How to do Deals in Latin America

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1:46I'm Kisan Patel, and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

2:10Hello, M &A scientists. Here at M &A Science, our goal is to continuously expand our understanding of M &A and use that knowledge to curate top-notch training programs and resources by visiting mascience.com. You'll find all the information you need to take your M &A skills to the next level. Get started by signing up for a free weekly newsletter to stay up to date on our latest courses, upcoming events, and expert interviews. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Juan Castaneda, recent CEO of the Americas for Smurfit Kappa.

2:51Smurf A Kappa Group is Europe's leading corrugated packaging company and one of the leading paper-based packaging companies in the world. Traded on London Stock Exchange under SKG. Today, we're going to talk about how to do deals in Latin America. Juan, how are you doing? Good morning, Kism. How are you? And thanks to you and thanks to M &I Science for having me here. Thank you for taking the time, Juan. When did you start working on M &A and how many deals have you done? Around 20, more or less, since we started this back in the mid-90s. Part of the DNA of Smart Fit Capra Group is actually growing by acquisitions.

3:29The company has been very successful growing by buying companies in Europe and in the Americas. So I've been there, I could say, since the beginning that we started acquiring companies in Colombia and then for the region from the United States. And you've done deals in which countries? I don't deal with Argentina, I don't deal with Colombia, in Mexico, in Dominican Republic, in Central America, in Brazil, and in the U.S. All right. That gets to our theme. What's the biggest difference between buying companies in the U.S. compared to Latin America? We will need to separate this in two different words.

4:09When you come to Latin America, and let me stay there, you normally talk about buying mid-sized companies, normally family-based companies, because when you come from a big corporation from Europe or from the U.S. and try to grow in this area, what you try to do is to buy those kind of companies. So most of the conversation here would be around those type of companies. Obviously, there are big local companies in Latin America that are public companies listed in the stock exchange that are properly organized, like U.S. standards that have proper accounting standards, proper governance, et cetera, et cetera.

4:49But let's try to stay here in this conversation in the other set of companies. I'm talking about companies that are originally family companies that are mid-sized. And when you go there, you're going to find several differences from the world that you have in the U.S. We live in a world of complex regulations from our standpoint, some countries more than others. If you ask me, probably Brazil is on top of a company that has very complicated regulations. and I'm talking about regulations from the standpoint of labor regulations and lack of flexibility in terms of labor management. I'm talking about taxes regulation.

5:32Brazil, for instance, has a very complex tax structure at a state level and a federal level. And actually, if you go to Brazil, you will find that most of these companies will have big liabilities in terms of taxes, either with the states or the federal government. And I have found through the years that once you sit with the owners and you try to adjust price for the tax liability, they will say, no, that's not that liability. That's something that we have been handling. And it's basically a rollover tax liability. And they don't like to recognize that tax liability as price adjustment. That's very common in Brazil, let me tell you.

6:10There are also, when you go into labor issues, you will find that there are certain schemes of compensation, shadow compensation, particularly for the open management that most of the companies have. Either they are paying our country or they are paying our currency or they are paying other ways. We're talking about passing some dough under the table, basically. Yeah, yeah. That's unfortunately that's normal. And it happens. It's something that we can hide for different reasons. It's structural reasons, it's tax reasons. Sometimes it's looking for short-term cost savings issues. There are many taxes associated with payrolls here in Latin America.

6:51So companies try to save money by avoiding those additional payroll taxes, etc. And normalize that when you come with a serious company, a multinational company, that simply cannot accept those kind of schemes like we do. We don't accept. And our first step in buying those companies is to normalize and regularize and bring everything up to standards. Going through that process sometimes is difficult because either it goes to the person or it goes to the company. And in that process, you might lose some people. There are also, let's say, great areas on environmental issues. And it's not because of regulation.

7:28On paper, regulation is pretty standard in America. You have some countries more advanced than others. But let's say on paper, all regulation is up to standards. Now, compliance is another story. And there are several instances in which you go to a company, you look at what's the regulation in terms of environmental, and you will find that normally it's very strange to have companies that are 100 % in compliance with what there is on paper. Accounting practices are not necessarily standardized. It's not that you're going to go to mid-sized family companies and you're going to buy international accounting standards or IFRS or in compliance in those companies.

