Mergers and Acquisitions 2017

Last verified on Thursday 9th March 2017

Guatemala

Juan Carlos Castillo Chacón
Aguilar Castillo Love
  1. 1.

    Has the level of M&A activity slowed, increased, or remained flat in 2016 as compared to 2015, and what are conditions like today? In general terms, what level of activity is foreseen for 2017? What are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Liquidity? Rule of law? Other?

  2. As predicted, 2016 was a tough year for investments in general and for M&A in particular. A very week gov ernment combined with a political crisis triggered by corruption scandals resulted in a drop in foreign direct investment, from US$220.8 million in 2015 to 879.1 million as of September 2016, a drop of 28 per cent considering that 2015 was also a down year, the drop is even more significant. 2017 does not look promising, but we anticipate a modest reversal to the upside. We believe M&A activity will increase slightly.

  3. 2.

    Which industries do you expect will see the most M&A activity in 2017?

  4. We expect electricity, telecommunications and mining to lead the way in 2017. We do not expect a major departure from what has been the trend in recent years: banking and electricity. We could also see some deals in mining and agribusiness. 

  5. 3.

    What types of deals do you expect to see?

  6. We expect most deals to be outright acquisitions of local entities by foreign strategic investors, around US$150–US$300 billion. However, investment funds have been more active in the region lately, therefore we expect to see an increase in minority acquisitions.

  7. 4.

    Discuss the level of M&A activity you have seen over 2016 and expect to see in 2017 of:
    (i) pure domestic deals;
    (ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
    (iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.

    • We do not expect an increase in pure domestic deals;
    • we expect an increase in this sector, especially from Colombia; and
    • we could see some increase in this sector, especially with regional (Central American) targets, as local companies try to expand in the region, consolidating its integration.
  8. 5.

    What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?

  9. The level of private equity activity is picking up. It has come mainly from international funds looking to invest in renewable energies, infrastructure and agribusiness. However, we have seen large funds going into regulated activities such as electricity distribution. Funds are not usually interested in control so they tend to look for a minority deal with strong shareholders agreements granting them veto right on key decisions (although there are notable exceptions). Having said that, the level of private equity activity is still low compared with other Latin American jurisdictions. In our opinion, the typical size of deals in Guatemala is too small to attract medium or large-sized funds.

  10. 6.

    Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From domestic or international sources? What amount of debt/ equity leverage are you seeing in private equity transactions? Where is financing coming from – domestic sources, international lenders? Governmental agencies? Banks or capital markets?

  11. Acquisition financing is available. Depending on the sector and the size of the deal, it can come from multilateral agencies, local banks or international banks. Multilaterals tend to finance projects with a positive environmental impact. We believe that is the main reason behind the great interest we have seen in renewable energy deals. Local banks have also been very aggressive in financing important acquisitions for strategic buyers, but their size limits the amount of financing they can provide. Private equity buyers, on the other hand, usually use the funds they have been able to raise. When financing is involved, the debt: equity ratio is around 70:30, although we are seeing a tendency from lenders, especially local banks, to demand more equity (around 60:40).

    Financing is available mainly from commercial banks, but also from multilaterals, especially in highly sensitive areas, where the additional protection offered by multilaterals becomes very important.

  12. 7.

    How open is your country to investments and acquisitions by foreign buyers? Is there a level playing field when foreign and domestic bidders compete to buy the same domestic target company?

  13. From a legal standpoint, Guatemala is a very open country to both investments from and acquisitions by foreign buyers. There is practically no legal difference between domestic and foreign bidders. The playing field is level, but there is not a lot of competition among bidders, except for certain projects of considerable size. Having said that, foreign bidders are usually more exposed to non-legal pressure from NGOs, politicians and the press. This kind of pressure is relevant in key sectors such as mining, hydro projects and infrastructure.

  14. 8.

    Are corruption and compliance concerns affecting M&A activity?  Are there industries where this is a particular issue?

  15. Not directly, but indirectly. The recent political crisis Guatemala went through in 2015 was triggered by the public’s perception of high levels of corruption. Such crisis and its aftermath (the former president, vice president and some ministers being jailed), resulted in a virtual paralysis of government. Government officials were too scared of the press and prosecutors to function properly. This resulted in everything becoming more complicated.

  16. 9.

    How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2016 as compared with 2015? What are the prospects for 2017?

