market consolidation outlook investment strategy and merger & … · 2020-05-09 · strategy...

Market Consolidation OutlookInvestment Strategy and Merger & Acquisition Activity2015 Survey

Table of Contents

Time to overcome challenges and create opportunities ......................................... 3

Alternatives for challenging times .......................................................................... 4

Executive summary ................................................................................................ 6

Research methodology and sample profile ............................................................ 8

Paths to growth ................................................................................................... 10

Acquisition, partnering and sales strategies .......................................................... 11

Investment projects carried out ........................................................................... 12

Fundraising alternatives ....................................................................................... 14

Consolidation challenges ..................................................................................... 16

Perspectives and strategies .................................................................................. 18

Market Consolidation Outlook 2015 3

By confronting this complex cycle with an active position in the market, companies are demonstrating maturity and contributing to create a virtuous cycle, generating business opportunities and strengthening and developing their sectors and the country.

Time to overcome challenges and create opportunities

With this report, Deloitte is pleased to share the results of the “Market Consolidation Outlook – Investment Strategies and Merger & Acquisition Activity” survey, which presents, by means of a project led by our Corporate Finance Advisory team, conclusions drawn from responses obtained from companies throughout Brazil on their business strategies.

The present study aims to understand the behavior of organizations with respect to purchase and sale of companies or assets and related initiatives. At a time when the Brazilian economy is going through an adverse phase, these operations are among the measures adopted by organizations to make inorganic expansion projects feasible in order to maintain or gain competitiveness, in an environment where innovation and ongoing cost reduction were never more essential.

To deal with the challenges of the current scenario, companies have positioned themselves pragmatically in relation to the need to optimize cash flow and prioritize its use, requiring them to strategically rethink their asset portfolios, business lines, brands and products. In order to understand this activity, we structured this survey of more than 200 organizations to show their motivations, experiences and expectations in relation to merger and acquisition operations in Brazil.

Initiatives such as Initial Public Offerings (IPOs) and internationalization of Brazilian companies should also increasingly appear on the agenda of business leaders to the extent that economic activity begins to show signs of recovery. For some time now, IPOs have driven merger and acquisition activities by capitalizing companies for actions to consolidate fragmented markets. Internationalization, on the other hand, expanded the growth potential of organizations, mainly when their participation in the local market was already restricting, making them less dependent on fluctuations in the domestic market and giving them access to new technologies, products, clients, distribution networks and sources of financing.

By confronting this complex cycle with a proactive position in the market, companies are demonstrating maturity and contributing to create a virtuous cycle, generating business opportunities and strengthening their sectors and the country as well. The results of our survey indicate that companies are enhancing their efforts in this sense, increasing the number of merger and acquisition operations in recent years and promising continuation of this trend in future years.

Good reading,

Reinaldo GrassonDeloitte Financial Advisory Partner and leader of the Corporate Finance Advisory practice

4

Alternatives for challenging times

Companies have been facing the difficulties imposed by the current economic environment for some time now. In the last year, the Gross Domestic Product (GDP) remained practically unchanged in relation to 2013, at a level below that of the prior three years – and the perspective is for continued deceleration of economic activity throughout 2015.

The basic interest rate – the Selic rate – was raised six consecutive times in the first half of 2015. The main reason behind the Selic increase is to restrain inflation, however, as a side effect it makes credit more expensive and selective, making it difficult for companies to find resources to finance their growth and expansion projects or even refinance the debts they have contracted in recent years. This puts pressure on the capital structure and the payment

Brazilian Gross Domestic Product (%)

5,7

3,24,0

6,0

5,0

7,6

3,9

1,8

2,7

0,1-0,2

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Banco Central do Brasil

capacity of companies, given that the indebtedness of families and the consequent reduction in demand impact companies’ sales and cash generation.

Public offerings have also slowed in recent years. In 2014, only two companies went public, raising together R$ 1 billion. Through April, only one company has gone public in 2015. With the exception of a slight increase in 2014, the number of companies withdrawing from the stock exchange has exceeded the number of IPOs since 2007 – a sign of the financial difficulties of some companies or an option to resume a private profile for strategic reasons, due to lack of stock liquidity, for having been acquired by third parties or because shareholders did not agree with the market value of the stock.


Resumption of IPOs is awaited with great anticipation by the market, not only because they represent an important source of resources for investments and acquisitions, but also because they provide liquidity for investments made by private equity funds in private companies in recent years. These funds, in fact, play an extremely important role in the market by providing capital essential for companies to execute their business plans, especially at times when there is no market opening for IPOs and public or private credit is scarce.

