M&A: Obstacles to Foreign Investors

 

Financial troubles have sent many Vietnamese companies into chaos and this has given rise to big M&A deals in the past time. This activity was most clearly expressed on the stock market as three blockbuster deals among industry leaders were concluded. Instead of splitting up as before, many companies now opt for amalgamation plans.

 

While the stock market is in a tough cycle and investor confidence is eroding, the mergers of Kinhbac City Development Share Holding Corporation (KBC) and Saigon Telecommunication & Technologies Corporation (SGT); Kinh Do Corporation (KDC), North Kinhdo Food Joint Stock Company (NKD) and Kido; and Vinamilk (VNM) and Lam Son Milk Joint Stock Company, caught the interest of investors because the market capitalisation of these listed companies were very large. At that time, a lot of hard questions were raised, such as how these deals would go, how they would be swapped and how they would work after the mergers?

After much delay, KDC, NKD and Kido, leading food and beverage producers in Vietnam, reached a new agreement in early May to merge into KDC, with the swap ratio of 1.1:1 for NKD (or 1.1 NKD shares for 1 KDC share) and 1:1 for Kido (traded on the OTC market). NKD and Kido became KDC’s units. The new registered capital was raised to nearly VND1,200 billion, about 7 times greater than that of NKD and nearly 20 times greater than that of Kido. The post-M&A earnings per share (EPS) ratio is 9 percent.

 

SGT or SaigonTel was merged into KBC after the latter took over the entire stake in the former. In the same move, Vietnam’s largest milk producer Vinamilk also bought all stake in Lam Son Milk Joint Stock Company, making a wholly Vinamilk owned unit.

 

To create a “high mountain” by basing on each other’s strengths, many companies decided to amalgamate rather than split-up as earlier. For example, KBC is a big property developer in the north while SGT has its foothold in real estate and telecom services in central and southern regions, thus they can support each other. KDC is now distributing its products from Quang Binh province southwards while NKD is doing the same thing from Ha Tinh province northwards. Or Lam Son Milk Joint Stock Company, with a registered capital of VND80 billion, has a big dairy farm which will supply fresh materials for VNM, thus helping the latter strengthen its influence and dominance on the market.

 

However, not all M&As bring immediate success for companies. After an M&A, share value may continue to go down, even to a lower value than the time the M&A plan is finalised. Dr Dinh The Hien said, “M&A in Vietnam is mainly in the form of restructuring, not a quality change, because they have the same owners.”

 

A recent survey conducted by the consulting firm Grant Thornton International showed that 17 percent of privately held businesses (PHBs) in Vietnam plan to grow through acquisitions in the next three years, down from 19 per cent in 2010. However, up to 20 percent of Vietnamese firms believed that there will be a change in the ownership relation in their companies, nearly double the global average of 11 percent. They expected to achieve sharp growth following M&A deals and create new development strategy in the current difficult financial and economic context.

 

Mr Phan Huu Thang, Former General Director of the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment, said up to 50 percent of Vietnamese companies may be merged or taken over in the next 6-10 years. For the time being, the M&A market is governed by the Law on Competition and some other documents. However, as this market is getting more developed, it will need a more specific legal foundation to avert risks. Vietnam has never had more multi-business corporations than now.

 

In reality, if a company wants to step into a new industry, the first thing it cares about is to be acquired by a leading company in that industry; this fuels the M&A market.

 

Tran Duy Hung, Director of First Asia Company, a leading consultant on M&A in Vietnam, said the M&A market is expanding and it is coupled with more risks arising from this activity. The primary risk is not having a clearly defined legal framework that regulates M&A.

 

For long, Vietnamese companies simply understand that only legally troubled or loss-making company engaged in M&A. However, many now see M&A as a form of raising capital. According to the Law on Enterprises, an investor has the right to contribute capital or purchase shares of a company and M&A is also a right of investors.

 

With this right, investors have equal rights and Vietnamese enterprises consider M&A as a way of attracting foreign investors of strong financial capacity but the real rights of foreign investors are much more limited.