Matt KendallThe growth of the United States tech industry is resulting in exceedingly high valuations – so high that more and more private equity and venture capitalists are walking away. This has created a situation where companies are amassing billions of dollars of capital that needs to be spent, then investing it into businesses whose valuations do not reflect the general worth of the company itself. Essentially, these are bad deals.
There are still places, however, where the investment environment is more fertile. For example, an increasing number of U.S. dollar holders are buying tech-related companies in Latin America and seeing better value on their investments. The strength of the dollar and the devaluation of Latin American currencies are revealing eye-popping opportunities for shrewd and selective investors.
Before you make the jump though, many factors need to be considered in order to ensure your investment is smart, sensible, and holds long-term value.
Opportunity Arising from Disaster
It’s no secret that Latin American currencies are devaluing. Colombia’s currency devalued in early February 2016, dropping by around 50% from its value 4-5 years ago. Brazil’s currency devalued by 40% from what it was five years ago. The Mexican peso devalued more than 50% from its level eight years ago. These examples show that the global commodity market has crashed, along with the global oil market, and those crashes will affect the countries that rely on energy and minerals.
In speaking with economists and foreign government officials, Marks began to discover that this is not a temporary bubble, because the devaluations are causing a lot of damage. “In the past couple of months, there has been some improvement throughout the region, but the general feedback is that this a two to three year window of opportunity where dollars are going to go a long way,” he said.
Ensuring a Smart Acquisition
Once you have worked out where you need to be and have outlined reasons for your decision, the key factors that represent a smart acquisitions on the nearshore are debt, revenue, and education.
The first question to ask is, how much debt is on the business? Some companies may be producing some revenue, but would be a risky purchase with US$5 million of debt behind it, for example. “There are acquisitions in play where there is very little debt, but the opportunity to buy or invest is only there because of the strain of localized economic conditions,” said Marks.
In terms of revenue, you need to assess the company and its customers. If IT service providers are serving the government, then that is a risky contract. Whereas, if the firm has something like a multinational telecommunications client, then that would be a bit more stable. So performing your diligence and looking at where the revenue comes from is extremely important.
Finally, make sure to educate yourself on the local market and talk to the right people. This can be facilitated by local trade professionals that work with the government, private sector individuals in the U.S., or even accounting professionals. It’s a simple enough process to talk to somebody in these facets of the industry in order to get their general impressions about the market you are targeting, and is a great way to understand the challenges you will face moving forward.
Taking the Steps to Buy
Once the due diligence and background research has been completed and there is an acquisition prospect in play, then heading into the country itself, experiencing it first hand, meeting the business owner and soaking up the local culture is a must before you sign on the dotted line.
Next up, you should find the right price point, but remember that currency is going to be a big factor, whether you’re doing the deal in dollars or in local currency. Marks predicts that, in as little as three to six months, currencies could fluctuate by as much as 10%, so be aware of that risk.
Edison Sepúlveda, Private Equity Analyst at Amergent Capital in the Dominican Republic, explained that the major obstacle in acquiring nearshore firms is that most of them are small, resulting in the possibility of unmet profitability targets. “Ideally, BPO companies in particular need to be able to provide some sort of value-added services on top of voice; they need to be specialized in what they offer in order to be an attractive investment,” he said. “Also, the valuation of the company has to be reasonable, and the quality of a company’s equipment and its agents should be considered.”
The other challenges can be the governments themselves. When there is a transition in government, sometimes it can lead to drastic changes in economic policy. Argentina is a good example, where it went from a left-leaning, quasi-socialist government to a more conservative government—a move toward the better, explains Marks. “I believe that we are also going to see a tilt In Brazil toward a more fiscally conservative government, but things also shift into the other direction too, so companies must remain cognisant of these possibilities in order to be protected,” he said.
Solidifying Your Position
Once you’ve made the deal, you need local talent that knows the workforce and knows how people work. Multinational companies have run up against a lot of problems trying to enter Latin America because they didn’t do their homework, didn’t conduct market research, and made common mistakes. Furthermore, once they do begin to operate somewhere, they are bringing in management from the U.S. who may have no understanding of the local culture.
M&As can sometimes result in negative consequences, particularly when companies are not invested in the long term. If companies don’t operate to the appropriate standards in a foreign country then they run the risk of causing reputational damage to their brand. More than anything, the impact that an M&A can have for the company and for the chosen country comes down to knowledge of the local market.
Marks predicts that the future of the region is going to be on the shoulders of people who have spent a lot of time abroad, who might have been educated in the U.S. or in Europe. “These individuals have a much more fiscally conservative view of the world, and that bleeds into economic policy,” he explained. “Trade commissioners of today are going to be the financial ministers, trade ministers, and even presidents of tomorrow. I see a long-term stability throughout the region, but you still have to be careful to understand where you are going and be aware that conditions can change.”
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