The general counsel of one of our U.S. clients called me yesterday seeking urgent advice after it discovered that certain employees of its newly acquired Mexican subsidiary were looting the subsidiary and had been doing so for at least 5 years prior to the acquisition. The client had acquired the Mexican company, which is located in a border city, indirectly (by purchase of another U.S. company), and had not performed any due diligence on the employees or labor matters relating to the company.
It turns out the Controller and the Managing Director of the Mexican company had orchestrated the looting by "hiring" a half dozen or so managing-level employees and paying them salaries and other bonuses even though they never appeared for work. (Lesson #1: if the number of managers of a Mexican company set forth on the company’s payroll records is high relative to the number of employees, the company may have phantom employees.)
The Managing Director, who was seconded to the Mexican subsidiary by the U.S. parent, alleged that the Mexican Mafia had carjacked him and required him to pay the phantom employees. He said he feared for his life. The Managing Director may or may not have been telling the truth, but our U.S. client assumed (I think appropriately under the circumstances) that he was. The Controller apologized in a detailed written confession.
Since the Managing Director was both an employee of the U.S. parent who was paid by the U.S. parent and a employee of the Mexican subsidiary (because Mexican law deems any person who provides services to another person an employee), we prepared release and termination agreements for him under both U.S. and Mexican law in conjunction with Mexican labor counsel.
(Our client elected not to require the Managing Director to sign U.S. and Mexican resignations, but rather to cause the U.S. parent to pay the Managing Director a very limited severance under Mexican law in exchange for his signature of the release and termination agreements, principally because of concerns that the Managing Director could have made an argument in a post-termination lawsuit in Mexico that he was forced to resign based on the specific circumstances of the resignation, among other reasons.)
The severance payment also served as consideration for the termination and release agreement under U.S. law. We then had Mexican labor counsel prepare terminations/resignation agreements under Mexican law for the Controller. Our client decided (again, I think appropriately) that it would have been imprudent to require the Managing Director to obtain resignations from the phantom employees because of the possible Mexican Mafia involvement.
Lesson #2: With the help of competent Mexican labor counsel, perform extensive labor and employment due diligence on all Mexican companies prior to any acquisition. In most cases, problems like phantom employees can be discovered and remedied prior to closing. Even in the absence of corrupt employees, labor and employment liabilities of Mexican companies are often extensive because of Mexico’s paternalistic labor laws and should be rooted out prior to closing. Sometimes the extent of the liabilities merits adjustment to the purchase price of the acquisition.
The Mexican Tax Administration (Servicio de Administracion Tributaria – SAT) has determined that the employment outsourcing activities performed by certain Mexican outsourcing companies violate tax laws, according to a SAT press release dated June 16, 2007. The violations involved the transfer of workers to various partnerships with the purpose of avoiding the required employee profit sharing, federal taxes, and social security contributions under Mexican law.
U.S. companies with Mexican subsidiaries that retain outsourcing companies should always make certain they are contracting with outsourcers that fully comply with Mexican tax laws. If an outsourcing deal seems to good to be true, it probably is, and the outsourcer probably isn’t complying with such laws.
In due diligence investigations pending acquisitions of Mexican companies, we have seen business structures where one or more services companies designed to lease workers to the target (and thereby enable the target to avoid employee profit sharing obligations) is organized as a partnership. Among the problems with these structures for the acquirer is that the SAT and/or the Mexican Social Security Institute could, after the close of the acquisition, retroactively impose liability and penalties on the target and/or such affiliates for unpaid employee profit sharing, social security payments, and other obligations arising from the improper use of the partnership.
Alberto Vilar, chief executive of MetLife Mexico, S.A., forecasts 8%-10% growth in Mexico’s life insurance market in 2008, according to a report by Ken Parks of Dow Jones Newswires released on May 30, 2008.
MetLife Mexico’s life insurance sales in Mexico totaled MN$23.08 billion (approximately US$2.23 billion) in 2007, giving the company a 30% share of the total market. Life insurance appears poised for growth in Mexico because of the country’s young population, emerging middle class, and limited use of financial services.
