How is M&A Shaping Up in Mexico?
The implementation of recent legislation and trade agreements stands to place Mexico as a leader in the global M&A market. But what challenges are yet to be overcome?
Lawyer Monthly discusses the subject with Jaime López, partner at DeForest Abogados, who offers his thoughts on how far M&A in Mexico has come and how it is set to develop.
How have the UMSCA and other free trade agreements placed Mexico in the global M&A market?
International trade is very important for Mexico. It currently has twelve free trade agreements, which represent an immense range of commercial opportunities. If we study the numbers, it is clear how essential the European market is to us, but especially the United States and Canadian markets; about 80% of our exports are to the United States and Canada and about 43% of our imports come from them. Thus, we depend mainly on trade relations with these two countries.
USMCA, as it was approved, kept most of NAFTA’s market-opening statutes, but some major changes were introduced to the auto industry rules of origin, as well as dispute settlement provisions, updates to labour issues and government procurement, and the addition of digital trade, state-owned enterprises and corruption issues, among others. From that moment on, including the free trade agreement with the EU, Mexico took an important role in the global market, taking advantage of its geographic location to be placed as a strategic country for companies of several industries to invest in operations. This has boosted mergers and acquisitions in the country, especially regarding the automotive industry.
The rules of origin for the automotive industry were one of the most important and tough issues in the negotiations of the USMCA. It is important to notice that, recently, the major growth in the North American market took place mostly in Mexico, which comprises about 20% of the whole continent’s vehicle production. Recent investments in US and Canadian assembly plants were used to modernise or expand existing facilities, while Mexico has had the advantage of new assembly plants.
USMCA, as it was approved, kept most of NAFTA’s market-opening statutes, but some major changes were introduced
NAFTA, according to the Bush administration, was encouraging the North American auto industries to move their production to Mexico where labour costs are lower. Therefore, the US originally proposed that the percentage of a vehicle coming from North America should increase from 62.5 to 85% and that 50% of the content must be American. The governments of Mexico and Canada and the representatives of the automotive industry refused the proposal, arguing that it would not be possible to fulfill such conditions. After months of discussions, the US removed the requirement that 50% of automotive content should originate in the US.
The rules of origin were hardened in the USMCA. They include the following:
- 75% of the content in automobiles must be sourced in North America to qualify for tariff-free treatment, as opposed to the 62.5% required by NAFTA;
- Between 40 and 45% of the content of an automobile must be produced by workers earning at least $16 per hour;
- Parts must be divided up into core, principal, and complementary parts with North American contents requirements of 75%, 65% and 60% respectively;
- 70% of steel and aluminium used in auto production must originate in North America, on top of a plan to enforce the implementation of manufacturers’ rules of origin certification requirements;
- A total quota of 2.6 million passenger vehicles from Canada and Mexico on an annual basis versus the 1.8 million established by NAFTA;
- Quotas of $32.4 billion in Canadian auto parts imports and $108 billion in Mexican auto parts imports.
Other sectors are affected by said new rules of origin, including the textile, chemicals, and steel-intensive products industries, among others.
However, it can be a little risky to talk about what to expect of the USMCA in the short term. From a broad perspective, it is beyond any doubt that the USMCA provides the means to increase the growth of the North American region – which generates most of the wealth worldwide – making it stronger.
The automotive sector is the most affected by the USMCA. The new rules of origin determine the effect on supply chains, resulting in meaningful increases to costs and making industries pay a high price. On the other hand, the agreement encourages Canada and Mexico to find new ways to become more competitive. According to experts, this agreement encourages an invasion of Chinese auto parts manufacturers in Mexico. By opening facilities in Mexico, Chinese auto part manufacturers will be able to avoid the more severe rules.
