🧭 Dojo Compass
Module: Entrepreneurship and Scaling; Finance, Risk Management and Long-Term Resilience
Focus Area: Entrepreneurship and Scaling; Risk Management
Key Issue
Atlas International was a European industrial products company looking to expand its presence in Latin America. Management had identified an attractive acquisition target, Andina Industrial, a well-established manufacturer and distributor with operations in three Latin American countries.
At first glance, the transaction appeared risky.
The target operated in markets characterized by currency volatility, inflation, political uncertainty, and relatively high financing costs. Several potential buyers had reviewed the company but appeared unwilling to pay the valuation its owners were seeking.
Atlas initially had similar concerns.
However, as its diligence progressed, the company discovered that the target’s actual risk profile was substantially different from the risk profile suggested by its geographic location.
Most of Andina’s revenues were denominated in U.S. dollars or effectively linked to the U.S. dollar. Its largest customers were multinational companies. Its major suppliers included international manufacturers with established contractual relationships. The company had relatively conservative leverage and operated across several countries rather than depending on a single domestic market.
Atlas began to see a potential opportunity.
The target was being priced, at least in part, as though it carried the full risk of the countries in which it operated.
But Atlas believed that Andina did not actually bear that level of risk.
The strategic question became:
Could Atlas acquire a fundamentally resilient business at a valuation reflecting risks that the company did not actually carry—and then further improve its risk profile after closing?
Facts
Andina Industrial had approximately $180 million in annual revenue and a long history of profitable operations.
Its business was not particularly dependent on domestic consumer demand. Approximately 70% of its revenues came from customers whose contracts were denominated in U.S. dollars or included mechanisms that allowed prices to adjust when local currencies moved significantly.
The company also had operations in three countries, giving it some geographic diversification.
Nevertheless, the company was being valued at a relatively modest EBITDA multiple compared with comparable businesses in developed markets.
Several factors contributed to the discount.
Local investors were concerned about currency volatility and political uncertainty. International investors applying broad country-risk adjustments reached similar conclusions. Andina’s cost of local debt was significantly higher than the cost of borrowing available to Atlas in Europe.
Atlas’s investment team initially applied a conventional country-risk adjustment to its valuation model.
The results were not compelling.
The acquisition price appeared reasonable, but not sufficiently attractive to justify the perceived risks.
The team then conducted a more detailed risk decomposition.
Rather than treating country risk as a single variable, it separated the analysis into:
- Country risk.
- Currency risk.
- Customer risk.
- Supplier risk.
- Financing risk.
- Operational risk.
- Regulatory risk.
- Transaction risk.
This produced a very different picture.
Atlas discovered that many of the risks embedded in the valuation model were already substantially mitigated by Andina’s business model.
Currency exposure was limited because revenues and many costs were effectively dollar-linked.
Customer concentration was less concerning than initially assumed because the largest customers were multinational companies with strong credit profiles.
The company also had relatively low leverage.
Most importantly, Atlas believed it could refinance a significant portion of Andina’s expensive local debt through its international banking relationships.
The acquisition therefore presented two distinct opportunities.
First, Atlas could potentially buy the company at a price reflecting more risk than it actually carried.
Second, Atlas could reduce some of the company’s remaining risk after acquisition.
Solution
Atlas decided to proceed, but it changed its investment thesis.
Rather than simply arguing that Andina was an attractive company in a difficult market, Atlas developed a specific risk-arbitrage thesis.
The thesis had three components.
1. Identify the Mispricing
Atlas determined that the market was effectively applying a broad country-risk discount to Andina.
The company did not dispute that the countries in which Andina operated were exposed to meaningful political and economic risks.
The critical point was that Andina did not have the same exposure to those risks as the average domestic company.
Its international customers, dollar-linked revenues, geographic diversification, and conservative balance sheet materially reduced its exposure.
Atlas therefore believed it could acquire the business at a valuation reflecting risks that were greater than the risks actually embedded in the company’s cash flows.
2. Redesign the Risk Profile
Atlas then identified several actions that could further reduce risk after closing.
