Mexico may be a distant market, but for internationally focused commercial firms with the right strategy, there is significant potential for growth in this rapidly expanding economy. With BRIC countries (Brazil, Russia, India and China) experiencing slower growth than in the years that put their economies on the map, investor attention is turning to the four emerging economies of Mexico, Indonesia, South Korea and Turkey (MIST).
Mexico is the second-biggest economy in Latin America after Brazil, and analysts predict it will rise to become the world’s seventh-largest – ahead of the UK – by 2050. Mexican conglomerates are increasingly looking at international capital markets, including the London Stock Exchange, to fund their expansion.
Furthermore, the Mexican government, led by newly elected president Enrique Peña Nieto, is investing in infrastructure through a public-private partnership programme based on the UK model. There is also significant investment in renewables and some liberalisation on the horizon in the state-controlled oil and gas sector.
Yves Hayaux du Tilly, partner at the London office of Mexican law firm Nader, Hayaux & Goebel, is upbeat about Mexico’s prospects. He says: ‘These reforms will undoubtedly create significant opportunities for foreign law firms in areas such as project finance, joint ventures, capital markets and cross-border financing.’
Mexico has 12 free trade agreements covering 44 countries, including the US and Canada (the North American Free Trade Agreement came into effect in 1994), and the EU (the EU-Mexico Free Trade Agreement dates from 2000). This makes it one of the most open economies in the world. And the legal sector is no exception. Foreign law firms do not need to register with the local bar and can open offices under their home name. Although only Mexican lawyers can appear in court and advise on local law, foreign law firms can employ Mexican abogados to offer advice on Mexican law in addition to international and home country law. Membership of Mexico’s six bars, which include Barra Mexicana Colegio de Abogados and Asociación Nacional de Abogados de Empresa, is not mandatory for the country’s estimated 265,000 lawyers.
There are some barriers, however. First, Mexico has a competitive and sophisticated legal market. As Wragge & Co partner Mark Greenburgh notes: ‘Foreign law firms looking to move into Mexico are wrong to think there is an open market to hoover up. You would be surprised at the quality of the Mexican law firms.’ Greenburgh, who took part in the recent lord mayor’s visit to Mexico, says that nearly all the Mexican lawyers he has met hold a masters degree from Harvard or other US universities and have been admitted to the bar in the US.
Second, with a local partnership often an advantage for foreign firms, the fragmented nature of the market poses problems. Very few firms have more than 100 lawyers, in sharp contrast to Brazil, which boasts many larger firms of 200 or even 300-plus lawyers. As Vicente Corta Fernández, corporate partner in the Mexico City office of US law firm White & Case notes: ‘Law firms in this market tend to be very small. We are medium-large for the local market and we are a 70-lawyer firm.’ There is little to suggest that this is going to change. Spin-offs from established firms to create specialist boutique-style practices are on the increase – partly because of the long wait for partnership.
More generally, Mexican lawyers are reluctant to sacrifice their independence in a larger firm. Hayaux du Tilly, whose own finance and corporate specialist firm, Nader, Hayaux & Goebel, was the product of a spin-off in 2011 from Mexico’s full service firm Jáuregui y Navarrete, says: ‘International law firms have not been able to persuade the top Mexican firms of the advantages of committing only to work with them and become part of a larger organisation.’ Of his own firm, he says: ‘We don’t have the kind of complex legal structure where someone in Chicago or New York or London makes decisions for us. We are independent and in control of our destiny.’
Carlos Valencia, co-managing partner of DLA Piper’s Mexico City office, says: ‘Mexican legal practitioners have not been inclined to join large firms – to take advantage of a global platform – until recently.’ But this is changing. Valencia, whose global firm established an office in Mexico last February, believes the recent influx of foreign law firms is down to ‘a combination of market opportunities and finding that Mexican lawyers are now more willing to become part of an international law firm’. White & Case’s Fernández previously worked for the Mexican state, including for the Ministry of Finance, so he was accustomed to working for large organisations. Apart from the ‘glamour’, he remarks that Mexican firms often lack not only size, but transparency in awarding partnerships. That is why he – and new generations of Mexican lawyers – are keen on international firms. ‘It is very important that you can show, with a lot of transparency, to associates and new recruits how they are going to grow within the firm,’ he says.
