M&A and tech in Latin America: how will unicorns (existing and up-and-coming) confront a changing investment landscape?

Fernando Arias

ARIFA, Panama City

fariasf@arifa.com

Conference report

Biennial IBA Latin American Regional Forum Conference: Technology, social media and artificial intelligence: challenges for the legal industry in the digital age

23 March 2023

Breakout session 6

Session Co-Chairs

Paula Vieira de Oliveira Mattos Filho, São Paulo; Vice Chair, IBA Latin American Regional Forum

Jose Visoso Galicia Abogados, Mexico City; Scholarship Officer, IBA Latin American Regional Forum

Speakers

Mariana Seixas Softbank Investment Advisers, Miami

Carlos Albarracin Millbank, New York

Juan Naveira Simpson Thacher & Bartlett, New York

Maria Shakespear Beccar Varela, Buenos Aires

The session was opened by the Co-Chairs, who introduced the speakers and stated that panel will discuss trends of M&A transactions in Latin America, including the challenges of Fintech to secure financing, increased length of regulatory approval in tech deals and landmark tech deals in the region.

The introductory theme was the challenges faced by Fintechs to securing finance. Carlos Albarracin pointed out that Fintechs often have a difficult time finding a sustainable business model with sufficient cash flow to repay their respective debt and, as result, they are often required to lower the cost of equity capital by offering capital to the venture funds/lenders in order to create a credit profile which is sustainable for the venture capitalists and banks. It was noted that revolving loans are also viable options for Fintechs, as they offer the option of securing the loan and tapping into it at later dates.

Maria Shakespear mentioned that in Europe approximately only three out of 20 unicorns are profitable and they frequently face an important dilemma: to find a buyer or fail. During her participation in the ground-breaking first acquisition of a bank in Argentina by a Fintech, they had to engage in a regional discussion with regulators, which required additional guarantees from the purchaser, such as evidence of sufficient funding to comply with the business plan. They also required a regulatory endorsement from the Central Bank, which took approximately 15 months. Some important lessons from such a transaction include: to remain patient (taking into account that, on many occasions, the regulators are dealing with this type of transactions for the first time); and to be transparent with authorities. It is also not always necessary to reinvent the wheel, as sometimes existing regulation can be used to achieve the desired result.

Juan Naveira noted that today ‘every deal is a tech deal’ and discussed how every target is an information provider or receiver. This statement is particularly true for tech companies, which handle Big Data and the result is longer time frames for regulatory approval. Lots of potential and future acquisitions during the interim review period by the regulator and the regulatory oversight has affected deals and M&A provisions. Some examples include:

• The extension of drop-dead dates in share purchase agreements (up to 21-to-24 months in some cases, which is off market and a very long period between signing and closing). This, of course, brings significant issues, such as how to handle communications with investors and employees.
• Sellers beginning to request reverse termination fees.
• Significant challenges in securing bank funding for such a long period.
• Prevalence of antitrust regulation fees.

In the specific case of Brazil, Mariana Seixas pointed out that, as a result of the distressed nature of the assets, there appears to be a trend towards market consolidation, with strategic acquisitions thinking long term and taking advantage of the low valuations, as opposed to late 2021 when valuations were at an all-time high and it was unsustainable.

Panellists agreed that valuations in 2022 crashed across the board and noted that the market has since corrected. Sellers are now becoming creative as a result of this correction. Some examples of this include additional follow-on investments from existing investors instead of seeking news investors and more investor-friendly terms due to the higher cost of capital. Careful consideration and analysis should be given to requirements to pledge receivable or cash flows to assess if the company can still operate comfortably and successfully after the perfection of such pledges.

The discussion continued and involved changing opinions about ESG initiatives and its legal challenges. Paula Vieira pointed out that there are a high number of deals focused on ESG as investors are increasingly interested in ESG-compliant companies, but in several cases there is often insufficient information to assess if the targets are indeed ESG compliant. Consequently, a trend that has emerged is that companies have built in processes to provide evidence to potential investors and regulators that they are ESG compliant. The SEC and other regulators are now starting to require information in a standardised format to ensure this. As a result, ESG is becoming significantly more relevant in due diligence processes during M&A transactions.

The speakers then highlighted the following important aspects that should be taken into account in tech M&A deals:

• Has the target complied with privacy laws?
• How does the target obtain the information from its customers?
• Has the target complied with the respective laws when gathering information?
• Can the target share the information?
• Is the information safely stored and can they move it?
• Has the target granted consent to use the information post-closing?
• Is artificial intelligence part of the value proposition for the transaction?

The speakers concluded that recent inflation and increased interest rates have resulted in substantially less initial public offerings and increased market consolidation. There has also been a shift of power from shareholders to financing sources resulting in more lenders becoming stakeholders and increased collateral during the acquisitions.