Over the past decade, we have seen nations fall in love with Brazil; the country’s natural beauty has not been their only asset, with the World Cup and Olympics showing the world what talent Brazil truly has. Alongside their flair for gaining international attraction, their M&A and investment scope has also thoroughly developed. We speak with Martim Machado, an experienced corporate legal expert, on how Brazil has developed in the M&A world and what he expects in the near future.
You have practised law for over 20 years, both in Brazil and abroad (in New York and Washington, DC). How have you seen Brazil developed in regard to the M&A legal practice?
Brazil has been adversely affected by many “plagues” during its recent history (economic crisis, political instability, corruption scandals). And these “plagues” tend to cloud our judgment and prevent us from seeing what the country has been able to accomplish in many different areas (social, economic, political) over the past 20 years.
Brazil has a consolidated democracy, with strong institutions (that have been recently tested and have withstood the pressure), a very large economy (one of the largest in the world), and a society that, in spite of dwelling with urban violence, has been spared from terrorist acts, civil wars and regional conflicts, and is better educated, less unequal and more vigilant and conscious about its rights and roles. Without a doubt, Brazil is a much better country now than it used to be 20 years ago. And the same may be said to its M&A legal practice.
Generally speaking, laws and regulations have evolved, best practices have been adopted (in how we approach, conduct and document M&A transactions), alternative dispute resolution methods – notably arbitration – have provided M&A players with a more efficient way to settle their differences without having to resort to the not always reliable Brazilian judicial system, and the legal market has become more mature, competitive and prepared to handle sophisticated transactions (mainly with the flourishing of new, highly qualified local law firms). More specifically, our legal M&A market has been strongly (and positively) influenced by the constant interactions between Brazilian and non-Brazilian lawyers since the late 90’s, which were fostered by an increasing number of international transactions involving Brazil. These interactions, among other benefits, resulted in the introduction of New York/English style M&A documents – nowadays the market standard – to the local market, sparked young Brazilian lawyers to seek knowledge and experiences in the US and Europe, gave international law firms an opportunity to set up shops in Brazil (in spite of some initial resistance from the local Bar), and contributed to an information and best practices sharing that has added certainty to M&A transactions and has improved the M&A legal practice.
How have you seen the M&A investment change over the years? Have international opportunities, such as the Olympics, helped the country to further progress? And what to expect from the near future?
Many in Brazil dispute the benefits of the 2014 Soccer World Cup and the 2016 Summer Olympics. Critics claim that the World Cup and the Olympics drained public funds from areas where they were more needed and provided corrupt politicians and businessmen one more opportunity – and what an opportunity – to profit. But, despite the criticism, these two world class events, without a doubt, put Brazil in the spotlight and have helped foreign investors to see the country as a viable investment option.
The M&A market had been active for decades before the World Cup and the Olympics took place. But the wave of optimism generated by the choice of Brazil as a venue for these two events (a wave that began to roll out years before the events actually happened), coupled with what at the time appeared to be sound and promising economic/social indicators, boosted foreign direct investment and M&A transactions for at least 5 years beginning in 2010.
The current crisis and the uncertainties that followed it have clearly affected the M&A market. 2015 and 2016 were difficult years. 2017 sees signs of recovery, but the Brazilian economy is too big to ignore, too large to crash. Even in a slower pace economy, there will be M&A opportunities for strategic multinational players with a long-term view, for competitors weakened by the crisis to consolidate their operations, and for international investors with a higher appetitive for risk to find the potential of big returns in distressed assets or good bargains.
2018 will see presidential elections again. The election process should bring more political stability to the country. And depending on which political forces prevail at the election (the scenario is still uncertain), the Brazilian economy should be positively impacted by the greater political stability. So, after years of recession and low growth, Brazil may see another period of boom beginning in 2019 and 2020.
Aside from effective due diligence, what else do you think accounts towards a successful M&A transaction? What challenges do you often witness along the way?
Every M&A transaction is different. No matter how experienced one might be, there is always something new to learn from and deal with in an M&A transaction. And this is particularly true in Brazil. The size of the deal is not often commensurate to the challenges it presents. Smaller deals involving targets which are medium-sized, family-owned companies tend to be much more complicated than high profile transactions between sophisticated players.
Taxes, labour and environmental issues are usually the villains in every Brazilian deal, but the lack of proper accounting controls and systems, the unreliability of financial statements and other difficult-to-believe-problems that not even a very keen investor is able to anticipate (and, trust me, these problems exist) also play an important role in “killing” transactions.
I believe that more important than effective due diligence (and I am not diminishing the importance of good due diligence being exercised), having a good understanding of the parties’ goals (including the adverse party’s goals) and the ability, knowledge and experience to properly deal with the issues that a thorough due diligence exercise will uncover, is very key to a successful M&A transaction. Spotting the issues is not always the problem (although they hide well sometimes); however, not knowing how to address the issues in a sensible and mutually acceptable way, is.
Martim Machado
Partner
T: + 55 11 2394 8960 l + 55 11 2394 8900 l M: +55 11 9 9246 8484
Av. Brig. Faria Lima, 1.663 – 5º andar l 01452-001 l São Paulo, SP l Brazil
martim.machado@cgmlaw.com.br l www.cgmlaw.com.br
Martim Machado is one of the founders of CGM Advogados, a leading Brazilian firm with a full-service practice based in São Paulo, Brazil’s most populous and important city. CGM represents clients from different sizes and industry sectors (including international companies doing business in Brazil) on a variety of legal matters. A marathon runner and a long distance road biker in his free time, Martim is an experienced corporate/M&A Partner who has been “enduring” in the challenging Brazilian market for over 20 years. He has been involved in a number of M&A transactions representing both sellers and buyers.