  17. Guatemala has been lucky in not being severely affected by the major recession that is affecting the developed world. In this regard, we believe the international financial situation does affect M&A activity negatively, but indirectly, because the usual sources (US and Spain) have decreased their level of acquisition owing to the economic environment in their countries. Having said that, restructuring is not a big part of M&A activity.

  18. 10.

    Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy? Are you seeing much activity in this area?

  19. One of the weaknesses of the Guatemalan legal system is its lack of a bankruptcy law. Current regulations do not allow a reorganisation or acquisition of a bankrupted entity. So, despite the global economic turmoil, we have not seen any activity in this area.

  20. 11.

    Has there been any increase in shareholder activism and hostile takeovers? Are international hedge funds active in your market? What defences are target companies permitted to adopt?

  21. It would be misleading to talk about an increase in hostile takeovers. However, we have seen some isolated cases. In those cases, target companies have opted for rudimentary defences such as amending their by-laws to introduce restrictions on the transmission of shares. Shareholder activism does not exist in Guatemala.

    In addition to the lack of experience in the area of hostile takeovers or shareholder activism, commercial regulation is fairly rigid, limiting the kind of defences a target company might adopt. In any case, both shareholder activism and hostile takeovers are practically unknown in Guatemala.

  22. 12.

    How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisors, fairness opinions?

  23. Guatemala has no public companies, nor any regulation protecting minority shareholders in acquisition situations. However, large private companies tend to include some protection in their constitutional documents: for example, the need for directors to convene a shareholders’ meeting whenever an offer is received, and the creation of admission committees to ensure no large blocks of shares are sold without the knowledge of other shareholders.

  24. 13.

    Have directors, management and controlling shareholders changed how they conduct themselves in M&A deals? What kind of fiduciary duties do directors, management and controlling shareholders have under the laws of your jurisdiction? From your experience, are directors, management and controlling shareholders more diligent today in their review of M&A transactions and other matters?

  25. Another weakness in Guatemala’s legal system is the lack of legislation and regulation regarding the fiduciary duties of directors and management on private acquisitions (which is the only kind of acquisition that takes place in the country). Having said that, we would say that their conduct has changed for the better. The reason behind this positive change can probably be found in the litigation arising from some past deals. Directors and management are now much more diligent, trying to keep shareholders informed and having them participate in the decision-making.

  26. 14.

    Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation?

  27. As explained above, the answer is yes. They should be more concerned, and they are more concerned.

  28. 15.

    Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?

  29. Although there are some differences, the know-how that local law firms have gained from working alongside major international law firms has resulted in greater uniformity in deals, both pure domestic deals and cross-border deals. Purchase agreements tend to be more elaborate in cross-border deals, but conceptually there is not much difference. They usually involve:

    • an indicative offer subject to due diligence and other conditions;
    • a memorandum of understanding granting possible buyer exclusivity (usually for six months);
    • a binding offer;
    • a share purchase agreement drafted by an international firm, but based on due diligence reports produced by local firms; and
    • some kind of guarantee agreement (usually keeping a portion of the price in escrow for a period of time, depending on statutes of limitation) for any contingency detected during the due diligence phase.
  30. 16.

    Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?

  31. Owing to the implementation of stricter fiscal rules, local sellers and buyers tend to be more risk averse than they were in the past, with taxes becoming an issue and prices increasing to compensate.

  32. 17.

    Do domestic buyers have a greater tolerance than multinational buyers for risk in transactions, such as (i) assuming risk of tax, labour, environmental and other contingencies; (ii) assuming risk of regulatory approvals; or (iii) bearing the risk of non-compliance/corruption issues at the target company? If so, does this give domestic buyers a competitive advantage over international buyers? 

  33. Yes, not only are multinational buyers more exposed to non-legal risks, but usually they are more risk averse than local or domestic buyers (see question 7). We would not go so far as to state that domestic buyers have a competitive advantage in general, because that higher tolerance for risk is generally balanced by a lack of expertise or a lack of capital. However, it does provide a competitive advantage in certain sectors where locals have acquired sufficient know-how and investment size is moderate. That is the case, for example, of the electric sector. In that sense FCPA and similar regulations do present, in our opinion, a significant challenge to international buyers, especially in sectors related to government procurement. Most practices that are customary in Guatemala when dealing with government agencies could run afoul of FCPA and similar regulations. 