With less access to resources in the market, organizations have sought alternate ways to obtain capital to execute their plans and remain competitive. Consequently, the sale of stockholdings or assets or a strategic merger or acquisition may be essential for an organization to continue growing and investing to expand capacity and increase productivity and profitability during challenging times such as the present.

Source: Banco Central do Brasil

Interest rate and inflation in Brazil (%)

7,6

17,75 18,00

13,25

13,753

11,2513,75

8,75

10,75 11,00

7,25

10,0011,75

5,7

3,1

4,5

5,9

4,3

5,325,9

6,55,8 5,9

6,4

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Inflation – Extended National Consumer Price Index (IPCA)

Interest rate – Selic1

1 December rate for the corresponding year2 Cumulative through May 20153 May 2015 rate

Source: BM&FBovespa and Economist Intelligence Unit

Number of companies listed on the BM&FBovespa

350

404392

385 381373

364 363369

358

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (Jan/Apr)

6

Executive summaryMain conclusions of the survey

Alternatives in a challenging environment At times of low economic growth, such as today, it becomes very difficult and slow for companies to only grow in an organic way. Therefore, organizations have sought other ways to increase revenue, and the main one involves inorganic growth strategies – such as mergers and acquisitions.

Ongoing growth of acquisitionsAcquisitions of companies or assets – which showed steady growth among the survey participants in recent years – will continue to stand out in future years. Although companies are more cautious in carrying out this type of operation, there is a consensus that making acquisitions can be an effective strategy for applying resources, generating competitive advantage in relation to competitors who remain smaller in size and scale, especially in markets that are fragmented or have intensive capital, where synergies, gains of scale in procurement and competitive costs are essential.

Acquisition, partnering and sales strategies over the last five years (% of respondents; multiple responses)

23

21

13

11

10

9

Acquired assets of other companies

Acquired control of another company

Sold company assets

Participated in a joint ventur

Carried out a merger

Was acquired by another company

132

Acquisition of an asset of another company

Acquisition of another company

Merger

The three main strategies for the next two years (multiple responses)

1

2


Strategic sales According to the survey, asset sales have also grown in recent years. This growth confirms the fact that companies are compensating for scarce capital using alternative sources to obtain resources, either to increase liquidity in order to rebalance or strengthen their capital structure or to pay down debt. Thus, the challenge for companies is management of these scarce financial resources in their main or most strategic activity.

Credit to expandThe survey numbers show ongoing growth of mergers and acquisitions primarily to increase sales and market share. However, sources of financial resources – such as credit and capital market – are scarce to finance these investments. Companies are financing these operations mainly by means of reinvestment of profit and sale of assets or low profitability brands. This strengthens the need to regularly reevaluate one’s portfolio, not only to map opportunities to improve margins and return on invested capital, but also to identify lines or brands that are not strategic or do not add value, and if they are often large consumers of cash and working capital.

132

Reinvestment of profits

Development banks and funds

Loans or bankfinancing

Main ways companies are using for raising funds (multiple responses)

5

1324

Uncertainty about the economic scenario

High cost of going public

Low stock market liquidity at the moment

Preparing to make an IPO in future years.

Waiting for a better time for the globaland local economy

The value attributed to the company by investors does not

reflect the perceived value of current

shareholders

Main reasons for not carrying out an IPO in 2015 (multiple responses)

13245

Rebalancing of financial position

Payment of debt or reduction of liabilities

Asset was not profitable

Increase in company

liquidity

Asset was no longer

strategic

Main reasons for sale of company assets (multiple responses)

Asset sales strategies of companies over the last five years (% of respondents)

19 19

3343

57

2010 2011 2012 2013 2014

3

4

8

Company size (% of respondents)

More than R$ 1 billion From R$ 250 million to R$ 1 billion Up to R$ 250 million

17

67

16

221 companies

make up the survey sample

Research methodology and sample profile

The survey included 221 companies of the most diverse sizes and segments. The survey of respondents’ information and opinions was made by electronic questionnaire in March and April 2015.

A third of the survey respondents is made up of company presidents and shareholders and almost half of the sample consists of C-levels. These numbers support the high qualification of the sample. Companies in the technology segment made up a significant 19% portion of the sample and are primarily classified in the group with sales revenue up to R$ 250 million. Companies in the infrastructure, oil, gas and mining sectors, for example, in large part had revenue above R$ 1 billion.

