That is how much the publicly-held corporations invested in acquisitions over the past five years – a record in Brazil. What worked. What went wrong. Why? - CRISTIANE MANO AND JOÃO WERNER GRANDO
A ride through the São Paulo metropolitan region – easily done in a single day – was all it took to drive by the 22 office buildings and warehouses belonging to the BR Properties until late 2007, its first year in operation. Today, if you would like to visit the company’s properties, it will take you a few weeks to go to the 25 cities in 24 states, where its 126 properties are located. To soar from zero to the leading position in the industry, in the past five years BR Properties
ZANETTI, HAUACHE, BRUNI AND COSENTINO (FROM LEFT TO RIGHT): Together, they have spent nearly 9 billion Reais in acquisitions since 2007
invested some 7 billion Reais in taking over companies owning real estate portfolios and buying buildings and warehouses. With 279 million Reais in revenue and property appraised at 10 billion Reais, the company is now four times bigger than its competitors. In early September, BR Properties CEO Claudio Bruni made his boldest move in this amazing expansionist movement by taking over WTorre Properties, a commercial property management outfit controlled by the BTG Pactual bank, a deal believed to be worth about 2 billion Reais. The company comes out of this deal with 1.5 billion Reais in cash," said Bruni. "We are still looking to buy a lot more."
A similar transformation took place with each of the other execs and entrepreneurs appearing in the photo that opens this report. Together, they more than doubled their revenues by closing 50 deals that cost about 9 billion Reais over the past five years. Laércio Cosentino, the founder of software company Totvs, invested 880 million Reais to take 18 businesses over. After acquiring 11 minor competitors since 2007, São Paulo native Omar Hauache, the CEO of the Fleury laboratory network, completed the purchase of Rio de Janeiro outfit Labs D'Or - for 1 billion Reais. Randal Zanetti, the founder of the Odonto-Prev dental insurance network, wrapped-up a merger with Bradesco Dental in 2010 and now holds a 32% market share in this industry. Bruni, Cosentino, Hauache and Zanetti are a few of the players involved in a historical consolidation movement that is taking place in Brazil. In the first half of the year, there was a record number of 379 mergers and acquisitions on the Brazilian market, the most ever recorded in a single half-year in the series of studies KPMG began on this issue in 1995. On average, there were two transactions per day - 10% more than a year earlier. "There has never been such an intense period for this type of deal in Brazil," said Luíz Motta, KPMG'S officer in charge of the mergers and acquisitions area.
The two main drivers behind this movement are the effort publicly-held corporations have been making to deliver on promises made when they went public and the growing interest in the Brazilian market among private equity funds - and, often, a combination of these factors. At EXAME'S request, KPMG conducted an unprecedented survey to find out who came out on top and who lost in this huge wave of consolidations (see the chart on page 46). The assessment included 65 publicly-held companies that used the strategy of growing by means of mergers and acquisitions and defined the list of the best and worst based on four indicators - income, net profit, stock value and indebtedness - since 2007. The outcome is the broadest picture ever made of the performance of the Brazilian consolidator companies which, together, invested 120 billion Reais in acquisitions in this period. A large part of the sample is of companies that operate out of pulverized industries. And it was precisely in this group that some of the most meteoric growth performances took place. PDG, Brazil's biggest developer, topped the list with an estimated income of 6.6 billion Reais this year, 1.097% more than in 2007. The company is among eight publicly-held corporations which rose above the 1-billion-Real-per-year-in-sales threshold over the past five years (see the chart to the side). The list also includes companies of the likes of the Dasa laboratory network, which soared 858 million to 1.8 billion Reais in income since 2007, and the Anhanguera educational network. After a series of 37 acquisitions in the period, which cost more than 1.2 billion Reais, Anhanguera grew its income nearly fivefold in the last five years. In 2011 alone there were nine takeovers, averaging nearly one a month. The biggest was the purchase of Uniban, announced in September, for 510 million Reais. After the deal, the group became the world's second largest higher education corporation in number of students, with 400,000 enrolled, trailing only the American Apollo Group.
