Kirk LaughlinIt’s a crazy time to make predictions, but this one should hold up: There will be an uptick in company-buying-company activity in the nearshore during the remainder of the year. After a slowdown in dealmaking in the past two years, mergers and acquisitions will be on the rise as corporations go hunting for ways to grow—but not just grow anywhere.
“There’s no doubt there will be a lot more activity, and a lot of it in Latin America, because everyone wants a nearshore component to their offshore strategy,” Ben Boissevain, managing partner at Agile Equity, told us. Agile is an investment banking firm that advises on mergers and acquisitions and has represented companies buying into Latin American and the U.S. “The recovery will be bumpy, but people still want that nearshore component, especially to serve people who speak Spanish. Healthcare claims processing, for example, is a huge market, and companies in that business need Spanish. You’re not going to do Spanish in India.”
“International companies are increasingly interested in investing in resource-rich Latin America. At the same time, Latin American companies are expanding abroad to become global leaders in their sector.”
Legions of Buyers
John Bradshaw, an investment banker with Focus LLC, advises clients who buy and sell call-center companies. “There are a lot of buyers out there right now,” he told us. Most are large international companies or publicly traded firms with lots of cash or funding capabilities.There are many business reasons to acquire companies in the US. Some of the buyers want to augment their client base and get into new industries. Some want to add new locations and capacity. As an example an Indian BPO company buying a U.S. call-center company wishes to have a local presence in the Americas.” Large public corporations are often looking to boost their stock prices—essentially by buying growth and earnings.
Recent sellers, on the other hand, are typically either entrepreneurs who now see a chance to make a better deal than they could’ve gotten in the past two years, when profits and valuations were down, or they’re distressed.
Expect consolidation in the world of IT services too, Bradshaw says. “What we’re seeing is IT services companies worth $10-$60 million being bought by larger IT services companies or private equity firms, for the same buying reasons as in the call-center business: new product lines, new sectors, and additional customers.” An example would be a giant international conglomerate that has a huge BPO business but wants to bring IT services under its corporate umbrella.
Sonda and Softtek Poking Around
But it’s not just big firms from the U.S., Europe, and Asia swooping in to the region to make deals. “There is a lot of looking around being done by Latin American companies, like Sonda and Softtek, that are interested in the regional market and also in other regions of the world,” says Priscilla Murphy, Latin America bureau chief for mergermarket, an M&A intelligence service with a worldwide network of journalist/analysts on the beat.
Chile-based IT provider Sonda, for example, agreed to buy Brazilian IT company Telsinc earlier this year. And according to a story in a Santiago-based newspaper, Diario Financerio, Sonda has its eye on companies in Mexico and Colombia.
Softtek, according to a mergermarket report quoting an executive of the Monterrey-based IT company, is hoping to increase growth in Brazil, and that means considering acquisitions. The company could expand into application security by picking up Modulo, based in Rio.
Here, courtesy of the folks at mergermarket, are a few recent deals or potential deals of note:
• Private equity investment group Apax Partners acquired a controlling interest in the Brazilian company Tivit, one of the biggest IT and BPO providers in Latin America.
• Software AG, the huge German company, “is looking for opportunities in nearshore services for our North America customers,” an executive told mergermarket. Targets could include BPO providers BRQ and Cast Informatica, an analyst told the service.
• Another global software firm, CA, could also be looking at Latin American companies in order to expand into more innovative spaces like cloud computing and virtualization. A CA exec told mergermarket that Latin America is growing and “we want to be part of it.”
• Glintt, a Portugal-based IT company, hopes to gain access to the Brazilian healthcare market via acquisition or partnership. A logical choice could be IT services provider Ci&T, which counts some health-related businesses among its clients.
Contract Worker Hurdles
Brazil is where much of the action is or will be taking place. No surprise there. It’s the largest market in South America and its IT talent is well-regarded. But when we talked to the head of Latin America for a very large IT services and consulting company, he warned that there’s one big problem “curtailing the number of acquisitions” and that is the use of contract workers. “Lots of BPO and IT companies use contractors,” he says. “Instead of everyone being on the payroll, they’re a contractor. If you work for a company for longer than six months, you have the right to go to the labor court and settle disputes over things like vacation time. You can sue for things like unpaid overtime,” he says.
A contractor has up to five years to file such grievances. “Would you buy a company that had this potential liability? You never know what might come up within that five-year period. You could end up paying out millions of dollars,” he says.
The Brazilian government is pushing to change this, he says, but in the meantime, “M&A activity has been slower because of this uncertainty and the labor laws.”
Everyone we talked to agreed that labor laws in Brazil are a concern. “You have to look at labor laws,” says Ben Boissevain. “If you need to reduce your work force, for example, how easy is it to do that? But that’s just one set of regulations you need to consider. You have to do an in-depth, top-down analysis on a country-by-country basis when exploring acquisitions.”
With interest, opportunity, and economic factors converging, the nearshore region is shaping up for a much bigger year in terms of mergers and acquisitions. The region has what businesses want.
As JPMorgan Chase executive Nicolas Aguzin told Bloomberg Businessweek, “International companies are increasingly interested in investing in resource-rich Latin America. At the same time, Latin American companies are expanding abroad to become global leaders in their sector.”
“Everybody in the industry is looking at offshore, onshore, nearshore,” Boissevain says. “But if you dont have nearshore capability, it’s difficult to get clients to hire you.”
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