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Mergers, Acquisitions, and Nearshoring – challenges and Opportunities for 2023

During 2021 and 2022, the M&A market in Mexico will grow 44% compared to 2019 and 2020, having the effect of mobilizing approximately USD$16,000’000,000.00, according to Transactional Track Record Data’s (TTR Data) 2022 annual report. This growth is due to several factors, highlighting the following (I) market recovery to pre-pandemic levels, (ii) increased need for greater liquidity, (iii) business expansion, and (iv) cost reduction.


Mexico’s position in Latin America’s mergers and acquisitions market


As shown in TTR Data’s quarterly report through May of this year (2023), Mexico ranks third in Latin America, below Brazil and Chile. During that period, 130 transactions were carried out in the country, representing a 27% decrease compared to the previous year. However, there was a 32% increase in the total value of transactions, reaching USD$9,300,000,000,000. The region report also notes that May 2023 saw a 30% drop in deal volume and a 35% decrease in aggregate value across Latin America compared to the same period last year, indicating that although there were fewer transactions, the value of deals completed was higher, reflecting an overall picture of lower activity in the M&A market.


Resilience in financing for acquisitions and current investment projects


Despite adverse market conditions, acquisition financing remains strong, as do structured project financings and private equity investments.


Financial institutions, both in Mexico and abroad, continue to back these investments through different instruments such as securitizations, asset-backed loans, and bond issues.


Other factors can drive mergers, acquisitions, restructurings, and business reorganizations promptly such as nearshoring, which has existed for many years and with the Agreement between the United States, Mexico, and Canada (USMCA), has managed to consolidate a solid legal framework for trade between the three countries and has provided additional incentives for companies seeking to move their operations to Mexico, especially in the northern region of the country, to assemble products and export them to the United States and Canada. Such is the case of Tesla’s mega giga-factory, which announced its new headquarters in Monterrey, Nuevo Leon, as well as the expansion of the German firm BMW, both located in the north of the country where they will be able to take advantage, in addition to the geographic proximity, of the low production costs given the economic and geographic incentives offered by this Entity.


In addition to these automotive projects, other international companies have also announced investments in Mexico. Schneider Electric, Miba, Tupy, WBTL, Brembo, and ZF Group, among others, have announced investments in various sectors, thus strengthening the Mexican economy.


In a recent announcement, the Secretary of Finance and Public Credit, Rogelio Ramírez de la O, revealed that the Mexican economy has experienced a significant boost thanks to the arrival of companies to the country through the nearshoring phenomenon. This trend has triggered investments exceeding USD$13,000,000,000,000.00 so far this year. During the National Meeting of Regional Advisors 2023 of BBVA Mexico, the official highlighted that these investments have benefited the country’s economy, highlighting the automotive and auto parts sector as it has been the main recipient of these investments, representing 54% of the announcements made.


However, we should not underestimate the importance of the trade relationship that Mexico maintains with other countries such as China. Although we are competitors in some sectors, we are also the bridge that China needs to enter the U.S. market. In 2019, foreign direct investment from China in Mexico was USD$137,000,000.00 dollars, compared to USD$386,000,000.00 dollars in 2022, which shows an increase of 282%, according to official figures from the Ministry of Economy.


Legal and regulatory challenges of nearshoring in Mexico


Near-shoring also presents legal and regulatory challenges for companies seeking to establish operations in Mexico. Companies must comply with Mexican labor and tax laws and must take steps to ensure that they meet social security, environmental and antitrust standards to achieve the expected return on investment.


The Consejo de Empresas Globales (CEG) has indicated that the investment attracted by nearshoring can have a significant impact on Mexico’s economy in the long term. According to the CEG, this investment could increase the country’s Gross Domestic Product (GDP) by between 1.5% and 2.5%, as well as increase labor productivity by between 15% and 30% by 2030, if policies and programs that promote collaboration, training, and financing are strengthened, as well as improving the productive capacity and quality of companies for better integration into commercial value chains.


By implementing these measures, Mexico can take full advantage of the potential of nearshoring and consolidate itself as an attractive destination for international investment by making progress on the challenges previously mentioned.


Conclusions on the mergers, acquisitions, and nearshoring landscape in 2023.


Nearshoring remains a trend in 2023 for companies looking to diversify their supply chains and reduce dependence on suppliers with Mexico remaining an attractive destination for nearshoring due to its proximity and the sound legal framework provided by the USMCA Companies must be adequately prepared and advised to face the legal and regulatory challenges that arise when establishing operations in Mexico.


In Acedo Santamarina, we have extensive experience advising national and international clients and transnational companies that have the objective of doing business in Mexico, achieving their objectives with the best strategies according to their needs.


Rodrigo Flores

Rodrigo Flores

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