What kind of opportunities appeared lastly in that region?

By Eugenio Micheletti* for staffingamericalatina

As we always say, companies have to seek out sellers that match with its strategy, gain synergy and add profits to the group immediately or in the short term.

Having said this, the region offers valuable alternatives to those companies that know how to assume a controlled level of risk.

Beyond the opportunities that you can always find in a market (for example companies with extraordinary performance and profits, as a consequence of excellent image and commercial performance; those well-positioned in special niches; good family companies with no succession; professional companies, whose shareholders (one or more) want to separate themselves from the others; exceptional circumstances in good companies), currently we also can describe two types of opportunities in the region as a consequence of economic conditions:

1. High gross profits with poor structure performance: when revenues decline (there are markets that have suffered a demand reduction), then companies have to react rapidly and adapt structures to the new conditions.  But not all of them know how to achieve the accurate degree of service on time, adapting the indirect costs to the new level of revenues.
2. High operating profits with high financial costs that reduce net profit: The cost of capital in the region is high.  Interest rates of banks overdraft or loans reached values over 30% annually in Argentina; 25% in Peru; 12% in Colombia; 15% in Brazil.  This creates a vicious circle because worsen the payment behavior of the clients, increase DSO, but payments of the main costs (wages and social security charges) cannot be deferred.   Staffing companies are “the ham of the sandwich”, and this increases the financial assistance requirements from the companies (to banks and fiscal authority).

Therefore, from the buyer perspective, appeared investments opportunities with special condiments.  So the questions are: which is the benefit for the buyer?; which are the related risks?; how to mitigate or administrate those risks?

Referring to those companies with high gross profits, generally the sellers have excellent performance in commercial and operational areas.  These aspects clearly represent a competitive advantage that is really hard to achieve, as well as aspects in which buyers will not be able to make a significant contribution in the short term, as they are linked fully with knowing clients, regulations and business risks in each market.

As regards related risks, top management, particularly the CEO and the CFO must be examined. If they have failed to reduce indirect costs in the term that the company required, so maybe they will not achieve the goals in the near future.  It will be necessary also to look at the internal staff’s the labor seniority and performance. Finally, fix-term contracts included among indirect costs (insurance, buildings rents, etc.), which may not be reduced in the short term, must be assessed.

In order to administrate those risks, focus must be put on due diligence processes to check figures, and estimate a provision for those contingencies not included properly in the financial statements.

As regards companies with high operating profits, the buyer may acquire a properly managed company with high EBITDA, while earning financial profits by adding working capital and taking mid-term loans.  We can estimate that financial liabilities in some markets represent a median ranging from 25% to 40% of the companies’ value. Taking into account that the interest rate in developing countries is around 2% to 3%, the buyer may earn financial profit as well as prevent financial costs for the seller given the interest rate’s spread.  Furthermore, the investor has to monitor the cash flow management (making sure that the evolution of financial liabilities has its correlative in a current assets behavior). Another issue of concern would be exchange rate’s fluctuations (local currency versus US Dollars), to guarantee the repayment of loans among the companies of the group. Obviously, in these cases the due diligence process will also be critical to avoid surprises, and to cover the fluctuations in the exchange rates the buyer could take a insurance coverage on a quarterly basis.

CONCLUSIONS

Many countries in Latam are offering profitable opportunities to those strategic investors that know how to assume a controlled level of risk.   Excellent companies need support from bigger players that deliver new and better tools to the sellers to take advantages of their positions in local markets, with IT solutions, financial support, and best practices implementations. 

*Eugenio Micheletti is Director of Emerging Staffing Brokers – emicheletti@emergingsb.com