Navigating M&A in the Mexico Market

Steve Katz  00:16

Hi, everybody, and thanks for listening in on our Hilco Global Smarter Perspective podcasts. I’m your host, Steve Katz. Whether you’re a return or first time listener, we’re glad you could tune in today. And we’re going to be discussing something that’s pretty interesting. It’s the second part of our continuing series on doing business in Mexico. And today, we’re gonna be talking about the tricky business of conducting merger and acquisition activities within that country and why many businesses have found, unfortunately, that undertaking these types of efforts can be fraught with unexpected and, in many cases, costly roadblocks and landmines. So, as I said, this is part two in a series of topics that we’re covering in doing business in Mexico. And once again joining us for the discussion today is Jan Rene Aguirre, director of business development and turnaround strategy at Hilco Global Mexico. Jan, welcome back to the podcast.

Jan Rene Aguirre  01:12

Thanks for having me on again, Steve.

Steve Katz  01:14

Yeah, absolutely Jan. Listen from what just maybe, you know, 36,000 foot level why would you say that companies and their advisors, meaning their lawyers, accountants, etc, frequently run into trouble when they engage in either merger or acquisition activities involving businesses that are located inside Mexico?

Jan Rene Aguirre  01:35

Sure, Steve. Listen, companies engaging in mergers and acquisitions in Mexico often encounter significant challenges due to the complex blend of factors. These factors may include navigating Mexico’s unique and intricate regulatory environment, cultural differences in business practices, difficulties in conducting comprehensive due diligence and the impact of political and economic volatility. Among other things, legal system disparities, concerns over corruption and security issues in post merger integration, financial risks, environmental and social governance standards and language barriers, further complicating transactions. These factors require in depth local expertise and careful strategic planning to successfully manage and execute such cross border deals.

Steve Katz  02:26

Okay, so that’s a good good topline good basis for our discussion. I jotted down five areas that I’d really like to explore with you today to learn how each specifically can benefit businesses that find themselves on either side of this M&A equation. So the first on my list is holistic valuations and their importance as part of the M&A process your thoughts on that?

Jan Rene Aguirre  02:52

Having the right expertise in asset valuation ensuring a meticulous assessment of target companies is essential. Going beyond the surface, delving into tangible and intangible assets and providing a comprehensive picture of value is a best practice that is critical to adhere in the Mexico market in particular. Having said these, Steve, holistic valuations are integral to the M&A process providing a deeper multi-dimensional understanding of a company’s value, aiding in the risk assessment, strategic decision making and ultimately contributing to the success and sustainability of the transaction. Holistic valuation play a crucial role in the M&A process for businesses on both sides of the transaction. Offering several key elements. Between these benefits, I would highlight Steve, a comprehensive understanding of value. The holistic valuations go beyond traditional financial metrics to include non financial aspects such as brand value, customer relationships, intellectual property, and employee talent. This approach provides a more complete picture of the target companies through words, aiding inaccurate pricing and negotiating strategies. Furthermore, we can identify the risk identification and mitigation. By considering a wide range of factors including market trends, regulatory environments, and potential synergies, holistic valuations helping identifying and assessing risks more efficiently. This can lead to a better informed decisions and strategies for risk mitigation . Along these lines, Steve, we can then go to our third point, which would be the strategic decision making. Holistic valuations allow acquirers to align acquisitions with their strategic objectives by evaluating how well the targets resources, capabilities and market position complement their own. For sellers, understanding the full spectrum of their value propositions can help in positioning the company more attractively. But also we can talk about how an holistic valuation facilitates a financing and provides investor confidence. A well rounded valuation can be instrumental in securing financing for acquisition. It provides lenders and investors with a clearer understanding of the deals potential and increasing their confidence in the investment. Furthermore, enhancing post merger integration, understanding all aspects of target company aids in a smoother integration post acquisition. Specifically, when you are doing cross border transactions and deal with different types of cultures. It helps in aligning cultures, systems and processes, thereby reducing integration costs and accelerating the realization of synergies. Finally, I could mention that it also provides a competitive advantage. In a competitive bidding scenario having an holistic approach to the evaluation can provide a distinctive advantage. It enables acquirers to identify unique value drivers that others might overlook, potentially leading to a more compelling and a successful bid.

Steve Katz  06:06

All right, let’s let’s let’s take it to the next level here, in terms of disposition of certain unwanted or unneeded assets that are associated with M&A activity, what’s unique or challenging about undertaking that process in Mexico that you found particularly problematic for companies in the past?