MARCELO NOLL BARBOZA, CEO OF DASA: with 15 acquisitions in the past five years, the company entered the billion team
For some of the businesses that invested in the consolidation strategy, however, buying was the easiest part of the story. The hard part was "digesting" the acquisitions in order to gain more efficiency in the operations.
"These companies grew faster through acquisitions, but making this strategy work is another matter altogether," says Renato Ejnisman, an officer at Bradesco BBI, which specializes in mergers and acquisitions. Jumping into the deal, a constant temptation in these cases, is usually the biggest foe of good results. Execs at Paraná's Bematech, a commercial automation equipment manufacturer, learned their lesson the hard way. The company's first acquisition, just a few months before its debut on the stock exchange, in 2007, was software manufacturer Gemco. Negotiations took but a few months to be wrapped up. Attracted by Gemco's leading position in a market that it itself didn't operate in - retail management programs -, Bematech agreed to pay out 60 million Reais for the buy. Six months after the deal was closed, problems started surfacing. Without a structure to meet demand, Gemco started delaying software deliveries. The state of affairs got so critical that Bematech decided to put prospecting for new customers in a standstill. "Anyone only looking at the company's financials would think it was the ideal business," said Marcel Malczewiski, one of the founders and the chairman of the board of Bematech. "Our mistake was not talking with the customers beforehand in order to get to know the company better." It took two years and a restructuring process for Gemco to be able to resume growth. In KPMG 'S survey, Bematech was one of the companies that grew the least in net income: only 24% over the five-year span. "We are more careful now, and take the time we need to investigate the operation," said Malczewiski.
A PDG CONSTRUCTION SITE IN SÃO PAULO: income and profit soared more than 1,000% since 2007 and ensured the company the industry leadership
Companies that turned into buying machines and were able to keep good financial indicators were more careful. In general, they put teams and processes together not only to make financial audits, but also operational and cultural probes before closing the deals. "We always measure the degree of affinity before going for the buy," said Totvs' Cosentino. "This brings up issues that might only surface after the operation." Anhanguera's integration team does something similar. It has 45 full-time professionals dedicated solely to merging the acquired businesses. In the Uniban acquisition, in September, the team studied the company for about 60 days before the deal was signed. The Kroton educational network, controlled by the Advent private equity fund, prepares what it calls a "social map" of the business to be acquired during the due diligence period. To achieve this, Kroton's integration team sends a questionnaire to employees and students to determine, on any hierarchical level, where the most influential people are in the structure. "It is very important to find them to reduce friction during integration," said Kroton CEO Rodrigo Galindo, who has bought out 15 competitors since 2008. The second risk factor in a buying season such as this one is soaring asset prices. "Over the past couple of years, a lot of small businesses became aware of their value in this time of consolidations and started getting ready to receive investments or to be taken over," said Maria Cristina Cescon, a partner specializing in mergers and acquisitions at the Souza, Cescon, Barrieu & Flesch law firm. Part of this preparation process, in addition to putting an end to possible informal policies and organizing governance, includes building a discourse about the company's growth perspectives, which is not always fulfilled, but is embedded in the price. To avoid falling into this trap, execs at Lopes, Brazil's biggest real estate agency, have used a standard ever since the first acquisition the business made back in 2006. In general, the company acquires stakes of up to 60% - and only pays 40% of the amount at sight. The previous owner remains at the business and the rest of the payment varies based on the profit made in the next three years. In other words, Lopes only pays if the acquisition actually proves to be advantageous. Another benefit afforded by the model is that, by keeping part of the original execs on, it does not lose experience that is hard to replicate. "In our industry, the most valuable thing is the relationship network these companies bring with them," said Lopes CFO Marcello Leone. "We needed the people who ran the business, and to keep them interested we paid for the results." Even companies that decide to take on 100% stakes of the businesses they acquire have used the model known as earn out, which links part of the payment to the achievement of targets. "This allows us to share the risk with the entrepreneur," said Fleury CEO Omar Hauache.
One of the biggest traps for consolidator companies in a buying season such as this one is soaring prices
BRMalls shopping mall in São Paulo: credibility among investors helped the company raise 730 million Reais in the stock exchange in May
AN ANHANGUERA CLASSROOM, IN SÃO PAULO: The purchase of Uniban, in September, turns the São Paulo educational network into the world’s second biggest.