8:11But issue that I would like to mention also around titles and property, it's very common that you might find problems in that. And I would say the reason for that is that most of these family companies come from a lot of history behind probably in the process of growing and adding properties or they didn't follow the proper procedures or they didn't find the proper titles in the process. And when you're local, it's easy for you to manage that and to circle around that. But when you come with a big name, when you come with your company, when you come as a multinational company with your reputation that operate totally according to the regulations and according to the local norms, you can live with great areas.

8:59It's as simple as that. While locals tend to be more comfortable operating in gray areas, managing the day-to-day with the authorities and the regulations, when you bring your company reputations and your company way to do business into these kind of companies, all the adjustment process sometimes is complicated. And you need to be much more specific and much more black and white on these gray areas. I think that's the big theme I'm picking up on. Part of this, you almost convinced me not to do any deals in Latin America from everything you described. But I'm sensing that so much of this is around being a larger multinational corporation.

9:37You can't have any funny business. So that's where there's so much scrutiny in these areas from the employment labor issues, making sure everybody's doing things properly. The tax, make sure there's no big liabilities there. Environmental issues, you talked about the property piece, making sure there's the right ownership title. and then even the accounting practices behind all this stuff. Can we talk about these individually? I'm just curious to get a sense if they differentiate by countries specifically within Latin Central America. And how do you go about mitigating some of these risks? There are some.

10:11And I guess when you are from outside looking at Latin America, particularly with the U.S., the U.S., they don't have sometimes the proper knowledge that even though we classify as Latin America, There are certain ways to do it in Mexico versus what is in Argentina. Mexico tends to be on the cultural side much more formal, while Argentina at the end of the day are from Italian origin, so everything is much more informal. And in the middle, you find many ways to do things. As I mentioned to you before, Brazil, for instance, is basically a country of regulations. Everything is on paper, I speak.

10:48So in mitigation, at the end of the day, you need to understand the local regulation. And to understand the local regulation, you need the locals. You need to have local people who understand taxes, local people who understand labor issues, local people who understand legal issues, local people who understand environmental issues. And I would say those are those critical areas for me. And you need to work with them. And they need to do the proper due diligence to see where the company is, trying to get through the information because sometimes part of the problem is that information is not necessarily available in the way that you are normally used to, starting with the financial statements.

11:30You know that you go to a U.S. company and you will have financial statements reported in a certain way at a certain date. That's not necessarily the norm in this kind of companies. There are delays. So if you want to make a closing based on financial statements on December 30, probably you wouldn't have that until February or March. Something like that happens. Again, I would say a proper due diligence using local people who understand the local regulations and trying to find as much as information that you can from the business that you are acquiring. I don't want to leave with the impression here to the people, Kison, that everything is as disorganized in Latin America.

12:09I'm just trying to stay on the cautious side based on experience. But when you go to a mid-sized company, family company, two, three generations, that is what you normally find to buy. Because, again, it's normal. The first generation rarely is willing to sell a company. The second generation is its transition. Once you go to the third generation, it's much more probable that you find. So those companies on the mid-sized family company, they tend to be very informal in every company. It's a different environment. You don't have thousands of private equity firms like you do in the U.S. that have institutionalized a lot of these assets.

12:44You have a lot of family-owned businesses. You do have a really good point about using local experts and leveraging them so that you can avoid or get around a lot of these challenges and pitfalls. Local and with good reputation, Kirsten. You will find advisors with very good reputations in every country. That's what I was going to ask. How do you do that? It's taken me so long to build a network of subject matter experts here in the U.S. How do you go about that and finding those experts? Normally, they're a reference. And if you find a legal team in the U.S., they normally hire people, which they work in the different countries.

13:18You go to the lawyers, two lawyers in the U.S., and you say, hey, who do you use when you deal with the business in Mexico or in Argentina? There is a network. And then on the accounting or the tax side, you always have the big four present in most of these countries. And then there are experts in environmental issues that also have operations in the different countries. In Brazil, you find any big brand of advisors and consultants that you find in the U.S. Mexico as well. Probably you might have some problems in other countries. But in Mexico, Brazil, you can find any big name in experts. Ask for referrals from U.S.

13:56contacts, maybe doing business in Latin America, and then even use those contacts to find other adjacent areas. you may need help with or pick up your favorite brand and go from there. Can we talk more about the cultural aspect of it? Because I think that is a big component. Outside, there's these tactical areas that you have to overcome and leveraging SMEs for that. But in terms of working with other executives to get deals done, are there any specific cultural challenges that you found or maybe distinct by country? I don't think there is a specific secret or a specific difference. As I tell you, Mexicans in general tend to be much more formal.