Jan Rene Aguirre  06:29

Sure, Steve, I mean, there’s a lot of content to go through this, especially in M&A situations. But I will try to highlight and focus on the key issues regarding the disposition of unwanted or unneeded assets during a merger or acquisition in Mexico presents unique challenges and complexities, often providing problematic for companies involved. The main one would be regulatory hurdles. Mexico’s regulatory environment can be intricate, especially regarding asset sales and transfers. I insist that companies must have a myriad of local regulations, tax implications and bureaucratic procedures, which can be significantly different from those in other jurisdictions. Another key element would be the different market dynamics. The Mexican market may be different dynamics for certain assets compared to other regions. This can affect the valuation and liquidation of assets making it challenging to find buyers or achieve expected prices. Furthermore, the legal complexities within the Mexican legal system rooted in the civil law can present complexities in the transfer of assets, particularly in real estate and intellectual property. Ensuring a clear title to compliance with zoning laws, and navigating that intrinsic lease of intellectual property rights in Mexico can be challenging. We recommend legal advice. Another important issue would be tax implication. The disposition of assets in Mexico can have significant tax implication, making sure that you understand and plan for these tax implications include capital gains tax and VAT, (which is a value added tax) is crucial to avoid unexpected liabilities and optimize financial outcomes. Another issue to address would be the cultural and negotiation difference. Cultural nuances in business practices and negotiation styles can impact the process of selling assets, misunderstandings, or misalignments and expectations can lead to delays or on federal tariffs. And finally, key consideration, we call that obligate topicalization of business practices, unfortunately, also involves corruption and security issues. Navigating issues of corruption, and ensuring security during that transaction process can be a significant concern, especially in the sense in certain regions of Mexico. The final point that I want to highlight would be the operational disruptions risks. divesting assets can disrupt ongoing operations, particularly if the assets are integral to current business process. Managing these disruptions and planning ahead carefully, is essential to maintain business continuity and be able to close a transaction on the time proposed. Finally, and this would be one of the most critical issues Steve, would be doing a due diligence properly. Buyers in Mexico may conduct extensive due diligence which can lengthen the sales process. Preparing a comprehensive documentation and transparent records can help in smoothing this process. Steve, I know this is a lot of information, but I can assure you that these challenges require careful planning, local expertise and strategic execution to ensure the disposition of assets in the context of mergers and acquisition in Mexico so that this practice can be conducted effectively and efficiently.

Steve Katz  09:58

Yeah, and I would imagine And then navigating the financial intricacies of M&A efforts in Mexico is a bit of a different animal so to speak. So what clarity Jan, can you provide on that process and how it might differ from what key players within companies are used to in the US?

Jan Rene Aguirre  10:16

I mean, sure, Steve. Navigating the financial intricacies of, of business, and specifically, M&A efforts in Mexico indeed presents a different landscape compared to what companies especially those from the US might be accustomed to. Again, this might be a little bit repetitive, but I would insist on the regulatory environment, the Mexican regulatory framework, governing financial transactions, including mergers and acquisition differs significantly from those in the US. This includes different rules and regulations regarding disclosure, financial reporting, corporate governance and compliance. The challenge is understanding and adhering to these regulation, which would be crucial to avoid legal and financial repercussions. One of the other things that is quite different is banking and financial structures. The banking and financing systems in Mexico may not be as diverse our or as developed, as in the US. This affects how deals are financed, companies may find fewer options for funding and potentially face higher cost of capital. Understanding local market financial practices, and identifying the right financial partners, whether it’s local or international, in Mexico, is key to close or to be part of these transactions. Again, I want to emphasize on the taxation differences. The tax systems in Mexico include corporate tax, capital gains tax, and VAT, which, again, would be value added tax, has its own set of rules and implications for M&A transactions. So make sure that the tax structure that you’re using is a tax structure that are advantageous in the US might not apply in Mexico and vice versa. Effective Tax Planning and structuring are essential to optimize the financial outcomes of the deal. I would highly recommend to find a local advisor or tax advisor regarding these taxation differences.

Steve Katz  12:30

Yeah, absolutely.

Jan Rene Aguirre  12:31

Yeah, for sure. I mean, adding up to that highlight the cross border transaction challenges for US companies, cross border transactional challenges, such as Foreign Exchange Management, repurchazation of property profits, and compliance with international laws, like foreign corruption Practices Act become pertinent in the Mexican M&A deals, no? And so it’s important for you, for anybody doing cross border transactions to to just make sure that you have that on your radar. And that that’s on point. And finally, a point that I would add would be the integration of financial planning. Post merger, financial integration can be much more complex due to difference differences in financial systems, practices and reporting standards between the US and Mexico. So in summary, Steve, I would, I would add that understanding and navigating these differences requires specialized knowledge of the Mexican market, local financial practices, and regulatory environment. Companies often benefit from partnering with local experts, including financial advisors and legal counsel, who are very well versed in the nuances of the Mexican market, especially in M&A transactions.

Steve Katz  13:48

Yeah. And that seems to be sort of the preeminent message here. And I’m sure it’s true in in every country, but I but I know there. There are certainly some differences in Mexico and some complexities, as we said, from the corruption standpoint, and just in terms of how business is done, and to some extent, who you know, I think, as well, right?

Jan Rene Aguirre  14:09

Yeah. Know how and know who, right?

