Transactions in focus: Spotlight on M&A in Mexico
What are the spoken and unspoken rules for doing deals in Mexico? In this issue of Transactions in focus, we explore at the investment opportunities in this rapidly growing economy, as well as some of the on-going challenges.
Transaction considerations in Mexico
As one of the most dynamic emerging markets in the world, Mexico is already one of Latin America’s most indispensable economies. While Brazil might be considered a darling of investors, Mexico may soon eclipse it. The country, with a population of 117.6 million people (2013) and foreign direct investment (FDI) of US$12.7b (2012), could be on course to overtake Brazil and become the region’s largest economy within a decade.
Mexico has come a long way since the 1980s and early 1990s, when it was primarily known for its maquiladoras1, or manufacturing hubs, along the US borders. Although manufacturing still accounts for 80% of Mexico’s economy, it is now looking to grow and move on to the next stage. It is focusing on the development of research and skills in design and engineering for sectors such as automotive, aviation and medical devices. Meanwhile, its financial outlook is significantly more stable, thanks to a series of economic reforms carried out in recent years. However, some of the uniqueness of its family-owned business culture means that foreign investors need to have a good understanding of the various spoken and unspoken rules when doing business in Mexico.
Learning the local rules
Foreign companies looking to invest and operate in Mexico, like those in other emerging markets, need to have a good understanding of key issues and complexities that can remain in the country. Key challenges that face foreign investors are the loss of technically skilled middle management to markets overseas, and some companies’ lack of access to markets. Another is the preponderance of family-owned businesses and the particular problems this introduces. Given some of the challenges that can still raise concerns among investors, there are also a number of advantages they can benefit from when entering the market.
For any business looking to move into this promising market or dealing with local partners, here are six practical guidelines:
Get local know-how. An advisor who knows the market is crucial. The advisor can help you to understand the general structure of the deal and the cultural aspects.
Embed roots. Key shareholders need to be involved at an early stage in the M&A process. A local management team and local ownership are recommended for the first few years of the operation. Lack of deal experience among company owners and management, lack of access to them and the absence of external advisors assisting the seller may result in an inefficient sales process.
Understand the system. Deal-makers must keep a close eye on the specific set of factors that are unique to Mexico, such as foreign ownership restrictions on certain industries, creative tax structures and labor laws.
Take time. Long-term negotiation timetables are generally required to close a transaction in the region. Preparing and delivering due diligence information requests can be more lengthy than is the norm in the US and Europe.
Always plan for hands-on integration after the deal. Due to the lack of internal controls and inexperience of management, post-close integration may require careful monitoring and on-the-ground assistance. Integration can be a key issue due to a lack of communication in middle management.
Relevance of personal contacts. Especially in emerging markets, you need to give people the understanding that you invest in personal relationships, and not companies or institutions, and develop them for the long term.
- 1 A US or other foreign assembly plant located just below the Mexican border employing labor at a much cheaper rate than is possible north of the border. These factories assemble products that are then shipped north, tariff-free, back to the US.
Mexico in numbers (recorded and estimated)
|Real GDP growth (% per year)||3.6||1.2||3.9||4.1||4.2||4.1|
|Consumer price index (CPI) inflation (% per year)||4.1||3.7||3.4||3.3||3.2||3.1|
|Current account balance (% of GDP)||-1.2||-1.9||-1.1||-1.0||-1.3||-1.3|
|External debt total (% of GDP)||25.1||24.6||24.0||23.4||23.1||22.8|
|Short-term interest rate (%)||4.4||3.8||3.9||4.9||5.3||5.7|
|Exchange per US$ (year average)||13.2||12.7||12.8||12.9||13.2||13.4|
|Government balance (% of GDP)||-2.2||-1.9||-2.5||-2.6||-2.7||-2.8|
|Nominal GDP (US$b)||1,179.2||1,251.8||1,335.7||1,424.5||1,500.2||1,585.9|
|GDP per capita (US$ current prices)||9,743.4||10,217.1||10,773.6||11,358.6||11,831.5||12,374.0|
|Source: Oxford Economics.|