14:35The way that meetings are conducted is when you listen in the U.S. talking about how to deal with business in Japan or how to deal with business in China. You are given certain protocol recommendations. Latin America has a small difference, but again, in Latin America, there are countries more formal than others. Mexicans, again, tend to be much more formal where Argentinians or the Caribbean countries tend to be much more informal. And that means everything from the dress code to the way that you refer to the people and etc. But at the end of the day, let me go back a little bit. You go there to Latin America looking for an acquisition and you are looking obviously for probably market and to grow.

15:16You might be looking for some assets, good or bad, or at least well located or the strategy located. But at the end of the day, what you are looking for is people. It's a team of people that work with you and are able to actually maintain the business and grow the business with you. You bring the best that you can from outside and you take the best that you found in that business. Because at the end of the day, if you went there and you are willing to acquire that company, it's because you found something that is good. And that good was built for that team. So said that, it's critical that you maintain that team as much as you can and integrate that team into your team, that you bring the best that they have, you bring the best that you have, and you try to make a combination and a proper balance of those two things and make it work.

16:04If you are a U.S. company going into Brazil, for instance, and you try to bring your executives from the U.S., your standard from the U.S., everything at the U.S. side, you are not going to have easy because there are certain limits on what the people locally want to do, are willing to do, and they are used to do things a certain way. So you have to be flexible and you have to try to balance those two words to try to strike the best of that. Because in the process of making acquisitions, making the strategic choice, finding the target, making the diligence, making the negotiation, that's the easy part.

16:40The complicated part comes in integration. And integration is being successful balancing what you find, what you bring. I would say part of the success of Smurfing Kappa Group in making this acquisition has been that, that we try to understand that. And we bring what we know we do best, but we also try to maintain locally what we know they do well. That combination of those cores through a proper integration process is what gives you success at the end of the day. And again, for me, what is critical there is communication and managing of expectations. You need to go there. You need to put faces.

17:22You need to bring your people, put the faces there in a table and say clearly to that people, this is what we expect. What are you expecting from us? And agree on the expectations and with proper communication and continuous communication. I think that might work. I want to break down the front end of the deal because it sounds like there's a lot of nuances around getting some people alignment there to get things set up. And then we'll talk more about integration to actually get the execution there to make everything work out. How do you go about sourcing deals? Several sources. If I maintain my story here, a mid-sized business, it's very rare that a mid-sized business is willing to pay the kind of fees and costs that using big private investment firms or big bank names are charging for their work.

18:08I'm not telling you here that doesn't work. It's just that there are things that you can't pay, simple as that. So if you're talking about deals around$300 million, $250 million,$400 million on that level, simply paying the big names in banking, in investment banking, it's not possible. You can't afford that. It will take a lot of money for new deals. Yet there are small private investment firms, even Latin America's small boutique firms that probably find you through the ranks and bring deals to the table. But most of the time, the targets are found by ourselves. We know our business. We know what we want.

18:47We have our strategy set up. We know where we want to be. We have some information about the reputation of the company in the market, in the business. It's not a big work. So most of the time, we actually have a direct approach to the right person in the organization. And if you are looking up, you make this contact in the right moment. Sometimes you simply get your door closed in your face. Sometimes the door is open and you find a way to get the deal done. Using big bands, big names in investment banking is not the norm. It's more small boutique firms or it's contacts that you make directly.

19:28How do you reach out to these companies? Are you finding them at industry events? Are you just sending cold calls, cold emails, writing letters? How do you get a hold of them? No, sometimes it's a direct call. It's finding the right person and bringing some to the table, some value to the table for them and for us. Again, it's a small group. You know who is in the paper business in Mexico and you know who are the owners or the managers or who are the decision makers. And you just sit with them on the proper environment, with the proper protections from the point of view of antithrallals, laws and everything.

20:02And you sit with them and say, hey, are you interested in making business? It's either let's combine the business or right away, are you interested in selling? And sometimes they are. You get those conversations going pretty casual, maybe just learn about their business and what their goals are and then see if they have that general interest or do you a little more prompt to propose that you're interested in buying them? Because sometimes the best approach is the direct approach. It's your business is good. We believe your business is good. We like your business. We would like your business. Are you interested or not?

