Finally, Latin America is realizing that more of its companies should invest internationally to harness the forces of globalization and consolidation.
| Asia: Where the money's coming from. |
Modest Beginnings
Marcopolo, a Brazilian busmaker, became a market leader at home and then began modestly setting up production units in Argentina, Mexico, Colombia and South Africa. The company now has a unit in Portugal and is mulling an expansion into Asia. José Rubens de la Rosa, Marcopolo's CEO, says: "First we looked at the markets that are close to us, but India and China are very important markets. Our decision is to go there eventually, but with a partner who has the same views as us. Technology and distribution are becoming commoditized, so what really matters are relationships, brands, reputation."
A botched international expansion can drain companies of resources and management time. Bimbo expanded into the US in 2001 by paying $610 million for George Weston Brands, which brought it a portfolio of popular US brands such as Boboli pizzas and Entenmann's cookies and cakes. However, the American subsidiary never made any money. Bimbo reacted by firing its senior US executives and replacing them with a new team. "At last we have started to post good figures. We are in the black at last," says Rodríguez. The company still relies on Mexico for two-thirds of sales and nearly all its profits. This year, the US should generate about 25% of Bimbo's $5 billion annual revenue and other Latin American markets should bring 7%. Instead of looking for new blockbuster acquisitions, Rodríguez says Bimbo is now targeting smaller foreign companies. In July, Bimbo paid an undisclosed amount for Comestibles Lalo, a Colombian regional food company based in Barranquilla.
Despite the efforts of these pioneers, corporate Latin America is struggling to keep up with competitors in Asia as they continue to globalize at a terrifying pace. Unctad, the United Nations trade and development agency, says companies based in developing Asian countries posted an astounding $69 billion in outward FDI flows in 2004. But Latin American companies invested just $10.94 billion in foreign markets. Five years earlier, companies in both regions invested roughly the same amounts overseas. These figures are affected by broader economic factors, and as Latin America recovers, investment patterns – inbound and outbound – are likely to pick up. Furthermore, Michael Klein, chief economist at the International Finance Corp. (IFC), the World Bank's private sector arm, says there is a clear link between the pace of microeconomic reforms – which directly impact companies – and the volume of a country's outward investments. Microeconomic reform in Latin America has lagged far behind progress by Asian countries.
Gavin Wilson, a managing director at Goldman Sachs International, agrees that a positive domestic business climate stimulates offshore investments. He says the "strength of a country's economy, the depth and sophistication of its financial system and the vibrancy of local corporates are driving companies to invest abroad. You really need a deep domestic financial market for corporates to get more [active in] M&A by giving them access to finance."
This trend is surprising, since most developing countries are starved of capital and need to invest carefully in their domestic markets to fuel growth. It seems to make little sense for companies based in a country as poor as Brazil or Mexico to invest their profits abroad, especially in a developed country, when they could be creating jobs and helping raise the standard of living at home. But this view is losing ground as economists and business executives come to see that a company's health increasingly depends on investing around the world. Governments are encouraging the process and even development agencies such the IFC advise and finance companies' cross-border investments. Indeed, the IFC held a two-day conference in Mumbai in November, convening business leaders from Asia, Africa and Latin America, to debate the subject.
Mexico's development agency Nafin and Brazil's BNDES development bank are both beginning to offer financing and other assistance to companies expanding internationally. João Furtado, an adviser at BNDES, says the bank will finance foreign deals to support mid-market companies' growth strategy in the belief that growing companies create jobs at home.
Contrary to conventional wisdom, companies are not expanding internationally just to diversify away from their domestic markets. If companies were really seeking to avoid risk, they would surely try to buy assets in developed countries where consumer demand, currencies and interest rates are relatively stable. Marcopolo's de la Rosa points out that most Latin American multinationals are expanding into volatile Latin American countries because they prefer to operate in markets they understand even if this does expose companies to considerable risks. "Our business in Argentina was excellent. We were doing really well and it was our best market," de la Rosa says. "Then along came 2001 and our market stopped. Sales went from 1,000 units to zero. We halted production at the plant in Argentina and all that was left there was a guard dog." It has taken Marcopolo four years to rebuild its business in Argentina.
Companies with a broader portfolio of international subsidiaries can spread risk better. Alfredo Carvajal, president of his eponymous family-owned printing and paper products company, is an example. Carvajal is based in Cali and has 12 companies and 40 divisions in industries that range from pulp and paper to back office electronic procurement systems scattered around Latin America, the Caribbean and Spain. Carvajal says he is happy to live with risk and volatility as long as the combined company can generate reasonable profits. "Sometimes we can make a lot of money in a place like Brazil as we are now, so I love Brazil. Other times it is hard to make money there, but then I will probably be making money in Mexico or in Colombia, so it all balances out."
Currency Risk
Managing currency risk is obviously an important part of running any global company. However, de la Rosa says this usually complex challenge can be simplified. He says that after expanding into South Africa, Marcopolo struggled to manage three volatile currencies – the Brazilian real, South Africa's rand, and the US dollar. He gave up trying to satisfy investors by using the dollar as the company's reporting currency and simply stuck to reais. "Investors have to accept that they are invested in Brazil, in reais, and accept exposure to the currency," he says.
However, Latin American bosses say their biggest headache is finding good managers. De la Rosa, Bimbo's Rodríguez and Carlos Piedrahita, CEO of Colombia's Nacional de Chocolates, all agree that finding financing is less of a problem than recruiting senior executives. Nacional de Chocolates has expanded into Central America and was anxious to hire a non-Colombian as a top marketing executive. Piedrahita hired a firm of headhunters to find a suitable candidate from somewhere in Latin America. Disappointed by the candidates on offer, Piedrahita wound up hiring in Medellín. "Our biggest problem is human resources. I want to have more entrepreneurs in my company. You can't just go out and buy people whenever you want to. It's not like buying companies," Piedrahita says.
Who's Really in Charge?
This year's $7.8 billion sale of beverage company Bavaria to SABMiller, a London-based brewer, did not mean that Colombia's biggest company suddenly surrendered its identity to a faceless multinational. The sale was a combined cash and stock deal and as part of the sale, the Santo Domingo family – the controlling shareholders before the SABMiller acquisition – took a 15% equity stake in the merged company and took two seats on SABMiller's board in London. The deal put the Colombians in charge of the group's Latin American business, allowing the Santo Domingos to keep managing the family business as part of a stronger global group.
The Bavaria deal was modeled on a similar sale last year of AmBev, Brazil's dominant brewer and soft drinks producer, to Interbrew of Belgium. AmBev's three main shareholders sold their controlling stake to Interbrew for $4.1 billion-worth of stock in the merged company, now called InterbrewAmBev (InBev). Executives from AmBev and Interbrew each have four seats on the InBev board. InBev is headquartered in Leuven, Belgium, while AmBev is still based in São Paulo.
But why did a London-based company with roots in South Africa and a centuries-old Belgian group became global consolidators instead of Bavaria or AmBev?
André Parker, managing director at SABMiller, has an answer. "Being in London meant we were in the heart of the international financial system and our stock became well-known and could be used [as a currency] in acquisitions," he says. South African Breweries moved its primary listing to London in 1999, raising £300 million. SABMiller's stock is included in the London Stock Exchange's benchmark FTSE 100 index. In 2001, SAB became the first international brewer to enter Central America when it acquired Honduran brewer Cervecería Hondureña and formed a joint venture with El Salvador Beverages Business, a brewery and soft drink distributor. A year later it took over Miller Brewing of the US for $3.6 billion in stock and another $2 billion of assumed debt, in a deal that transformed SAB into a truly global player.
