Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Jonathan Mazon and Diego Enrico Peñas discussed The Art of Deal Making: Using External Expertise Effectively as part of the M&A Advisory chapter.
How has the M&A landscape changed in the aftermath of the Covid-19 pandemic? Has it changed the nature of deal making in your jurisdiction and which industries have seen most activity?
M&A activity around the world has been historically opportunistic and the deals conducted in the current Covid-19 scenario are no different in that sense. The noticeable difference that we observe comes from the fact that the consequences of the pandemic to businesses are a global phenomenon, which means an increased number of opportunities that is also more widely spread across markets and jurisdictions.
As far as deal making is concerned, the initial Covid-19 scare halted most of the ongoing negotiations in Brazil. Many deals that were in their final stages were paused or abandoned, such as the Boeing-Embraer transaction. This initial stage was succeeded by an introspective moment, during which investors re-evaluated whether the intended acquisitions still made sense to them, and also whether they expected to have the resources to follow through with those transactions. After that stage, the local M&A market slowly reignited, and deals started to flow again.
The current moment may be regarded as a waste-not stage in which companies that managed to stay afloat start looking outward for opportunity-driven deals among businesses hit by the pandemic, in need of additional capital to weather this crisis or with complementary characteristics, such as online capabilities for players not yet fully up to speed in that area. The recent devaluation of the BRL against the US dollar further fuels this perspective and makes Brazilian acquisition prospects more attractive to foreign investors.
Looking forward, we expect the M&A market to gain strength and further develop as divestment in the most affected companies’ accelerates and enduring companies secure enough of a foothold to start pursuing expansion opportunities. Moreover, as the situation stabilises, companies that profited most during this period will likely be sought after by well established groups and a second wave of M&A transactions may follow.
What advice could you give potential clients on effective pre-deal planning? For instance, preparing a business for sale in your jurisdiction or ensuring transparency for a buyer?
When planning a deal in any jurisdiction, the primary concern of sellers is usually to obtain a fair price for the business. For the sale of a business in Brazil the effort should be focused on being prepared to explain any industry or Brazilian legislation and regulatory particularities to buyers often lacking in knowledge about doing business in Brazil. To this end, pre-deal planning for the seller often involves some degree of diligence. This introspective analysis also becomes a prime opportunity for the seller to settle outstanding debts and risks, as well as adopt more efficient and streamlined structures that help maximise valuation.
From the buyer’s perspective the due diligence is paramount and focuses on the risks, both materialised as judicial or administrative claims and not yet materialised. In Brazil, tax matters are often relevant liabilities for players in all industries as far as amounts involved are concerned. Depending on the industry, labour and consumer liabilities can also be significant in terms of potential number of claims. Finally, for some industries, regulatory issues may also be vital due to the lengthy and often intricate processes involved. Again, being able to count on the expertise of dependable and knowledgeable local advisors that are capable of working and dialoguing with the representatives of all the parties involved is often the dealmaker for cross-border transactions.
Finally, there are the dispute resolution clauses, which affect both buyers and sellers of businesses and cannot be overlooked. The Brazilian judiciary system is notorious for being overloaded and, consequently, for the lengthy life spans of claims from filing until a final decision is reached. A faster, though relatively more expensive alternative than a judicial claim, would be to have any disputes settled by arbitration.
What deal structures prove most effective in your jurisdiction (e.g. asset vs share deals)? Are there any important legislative anomalies that international clients considering a merger or acquisition in your jurisdiction should be aware of?
Differently from other jurisdictions, asset deals are less common in Brazil as they do not provide relevant efficiencies or protection against liabilities when compared to share deals; both struc tures can likewise result in liabilities for the buyer – all of which highlight the importance of due diligence in M&A transactions.
Therefore, the choice between asset or share deals may be based on antitrust or other buyer-related motivations. Share deals are more common due to the fact that the sale of corporate assets at a largescale may be regarded by Brazilian courts as a de facto succession of the buyer in the liabilities held against the seller prior to the transaction. Moreover, M&A deals in Brazil often have their structures dictated by tax concerns specific to each transaction, aiming to provide the parties involved with the most effective results.
Tax aspects are highly important in any transaction involving a Brazilian party. For instance, the acquisition and corporate restructuring of a company can result in the booking of goodwill on the buyer’s entity’s balance sheet. Considering that this goodwill may be amortized and deducted for tax purposes and that the possibility of such amortization is a very contentious matter in Brazil, this factor can be by itself a dealmaker or a dealbreaker.
Another local peculiarity is the requirement for the specific registration of all foreign investment in Brazil under Law No. 4,131, be the investments made directly (through share acquisition) or through the indebtedness of the local company against the investor. It should be mentioned that, in regard to investment through indebtedness, Brazil has further tax regulations regarding thin capitalization and transfer pricing which must be analyzed in more detail by local tax advisors with the ability to dialogue and explain such anomalies to all parties involved.
Top Tips – Effective Negotiation Strategies In Your Jurisdiction
• When selling your business in Brazil, do your homework regarding due diligence, solve potential issues that may impact valuation and be prepared to explain any industry or Brazil-specific legal and regulatory particularities to buyers that may be unfamiliar with your business environment.
• When buying a business in Brazil, find reputable and seasoned local advisors to work alongside your acquisition team and your trusted advisors, from the due diligence process, to the negotiation and signing of the transaction documents, all the way to the post-closing dynamics with the sellers.
• Whether buying or selling a business in Brazil, do take the time to consider the most suitable method for dispute resolution for your transaction and the trade-off between the lower cost and lengthier claim decision cycle of the Brazilian judiciary system and the relatively faster