  34. 18.

    For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the three most important pitfalls that should be avoided?

  35. Our three most important pieces of advice would be the following:

    • Choose your local counsel carefully: most local firms perform purely mechanical due diligence processes without understanding the targets business. If you do not understand the business, you will not be able to pose the relevant questions or to identify the critical issues. Ask your local counsel pertinent questions that allow you to evaluate their understanding of business in general and of the target’s business in particular.
    • Have a good local partner: if you are investing in politically sensitive areas, you would be better off having a local partner that understands the culture and is better equipped to navigate those waters. Having said that, you have to perform some due diligence on your partner to make sure who you are dealing with to avoid future problems.
    • Think outside the box: in sensitive sectors, your problems and contingencies will not come from what is written in the law, so a purely legal and technical due diligence will not be enough. You have to truly understand the country, the region of the country where the target is doing business, and the social and political issues that could affect it and the sector.

    The three most important pitfalls we have seen are:

    • Assuming your culture and the country’s culture are the same and therefore coming to the wrong conclusions. Trusting the target more than you trust your local counsel or being too eager to do a deal.
    • Assuming the people you are talking to are the ones who make the decisions. Most local targets are family businesses in which the younger generation is handling the negotiation but all decisions are taken by the older generation. You should keep in mind that there is a large generation gap between the two groups.
  36. 19.

    Have there been any significant regulatory developments affecting M&A – your country's securities exchange commission, antitrust regulators, tax authorities, Central Bank, other regulators that review deals etc? 

  37. Guatemala is expecting a competition law in 2016 as part of the legal commitments the country took when it entered into an agreement with the European Union, Guatemala agreed to implement a competition law no later than 2016. The time has come and competition law will surely be enacted. Unfortunately, there are several competing bills and no one is sure which one will be chosen. We should have a clearer picture later in the year, but a new competition law would certainly affect the M&A sector, regardless of the model finally adopted.

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Questions

  1. 1.

    Has the level of M&A activity slowed, increased, or remained flat in 2016 as compared to 2015, and what are conditions like today? In general terms, what level of activity is foreseen for 2017? What are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Liquidity? Rule of law? Other?


  2. 2.

    Which industries do you expect will see the most M&A activity in 2017?


  3. 3.

    What types of deals do you expect to see?


  4. 4.

    Discuss the level of M&A activity you have seen over 2016 and expect to see in 2017 of:
    (i) pure domestic deals;
    (ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
    (iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.


  5. 5.

    What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?


  6. 6.

    Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From domestic or international sources? What amount of debt/ equity leverage are you seeing in private equity transactions? Where is financing coming from – domestic sources, international lenders? Governmental agencies? Banks or capital markets?


  7. 7.

    How open is your country to investments and acquisitions by foreign buyers? Is there a level playing field when foreign and domestic bidders compete to buy the same domestic target company?


  8. 8.

    Are corruption and compliance concerns affecting M&A activity?  Are there industries where this is a particular issue?


  9. 9.

    How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2016 as compared with 2015? What are the prospects for 2017?


  10. 10.

    Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy? Are you seeing much activity in this area?


  11. 11.

    Has there been any increase in shareholder activism and hostile takeovers? Are international hedge funds active in your market? What defences are target companies permitted to adopt?


  12. 12.

    How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisors, fairness opinions?


  13. 13.

    Have directors, management and controlling shareholders changed how they conduct themselves in M&A deals? What kind of fiduciary duties do directors, management and controlling shareholders have under the laws of your jurisdiction? From your experience, are directors, management and controlling shareholders more diligent today in their review of M&A transactions and other matters?


  14. 14.

    Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation?


  15. 15.

    Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?


  16. 16.

    Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?


  17. 17.

    Do domestic buyers have a greater tolerance than multinational buyers for risk in transactions, such as (i) assuming risk of tax, labour, environmental and other contingencies; (ii) assuming risk of regulatory approvals; or (iii) bearing the risk of non-compliance/corruption issues at the target company? If so, does this give domestic buyers a competitive advantage over international buyers? 


  18. 18.

    For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the three most important pitfalls that should be avoided?


  19. 19.

    Have there been any significant regulatory developments affecting M&A – your country's securities exchange commission, antitrust regulators, tax authorities, Central Bank, other regulators that review deals etc? 


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