneurship in the country, the idea of opening a new business arose from detecting an untapped opportunity in the market.

Impacts on the Mexican M&A ecosystem

While KPMG does not present the views of companies in other countries on M&A in its study, other players suggest that M&A is understood very differently outside of Mexico.

Referring to the U.S. landscape, the consulting firm PwC points out that a wave of M&As is coming in North America because, on the buy side, it has been learned from previous economic crises that acquisition and mergers between companies in times of recession tend to have extraordinary results, if well executed.

On the sell-side, The National Interest also believes that an intense M&A season is ahead in 2020 because, with the economic difficulties created by the COVID-19 financial crisis, many companies emerged unable to deal with their costs and debts at their current level of revenue. Thus, selling out to larger players is a way to survive.

This different way of conceiving M&A has already had palpable results in the number of transactions that have been recorded in recent months. By May, according to PwC, the value of U.S. deals was already close to $1.3 trillion. Between 2016 and 2020, transactions totaled $1.8 trillion in value.

At the Latin American level, the situation for buyers and sellers in Mexico also appears to be particular. In its Q2 2021 report for the region, intelligence platform Transactional Track Records (TTR) noted that Brazil remained the top country in the region for both the number of M&A deals and deal value.

Despite the relative size of its economy, Mexico ranked a distant second on both indicators. Between April and June, 916 mergers or acquisitions were registered in Brazil, 5.5 times more than the 165 reported for the Mexican Republic.

This enormous advantage could be explained by the fact that Brazilian companies are more similar to those in the United States in their perception of the objectives and purpose of M&A. A sign of this greater affinity is the interaction of these economies in the M&A territory.

According to TTR, in the second quarter of 2021, M&A deals in Mexico mobilized a combined $10.588 billion dollars (mdd) in the capital. U.S. companies led the transactions, buying smaller Mexican brands.

But in Brazil, in addition to U.S. companies looking for Latin American startups, there are several local companies going to the U.S. and leading M&A processes abroad. This suggests a greater affinity between the two countries in the M&A ecosystem.

Source: Arena Pública