Profile of mergers and acquisitions indicates improvement in the market – 10/08/2023 – Market

The profile of mergers and acquisitions operations in Brazil has been changing in recent months. While in the first half of the year most of the deals were financial in nature, that is, they were carried out by companies that were in crisis, needing to raise money to survive, since August there has been an increase in strategic M&As (acronym for mergers and acquisitions), considered of higher quality.

A Sheet carried out a survey of law firms that are recognized in Brazil for the volume of M&As they structure and conduct. The general feeling is that the quality of business is improving, several operations were opened in the second half of the year and the market is starting to heat up, with an increase in business volume.

The news brings some relief after a more critical first half of the year for the market. Data from TTR Data show that, from January to August this year, mergers and acquisitions in the country generated R$145.5 billion, with 1,282 transactions, a 27% drop in volume compared to the same period in 2022.

But even with the general perception of improvement, most lawyers are still cautious. The question is whether the improvement observed this semester will be sustained and how the challenging scenario abroad may impact the domestic market.

“We have felt greater interest in Brazil from foreigners since the end of the second quarter. Foreign investors are leading major mergers and acquisitions operations in the country, and these are more strategic, long-term businesses. Multinationals are looking at Brazil strategically” , says Arthur Penteado, partner in the M&A and Private Equity area at Machado Meyer Advogados.

He cites as examples the purchase of the Brazilian chocolate manufacturer Kopenhagen by the Swiss multinational Nestlé; the sale of Vale’s base metals division to the Saudi Manara Minerals and the American fund Engine No.1; the purchase of a 51% stake in Bluefit by Mubadala, linked to the sovereign wealth fund of the United Arab Emirates, and the increase in the stake of the American bank JPMorgan in C6 Bank.

For Carlos Alberto Moreira Lima Junior, partner working in the mergers and acquisitions area at Pinheiro Neto Advogados, the M&As agenda changed from the first to the second semester.

He recalls that at the beginning of the year, business was greatly impacted by the crisis in Americanas, which caused an even greater tightening in the credit market and increased the difficulties in the retail sector. Furthermore, the beginning of 2023 was marked by doubts regarding the organization of public accounts by the new elected government and the maintenance of the Selic basic interest rate at 13.75%.

Although the lawyer sees other challenges in this second semester, such as doubts regarding tax reform and the insecurities that measures such as the taxation of offshore and exclusive funds cause, in addition to the end of the JCP (Interest on Own Capital), he sees some improvement in quality of M&As operations. “I’m cautiously optimistic about what lies ahead,” says Lima.

The feeling of caution is almost general. “We see more enthusiasm from investors, they are exploring more, but it takes time to see if this heated market scenario will materialize”, says Luiz Octavio Lopes, partner in the Corporate and M&A practice at Lefosse Advogados.

According to the expert, more strategic mergers and acquisitions operations are gradually returning, that is, those that seek business integration and union of synergies between the companies involved, whether by reducing operational costs, expanding the customer base or verticalizing the operation. —centralization of the company’s production chain.

“We have been approached by private equity funds and engaged in businesses that seemed out of fashion,” he says.

For Marcos Flesch, partner in the M&A area at Cescon Barrieu Advogados, the environment is now more conducive to more strategic operations, after the tense atmosphere at the beginning of the post-election year. “We still suffer a little from political polarization, but everything indicates that we are in a good moment,” he says. “Since August, the market has, in fact, been more heated,” he adds.

Flesch is more optimistic about the future. According to him, the country has a sophisticated domestic market and capital available to attract more major operations next year.

Lawyer Pedro Whitaker de Souza Dias, who was recently elected managing partner of Mattos Filho Advogados, also has good expectations. He mentions the cycle of falling basic interest rates, which should heat up the capital market, a great ally of mergers and acquisitions.

It turns out that many companies enter into M&As operations with the aim of gaining muscle to go public on the stock exchange. And in several cases, companies also use the money raised in the stock market to expand through acquisitions, whether of assets or entire companies.

Dias believes that the consolidation of the improvement in the stock market and the definitive return of foreigners seeking strategic, long-term business in Brazil should strengthen a scenario where a positive moment is anticipated for M&A operations.

“There are real signs of improvement, more transactions are happening”, he says. “There is a solid recovery in the country, with more foundations”, he adds.

Lawyer Miguel Ramos, partner in the Corporate and M&A area at BMA Advogados, believes that, in addition to the drop in interest rates, the improvement in the market also happened because several investors’ fears regarding the new PT government did not materialize.

He says that the approval of the new fiscal framework and the reduction in the bellicose tone towards the Central Bank helped to increase confidence in the country. “After the PT scare at the beginning, the market as a whole improved a lot,” he says. “We already have a lot of fee proposals on the street,” he says.

For Ricardo Madrona, partner at Madrona Fialho Advogados, the second half of the year is indeed indicating growth, due to a better horizon in the stock market, with expectations of the return of the round of IPOs (acronym in English for Initial Public Offering) on ​​the Stock Exchange .

But he considers that, for now, even with the increase in strategic M&As, companies are still finding it very difficult to generate operational results, and end up resorting to mergers and acquisitions operations as an alternative to gain some muscle. “I don’t see such a positive agenda at the moment,” he says.

For José Antonio Miguel Neto, founder of Miguel Neto Advogados, the feeling of improvement in the quality of M&As also happens because several deals that were frozen came back and were completed in the second half of the year. “We actually see more mandates now, but much of it was held back”, he ponders.

He says that the mergers and acquisitions market is facing a much worse scenario than what was observed over the last year.

Indeed, there has been general frustration with the performance of the M&A market this year. Several agents expected a better 2023. And even though the general expectation for next year is positive, consultant Denis Morante, founder of Fortezza Partners —advisory on mergers and acquisitions—does not see a boom like what happened between the end of 2020 and throughout 2021.

In these years, the capital market was very heated by interest rates reaching historically low levels. Still, Morante says he is very optimistic about next year.

“The operations of companies that were desperate to raise money and reduce their debt greatly decreased. I see a lot of business from companies that are looking for capital to grow. This was the keynote of M&As in 2021”, he recalls.