One big perceived barrier for anyone wanting to do business – in law or in any other field – is security, linked to drug-related violent crime. The latter has been on the increase since the government declared war on the cartels in 2006. However, law firms already operating in the country appear unperturbed. Valencia says: ‘The government is committed to fighting this problem and ensuring that the rule of law prevails. It’s making headway.’ He notes that industrial parks in Mexico’s northern border towns, which have experienced the worst violence, have more than 90% occupancy.
Market entry strategies
In the last year three international firms – Greenberg Traurig, Littler Mendelson and DLA Piper – have opened offices, largely in Mexico City, the main centre for legal services, adding to an existing contingent that includes Baker & McKenzie (in Mexico since 1961); White & Case; Chadbourne & Parke; Curtis, Mallet-Prevost, Colt & Mosle; and Jones Day. So what market entry strategies have foreign legal firms deployed in Mexico?
DLA Piper favoured a tie-up with a firm already established in the local market. Last year, the global firm took over the Mexico City office and team of Thompson & Knight, a firm based in Dallas, Texas, and plans at least to double its size, to 36 lawyers, in two years. Thompson & Knight, which set up the office in 2006, struggled in Mexico City, but Valencia insists that despite tough competition from domestic firms, DLA Piper’s ‘global platform’ offers a unique selling point. ‘Mexican companies are becoming exporters of products and services, and are beginning to buy in to joint ventures in the US and Europe. So they are becoming international creatures,’ he says. With offices in close to 40 countries, Valencia argues that DLA Piper is very well placed.
He is also enthusiastic about how the new administration’s economic programme will boost business. ‘We believe that infrastructure is going to be the driver of the Mexican economy in the next five years,’ he says. Valencia expects merger and acquisition activity in the technology and telecommunications industry to bring in business for DLA Piper, along with banking and finance, and the energy sector.
White & Case was one of the first international firms to open an office in Mexico City, in 1991. It has since opened a second office in Monterrey, Mexico’s second-largest city. The firm focuses on corporate finance and financial regulatory work – for example, it has worked on the incorporation of Walmart Bank (Banco de Walmart) in Mexico, and advised Goldman Sachs with respect to a $4bn deal involving subsidiary Red de Carreteras de Occidente, Mexico’s largest private toll road operator. Project finance advice for infrastructure works and energy will be a growth area, Fernández says, and the firm is considering introducing a tax litigation practice.
For Hayaux du Tilly, the US corporate firm is by far the most significant international player in the country. ‘White & Case has been able to develop a local capacity and this has allowed it to be instructed in important matters,’ he says. White & Case started in Mexico by practising US law with US attorneys. However, it only really took off after absorbing the Sepúlveda branch of former Mexican firm Sepúlveda Mijares (now Mijares Angoitia Cortes y Fuentes), advising on Mexican law in competition with renowned domestic firms such as Galicia Abogados and Ritch Mueller. Hayaux du Tilly notes that White & Case gave the Mexican lawyers in the influential Sepúlveda family ‘a lot of freedom and liberty to develop projects’. Fernández points out that a local presence is not, however, necessary for firms which only want to practise international or home country law. ‘Cleary Gottlieb Steen & Hamilton has a very important market share in Mexico and it does not have a physical presence here,’ he notes.
Hourly fees charged in the local market for Mexican law services are about half of those charged in New York, and so the net financial contribution (which has always been positive) of White & Case Mexico is ‘pretty small’ compared to the overall business. But Fernández points out that the local work also wins clients for the firm’s global network.
Among foreign firms, the UK is in a minority. London-based insurance and reinsurance specialist DAC Beachcroft is to date the only UK law firm with an office in Mexico. The Mexico City office, which has a team of 12 lawyers, was established in 2004 by Davies Arnold Cooper, which in 2011 merged with Beachcroft. In making the move, the firm followed its existing clients, which include most of the world’s top insurance and reinsurance groups, into Latin America’s second largest insurance market after Brazil. Partner Hermes Marangos says: ‘Our clients were selling their products in Mexico and it made sense for them to have their specialist lawyers there.’
And, as clients expand further into the Latin American region, so does DAC Beachcroft. The firm has recently opened an office in Chile, is registering to practise in Brazil and is looking at other countries, such as Peru and Panama.
Showcasing the UK
With trade relations between the UK and Mexico strengthening, the Law Society has been busy promoting links between lawyers in the two jurisdictions.