Steve Katz  14:13

Exactly. The Know how, the know how and the know who. And we know that quite often these types of transactions will involve real estate assets from land ownership laws governing leases, and deal brokerage. Things are quite different in Mexico than in many markets around the world. So how would you suggest that companies come at those types of opportunities and challenges in Mexico?

Jan Rene Aguirre  14:36

I mean, sure, Steve. Every business in these situations shares a common goal in regard to real estate that they inherit as part of these transactions. And that is a need or desire to unlock the full potential of those assets. That might be to free up capital for operational expenses, or to make another type of acquisition for example. Gaining access to notable local expertise in real estate disposition can help to ensure a strategic approach to maximize these returns, whether it’s through sales, leasing, or other innovative solutions contributing to your overall growth strategy. Specifically, when dealing with a real estate asset in Mexico and through an M&A transaction, companies face a unique set of opportunities and challenges due to existing legal and regulatory landscape. Some of the strategies and considerations properly navigate within the real estate sector would be understanding land ownership regulations. Mexico has specific laws governing foreign ownership of land, and specifically in restricted zones, near borders or coastlines. It’s crucial to understand these regulations, including the use of what we call fideicomisos, or real estate trusts, and the Mexican corporations for ownership. I will recommend to engage local real estate experts. Partnering with local real estate experts, including lawyers and real estate agents familiar with the Mexican property laws is essential. They can provide invaluable insights into local market conditions, pricing, and negotiation tactics. I will also emphasize on the importance of doing a comprehensive due diligence. Conducting a thorough due diligence on real estate assets. This includes verifying ownership, ensuring clear title, checking for liens or encumbrances, understanding zoning regulations, and assessing the environmental and instructional conditions of the property is key. I would also highlight to navigate lease laws carefully. Lease laws in Mexico can differ significantly from other countries. It’s important to understand the terms conditions and tenant rights under Mexican law, which might offer more protection to tenants than in other markets.

Steve Katz  17:00

Yeah, interesting.

Jan Rene Aguirre  17:01

Yeah. Don’t forget to consider tax implications as well. Real estate transactions in Mexico has specific tax implications, including acquisition taxes, property taxes, and capital gains taxes. Understanding and planning these taxes is crucial to avoid unexpected costs. Finally, I would add maybe two points.

Steve Katz  17:24

Sure.

Jan Rene Aguirre  17:24

Strategic negotiations. So make sure to employ strategic negotiation tactics. Considering the local market dynamics and the broader context of an M&A deal, it’s important to balance the real estate aspects of the overall objectives of that transaction. Finally, we’re in Mexico and business is a bit different. Don’t forget to address security and corruption risks. Be aware of security and corruption risks, especially in certain regions. Conduct transactions transparently, and in compliance with anti corruption laws like that FCPA. By addressing these considerations, and employing a strategic approach, these companies can effectively navigate opportunities and challenges presented by real estate assets in Mexico, turning them into advantage components of their broader business strategy.

Steve Katz  18:15

Yeah, there’s so those are some great things that you pointed out some great significant differences between the market it’s, it’s really a complex topic overall. And it is, as we said, at the start, you know, really nuanced in different country to do business. And so, of course, you know, we only have so much time, and we’re just about out. So is there anything you would add? Or maybe you can just sort of sum up everything we covered in a little like a bite sized digestible takeaway for listeners to to take away today?

Jan Rene Aguirre  18:49

Sure, sure, Steve, certainly. I think it’s important to think about it this way, a deep understanding of the local Mexican market. And equally deep and trusted relationships within the business, banking and other communities is really something you want and need on your side if you’re a business involved in M&A activity in Mexico. And ideally, you want partners that not only have the local knowledge and relationships when it comes to the regulatory landscape and the business environment, but also have experience in markets outside Mexico, where an enterprise or its component business assets may bring greater value or be otherwise leveraged advantageously on a more global scale, as part of executing successful M&A transactions and efforts that may follow.

Steve Katz  19:43

Alright, Jan, great information again today and and for listeners who want to reach out with follow up questions or to discuss M&A efforts that they might be involved with. What’s the best way to get in touch with you?

Jan Rene Aguirre  19:56

Sure, Steve, thanks once again for the opportunity to share this information with your audience. I can be reached by email or phone. My email is JAGUIRRE at Hilcoglobal.mx. And my phone in Mexico is +52 55 8500 8547.

Steve Katz  20:22

All right, perfect. Well, we’re really glad you could join us again, Jan and we look forward to part three of our discussion which is coming up shortly after the holiday season, I believe. So for now, I’ll just say hasta la proxima vez. And listeners, we hope that you had a wonderful holiday season. And we also hope that this Smarter Perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. And remember that you can always check out more great podcasts and articles featuring timely insights from Hilco experts like Jan and HilcoGlobal.com forward slash smarter dash perspectives. Until next time for Hilco Global I’m Steve Katz.