Companies with successful takeover strategies entered a type of virtuous cycle. With good results, they were able to go back to the stock exchange to raise more money and, thus, continue buying at low indebtedness rates. "Raising money on the stock exchange is far from being the least expensive way to fund a wave
CLAUDIO BERGAMO, CEO OF HYPERMARCAS: In a quick reaction to the sharp decrease in income, the shares slumped about 60% in January
of investments," said Antonio Wever, the partner in charge of the merger and acquisition area at the Pátria investment management firm. The PDG developer was benefited by this cycle, and raised money on the stock exchange three times over the past five years. This allowed it to rake in 3 billion Reais. It now has one of the lowest indebtedness rates among all companies surveyed. Its cash generation is nearly twice that of nearly all its competitors. "We structured ourselves to be a company with pulverized capital, without an owner, to be able to count on the capitals market to grow," said PDG CEO José Antonio Grabowsky. BRMalls, Brazil's leading shopping center manager, followed suit. Created in 2006 with the union between American billionaire Sam Zell and the Brazilian GP Investimentos manager, BRMalls raised 730 million Reais in May, its third capital increase since its IPO, in 2007. The success of the operation can be considered a vote of confidence after a list of good results its executives reached with the 2.4 billion Reais it has already sought from investors on the stock exchange. Since it was founded, BRMalls rose from zero to holding stakes in 35 shopping centers. It now ranks second in KPMG 'S survey of the companies that made the most acquisitions. In 2011 amounts, BRMalls had the best margin in the industry in generating 695 million Reais. By opting for organic growth, Iguatemi, the industry's pioneer, now holds less than half of BRMalls billing and a third of its net income. "The money coming from this new fund raising effort will be reverted into new acquisitions in the next couple of years," said BRMalls CFO Leandro Bousquet.
The companies that promised more than they delivered were soon to feel the investors’ response – and lost market value
This is the opposite of what happened with businesses such as the Marfrig meat packing company, which is now going through something of an acquisition hangover. Since its debut on the stock exchange, in June 2007, Marfrig never had cash available to it that had not come from loans - the cash generated by the operation itself was always used to cover investments and debt. The company, which is controlled by São Paulo native Marcos Molina, now has a market value of 2.1 billion Reais, equivalent to about a third of its net equity. "We are going to stop buying and focus on the operation to make it more efficient," said Molina (see the chart).
Not delivering on promises is a capital offense to investors. "The market has been merciless with unkept promises," said Lior Pinsky, a merger and acquisition partner at the Veirano law firm. One of the companies that was penalized the most was the Hypermarcas consumer goods manufacturer, which belongs to businessman João Alves de Queiroz Filho, also known as Júnior. When it went public, in April 2008, Hypermarcas raised some 700 million Reais. The proposal was use acquisitions to create a consumption company with a significant performance in areas as distinct as drugs, food, hygiene and beauty - and to find synergies that could make these areas more efficient under a single structure. That was not what happened. In three years' time, the company made 23 acquisitions and quadrupled its income, but did not deliver the expected results. In the first half of the year, it announced a net income of 86.5 million Reais, 13.6% less than a year earlier. The stock depreciated about 60% from January to October. In July, their execs announced the company would be split into two areas - a pharmaceutical division and an area targeted at personal care. The tomato product Etti and cleaning product Assolan brands were put up for sale. "The sale is good news. It shows the company is likely to become more focused and, hopefully, more efficient," said Juliana Rozenbaum, an analyst specializing in consumption at Itaú BBA. A conservative approach when dealing with the capitals market usually affords the best results. "We never made projections for the market," said Zanetti, from Odonto-Prev, whose stock shot up 150% between January 2007 and October 2011. "Not even when we went public, when hardly anyone knew us."
