Mergers and Acquisitions in Mexico, in view of the results of the June 2 elections

• What will be the impact of the outcome of the federal and local elections in Mexico on investment to and from Mexico?
• How did 2023 end and how is 2024 going in the world and in Mexico in this regard?

Given the results of the federal and local elections in Mexico, it is a good time to pause, look back and see how 2024 started in relation to 2023, globally and also in Mexico, and see the expectations for the rest of 2024.

The world is constantly changing. The political environment, trade, immigration, and consumer behavior, among other circumstances, affect regional and global market trends and cause companies around the world to constantly adjust their business strategies. This is not only in Mexico, but globally there are also important factors to consider. To mention a few, this is a year in which there are elections in a very significant number of countries around the world, including Mexico. The war between Russia and Ukraine continues, as does the conflict between Israel and Palestine, and tensions between the United States and China are not expected to decrease in the near future; on the contrary, they seem to tend to grow. In addition to this, the results of the presidential election and certain gubernatorial elections in Mexico, as well as the integration of the Federal Congress in Mexico, will necessarily have an impact on the behavior of investments to and from Mexico.

What happened in 2023 in terms of Mergers and Acquisitions?

In 2023 we experienced a good slowdown in terms of operations, both in terms of the number of operations and their value. The value of operations during the first quarter of 2023 was the lowest in 20 years. Comparatively, in 2022 in Latin America[1], according to figures published by FTI Consulting on December 20, 2023, the value of operations (September to September) was $829 billion dollars and in 2022 $419 billion dollars; that is, about 50% less; in Mexico during the same period (September 2022 to September 2023) there were operations with a value of approximately $124 billion dollars and in 2023 $58 billion dollars. Not only was there a significant drop in the number and value of operations, but also in their size. That is, during 2023, with a few exceptions, there were no large operations like those we saw in 2022, rather there were operations of what is known as the middle market or mid market.

As for the causes of the slowdown, we can mention several. Companies had very healthy balance sheets before the COVID pandemic. When the pandemic began, companies had a lot of cash in hand, there were also government stimuli in much of the world (Mexico was one of the exceptions) and interest rates were very low.

These factors significantly triggered the global mergers and acquisitions market. Once the pandemic was over, that ended, there was less money on the balance sheets, there was less financing, interest rates rose significantly to try to control inflation and very important geopolitical problems arose, which reduced confidence in investments.

The situation in China also influenced this market during 2023. Large companies normally have a China factor in their strategy. The decline in China-related revenues had an impact on the overall balance sheet for acquisition purposes. The regulatory issue in general also had an impact; after the COVID pandemic, several countries began to close down and no longer viewed investment issues as liberally as they had before, and more restrictions were introduced regarding the government authorizations required to be able to invest. For example, in the United States, new guidelines were issued regarding concentrations that make the process for an acquisition more strict, and new guidelines were introduced to regulate US investments in certain countries in specific technology industries. In addition, in Europe, the level of compliance was tightened for sustainability purposes and, in particular, emissions reduction, which also increased costs and had an impact on the acquisition strategy.

The above factors affected non-strategic acquisitions more than strategic acquisitions. Strategic acquisitions occur when one company needs another from a strategic point of view to increase its potential and value. Non-strategic acquisitions are usually carried out by private equity acquirers (private equity) seeking to sell their stake again at a higher price after a certain period of time.

How is the market doing in this area and what are the expectations for the rest of 2024?

Starting in the last quarter of 2023, there was an increase in the number of transactional operations. This increase in activity, together with an expectation of interest rate reductions and a “soft landing” of the US economy, have allowed for greater movement in this area also so far in 2024, basically in transactions of mid marketHowever, we still do not see a clear positive trend. Rather, we see ups and downs in terms of the number of transactions, which, in general terms, represent a higher volume of transactions.

