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

In a region plagued by global trade disruptions, inflation, rising interest rates and complex political cycles, dealmakers remain cautiously optimistic that the transition to digital services across the region will create significant merger and acquisition opportunities for the tech industry.

Historically, deal activity in Latin America has been driven by energy and infrastructure deals. The region has experienced significant growth over the past two decades as most of its largest economies enjoy political stability and adopt market-friendly policies that have attracted significant foreign direct investment. Commodities played a major role in this growth. Latin America has some of the richest metal and mineral reserves in the world. The region is also rich in oil and gas reserves, driving significant infrastructure investment across the region.

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

Traders who follow the region will surely remember Brazil’s commodities boom, Mexico and Colombia’s infrastructure and real estate booms, and the inflows of foreign direct investment that have made Peru and Chile major players in the region.

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

Expand the scope of opportunities

Fast forward to the 2020s, and opportunity appears to be broader than energy and infrastructure, with technology becoming a key part of the region’s economic growth. Before the pandemic, Latin America was already 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 in everything from e-commerce to digital media. That growth has been exacerbated by the pandemic as consumers shift sharply to online and digital services. This surge in entrepreneurial activity has been particularly pronounced in countries such as Brazil, Chile, Colombia and Mexico, which have nearly tripled the number of tech start-ups in the past five years.

Tech deals in Latin America accounted for about 42% of the regional deal value in the first half of 2022. As we continue to emerge from the COVID-19 pandemic, as new technologies and digital services continue to develop in the region, there is likely to be a lot of deals in the tech industry.

Why is Latin America attractive to tech investors?

Fintech investment in the region totals $5 billion by 2021, up from $2 billion in 2020

Telecommunications and media sector deals totaled $6.57 billion in H1 2022
Source: Market Data

What makes Latin America an attractive destination for tech investors? First, the region has a large young population that is increasingly connected to the global economy. Second, Latin American countries such as Mexico, Chile, Colombia, and Brazil have introduced preferential policies for entrepreneurs, making it easier for new businesses to start. Easing global economic policies and access to cheap capital during 2020 and 2021 have significantly boosted valuations, prompting an unprecedented rise in M&A activity in the sector. The combination of low interest rates and a surging dollar have made it easier for U.S. investors to acquire or invest in Latin American targets at a faster pace.

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

The fintech industry is a good example. Banking services in the region have traditionally focused on traditional brick-and-mortar banking, which typically excludes a large portion of the population. Regional startups seize the opportunity to serve the industry with smart and disruptive solutions such as mobile payments, access to e-payment platforms and microfinance to the wider population with impressive results . Fintech investment in the region reached a record $2.5 billion in 2018, almost double the level in 2017. Fintech investments in the region totaled $5 billion in 2021, involving 120 deals, up from $2 billion and 82 deals in 2020. This growth was driven by a combination of factors, including low interest rates and a strong dollar at the macro level, and at the country level, the growing popularity 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.

Fintech is a driver of change

With the economy still largely cash-based, M&A activity in the fintech sector will remain strong in the coming years as investors seize opportunities
Huge growth potential

As fintechs continue to proliferate in Latin America, they are significantly changing the way people manage their finances. From digital banks to P2P lending platforms, they are delivering new and innovative solutions to meet the needs of Latin America’s growing population. With the economy still largely cash-based, we expect M&A activity in the sector to remain strong in the years ahead. Financial and institutional investors will seize the opportunity to build equity positions in large companies with huge growth potential due to tighter monetary policy, estimated valuations could be much lower than they were a few months ago. We also expect banks to make defensive M&A in the region to improve their technology platforms and serve a younger demographic craving faster, better and cheaper banking services. At the very least, banks will seek to retain their market share and customer base.

Demand for services in the telecommunications and media sectors has also grown. Many companies in the industry have been looking for M&A opportunities to consolidate and expand their business scope. The digital infrastructure and internet service provider space is experiencing a large number of M&A transactions by strategic and financial investors alike. The 2021 deals involving AT&T, Telefonica and DirectTV are the clearest examples of deal activity in this space. In the first half of 2022, the media industry announced 148 deals totaling $6.57 billion, according to public sources.

Consumer demand is driving strong M&A opportunities across the Latin American technology industry. The shift to digital experiences and services has also spurred investment in different areas of the industry. The first half of 2022 saw a strong volume of growth capital, financing and M&A deals, providing significant new funding to some of the most successful tech companies in the region. This new trend puts well-capitalized companies at the forefront of the M&A regional market, as they can now deploy some of their capital at more competitive valuations through strategic M&A transactions. High-quality startups are now better positioned to achieve inorganic growth through M&A.

On the other hand, smaller or less capitalized startups have had a harder time accessing new capital due to higher interest rates and stricter and more disciplined investment guidelines for private equity and venture capital funds. These less fortunate companies may become acquisition targets or seek more disciplined sources of financing at lower valuations and, in some cases, open the door to opportunistic and troubled M&A deals.

In uncertainty, opportunity

Regional markets are adapting to a new post-COVID-19 reality, shaped by disruptions to global supply chains, inflation, higher interest rates, and a new political cycle that rethinks economic policy, with dealmakers still reliant on regional-to-digital services. The transition will remain cautiously optimistic. Create significant M&A opportunities, especially in technology. The current economic environment will create attractive opportunities for venture capital and private equity funds to pursue mergers and acquisitions in the remainder of 2022. Other well-funded startups seeking to remain competitive and maintain the growth rates demanded by investors are also sensing opportunities and engaging in major strategic M&A activity at more realistic and sustainable valuations under less pressure. Stronger market players are certainly well-positioned to navigate the current uncertainty, including the risk of an economic slowdown. M&A professionals are wary of these opportunities as they explore this dynamic and exciting sector of the Latin American economy.

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