It is beyond any doubt that the USMCA provides the means to increase the growth of the North American region
International treaties have always been a fundamental part of Mexico’s development. The treaties mentioned above not only create new rules for the game, but also motivate the creation of more alliances, mergers and acquisitions to comply with their new provisions. The UMSCA and other free trade agreements place Mexico in a good position in the global M&A market, as we represent a strategic partner when it comes to international trade.
Has the 2018 Fintech Law had any notable impact on tech deals?
Mexico is still in a development process regarding technological issues. The Fintech Law has not yet had the impact that was expected; in my opinion, we could have a better regulation to generate a greater impact. What we must consider is that the Fintech Law is not the only law that currently regulates digital issues; the USMCA contains a chapter that elaborates specifically on digital matters. It includes, in general, all industries, but specifically excludes government provisions on data held or processed by the governments of the three countries. The main objectives of this chapter are:
- Equal treatment of electronically delivered goods and services as compared to physical products;
- Protection of cross-border data flows;
- Prohibition of data localisation regulations;
- Prohibition of tariffs or other charges for electronically transmitted products, such as e-books, software, games, videos and music;
- Cooperation on cybersecurity and publication of open government data in a machine-readable format for public use.
In brief, what are the major statutes governing M&A law in Mexico?
The three main regulations governing M&A in Mexico are the following:
General Law of Commercial Companies (LGSM): Regulates the incorporation of commercial companies, the obligations arising from the Articles of Incorporation and the structure of the company.
Securities Market Law (LMV): Develops the securities market in a fair, efficient and transparent manner; protects the interests of the investing public; minimises systemic risk and promotes healthy competition, among others.
Federal Law of Economic Competition (LFCE): Promotes, protects and guarantees free competition and economic competition, as well as prevents, investigates, fights, effectively prosecutes, severely punishes and eliminates monopolies, monopolistic practices, illicit concentrations, barriers to free competition and economic competition, and other restrictions to the efficient operation of markets.
What significant legislative and regulatory changes have come to the Mexican M&A framework over the past five years?
In corporate matters – meaning the Securities Market Law and the General Law of Commercial Companies – there has not been a significant change, but without a doubt the Federal Economic Competition Commission (COFECE) plays a more relevant role every day in regulation and surveillance to prevent unfair competition. We must always pay attention as, if life has taught us anything in recent years, it is that things can always change from one day to the next.
International treaties have always been a fundamental part of Mexico’s development.
Which sections of the Mexican economy are currently experiencing a greater number of mergers and acquisitions than most? Are there any areas where M&A activity is particularly lacking?
The three main sectors of the Mexican economy where we have been able to notice a significant increase in M&A during 2021 were the mining industry, the financial sector and real estate. Although in recent years we have seen an increase in M&A, everything in life can always be improved, and in this case a particular point where we could improve on the issue of M&A is in the response times of the authority. The processes of the COFECE can take time and this represents an obstacle. Response times should be more efficient to keep motivating the increase of M&A in the country.
Have there been any notable developments in foreign investment in M&A matters?
The most remarkable thing is that despite the pandemic, according to information published by the Mexican government, Mexico reached a foreign direct investment of $31.6 billion dollars in 2021, with the manufacturing and mining industries being the main beneficiaries:
By type of investment (source of financing): 38.6% through reinvestment of profits; 43.7% through new investments and 17.7% through intercompany accounts.
By sector: 39.7% in manufacturing; 15.2% in mining; 15% in financial and insurance services; 8.8% in transportation; 8.5% in commerce and 5.2% in temporary housing services. The remaining sectors accounted for 7.6%.
By country of origin: 47.5% in the United States; 13.7% in Spain; 6.5% in Canada; 5.7% in the United Kingdom; 5.2% in Germany and 5% in Japan, with other countries contributing the remaining 16.4%.
Likewise, Transactional Track REcord (TTR) reported 394 deals, including mergers, acquisitions, asset acquisitions and private equity and venture capital transactions. This meant an increase of 8.7% compared to 2020, which makes it evident that M&A will continue to be more dynamic every day despite the complicated circumstances that may arise worldwide.
