Having a clear strategy, focused management and a strong emphasis on communication and cultural alignment are all critical factors in the success of mergers and acquisitions (M&As) in Latin America’s IT and BPO sectors, a panel of industry experts agreed at Nexus 2014.
It may come as no surprise that hostile takeovers are much less viable than friendly acquisitions in Latin America’s service sector. Meanwhile large companies will drive M&A activity in the region but this may have a detrimental effect on local markets, the panelists noted. Moderated by Chris Nuttall, a managing partner at Laird Partners, the panel was comprised of Patrick Casserly, a business solutions entrepreneur; Manuel Gordo, CEO of Allied Global; Antonio Moreira, North America/APAC CEO at Stefanini; and Kevin Parikh, CEO of Avasant.
Although M&A activity is expected to grow in 2014 worldwide according to a recent study by KPMG, Nuttall noted that “Latin America historically has been a bit of a laggard when it comes to mergers and acquisitions. The region generally hasn’t yet achieved the economies of scale and scope to M&A that perhaps some other regions have achieved.” Nuttall also observed that the region sees relatively few large scale deals, with recent survey results showing that “77% of deals are worth less than $250 million in transaction value.”
What Drives M&A Activity in Latin America?
Stefanini chose an M&A strategy “to speed up growth” and “make sure that we leverage experience from different regions. To be a true global company we need to be able to mix cultures and M&A is a great way to learn how to do that,” Moreira told Nexus. This “international learning process” saw Stefanini successfully expand through Argentina, Chile, Mexico, Peru and then Colombia.
Allied Global also adopted a regional M&A strategy, Gordo told the panel, but he argued that making acquisitions in order to “acquire talent in a new industry, in a new type of service, while also acquiring a new client base” makes more strategic sense than “if you’re just looking for geographical expansion.”
“We decided we needed to work in three stages. First of all, assessing our performance and processes; secondly the strength of our IT and infrastructure; and thirdly, acquiring the know-how by taking control of larger plants,” Gordo explained. “We started that process in 2007 and in 2011 we made our first acquisition in Canada. Then last year we made our second acquisition in the United States – a company (Marketlink) in Iowa – and it was a little bit awkward because how can a Latin American company – especially one from Central America – come to the United States and make an acquisition? Culturally, I think it’s one of the first cases I’ve heard of. It was a challenge but we understand that we need to acquire talent.”
Do M&As Damage the Local Market?
“Latin America is very strong particularly in language-based support and BPO,” Parikh noted, but “as we see automation increase in the region … we will see those jobs begin to erode. Automation in voice recognition and response is eroding the market.”
With advances in technology making many jobs in language-based support redundant, local markets will be further damaged by takeovers by global players, Parikh believes: “So what are we going to so in terms of acquisition? Well we’re already seeing (acquisitions by) TCS, IBM and Convergys, which recently purchased Stream for $820 million.”
The growth of global providers is slowing, Parikh said, “so they will continue growing through acquisition, which is essentially what could destroy the local market in many smaller countries … They’re going to come and they’re going to acquire smaller players, which in five years will likely not exist anymore. And that’s how they’re going to guarantee their growth – they’re going to buy captives.”
Planning for Success
Given that 80% of M&As are deemed failures, Nuttall asked the panel how buyers can ensure that they are among that successful 20%. “M&A deals fail for the same reason that outsourcing transactions fail. They fail ultimately because of misalignment of expectations between the buyer and the contract and the service provider of what they’re delivering. That hasn’t changed in 50 years and it won’t change. So how do we get better deals? I think that’s the fundamental question,” Parikh said.
“The way that this really works is ensuring cultural alignment, ensuring very strong governance and making sure that we have a strong project management office that continues the alignment of the contract and the changeover management process,” he added. “The best deals out there are those that remain flexible, that can change and move with the changing needs of the customer.”
The main factors to be considered in any acquisition include the know-how and expertise of the executives that run the company to be acquired, the length of contracts and types of services they offer, and the strong relationship between the company to be acquired and their clients, Gordo said. “I think (the latter) is the most important factor. A lot clients leave after an acquisition …some of them will tell you ‘we’re not very happy with the vendors that are servicing us’ so it’s very important to take that into account,” he explained.
“You have to have a very clear strategy,” Moreira added. “And if you do acquisitions in different regions and cultures then you have to respect the culture of the company and the region, but at the same time really ensure that you’re going to be able to keep the values of the company that is acquiring it, because you cannot have a bunch of companies working under the same name. You have to be one company working together from the outset. That’s very important.” Given the need for both companies to work in harmony, while not disrupting the relationship between the acquired firm and its existing clients, Moreira stated that “Personally, I don’t think hostile M&As can work in this industry … A hostile acquisition is very risk, especially in the service industry … In this industry, a friendly acquisition provides far more leverage than a hostile one because at the end we need to keep up relationships.”
It’s Good To Talk
“Post-acquisition execution is critical to this process. You have to plan what you want to look like after the acquisition and make sure that the organizations are aligned,” Casserly added. Post-acquisition is when communication is “most critical because if there’s any discontent then it can impact your client base significantly,” he explained. All of the panelists agreed on the importance on communication in any merger or acquisition. “Communication can absolutely solve post-M&A implementation challenges,” Parikh said, while Moreira affirmed that “everyone has to know exactly why we’re acquiring this company.”
Parikh also emphasized the need to reassess how well staff from the acquired firm have been integrated in order to minimize any risk to the acquiring firm: “What we recognize going in to any kind of acquisition is that somewhere between three to six months into the acquisition you need to identify what I call ‘the trimming phase.’ That’s where there are some key individuals that never really supported the acquisition to begin with or maybe they’re not really supportive of the joint organization. Those individuals need to be moved to other roles or turned out of the organization and that’s really critical to maintain the culture. The culture of the new organization is at risk and what happens when you have a people acquisition is that even the acquiring firm has some potential risk because of the cultural change that occurs when new blood comes in. So it’s very important to have a very strong message but it’s also very important to get the distracters and detractors out of the way.”