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|The many tastes of M&A: Game of the giants|
When M&A transactions are initiated by friendly handshakes, the results are usually positive: rebirth or rapid development of enterprises and satisfying smiles from all involved parties.
In a transaction in May 2009, Eland Asia Holdings Pte., Ltd (Eland) from Singapore, a subsidiary of EL International Ltd. from South Korea, spent $5.9 million on acquiring 30 per cent of Thanh Cong Textile & Garment Investment Trading Joint Stock Company (TCM)’s stocks.
From the beginning, Eland had announced its plan to increase its holdings in TCM,. Once the deal was struck, together with increasing its members in TCM’s board of directors, Eland was active in supporting TCM’s business activities, and add TCM to its production chain. As a result, TCM’s revenue and profit escalated in the following years.
In its annual general meeting on April 7, TCM agreed to lift the foreign ownership limit entirely to assist Eland in raising its holding to become the controlling shareholder after eight years of effective investment. This fiscal year, TCM expects revenue to continue soaring to $145.9 million and after-tax profit to $7.8 million, 54 per cent higher than that of 2016.
Another story of a successful friendly M&A is the merger between two securities companies MB Securities Corporation (MBS) and VIT Securities Corporation (VITS) to form MB Securities Joint Stock Company (MBS).
This transaction was the pioneer merger deal among securities companies for later restructuring. The merger helped MBS do away with its accumulated losses, improve its financial situation, expand its assets and accounts, and to eventually be listed at the beginning of 2016. Three years after the merger, MBS has been continuously developing and became one of the five companies with the greatest brokerage market share in the Vietnamese stock market.
Both cases of MBS-VITS and Eland-TCM are emblematic of friendly M&As, with agreement from both sides. That the involved parties proceeded to merge or one party bought shares from the other’s big shareholders or bid publicly to aim for takeover or replace the board of directors in peace is considered a happy ending in the world of M&A. These transactions satisfy both the seller and the buyer, promising a new chapter for their enterprises.
The arguing couples
As capital flows become easier, enterprises are more likely to become targets for M&A. However, not everyone likes to be targeted. When the big long-time shareholders cannot find mutual understanding with the new ones, a ruthless fight for control ensues.
For example, at Phuong Nam Cultural Corporation (PNC), there have been constant disagreements between shareholder groups and the board of directors in recent years. In 2016, two general shareholders’ meetings were concluded with very little to show, as almost every proposal was vetoed by the sides vying for control. In the aftermath a few bigger shareholders opted out, transferring their shares to new investors, yet the arguments showed no signs of stopping.
In mid-February this year, Truong Phat Business Development JSC and Thanh Vinh Business Development JSC (a new group of shareholders possessing more than 47 per cent of PNC’s shares) complained to authorities that PNC’s board of directors had violated the orders and procedures of summoning the 2017 annual general shareholders’ meeting.
Afterwards, the Ho Chi Minh City Stock Exchange passed orders and PNC had to organise the first extraordinary shareholders’ meeting on April 5. However, only 35.25 per cent of shareholders having the right to vote attended the meeting. The second extraordinary shareholders’ meeting on April 21 and the third one on May 5 were also unproductive.
Internal conflicts not only wasted the company’s resources but also negatively affected its business results. In 2016, according to PNC’s financial report, its profit was only $83,600 and accumulated losses took up 36 per cent of the chartered capital. Additionally, its stocks were put in the warning zone since the undistributed after-tax profit was negative and the company was put under special surveillance due to violations of the disclosure rule.
Several sources assume that PNC’s internal conflicts are related to its 20 per cent contribution to CGV Vietnam’s capital—one of the biggest cinema systems in Vietnam.
The complicated story of PNC reminded investors of a similar case with Bibica Corporation (BBC) several years ago. In 2007, with ambitions of ground-breaking achievements, Bibica started a partnership with Lotte Group from South Korea, hoping to benefit from the new strategic shareholder’s potential, distributing system, and rich experience in retail.
The story had a complicated twist three years into their partnership. Lotte (possessing 44.03 per cent of Bibica’s capital) started expressing ambitions to control the confectionery brand and pushed Bibica to an incessant internal battle.
With the appearance of another giant shareholder akin to Lotte, PAN Food Manufacturing (PAN, possessing 43.73 per cent of Bibica’s capital), the internal conflict has come to a temporary halt to focus on manufacturing and business activities. However, the fight for influence is predicted to resume at any moment.
When groups of shareholders cannot reach agreement, M&A takes a vengeful turn. These endless battles for control are not only wasteful of time, money, and resources, but also harm the business activities and badly impact small shareholders.
The arranged marriage
The transactions between banks are of a different type: the arranged marriage.
2015 is considered the peak of bank mergers, with transactions between MHB-BIDV, PG Bank-VietinBank, Mekong Bank-Maritime Bank, and Sacombank-Southern Bank. These mergers were completed according to the banking restructuring plan of the State Bank of Vietnam (SBV), aiming to reduce the number and increase the quality of commercial banks in the country.
After the mergers, all the affected banks’ chartered capital increased, network expanded, and assets and capital resources surged tremendously. For instance, BIDV’s total asset reached $30.8 billion (ranking fourth in the domestic commercial banking system) and chartered capital $1.5 billion. Vietinbank also showed impressive performance after the merger, collecting the highest amount of chartered capital ($1.8 billion) and total assets of $30.2 billion.
Similarly, after uniting with Southern Bank, Sacombank’s chartered capital rose to $829.6 million and total assets to $12.8 billion, becoming one of the five biggest joint stock commercial banks.
Despite the appealing numbers, Sacombank’s shareholders expressed little to no joy as they had to shoulder the weight of nonperforming loans (NPL). Most of the banks merged into the bigger banks were weak, leading to a fall in efficiency for the original banks after the transactions.
Sacombank’s NPL rate was 1.86 per cent in 2015, but then rose to 5.35 per cent in the end of 2016, making Sacombank one of the banks with the highest NPL rate in the whole banking system. The main reason for this upsurge in NPL was Southern Bank’s formidable NPL rate (55.31 per cent as of November 2013). In its detailed proposal after the merger, Sacombank expected to set $79.2 million aside for risk provision in 2015, $136.8 million in 2016, and $228.8 million in 2017.
After remarkable result in the fiscal years 2013 and 2014, with profit of $96.8 million per year, Sacombank’s profit after the 2015 merger plummeted to $50.4 million and $16.4 million in 2016. The amount of NPL sold to Vietnam Asset Management Company (VAMC) is $1.6 billion, twice as much as Sacombank’s chartered capital.
According to Ho Chi Minh Securities Corporation (HSC), Sacombank will barely make any profit in 2017 and will struggle to avoid losses in the coming years. The company’s prospects show little to no outlook of profit development in the next 5-10 years. In this period, dividend will be a luxury for shareholders.
While not hit as hardas Sacombank, Vietinbank and BIDV’s development also slowed in the last two years. Correspondingly, their NPL rates have also been swelling at a steady pace.
M&A with weak banks have eventually wiped the smiles from the faces of the receivers’ shareholders, as they had to shoulder too much of the burden of their acquired partners. However, this is a price that every investor must accept when investing in this special field. Under the management of SBV, shareholders must compromise their own benefits to ensure the balance and safety of the whole banking system and increase the faith in domestic currency.
When proceeding with an M&A, all involved parties expect a happy ending. However, to achieve this goal, enterprises must do careful research, prepare thoroughly, and set clear goals and directions.
“M&A is similar to a marriage: both partners must take time to get to know each other, who they are, what they want, their culture, and characters. Only mutual understanding can guarantee a steady relationship,” said an expert in the field.