Is Latin America the next frontier for tech M&A? | White & Case srl

In a region suffering from global trade dislocations, inflation, higher interest rates and complex political cycles, negotiators remain cautiously optimistic that the transition to digital services in the region will create significant opportunities for mergers and acquisitions in the technology sector.

Historically, deal activity in Latin America has been driven by energy and infrastructure deals. Over the past two decades, the region has experienced significant growth as most of its largest economies enjoyed political stability and adopted market-friendly policies that attracted significant foreign direct investment. Commodities played an important role in this growth. Latin America is home to some of the most abundant reserves of metals and minerals in the world. The region also has vast oil and gas reserves, which have fueled significant infrastructure investment across the region.

As a result, Latin America is more connected and more prosperous than ever.

Traders watching the region will surely remember the commodity boom in Brazil, the infrastructure and real estate frenzy in Mexico and Colombia, and the influx of foreign direct investment that has positioned Peru and the Chile as dominant regional players.

Over the past 20 years, these countries have developed robust industries and attracted trillions of dollars in foreign investment while making progress in reducing poverty and expanding access to infrastructure.

Broaden the scope of opportunities

Fast forward to the 2020s, the opportunities appear to be broader than energy and infrastructure, with technology becoming an essential part of economic growth in the region. Before the pandemic, Latin America was already on its way to becoming a hotbed of tech startups. Fueled by a rapidly expanding middle class and an influx of foreign investment, the region has seen a boom in new businesses specializing in everything from e-commerce to digital media. The pandemic has exacerbated this growth as consumers have shifted dramatically towards online and digital services. This surge in entrepreneurial activity has been particularly evident in countries like Brazil, Chile, Colombia and Mexico, where the number of tech startups has nearly tripled in the past five years.

In the first half of 2022, technology deals in Latin America accounted for approximately 42% of the value of regional deals. As we continue to emerge from the COVID-19 pandemic, the technology sector is expected to experience high transaction volume as new technologies and digital services continue to evolve in the region.

Why is Latin America an attractive region for technology investors?

In 2021, fintech investments in the region totaled US$5 billion, up from US$2 billion in 2020

In the first half of 2022, transactions in the telecommunications and media sectors amounted to an aggregate amount of US$6.57 billion
Source: market data

What makes Latin America an attractive destination for tech investors? First and foremost, the region has a large and young population, increasingly connected to the global economy. Second, many Latin American countries, such as Mexico, Chile, Colombia, and Brazil, have adopted entrepreneur-friendly policies, making it easier to start new businesses. Loose economic policy around the world and access to cheap capital in 2020 and 2021 have significantly boosted valuations, prompting an unprecedented spike in M&A activity in this sector. The combination of low interest rates and a rising US dollar made it easier for US investors to acquire or invest in Latin American targets at a faster pace.

With its vast potential for growth and innovation, Latin America is poised to become a major player in the technology landscape. For one, the region is home to a number of fast-growing technology companies that continue to be attractive acquisition targets for large multinationals. Additionally, Latin America is an increasingly important market for many global technology companies, and acquiring local companies is a good way to gain a foothold in the region. Finally, many Latin American countries have implemented legal reforms that make it easier for foreign companies to do business in this segment, which has also boosted M&A activity. As a result, it’s no surprise that Latin America has become a top destination for tech startups and tech M&A activity, and is now one of the most active regions for M&A. technologies. This trend shows no signs of slowing down.

The fintech sector is a prime example. Banking services in the region have traditionally focused on traditional banking, which generally excludes a large portion of the population. Regional startups have seized the opportunity to serve this sector with impressive results by providing smart and disruptive solutions such as mobile payments, access to e-payment platforms and micro-finance to the entire population. In 2018, fintech investment in the region reached an all-time high of US$2.5 billion, nearly double the figure of 2017. In 2021, fintech investment in the region totaled 5 billion from 120 deals, compared to $2 billion from 82 deals in 2020. This growth was driven by a number of factors including, at a macro level, low rates and a strong dollar. , and at the country level, the increasing availability of online banking and mobile payment services, the expansion of the middle class and the region’s young population. Fintech companies also benefit from supportive government policies in many countries.

Fintechs are driving change

With economies still largely cash-based, M&A activity in the fintech sector will remain strong in the coming years as investors seize opportunities to build stakes in large companies with a
enormous growth potential

As fintechs continue to proliferate in Latin America, they are dramatically changing the way people manage their finances. From digital banks to peer-to-peer lending platforms, they offer new and innovative solutions to meet the needs of Latin America’s growing population. With economies still largely cash-based, we expect M&A activity in this sector to remain strong in the years to come. Financial and institutional investors will seize opportunities to build equity positions in large companies with huge growth potential, likely at valuations well below those of just a few months ago, due to the tightening of monetary policy. We also expect banks to engage in defensive mergers and acquisitions in the region to improve their technology platforms and serve a much younger population that is hungry for faster, better and cheaper banking services. At the very least, banks will seek to retain market share and customer base.

There is also a growing demand for services from the telecommunications and media sector. Many companies in this sector have sought M&A opportunities to consolidate and expand their reach. The digital infrastructure and internet service provider segments are experiencing a high volume of M&A transactions by strategic and financial investors. The 2021 deals involving AT&T, Telefonica and DirectTV are the clearest examples of trading activity in this segment. According to public sources, 148 deals were announced in the media sector in the first half of 2022, for a total amount of $6.57 billion.

Consumer demand is generating strong M&A opportunities across the tech sector in Latin America. The shift to digital experiences and services is also driving investment in the different segments of the industry. The first half of 2022 saw a strong volume of growth capital, financing, and M&A deals, which provided significant amounts of fresh capital to some of the region’s most successful tech companies. This new trend has placed well-capitalized companies at the forefront of the regional M&A market, as they can now seek to deploy some of that capital through strategic M&A transactions at much higher valuations. competitive. High-quality startups are now better positioned for inorganic growth via mergers and acquisitions.

On the other hand, smaller or less capitalized startups find it more difficult to access fresh capital due to higher interest rates and stricter and more disciplined investment guidelines for private equity funds and venture capital. These less fortunate companies will likely become acquisition targets or seek sources of financing with tighter terms at much lower valuations and, in some cases, open the door to opportunistic and distressed M&A transactions.

In uncertainty, opportunity

In a regional market adjusting to its new post-COVID-19 reality, which is shaped by global supply chain disruptions, inflation, rising interest rates and new political cycles rethinking economic policies, negotiators remain cautiously optimistic about the regional transition to digital services. create significant M&A opportunities, particularly in the technology sector. The current economic environment will create attractive opportunities for venture capital and private equity funds to pursue mergers and acquisitions through the end of 2022. Other well-funded startups looking to stay competitive and maintain growth rates demanded by their investors also see the opportunity and engage in significant strategic M&A activity under less pressure and at more realistic and sustainable valuations. Stronger market players certainly have the wherewithal to navigate the current uncertainties, including the risk of an economic downturn. M&A professionals remain alert to these opportunities as they explore this dynamic and exciting segment of the Latin American economy.

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