Domestic and Global Alliances: Synergies in Energies
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Domestic and Global Alliances: Synergies in Energies

Photo by:   Claudio Rodríguez
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By Claudio Rodríguez Galan - Holland & Knight
Partner

STORY INLINE POST

While studying a Masters in International Business Law in England, one particular book impressed me, written by Roy Goode, a magnificent British commercial law professor. Professor Goode once said, wars can come, natural disasters will swipe communities, but, somehow, businessmen will find a way to conduct their activities. As true as it is, globalization of business structures and the changes in competitive conduct has created the need for  new approaches and strategies for many, if not all, international companies, including those in the energy spectrum. New operational, logistical, technical, financial and legal strategies have propelled companies to a new international reach and, in  doing so, they have to understand new, and sometimes challenging legal frameworks. 

Indeed, domestic laws impose limits on  ventures, mergers, acquisitions, asset transfers and holdings incorporation, all created to assure and maximize financial, legal, economic, industrial, technical and commercial benefits. But as Michael Porter said, ”for many of those companies, deciding on the structure is by far less complex than to implement those global strategies,” simply because several rationales need to be taken into account, including the extent of control, cost and tax efficiency, change in laws, availability of financing, protection of intellectual property, rule of law, and exchange control rules. Not an easy task. Strategies are thus limited by legality and financial resources, but once both requirements are covered, the creativity needed to design new businesses is unlimited. Even detractors of globalization can acknowledge that today, the local market considers international cooperation an essential component of success in international and local strategic businesses. The international presence of any corporation in a domestic market can be shaped as; (i) the establishment of a foreign branch, (ii) the acquisition or investment in an existing local entity, (iii) the incorporation of a domestic entity with foreign investment, or (iv) the execution of an associative agreement with a local existing company, both public or private. Of course, many commercial agreements shall be drafted by even more creative lawyers, which impose the need to be aware of trends and the changes created by lex mercatoria.

In any case, Porter Lynch has detected seven drivers for global business' alliances:

  1. When a company is ready to penetrate a foreign market but lacks financial, administrative or product capabilities in the domestic market;

  2. When local governments start privatization processes or open new industries previously closed to foreign investments;

  3. When international competitors start a strategy to increase their market presence in the local market;

  4. As a first mover advantage strategy before other foreign competitors willing to reach the same domestic market;

  5. To create a permanent domestic distribution channel in an efficient way;

  6. When domestic laws require a high percentage of national local content and local industries need fresh technologies, capital or skills;

  7. To create a foreign production unit, avoiding shipping and export costs and/or reaching bigger markets under a free trade agreement.

Thus, whether a government, irrespective if driven by market, products or technology or geopolitical reasons, has recently imposed new rationales or has promoted the participation of new types of companies in new markets, then domestic and international businesses shall be savvy enough to detect such movements and implement opportunities. This and other fascinating drivers motivated me to write my own book titled "Derecho de los Negocios Internacionales" now on its Third Edition.

Having said that, it is clear that the energy sector, of course, is not the exception. Even in situations where domestic countries have restrictive laws, where local constitutions impose limits or partial barriers to foreign investments or national sentiment drives new policies, companies are still finding and will find a way to conduct their activities, confirming Roy Goode's vision. This is not to say  that such entities will breach the law, but simply because the facts are on the table and governments are indeed acknowledging that alliances are needed in the energy industry for it to be successful and for the state to obtain the best available benefits. When properly understood, the state can greatly  benefit from the financial capabilities, technologies, strategies and efficient resources brought by domestic or international companies without a breach of the sovereignty rules imposed by the local constitution. Again, there are several successful examples in Mexico, which confirm all the above.

We thus foresee that new alliances will be instrumental simply because recent and past changes in this particular market have opened new opportunities to those in the correct geopolitical position or vision to take advantage of the massive energy needs of Mexico. It is true that some players have abandoned their idea to continue with their ventures. But it is also true that long-standing players and new or returning companies have reshaped their strategies to continue investing in Mexico, and with that, creating jobs and in a collaborative public-private mindset. All those lawyers and counselors navigating the energy spectrum in Mexico for more than 23 years, will understand those rationales in a positive fashion. 

In summary, we foresee that synergies in the energy sector as above understood will be a trend, and not an exception. We are looking forward to  further confirmation of our interpretation within the following years, if not months. Some great recent examples are just first corner stones of new opportunities for the sole common good of the energy industry in Mexico. We are ready, indeed.

Photo by:   Claudio Rodríguez

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