Profile of respondents (% of the sample)

President/Shareholder

Financial Director

Director/Managing Director

Manager

Others


Company control (% of respondents)

Family control Multinational subsidiary Dispersed control Local corporation Institutional investor

51

24

11

8

6

38% is the average share of

investors in companies with institutional capital

Operating sector (% of respondents)

IT Services 19

Machinery and Equipment 11

Financial Activities 9

Chemical Industry 6

Services to companies 6

Oil, Gas and Mining 6

Construction 5

Commerce 5

Tourism, Hospitality and Leisure 4

Food and Beverages 3

Electro-electronics 3

Other services1 11

Other manufacturing2 13

1 Telecommunications; Transport and Logistics; Health; Energy; Gas and Sanitation

2 Vehicles and Auto Parts; Publishing and Printing; Agriculture and Livestock; Steelmaking and Metallurgy; Paper and Pulp; Hygiene and Cleaning; Pharmaceuticals; Perfumes and Cosmetics

More than half of the companies participating in the survey are family controlled. Approximately a quarter of the respondents are subsidiaries of multinational companies. Of these companies, the majority has capital coming from the United States. Subsequently, and far behind, are France, Japan and Germany as the most recurring countries of origin. Among companies with institutional capital, the average investor share is 38%.

Capital source of subsidiaries of multinational companies (% of respondents)

42

10 8 8

32

United States

Other countries

France Japan Germany

10

Paths to growthCompany investment models

To stay competitive in a market undergoing continuing consolidation, organizations may choose various models of capital investment. The choice will depend on the real-time situation and maturity of the company, as well as the economic and business environment.

The Information Technology (IT) Services sector stood out in use of all the models of expansion listed in the survey, leading in practically all options. In operations to modernize manufacturing facilities, the Machinery and Equipment sector unsurprisingly stood out. The Electro-electronics and Financial Activities sectors also had projects in all the expansion models.

Sectors most active in mergers and acquisitions

Expansion of manufacturing

facilities

Modernization of manufacturing

facilities

Launching of new units


Purchase of other company assets

Joint ventures Agriculture and Livestock

Food and Beverages

Financial Activities

Electro-electronics

Chemical Industry

Transport and Logistics

Machinery and Equipment

Oil, Gas and Mining

Advertising and publicity

Services to companies

Telecommunication Services

IT Services


Acquisition, partnering and sales strategies

In our analysis of company acquisition, partnering and sales strategies over the last five years, it is possible to see significant growth in the number of companies involved in joint venture and asset sales initiatives.

Among the main reasons for the last acquisition of a company or asset, respondents highlighted their desire to increase revenue, a new expansion strategy and market aspects, such as gaining market share and strengthening their position compared to the competition.

Main reasons for the last company or asset acquisition (% of respondents; multiple responses)

69

64

64

59

33

26

15

15

15

10

10

7

7

7

10

Revenue growth

New expansion strategy

Gain market share

Greater market power against the competition

Economies of scale

Acquisition of technology or a new production process

Reduction of corporate activity costs

Company restructuring

Reduction of production costs

Improved access to distribution channels

Increase in company liquidity

Greater bargaining power with suppliers

To obtain tax advantages

Managerial and technological improvement

Others

Acquisition, partnering and sales strategies over the last five years (% of respondents; multiple responses)

2010 2011 2012 2013 2014

Sold company assets

Participated in a joint venture

Purchased assets of other companies

Acquired control of another company

Carried out a merger

Was acquired by another company

32

27 27

25

19

21191913

5

15

11

32

20

19

37

3633

29

47

43

39

1313

35

19

13

39

53

57

12

Investment projects carried out

Expansion of manufacturing facilitiesManufacturing facility expansion projects had ongoing growth, both as a percentage of companies carrying them out and the number of projects implemented. The average number of expansion projects carried out per company grew from 4.8 in 2012 to 5.6 in 2014.

Launching new unitsThe percentage of companies surveyed that launched new units grew over the last two years. The total number of projects reported by the companies in 2014 is twice that of 2012, however, less than that recorded in 2013.

Modernization of manufacturing facilitiesThe practice of modernizing manufacturing facilities was the one that most of the companies responding to the survey engaged in, with 38% of organizations reporting this type of project in 2014. The total number of projects reported also grew in the last two years.

24

251

26

291

28

343

2012 2013 2014

Companies that carried them out (%) Total projects carried out

16

71

24

152

28

143

2012 2013 2014


30

233

37

287

38

309

2012 2013 2014


5,6 is the average number

of manufacturing facility expansion projects carried out

by companies in 2014

2,3 is the average of new units opened by the companies

in 2014


of manufacturing facility modernization projects

carried out by the companies in 2014


Acquisition of another companyThe number of companies making an acquisition and the total number of operations of this nature in 2014 are practically double what was recorded in the prior year, having exceeded the 2012 level.

Purchase of other company assetsBoth the percentage of organizations acquiring other company assets and the number of operations of this type grew significantly in the last two years.