In terms of the global context, the M&A environment remains difficult due to regulatory hurdles. For example, in the United States, the regulatory body (FTC – DOJ) wants to broaden the perspective on how they view deals. The regulator is now also looking at how the deal in question will benefit consumers, so it is important that the parties to the deal are ready to respond to such questions. Also, if under the new regulation it is necessary to obtain authorization under the HSR Act[2] The time for authorization may increase significantly. Finally, some states in the country are restricting most non-compete agreements for employees.

In particular, what is expected for Mexico?

Challenges

There are interesting factors for Mexico that are worth considering. Economic growth for Mexico in 2024 is not expected to be as significant as it has been in 2023, 2022, and 2021. In Mexico, growth is expected for 2024 of approximately 2.4%, which is low compared to 3.5% in 2023, 3.9% in 2022, and 5.8% in 2021.

The exchange rate has also been a challenge, especially for exporters; the trade balance with the United States during 2023 was very good and the volume of exports was also very good, but the income received by Mexican companies for exporting with such a cheap dollar was very low. The depreciation of the exchange rate that we have recently experienced should be beneficial for the balance sheets of Mexican exporting companies.

The messages that the new government sends will be key to whether or not legal certainty is granted to potential investors, and this will make investment flow positively or rather turn towards other jurisdictions where this certainty is offered. In one way or another, there could be important adjustments in terms of mergers and acquisitions.

Competitive advantages

Mexico has important competitive advantages that are worth considering.

North America accounts for 28% of global GDP. The investment outlook for North America is very positive. Swiss bank UBS expects the family offices Mexico is investing heavily in North America, including Mexico, above the rest of Latin America and Europe. The network of treaties we have gives potential investors access to a potential market of 1,350 billion consumers. Mexican talent is unique and irreplaceable.

Contrary to what has happened in certain jurisdictions where protectionism is having an impact on M&A, Mexico continues to be quite open to this type of transactions with a clear internal legal framework backed by an impressive network of treaties that are recognized and respected as Mexican internal law with a higher hierarchy compared to local Mexican law.

As an example, and unlike in other countries, the examination of foreign investment in Mexico is quite objective and the law indicates in which cases a prior authorization is required and in which cases it is not. Merger control requirements in Mexico are also quite objective. Our Federal Economic Competition Law has very clear thresholds to determine when a prior authorization is required. Market participation is not a triggering event. These issues give certainty to investors thinking about Mexico, compared to other jurisdictions where the analysis may even have some political component.

Finally, the nearshoring, along with the new phenomenon of restoring, can bring important new investments to Mexico. The investments that there were in 2023 in terms of nearshoring They are not necessarily new investments, many of the amounts were reinvestments, which are certainly positive, but not necessarily new investments. According to an analysis carried out by Actinver as of December 2023, the investment figures related to the nearshoring The total investment in foreign direct investment for the third quarter of 2023 was estimated at approximately $32.9 billion dollars and considered 76% as reinvestment of profits, 16% as accounts between companies and only 8% as new investments. According to figures from the Ministry of Economy, during the current administration's six-year term, the participation of new investments in total Foreign Direct Investment fell to 34.8% with the current administration, from 35.7% and 50.0% of Peña Nieto and Felipe Calderón, in that order. To continue boosting the nearshoringMexico must send strong signals of legal certainty, strengthen its electrical infrastructure, also considering renewable energy sources that allow investors to meet their international commitments, telecommunications, road and rail infrastructure.

Conclusion

As discussed throughout this article, the future presents uncertainties. Our new governmental integration and the implementation of its new policies, the upcoming review of our free trade agreement with the United States and Canada, and the global environment all represent challenges. At the same time, new times present opportunities for growth in markets and sectors favored by the new political landscape. Challenging environments demand smart agreements that allow us to benefit from current trends and support growth and progress.

[1] Argentina, Brazil, Chile, Colombia, Mexico and Peru.

[2] Hart-Scott-Rodino Antitrust Improvements Act