Dealing (and Dealmaking) with Mexican Grupos

Excerpt from
North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.
by Alyssa A. Grikscheit and Javier Fierro
(Goodwin Procter LLP)


Grupos are the large family conglomerates that dominate the Mexican economy. If you are a strategic or private equity investor attracted to the increasing opportunities in Mexico what kind of structural issues are you going to encounter if you invest with Grupos?

In Mexico, Grupos have impeded competition, keeping near-monopolies in certain industries. For instance, there are only two beer companies, two major food processors, two television networks and six radio chains in the country.Some Grupos have successfully expanded outside of outside of Mexico.

There are three main common characteristics found in a Mexican Grupo. First, the Grupo will typically run several businesses, and often these businesses will operate within various industries. Second, the Grupo will generally be composed of more than one family, but their connections run deep. And third, the organizational structure is predominantly based on kinship.

Dealing with Grupos can be a thorny issue, especially when trying to exit the investment Some Grupos may not want to exit their investment because they want to pass down the business to their offspring. Other less scrupulous Grupos may use
their political and economic muscle to shift assets to other investments within the
Grupo.

On the other hand, a Grupo on an investor’s side can
be a significant ally in an emerging market. By integrating with
a Grupo, an investor will gain political power, acquire local
knowledge of the country, and avoid contractual problems
with other local firms, all while avoiding expensive search
costs. The question therefore arises: how to find a suitable
Grupo? As with any other investment opportunity, finding a Grupo will inevitably require the investor to do its homework.


Due Diligence
First and foremost, the investor needs to perform a background check on the family. The investor needs to identify red flags such as young and inexperienced family members in key management positions within the company. In addition, the investor needs to review their resumes. Are they educated professionals or are they simply in their positions because of their family name? A strong kinship bond within the Grupos sometimes displaces sound business judgment and good corporate governance.

The investor should also identify the family patriarch within the Grupo. Sometimes knowing who holds the power within the family may not be readily apparent because of the complexity of the Grupo network. Understanding the family organizational hierarchy will prove invaluable when a conflict arises. The investor should also verify whether the Grupo has the political and economic muscle they claim to have; sometimes it may just be pure bravado.

In addition, the investor should check to see if the Grupo has commitments with other foreign firms. Such commitments may mean a Grupo has already been required to keep family assets and company assets separate and to meet certain corporate governance standards. It may also mean the Grupo’s reputation will be affected by a major fallout with a foreign investor. While checking the Grupo’s commitments, the investor should also check for potential conflicts of interest that may arise from the transaction.

It is critical to identify the keyplayers in the Grupo. This is particularly important in the negotiation process. Negotiating with a family member with insufficient authority may mean that concessions made by the Grupo are later reversed, effectively giving the Grupo two bites at the apple.

It is also critical to build a relationship based on mutual trust. Although many Grupos have been successful in jurisdictions outside of Mexico where deals may go to the highest bidder regardless of emotional or other connections, they still tend to rely on building relationships before crafting and executing deals. Finally, it is crucial to note the long-term memory of most Grupos. Because of their family connections, management is typically not very fluid. The investor’s management team may change several times, while the Grupo’s team remains more or less intact. Perceived injustices by the investor will not be easily forgotten, and may impact future dealings with the Grupo.

Setting a Price
Earnouts can be a powerful tool in dealmaking with Grupos. They ensure that performance incentives are aligned and serve as both “sticks” and “carrots”. The stick is essentially the investor’s bargaining power in the event of future disputes, and the carrot, quite simply, is cash, which may be in short supply in Grupos that do not include a captive bank.

There are other possible leverage points as well. Sometimes a private equity investor will try to position itself as the information gatekeeper. The investor may try to hold certain valuable information or intellectual property separately from the portfolio company. Holding such information or intellectual property directly may allow the investor to exert external pressure on the Grupo without having to rely on weak institutions for enforcement. However, this approach may not be practical in Grupos where the management (and members of the Grupo) has an inherent information advantage. More