By reason of the risk factor, in the world of mergers and acquisitions (M&A) much depends from the economic and political stability where the targets (the companies to be acquired) are domiciled. A clear example is the pronounced decrease of M&A activities worldwide during the first quarter of 2016[1].

From Brexit to the Brazilian impeachment, every event with a political impact plays an important role in the investors’ decisions and adds a strong dose of uncertainty in the markets. However, the greatest insecurity in a transaction of this kind is overvaluation or undervaluation of the acquisition and lack of predictability regarding the integration of business models.  In this sense, the same economic crisis being faced by Latin American countries such as Brazil has caused a depreciation of local assets and resources making such valuation much easier. Thus, a recovery – albeit slow – has been seen in M&A activity in this country by reason of the low costs offered.

We can recognize two general strategies in M&A models:  To support the current business model by acquiring resources of other companies either to improve a product by implementing sophisticated technology or parts in order to increase the portfolio of clients or to cut down production costs, and to reinvent the business model.

For a real benefit to exist in the acquiring company and to have the effects desired by the shareholders, it is crucial to assess the value of the acquisition.  According to the authors of “The Big Idea: The New M&A Playbook”[2], many companies fail to allocate a real value to the acquisition and end up paying too much for a target that will not enhance their profits by such a proportion that will justify the high price paid, while they disregard other opportunities with much potential because they consider them costly.  The acquiring company has done a good business if the amount paid for the acquisition is lower than the benefit obtained.  That is why when economic crises force currency devaluation, the difference between cost and benefit is much clearer and it attracts investors who are willing to withstand the country risk factor.

Besides the nominal cost of this type of transactions, it is imperative to properly integrate the resources from the target into the business model of the acquiring company, or to recognize when it is convenient to treat the acquisition as an independent model.  In that sense, a due diligence may generally be a useful tool to determine whether it is advisable to take the resources that will increase productivity and dissolve the business, integrate it or manage it separately.  Aside from revealing the contingencies of the transaction, a due diligence may make evident if the administration of the business will be expensive and if it is preferable to capture certain assets only.

[1] http://crossbordermaindex.bakermckenzie.com/
[2] https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook

Warning: This newsletter by Pérez, Bustamante & Ponce is not and cannot be used as legal advice or opinion since it is merely of an informative nature.

Lexmundi Logo - PBP Law
Interlaw Logo - PBP Law
Club de Abogados Logo - PBP Law
Employment Law Alliance Logo - PBP Law
Insuralex Logo - PBP Law
Riela Logo - PBP Law
Lexmundi Logo - PBP Law
Interlaw Logo - PBP Law
Club de Abogados Logo - PBP Law
Employment Law Alliance Logo - PBP Law
Insuralex Logo - PBP Law
Riela Logo - PBP Law