Joint venturesThe percentage of companies involved in joint ventures remained stable between 2012 and 2013, but increased significantly in 2014. The total number of operations increased over the three years. This type of operation has become important in the market, since it often requires less investment of capital than an acquisition and it lowers risk by sharing expertise and resources of both companies in a specific segment, without involving the entire organization.

923

615

11

30

2012 2013 2014


27

513

824

2012 2013 2014


512

514

924

2012 2013 2014


1,2 is the average number of acquisitions made by

companies in 2014

1,3 is the average number of other company asset purchases made by the organizations in 2014


of joint ventures made by companies in 2014

14

Percentage of companies Average share of project financing

Company fundraising alternatives (% of respondents)

71

70

39

36

50

47

60

55

18

2

2

1

43

65

Reinvestment of profits

Loans or bank financing

Banks and development funds

Loans from related parties

Issue of securities in the market

Private equity and venture capital

Stock offers

Fundraising alternatives

A large number of the responding organizations rely on their own resources to carry out expansion projects. Other traditional means of fundraising – such as loans or bank financing, fundraising from banks and development funds and loans from related parties – come next.

Issuing securities in the market, private equity funds and stock offers are not yet among the main options chosen by the companies in the sample. However,

for companies that have access to these resources, the share of these sources in expansion projects is as significant, or more so, than the other financing modalities.

The main means of fundraising varies depending on company size. While smaller companies rely primarily on their own resources, larger companies rely on banks and development funds as their main means of financing.

Fundraising alternatives by company size (% of respondents)

TotalUp to R$ 250 million

From R$ 250 million to R$ 1 billion

More than R$ 1 billion

Reinvestment of profits 50 51 61 28

Loans or bank financing 21 25 15 14

Banks and development funds 18 15 17 33

Loans from related parties 8 7 7 14

Issue of securities in the market 1 0,5 0 6

Stock offers 1 0,5 0 4

Private equity and venture capital 1 1 0 1


In general terms, it is possible to highlight the fact that larger organizations have access to more diverse fundraising sources than smaller companies, reflecting the level of guarantees they can offer and, in some cases, aspects such as governance and audited financial statements, among others, that qualify the company’s degree of maturity. Issuing debt securities in the market and stock offers are significantly higher in large organizations in comparison to midsize companies. These, in turn, are more dependent on loans and commercial bank financing.

Going publicMore than 90% of the companies surveyed are not publically traded on the BM&FBovespa. Among these companies, 3% plan to make an initial public offer of stock still in 2015.

Foreign loans or financingOnly 15% of the companies participating in the survey rely on foreign loans or financing. Among these organizations, the average foreign debt and financing as a share of total obligations is significantly higher for large companies, reaching more than double the average for smaller companies.

Are you traded on the BM&FBovespa? (% of respondents)

Yes

No

7

93

Are you planning an IPO for 2015? (% of respondents)

Yes

No

3

97

Main reasons for not making an IPO in 2015 (% of respondents; multiple responses; up to three options)

27

22

16

15

12

9

9

7

7

4

2

2

6

Uncertainty about the economic scenario

Preparing to make an IPO in the near future. Waiting for a better time for the global and local economy

High cost of going public

The value attributed to the company by investors does not reflect the perceived value of current shareholders

Low stock market liquidity at the moment

Parent company is listed abroad

Not interested

It is not a company strategy

Feels that company is not large enough to make an IPORequirement for business information disclosure

after going public

Always seek other means of raising funds

Waiting for better company results

Others

Average foreign debt and financing as a percentage of total obligations, segmented by company size (% of respondents)

24

33

56

Up to R$ 250 million

From R$ 250 million to R$ 1 billion

More than R$ 1 billion

15% of the companies

have foreign loans or financing

16

Consolidation challenges

The greatest difficulty noted by the organizations participating in the survey in their processes of integrating companies, far ahead any other, is the conciliation of different cultures. Next, at similar levels, are aspects of technology and management systems, internal communication and human resources management – both to retain the most important talent or to make necessary dismissals.

The majority of respondents in companies that engaged in mergers and acquisitions in recent years indicated that the integration process took up to six months on average. This reality is even stronger for companies with revenue up to R$ 250 million, which would be expected to have a faster integration process.

Among the organizations that had revenue above R$ 1 billion, the majority of survey participants said that the integration process took one year on average. In keeping with the challenges indicated in the previous question, these organizations face a complex process of integrating technology and corporate culture in particular, requiring more time to complete.