Last October, as part of the shared goal to double trade levels to £4.2bn annually by 2015, the lord mayor led a business delegation to Mexico to showcase the City of London to Mexican corporations. The delegation included the Law Society. Following a visit to Mexico in 2011, last March Chancery Lane hosted a group of visiting Mexican lawyers as part of ‘Mexico Week in the UK’, a multi-sector event organised by the British Chamber of Commerce in Mexico, among others. This included a legal seminar in London with panel discussions for investors doing business in Mexico. A similar networking event is planned this May.
This flurry of activity ‘reflects that Mexico is becoming an important jurisdiction for the Law Society, our members and their clients,’ says Charlotte Ford, international policy adviser at the Society. ‘When we do our Mexican events we get quite a high turnout from [UK] firms. People are definitely interested in getting to know who the key players are and what opportunities there are in Mexico.’ It is still early days and law firms are trying to get a feel for the market and understand how to gain a foothold, she explains. ‘But I think in the next few years we will see more US and UK firms set up an office in Mexico.’
During the two trips to Mexico, the Law Society also promoted London as the global dispute resolution centre through the ‘Unlocking Disputes’ campaign. Mexico has traditionally looked to Paris – owing in part to Mexico’s civil law system – and New York. Ford, however, points out that Mexican companies are increasingly interested in what English law and jurisdiction can offer as the country diversifies its trade relations.
Is Mexico worth it?
But for most internationally oriented commercial law firms Mexico remains uncharted territory, and few appear to have a clear strategy. Some say there has not been enough international work out of Mexico to justify investing time, energy and money in such a distant country. Mexico is on the radar of Hogan Lovells, but the international firm says it is ‘still a very long way’ from deciding whether or not it wants a presence there – be it through a joint venture, merger or alliance with a local firm. Natasha Gunney, of the firm’s Latin American practice, says: ‘If you want to work in a new market you have got to raise your profile and create an internal network. That is very difficult to do from the other side of the world, and that means that you have to be quite committed to that market and to investing in it.’
Greenburgh explains that there have been limited opportunities for foreign law firms; most corporate and commercial work has come from either domestic or foreign direct investment into Mexico from the US, and this has been serviced predominantly by local firms. Furthermore, Mexico lacks a vibrant M&A market. But that could change with president Nieto’s economic programme, which includes reforms to promote flexibility in the labour market, designed to encourage economic growth and foreign investment. Greenburgh says: ‘In the next five years we are going to see much faster growth in Mexico than in Brazil in terms of opportunities for law firms. It’s certainly a good time to be going there and making friends.’
Wragge & Co already has correspondent firms in the country including Mexico City’s full service firm Santamarina y Steta. The UK-based firm sees growth opportunities connected to: consumer goods and luxury brands for Mexico’s expanding middle class; project finance relating to the energy sectors; and infrastructure, including prisons and hospitals. Commercial firm Ince & Co, which covers the energy, shipping and insurance sectors, is also watching the Mexican market with interest. Like Wragge & Co, the London-based firm has no intention of opening a Mexican office but plans to exploit opportunities in Mexico through its UK-based Latin America desk and non-exclusive alliances with local firms.
Richard Britain, head of corporate insurance at the firm, says: ‘Our strategy is not to tie ourselves to a particular firm in a particular jurisdiction. We are keen to build relationships with the right people in the right sector.’ For now, as Greenburgh recommends, Ince & Co is getting to know the place and the people. Silvia Mahringer, from the firm’s Latin America desk, says: ‘The idea is to raise our profile in the country by travelling there and visiting [prospective business partners and clients] and finding out where the best opportunities are.’
There is another attraction to Mexico for UK firms; Mexican businesses are looking beyond the US for other trading partners. And when it comes to sectors such as energy, English law is strongly competitive with New York law on business contracts. London is also increasingly seen as an alternative to Paris and New York for dispute resolution. ‘We have Mexican corporation clients looking for English law advice,’ says Britain. Ince & Co has advised PMI, the international trading arm of Mexican state oil and gas giant Petróleos Mexicanos (Pemex) on charterparty terms, and it is working on building this relationship.
And as the Mexican economy opens up to private investment, due diligence work will grow, offering additional opportunities for English firms. Britain says: ‘The way to tackle the Mexican market, as with any international markets where there may be concerns about security and corruption, is to make sure that you have done thorough due diligence, and London is one of the best places in the world to get that work done.’
The conclusion seems to be that there is business to be had in Mexico. But if you are to get some of the action, think hard about joining forces with a local firm; have a wider Latin America strategy; and, to survive in what is a very competitive market, be clear what your unique selling point is.
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Marialuisa Taddia is a freelance journalist