M&A to Boom on Cheap Stocks?

On March 29, 2011, price to earnings ratio (P/E) of the Vietnamese stock market was 8.33 and price to book (P/B) value was as low as 1.49 times, much lower than values at the six-year low of the VN-Index created on February 24, 2009 (when P/E was 11.46, and P/B was 1.19). Moreover, shares of nearly 170 companies are being traded below par value of VND10,000. Low valuations are expected to give a boost to takeover activities by purchasing listed stocks. Perhaps, Vietnam will see a boom in mergers and acquisitions (M&As) in 2011.

 

In 2010, the market witnessed 287 M&As of all sizes worth US$1.09 billion, representing an increase of 71 percent from 2009.

 

It is easy to count successful M&As. For instance, the military-run telecommunications giant Viettel Group spent VND700 billion to acquire 35 million shares of construction firm Vinaconex (VCG) at a price of VND20,000 per share in 2009, nearly doubling the then market price of Vinaconex shares traded on the Hanoi Stock Exchange (HNX).

 

Ha Tien 1 Cement Joint Stock Company (HT1) and Ha Tien 2 Cement Joint Stock Company (HT2), both listed on the Ho Chi Minh City Stock Exchange (HOSE), also successfully merged together. Many companies offered public bids to partially acquire others. For instance, Hung Vuong Corporation (HVG) bought into An Giang Fisheries Import & Export Joint Stock Company (AGF) or Phu Nhuan Jewellery Joint Stock Company (PNJ) got hold of Sai Gon Fuel Company (SFC) - all are listed on HOSE.

 

HSBC also reported to raise its stake in Vietnam’s largest insurer Bao Viet Holdings (BVH) from 10 percent to 18 percent after acquiring 53.6 million shares worth US$101.8 million in February 2011. This move helped HSBC uplift its position in key Asian markets, strengthened the ambition of becoming a leading global insurer. For Bao Viet Holdings, its BVH share price continuously climbed to its all-time high of over VND100,000 following the move.

 

However, not all M&As are successful. Kinh Do Corporation (KDC) - a confectionery - has to pay dearly for its silent takeover of Sai Gon Beverages Joint Stock Company (TRI). In 2009, TRI was a rare case on the stock exchange to be suspended trading for loss-making operations in two consecutive years.

 

When stock prices are low and major shareholders and insiders sell off their holdings, many see it a chance to start takeover. It is easy to see that when an M&A on the stock market is made public, share prices of the target company tend to rise continuously.

 

Many economic experts point out that M&A demand will be on the rise as the greater international integration will bring more foreign financial titans to the Vietnamese stock market. However, to have a robust-developing M&A market as globally recognised is not easy.

 

Looking back to the Viettel and Vinaconex case, if the Viettel Group had purchased VCG shares at market price, it would have saved nearly VND300 billion, or nearly 50 percent of the total buyout value. However, getting hold of 35 million shares at the then price of VND10,000 per share would take a long time while the stock market was very sensitive to big trades. Given low liquidity on the HNX, high demand for a continuous period of time would push up the market price of the stock.

 

Mr Truong Thanh Duc, an official of Banking - Securities - Investment Law Co., Ltd (Basico), said Vietnamese companies are typically weak at risk management and there are not many big enterprises. Moreover, differences in corporate cultures may result to lax cooperation of two stakeholders. This is another difficulty for M&A activity.

 

M&A bears a lot of risks and companies participating in this market must have enough knowledge and experience to pick up suitable partners. On the other hand, consultants must have sufficient standards to advise companies to minimise risks, Mr Duc said.

 

Meanwhile, Lawyer Nguyen Hong Bach of Hong Bach and Associates Law Firm said the M&A market lacks a legal corridor to develop. “Law is very general and instructions for this activity are not enough. Although there are major legal documents like the Law on Securities, the Law on Enterprises, the Law on Investment and the Law on Competition, the legal foundation for this activity is still very sketchy. Thus, there are a lot of loopholes in M&A activities.”

 

Mr Truong Thanh Duc said: “[Vietnam] enacted the Circular 194 on M&A regulations on March 3, 2010. However, this rule is inappropriate because it only refers to only anti antitrust and anti-takeover aspects, not other forms of acquisition like birthright acquisition.”

 

When insiders and major shareholders of a company sell their shares to tread water, they are prone to risks because they cannot stave off silent takeover when the legal corridor for M&A activities are unclear, Duc analysed.