Reasons for saleAmong the companies that have sold assets in recent years, the reasons that most justify this activity were directly related to cash – rebalance of financial position, increase company liquidity and debt payment or liability reduction. In a difficult economic environment, partial sales may support overleveraged companies raise funds and adjust their balance sheets.

The greatest difficulties in integrating companies and assets (% of respondents)

65

30

30

26

17

15

Different cultures

Integration of technology and management systems

Internal communication to maintain motivation and retain talent

Definition of a new organizational structure and possible dismissals

Uniform framework of contracts with third parties

Pressure from shareholders to complete the process

Main reasons for sale of company assets (% of respondents; multiple responses)

43

43

43

33

29

14

Rebalancing of financial position

Increase in company liquidity

Payment of debt or reduction of liabilities

Asset was no longer strategic

Asset was not profitable

Other reasons

Average time for integrating companies (% of respondents)

3 months 6 months 1 year 2 yearsMore than 2 years

Still undergoing integration

Total 22 33 18 11 7 9

Up to R$ 250 million 23 42 12 4 4 15

From R$ 250 million to R$ 1 billion 20 30 20 20 10 0

More than R$ 1 billion 14 14 44 14 14 0


The strategic view of the asset appears as well, mentioned by a third of the organizations. In this case, the purpose is to concentrate resources on brands, segments or essential markets or products and services with higher profit margins. This is also an option to raise capital for financing investment in core businesses or strategic acquisitions.

Challenges in carrying out merger and acquisition operationsAligning the value of a company with sellers and the quality and sufficiency of information on the target company for due diligence and subsequent negotiation of contracts and guarantees were mentioned by survey respondents as the main difficulties in carrying out mergers and acquisitions.

The human factor appeared crucial to the success of the process of integrating companies in merger or acquisition operations. Formation of a multidisciplinary executive group, retention of talent and communication are among the main success factors identified by the survey participants. Adaptation of different cultures, mentioned in a prior question as the greatest difficulty in integrating companies, also appears as a determining factor for the success of the process.

Difficulties in carrying out mergers and acquisitions (% of respondents; multiple responses)

48

48

47

34

26

14

14

Negotiation with sellers to align the expected value of the company

Sufficiency and quality of information for evaluation and due diligence of the target company

Negotiation of contracts and guarantees for contingencies

Contingencies of the target company under acquisition

Lack of financing sources

Lack of specialized assistance on the part of sellers

Approval from government agencies

Determining factors for the success of integration (% of respondents; multiple responses)

51

46

42

34

30

Multidisciplinary group of executives in charge of the process

Integration strategy and planning already existing in the pre-acquisition phase

Retention of key employees and third parties

Adaptation of different cultures

Comunicação efetiva para manter motivação das equipes

18

Perspectives and strategies

Among the survey participants, merger and acquisition operations in the next two years should exceed sales of company control. The possibility of internationalization is another option that merits attention.

Companies that intend to make acquisitions emphasized the need to increase revenue, gain market share and enter new markets as the main reasons for these actions.

Among the factors indicated by companies that do not intend to make acquisitions, a lack of resources for this initiative stands out. Acquisitions are not included in the strategies of 29% of the companies. External factors, such as the unfavorable economic scenario and lack of attractive companies for purchase, are also mentioned.

Among the companies that intend to sell assets, the strategic view prevails over the limitations of capital for investments. Rebalancing of the portfolio, however, is the focus of sales operations, by means of which the company aims to use its resources for its main or most profitable activity.

Strategies for the next two years (% of respondents; multiple responses))

39

36

34

25

17

17

23


Merger

Acquisition of an asset of another company

Sale of company control

Internationalization

Sale of a company asset

None of the options

Why your company intends to make an acquisition? (% of respondents; multiple responses)

69

66

62

38

Increase revenue

Gain market share

Enter new markets

Obtain economies of scale

Why your company does not intend to make an acquisition? (% of respondents; multiple responses)

61

29

18

14

No resources are available for acquisition

Acquisitions are not a part of the strategy

The economic scenario is unfavorable

There are no attractive companies

Why your company intends to sell assets? (% of respondents; multiple responses)

36

32

32

18

Some assets are no longer strategic

Limitations or lack of access to capital for investment and growth

Shareholders with focus on other businesses

Issues related to family succession

Project leadershipReinaldo Grasson – Deloitte Financial Advisory Partner and leader of the Corporate Finance Advisory practice

Study coordination and report preparationDeloitte Strategy, Brand & Marketing

[email protected]

Market Consolidation Outlook – Investment Strategy and Merger & Acquisition Activity

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

© 2015 Deloitte Touche Tohmatsu Limited. All rights reserved.

market consolidation outlook investment strategy and merger & … · 2020-05-09 · strategy...

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