20:32There's nothing bad in asking. Sometimes you say, do again, do. Say simply, no, we are not interested. Okay, we are friends. Sometimes, let's say, we do open the door to that contact. It's not complicated, really. How do you get them interested? Because I feel like there's got to be some alignment on what the incentive is for that company to want to sell. What is the value of joining your company? How do you get that alignment and get that interest created? At the end of the day, it's reputation on both sides. People who are in the business know who Smurfing Kappa Group is. They have seen the deals that we have made through the years in the different countries.

21:09Again, it's not a big word. If you go to Argentina, the people who are in the paper business, they know who Smurfing Kappa Group is. They know the deals that we have made in Argentina. They know that at the end of the day, the shareholders and the employees and everybody who are in the process. So at the end of the day, it's your reputation who precedes you. That's why you get deals done. If you go there and you destroy business and you destroy people, just forget it. But again, when you come here into a family business, at the end of the day, obviously price is quite important, but some of them care about their business.

21:46It's the legacy of their parents or grandparents or whatever. It's the people who they employ, which people who have been there for many years and they want their people protected. And we have offered that through the years. They witnessed that through the years in companies that we have acquired in every country, in Mexico, in Argentina, in Colombia, in Ecuador, in El Salvador, in the Dominican Republic. So maybe that at least creates curiosity to open the door, to have the conversation. If you don't have good reputation, it's impossible. But when you come here and you say, okay, can you give you a fair price?

22:23And we will steal your company throughout the years. Fair point. You get the reputation, how you treat people. How do you overcome the legacy part where you're dealing with family generational businesses and legacy is very important to them? How do you overcome that reservation when they consider selling to a big company? It's communication and reputation, Kirsten. And managing those social issues in acquisitions sometimes are equally critical to managing the financial issues. Again, how do you treat the shareholders? Sometimes they are managers besides shareholders. And it's nothing but keeping them in the management with good communication and a good set of expectations on both parts.

23:05Sometimes it's better at least to have them helping you in the integration, in the transition. It's communication at the end of the day. Are there any things you do to understand what their incentives are, what their drivers are? I can imagine there's got to be parts where you want to get a sense of how involved they want to be after you do the transaction, if they have certain goals or things like that. I don't know. Is there any of those things matter as much? No secrets here. It's just asking. It's what do you want from here? Do you want to stay? Do you want to just sign or fly from here? It's just asking.

23:39We are open to have that conversation. You need flexibility. Again, if you have an acquisition processing, would you say, okay, I come here, I bring my managers, third level, second level managers, everybody out, you fire 10 people, 20 people, 25 people, it's not a good start. You need to be flexible. You need to understand what is there, the roles of the people. And we have made mistakes on that because you have a certain set of mind and how a business should be run, how structured should be the management. And then you come here, you find a different structure, And your first reaction is, let's change this structure and let's make this structure similar to what I used to.

24:18If you don't understand why the structure that is in place, making that step very quickly, it might be a mistake. It might work. It might not. What are other mistakes you've made on deals? That was a critical mistake. Again, I think that I don't understand the structure and the local culture of the organization. thinking that the financial role of a person is the financial role. And similar to that you have in Colombia to what you have in the U.S. and Mexico, or the sales role is the same. Sometimes it's not. There are certain particularities from organization to organization. And you need to understand that first before making any change.

24:56What about red flags? What are red flags to you that, hey, this isn't a deal we should be moving forward with? When you start finding problems here and there, I used this word before, but sometimes you fall in love with the deal. It's just you have invested time. You know that it fits your strategy very well. You go there and you find, let's say, good asset and even a good portfolio of customers. But then you start finding problems in labor issues, compensation here, environmental problems that doesn't have been properly managed, liability that you find in the balance sheet that they don't have proper explanation.

25:36The thing that we just mentioned, you even find companies that they don't have the proper permits to operate in certain areas. They are not updated. They don't have the fire authorities permit. And then since you are already in love and you like the second, you will say coming in any other marriage, I will fix that after. Let's try to manage it and then we will see along the time. They will change. She will change. She will be different or he will be different. And then you try to justify everything along the line because you already set your target. And that's very dangerous because you are this here, this here, that there, it may get complicated and it may get very costly to get the deal done.