To specialists, the consolidation movement among Brazilian corporations is likely to continue heated through late 2011. KPMG data suggest that a few industries, such as education, health and shopping centers are not greatly indebted and can carry on buying. Additionally, some of the six companies that canceled their IPOs this year are expected to continue investing to grow and ensure a successful debut on the stock exchange. This was the reasoning that drove entrepreneur Ronaldo de Carvalho, the controller of the Drogaria São Paulo, to announce a merger through stock swaps with its Rio de Janeiro competitor Pacheco, in September - little more than a week after its listed competitors Raia and Drogasil announced a similar deal. "We might be stronger at the IPO, planned for 2012," said Carvalho, the chairman of the board of Drogaria São Paulo. DPSP, as the company resulting from the merger was called, became the market leader, with income estimated at 4.4 billion Reais per year - about 10% more than Raia Drogasil. "Deals involving stock swaps may gain significance from now on," said KPMG'S Motta. "This is a way to make bigger operations without spending money."
MARCOS MOLINA, CEO OF MARFRIG: “We now have to gain efficiency, generate more cash. We will not buy anything for quite a while.
BUYING WAS EASY
COMPANIES SUCH AS JBS AND MARFRIG GREW QUICKLY THROUGH ACQUISITIONS – WITH THE PROVIDENTIAL HELP FROM BNDES. TODAY, THEY ARE STRUGGLING TO DEAL WITH ISSUES BROUGHT ABOUT BY THE CRUEL COMBINATION OF FALLING PROFIT AND HIGH DEBT.
The high-speed growth Brazilian meat packers experienced is an entirely separate chapter in the history of mergers and acquisitions in Brazil. In little more than a decade, companies that were little more than large family-owned butcher houses, such as JBS and Marfrig, ballooned into global corporations in a series of competitor take overs in the country and abroad. Going shopping was the easiest part of this story - particularly with the providential help of BNDES. Being able to round-up a positive outcome from this movement, however, is a problem these companies have yet to solve. In early October, the difficulties involving the industry led to speculation about a possible merger between JBS, Marfrig and another competitor, São Paulo meat packer Minerva. Their execs deny there are any negotiations in this regard in progress.
Marfrig, which belongs to São Paulo native Marcos Molina, became the synthesis of the industry's situation and has been the main target for market criticism in the last few months. In the late 1980s, at age 16, Molina founded a meat distributor in Mogi Guaçu, in the interior of the state of São Paulo. He now has the second biggest Brazilian meat packer in his hands, with sales nearing 15.8 billion Reais in 2010. Extremely shy and discrete, Molina quickly gained the fame of being an industry wonder. Over the past five years, he has made 22 acquisitions - with investments of nearly 7 billion Reais (about half of this amount paid for by BNDES, between loans and the purchase of stakes). Among his most daring steps was the purchase of chicken manufacturer Seara and of the American outfit Keystone, the world's leading meat supplier to McDonald's. The problem is that the more Marfrig grew, the more profit dropped. Its indebtedness became the highest among the businesses operating in the sector. As could be imagined, investors were merciless - Marfrig's stock were hit hard and accumulate the biggest plunge in the industry this year, down nearly 60% in early October. "Now, we have to make gains in efficiency, to make the operation generate more cash," said Molina. "It is time to shape up."
In October, he set three changes into motion in his structure. The most important will be the unification of the beef businesses in South America, thus far managed separately in three independent business units located in Brazil, Argentina and Uruguay - remnants of the structures of business that were bought in those countries.
In October, Marfrig started integrating the beef businesses in Argentina, Uruguay and Brazil
Marfrig then expects to inaugurate a shared service center, in Santa Catarina, and a new distribution center to serve the entire nation, in São Paulo. The measures are part of a restructuring process designed by the Bain & Company consultancy firm - in September, the unification of the restaurant service area and the sale of a logistics division for 400 million dollars had already been announced. The selling season is over, says Molina. "And we are also not going to buy anything for quite a while," he added. Marfrig's hangover was felt, in 2010, by industry leader JBS, which is controlled by the Batista family. Over a decade, a series of more than 20 acquisitions turned JBS into the world's largest meat company. With tight margins and the payment of a type of fine on a BNDES loan, the company closed 2010 with a loss of 300 million Reais. In February, Wesley Batista replaced his brother Joesley at the helm of the operation. One of his most drastic measures thus far was closing six plants, a move announced in September. JBS' stock has plummeted 49% in the year. "Companies in this industry went through an unprecedented growth adventure," said Fabio Chaddad, an agribusiness expert at Insper. "But his management capacity for such huge business remains a question."