Nearshore Americas

Mergers Are Heating Up in Latin America: Is Consolidation Next?

Merger and acquisition (M&A) activity is reaching new highs and grabbing headlines for the lofty sums involved, as evidenced most vividly by the announcement that AB InBev will buy SAB Miller. The deal would combine the world’s two largest brewers, and at $106 billion, it will be the third-largest corporate merger in history. In truth, the M&A market for BPO in Latin America may be similarly frothy.

Several factors are driving robust M&A activity. In recent years, ultra accommodative U.S. monetary policy incentivized companies to borrow cheaply in order to finance acquisitions, and lately, as hesitation about precarious economic conditions in the U.S. gave way, many companies are jumping at the chance. At the same time, the dollar has strengthened in international exchange, which for American companies means buying businesses in emerging markets is relatively cheaper.

M&A in Latin America

At the 5th ALES Convention, which brought together more than 300 experts and business leaders from at least 25 countries to Guatemala City in early August, Avasant CEO Kevin Parikh detailed how ITO in Latin America fit into larger global trends. Whereas emerging markets accounted for 20% of M&A activity in the global outsourcing market five years ago, today they are nearly 33%, according to Avasant’s research. Latin America is a smaller share, only 9% of global M&A outsourcing activity, but this is up from 7% in 2010.

Parikh noted that nearly 75% of M&A activity in the IT outsourcing industry across emerging markets was comprised of firms specializing in BPO or IT services. Avasant’s research also suggests this growth has been influenced by improved regulations in select markets, while currency weakness in places like Argentina, Colombia and Brazil, has made businesses cheaper in those markets.

Overall, Parikh is optimistic that based on these trends M&A activity in Latin America will increase near term. But he was careful to stress that while Latin America’s profile is growing globally, it shouldn’t rest on its laurels; instead, what’s needed now is for regional leaders “to reach out and realize the potential” of nearshore operations.

Grupo PAE’s Strategy

At the ALES convention, Parikh was joined on the stage by Luis David, director at Asesors en Finanzas, and Ulises Muniz, vice president at Grupo PAE. I moderated the panel discussion. Muniz noted how Grupo PAE recognized the need to expand beyond its home market of Mexico several years ago. The company’s first attempt at foreign growth hit on some of the troubles of international expansion. Grupo PAE tried to grow organically in Peru, by starting its own office in Lima. However, the time it took to learn the market and hire workers proved costly: “We calculate that we have incurred double the cost of an M&A expansion to get the same result,” notes Muniz.

Since then, Grupo PAE has pursued growth via acquisitions. The goal of expansion is not to reduce costs or “conquer” the target firm. Rather, Muniz points out, acquisitions of companies gives Grupo PAE an immediate presence in a different Latin American market, in turn allowing the firm to deliver services quickly. The key is to “partner” with the bought-out firm, drawing on the talent that the company has, and deploying Grupo PAE’s cash, along with its resources and experience, in order to allow the partner firm to better realize its growth projections.

Muniz admits that the upfront costs of this approach can be high, while the benefits to Grupo PAE’s bottom line may only accrue over time. Grupo PAE appears fine with that, as the company sees itself as entering new markets and building presence over time. Today Grupo PAE has offices in Miami, a strong presence throughout Central America, and operations in the Dominican Republic, all in addition to its longstanding offices in Mexico and Peru.

Why Consolidation Is Likely

In 2015, M&A activity in Latin America is likely to rise again, thanks to the inertia of cheap financing and the strong dollar. However, any optimism should be tempered by the realities of the M&A cycle, which also looks set to coincide with a technological transition. M&A looks to be nearing a short-term peak, and this likely spells consolidation over the next five years, for at least three reasons.

First and foremost, today’s permissive financing conditions will disappear, most likely in 2016 or 2017. Once financing starts to get more costly, we may find—surprise, surprise!—that not all acquisitions were carefully calculated but rather undertaken by company’s that had money to spend and felt pressure from the overall climate to acquire. News of bad deals is likely to sour the collective appetite for takeovers.

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Second, as Parikh pointed out, ITO and BPO in Latin America remains largely driven by human processes like call centers, and automation will introduce greater deployment of voice recognition, taking the place of the worker. There’s still a case to be made for acquiring technologically-dated firms—that is, valuing talent, location and customer base as the source of the takeover bid—but such firms will see their market value erode as digital transition takes hold.

Third, Latin America as a region is facing a recession, if it is not already in one. If government’s try plugging budget deficits with drastic tax hikes and anti-business regulations, as many of them have done in the past, then naturally foreign firms will shy away from acquisitions in trouble spots.

To be clear, consolidation will not spell bust for ITO or BPO-related M&A in Latin America. New firms that are more adept at operating in the automation-driven environment will emerge. And regional slowdown does not mean bad news everywhere; if anything, Central America looks poised to enjoy ramped up M&A activity, even as the deal volume in Latin America’s larger markets slows.

Sean Goforth

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