One of MetLife Mexico’s target markets is lower- to middle- income Mexicans, to which it has been selling life insurance since 2006 through a joint venture with Wal-Mart de Mexico (WALMEX.MX).
Lionel Richie said "fiesta forever", and Ford Motor Company agrees. Ford announced on May 30, 2008 that it would commence production of its Fiesta small car at the company’s Cuautitlán Assembly Plant near Mexico City beginning in early 2010. The Cuautitlán Assembly Plant, which currently builds large trucks (ranging from the Ford F-150 to the F-550), will be transformed to accommodate small-car production as part of Ford’s manufacturing shift to smaller, fuel efficient vehicles. In addition to the Cuautitlán Plant, Ford has stamping and assembly plants in Hermosillo, Sonora that manufacture the Ford Fusion, Mercury Milan and Lincoln MKZ sedans, which are sold in North America, Venezuela and Brazil.
Expensive oil may continue to cause multinationals to modify supply chains, perhaps with additional positive externalities for Mexico.
Banks may be tightening commercial lending for transactions in the U.S., but U.S. and foreign banks appear ready, willing, and able to fund transactions in Mexico and many other Latin American countries on reasonable terms, including commercial real estate development transactions and leveraged business acquisitions.
Bed Bath & Beyond, Inc. (NASDAQ: BBBY) announced its formation of joint venture with privately-held Mexican home goods retailer Home & More, S.A. de C.V. BBBY invested $4 million to acquire a 50% equity stake in a new entity that currently operates two Home & More stores in Mexico City, which offer a variety of home furnishings, giftware and domestic merchandise.
Mexican business newspaper El Financiero reported today that Benetton Group SPA, the Italian fashion clothing manufacturer, signed an agreement with Sears México, S.A. de C.V. to develop its brand in Latin America and reduce its dependency on Western European sales. Benetton plans to open points of sale within Sears México’s retail centers as well as an additional 50 stand-alone retail stores, giving the marque approximately 250 retail outlets in Mexico by the year 2011.
Benneton’s press release described the attractiveness of the Mexican market for the fashion business. "With its rapid economic growth and young population (60% below 24 years of age), Mexico is considered one of the key markets on the American continent." The release also announced that Benneton will open a new office in Miami to monitor and manage sales, marketing and distribution for the Latin America region.
Sears México is controlled by Grupo Carso, which is controlled by Mexican billionaire (and No. 2 on Forbes’ 2008 billionaires list) Carlos Slim Helú. In addition to Sears México, the companies Slim controls include, among others: Telmex (Mexico fixed line telephony); America Movil (Americas wireless telephony), a few of the subsidiaries of which include Tracfone (U.S. prepaid wireless telephony), Claro (Brazil wireless telephony) and Telcel (Mexico wireless telephony); CompUSA (U.S. personal computers); Banco Inbursa (Mexico commercial and personal banking); and Grupo IDEAL (Latin America infrastructure development).
It is nearly impossible to do business in Mexico without running into one of Slim’s entities or family members. Slim appears to have created his own PR website, which contains some great photos and informative commentary.
On May 22, 2008, British-European private equity fund Aureos Capital closed a $5 million investment in Mexican transportation equipment leasing company Analistas de Recursos Globales, S.A. de C.V. (ARG) through its Aureos Latin America Fund (ALAF). ALAF is a $300 million fund that targets Mexico, the Central America Region and the Andean Region. The press release said that “ARG, which started operations in 2001, provides operating leases of transportation equipment like automobiles, trailers and specialized vehicles and provides fleet management services for companies. It focuses on small and medium-sized Mexican companies that find it difficult to obtain leasing contracts through commercial banks.”
According to its website, Aureos Capital was established in 2001 as a global private equity fund manager specialized in providing expansion and buy-out capital to unlisted mid-cap businesses in emerging markets. Aureos aims to double funds under management to US$ 1.2 billion in the next 2 years, and will launch new funds in Latin America, Central Asia, and Pan Africa.
The expansion of U.S. and other international businesses into Mexico continued its rapid pace in the fourth quarter of 2007 and first and second quarters of 2008, including moves by:
Copyright © 2008 by John Dorsey
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