The Fintech Law has not yet had the impact that was expected
What impact has the COVID-19 pandemic had on M&A in Mexico? Has this now been overcome, or are the effects ongoing?
As we all know well, 2020 was a difficult year; situations occurred we did not believe possible and the world was put on pause. The pandemic affected all levels of society, and a situation with such a large scope would obviously have enormous consequences. In 2021 we started to move again and could see an improvement in foreign investment, direct investment and M&A. The industries in general suffered, but in 2021 we started to become optimistic again. The pandemic affected the M&A sector in Mexico as it did around the world, only this time we were all affected in the same way. Although in 2022 we see life returning to what it was before, the Russia-Ukraine conflict will impact the global market again.
COVID-19 had such a strong impact that it is impossible to think the consequences will be resolved anytime soon. The pandemic affected every aspect of all industries and the obstacles it created cannot be solved from one day to the next. Today we face inflation problems, interest rate increases and continued supply chains complications, and as long as this continues at a global level, the M&A sector will be affected not only in Mexico but in all countries involved. To overcome this we will need to be creative and adapt.
What developments do you expect to see in the M&A scene in the remainder of 2022 and beyond?
We are living in unstable times globally. To name a few issues, there is the new increase of COVID-19 cases, the Russia-Ukraine conflict, accelerating inflation and interest rates, and stress in production and supply chains. I would like to be optimistic, but the current scene does not seem very encouraging. However, we have already seen that, even living through a pandemic, 2021 was a better year than the one preceding it. If these historical events have taught us anything, it is that we must adapt to survive. 2022 is a good year to review strategies and adapt them, and to make bold decisions; the global situation we are living could represent an opportunity for investors to thrive against all odds.
Please tell us a little about the development of your career. What would you consider to be your greatest professional achievement?
I always knew I would be a lawyer; you could say that my life working in law was always meant to be. My grandfather was a lawyer specialising in tax matters, an author of several books on that subject and an inspiration for me to follow his path. Just as I always knew what I wanted to do for a living, I was always sure that I would be a partner in a law firm. That was my goal and I put all my effort into achieving it. I studied for my bachelor’s degree in Mexico and later a master’s degree in international business law at the University of California, Davis. Commercial law has always been my passion; I find it an exciting sector that always presents new challenges. No case is 100% the same as the previous one and using creativity to solve problems has always been what I like most about this area of law.
DeForest has become my and my partners’ life project. Since the beginning we have worked hard to build a transcendent project; our vision and values are clear, we know where we want to take the firm and our everyday work is aligned with what we want to achieve. That is where our slogan “Pasión por lo que hacemos”, meaning “Working with passion”, comes from. We take it seriously and implement it with every client, no matter their size. I am convinced that we are heading towards our goals and we will keep working to become one of the best law firms in Mexico.
Looking back, I can say without a doubt that I am in a great moment in my career, and that my work has led me to where I am today. In particular, I would like to mention what I consider my greatest professional achievement: our assistance in establishing the first premium OEM in Mexico, which represented many challenges at state and national level. Within the process, which took us several months, there was a merger and therefore an investment that has generated thousands of jobs and continues to do so today. The launch of this OEM was successfully accomplished and is currently operating efficiently.
Jaime G. López y Porras, Partner
Osa Mayor No. 2523, Int. 1301, Col. Reserva Territorial Atlixcáyotl, Torre UMA. Puebla, Pue. CP 72193
Jaime López is a partner at DeForest Abogados. With almost 20 years of professional experience in law, his areas of specialisation include commercial law, corporate law, government administration, administrative law and civil and contractual law.
DeForest Abogados is an international law firm headquartered in Mexico. From its offices in Mexico City, Guadalajara, Leon, Queretaro and Puebla, its team of more than 90 lawyers advises companies both foreign and domestic on national and international business matters.