Specialized information and professional analysis are the ideal antidotes to assess the risks and seize the opportunities that emerging markets offer.

By Eugenio Micheletti* for staffingamericalatina

Mike and John were analyzing the growth strategy of the company and the expansion towards new markets. The main shareholders and member of the Board of Director of Phoenix Human Capital Co set the goal to reduce risk by diversifying their portfolio in a combination of services and markets, and in order to do that they defined the acquisition of companies specialized in market niches, as well as establishing in emerging markets.

John still had some doubts about emerging markets: “why are we going to markets that have an operational profit of 10% when in the US we can earn 15%/20%?” he wondered about a graphic that showed Mike’s presentation.

Theory says that it is better to have your eggs distributed in different baskets. However, this claim is not enough to define a strategy. The analysis in more complex and includes aspects such as the market’s potential, the economy’s growth expectations, the localization of talent, the market penetration rate, regulatory frameworks that result in a standard costs for the market, the gross profit, and others. But, most importantly of all, is the fact that emerging markets present opportunities in companies that are properly managed by their founders, with extraordinary results for those markets where they operate, that decide to open their capital o plan to sell their business to global or regional players. Sales can be enhanced through these acquisitions, by promoting the synergy in operations, providing global services to their customers and optimizing the administrative structures of every company of the investor group.

Mike continues with his presentation showing that by acquiring companies in Latin America, aggregate sales will grow 12% and that, even if the gross margin drops to 24%, the increase of the absolute value generates value for the shareholders. Besides, through the implementation of improvements in the indirect costs’ structure (automation of processes, reporting and centralization of tasks in the HQ), a rise of the operational profits (EBIT) is expected.

So, both Directors agree to hire regional specialized consultants to pursue opportunities, and compare the investment options for their presentation to the Board of Directors. In these cases, having accurate information about markets and regulations, and possible changes in the near future (possibly linked to political matters), as the stability of critical factors that lead us to make the decision to invest, provide sustainability to the strategic and financial analysis. And it is from such analysis that the concept of “opportunity” emerges.

Conclusion

The main leaders of the M&A industry indicate the past two years (2015/2016) as one of the periods with largest activity in M&A during the past decades and expect it to continue in the future. The market presents plenty of opportunities, which shall be seized by more agile, strategic, aggressive and professional companies.

*Eugenio Micheletti is Director of Emerging Staffing Brokers

 emicheletti@emergingsb.com