First, it refinanced a portion of Andina’s local-currency debt through Atlas’s international banking relationships.
Second, it introduced more sophisticated treasury and currency-management procedures.
Third, Atlas used its international procurement network to diversify several important suppliers.
Fourth, the company strengthened internal controls and reporting systems, improving visibility into country-specific exposures.
Finally, Atlas began integrating Andina into its broader international operating platform, giving the subsidiary access to additional customers and suppliers outside its original markets.
These initiatives were not merely operational improvements.
They changed the underlying risk characteristics of the business.
3. Create a Path to Future Repricing
Atlas did not assume that the market would immediately recognize the difference between perceived and actual risk.
Instead, management established a multi-year plan to demonstrate the company’s improved risk profile.
The plan included:
- Greater revenue diversification.
- Lower financing costs.
- More sophisticated currency management.
- Stronger financial reporting.
- Reduced supplier concentration.
- Continued conservative leverage.
- Increased exposure to multinational customers.
Atlas believed that these changes could eventually allow Andina to be evaluated using a lower risk premium.
In other words, the investment thesis was not simply:
“Buy cheaply.”
It was:
“Buy a company whose risk is being overestimated, reduce the remaining risks, demonstrate that improvement, and create the conditions for future repricing.”
Outcome
Over the following three years, Andina continued to perform well.
More importantly, its financial and operational risk profile changed.
The company reduced its financing costs, improved its currency management, diversified its customer base, and became more integrated with Atlas’s international operations.
The underlying business remained exposed to the countries in which it operated. Atlas had not eliminated country risk.
But the company had demonstrated that country risk was not equivalent to company risk.
When Atlas subsequently considered a partial sale of the business to an international strategic investor, the prospective buyer placed substantially greater emphasis on Andina’s actual cash-flow characteristics rather than applying a broad country-risk discount.
The resulting valuation was materially higher than the multiple at which Atlas had acquired the company.
Atlas had therefore captured value from several sources: operational improvement, financing optimization, international expansion, and—critically—its original understanding that the market had mispriced the company’s risk.
Key Takeaways
First, country risk and company risk are not the same thing. A company operating in a high-risk jurisdiction may have business characteristics that significantly insulate it from the risks associated with that jurisdiction.
Second, risk arbitrage requires decomposition. Instead of accepting a broad risk premium, investors should identify the specific risks underlying that premium and determine whether the target actually bears them.
Third, perceived risk can become an acquisition opportunity. If other investors apply broad risk assumptions while the buyer develops a more nuanced understanding of the target, the difference can create value.
Fourth, risk arbitrage can involve both buying and changing. Atlas did not simply benefit from a pre-existing mispricing. It actively reduced the company’s financing, currency, supplier, and operational risks after the acquisition.
Fifth, risk management can itself be a source of value creation. Refinancing, hedging, diversification, improved controls, and better governance are not merely defensive measures. They can change how a company is valued.
Sixth, the strongest risk-arbitrage opportunities have a repricing pathway. Investors should identify what evidence will eventually persuade the market that the company’s risk profile is better than previously assumed.
Finally, risk arbitrage should be an additional source of value, not the entire investment thesis. Atlas was willing to acquire Andina because it was a fundamentally attractive business. The risk mispricing provided an additional source of potential return and resilience.
The broader lesson from Atlas’s experience was simple:
Investors should not ask only whether a company is risky. They should ask which risks the company actually bears, how those risks affect cash flows, how they can be mitigated, and whether the market has priced them correctly.
That distinction can be particularly powerful in cross-border M&A.
The most interesting opportunity may arise when the market is pricing the geography while the investor is pricing the business.
Case Study Note
The case studies published by Business Warrior’s Dojo are intended primarily as tools for learning, discussion, and analysis.
They may be based on real business situations, publicly available case studies, professional experiences, or entirely hypothetical scenarios. In some cases, names and identifying details have been changed to preserve confidentiality. In others, facts, circumstances, timelines, or outcomes may have been substantially modified, combined, or simplified to better illustrate particular business issues or support discussion. Some case studies are entirely fictional and have been developed solely for educational purposes.
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