Restructuring via M&A for true gains

11:17 | 05/05/2021
The growing number of mergers and acquisitions involving Vietnamese buyers is reflecting the rising power of local players in the market – but it is not all plain sailing.
1542 p6 restructuring via ma for true gains
By Ho Quoc Tuan - Lecturer, Bristol University

In the 2019-2020 period, the value of the deals by Vietnamese buyers accounted for over 30 per cent of the total value of such mergers and acquisitions (M&A) in the country, which is three times higher than the figure in 2018.

There are four main factors contributing to the increase. Firstly, Vietnamese private groups have grown bigger. They have accumulated capital large enough for expansion. To increase revenue, they have to venture into the foreign markets, access capital markets, and grab international business opportunities. M&A is one of the fastest ways for Vietnamese conglomerate to pursue the targets while make a big splash with media.

Secondly, a number of Vietnamese groups are facing financial difficulties due to their large loans and high risk investments in the previous period of economic development. With the impact of the COVID-19 pandemic, cash-strapped companies are offered at more attractive pricing opportunities for large corporations with strong financial capability. For example, Truong Hai Auto Corporation took over Hoang Anh Gia Lai Agrico while Nova Group spent nearly $1 billion on M&A deals in 2020.

Thirdly, a number of corporations have stepped restructuring efforts through M&A activities. Some want to offset their assets to grow quicker, while others want to focus on their core businesses. Meanwhile, others are eager to acquire new companies to complete the ecosystem such as Masan Group’s purchase of VinCommerce and VinEco.

Fourthly, they are upbeat about the Vietnamese economy posting positive GDP growth during the crisis. They are aggressively conducing M&As to find opportunity in the home market as the world is going through ongoing global pandemic and geopolitical risks such as the US-China trade war. The optimism in Vietnam’s economic prospects plays an important catalyst in the groups’ decisions to expand business through M&A transactions.

In addition, there is speculation that some deals by Vietnamese groups are actually backed by foreign investors, who are the genuine buyers. However, there are no clear grounds for this speculation as such a case has yet to be observed.

Meanwhile, many mega-deals are announced by Vietnamese companies selling their assets to other local partners. This also contributed to the rise of M&As involving Vietnamese buyers.

Private companies have been long adopting M&A strategies to scale up global operations. The most obvious examples are cash tycoons like Apple and Google that conduct several deals. In February, Apple CEO Tim Cook said the company has acquired about 100 companies in the past six years, meaning Apple buys a company every month or so.

Companies with a lot of cash like Apple or Google, or those who have a special advantage in capital market access to make these deals are expected to thrive into giant with their buying spree. However, the problem also starts to arise – have companies become too big?

In 2018, The New York Times ran an article on that very subject. It explained how great companies can invest in many different areas, and become very powerful. The size of these companies may be good for themselves and some other areas, but they can also be bad for society.

On the one hand, when a company is getting too big, it creates economic benefits by its size and growth to develop the industrial spearhead of the country. Yet this sparks fears about monopoly with a few industrial spearheads and a focus on some giants. Above all, the economy is vulnerable if these companies take a few wrong moves. Even if the company is on the right track, big companies with too much market power and financial resources can limit the growth and innovation that comes from smaller and less cumbersome companies.

By 2021, many countries have criticised companies like Facebook, Amazon, Apple, Google, and Microsoft about the abuse of their monopoly power. Companies with supposedly monopolistic platforms have created concerns in many countries with rapid growth via M&A.

To avoid this situation, the government needs to be one step ahead in its private business development strategies. The government needs to invest wisely to form industrial spearheads and facilitate private tech companies, which will avoid losing trillions of VND in wrong investments. The flexibility of the private economy is evident. Private companies can adapt quickly and decisively to the ever-changing geopolitical, technological and consumer trends as well as the climate change of the world.

The invisible hand of the market can encourage a private company to become too large, which can pose certain risks without delivering the best benefits to the economy. Therefore, the visible hand of the government is to complete a legal framework and lay out the red lines for businesses. What are those red lines? The government can intervene in M&A activities if it feels the deals can damage the competitiveness in the market. The government can disapprove of a transaction likely to jeopardise the public interest.

At the same time, the government can create conditions to ensure that private companies do not cross those red lines. The legal framework of M&A needs to be clearly announced so that companies can become more confident to finalise the legal deals. This will help dealmakers to avoid the situation when they spent time and effort on deals which later are not approved by the government.

It should be clearly seen that besides the risk that a Vietnamese company can become a big group, there is another risk, that is, foreign businesses also become too important for the Vietnamese economy. Without a corresponding counterbalance from the Vietnamese private corporate side, Vietnam is susceptible to dependence on foreign decisions to invest in or withdraw from the country.

At this point, it is not advisable to put too many restrictions on private Vietnamese groups in M&A activities, but also not to open up too much in terms of policies and incentives for foreign-invested enterprises here.

By Ho Quoc Tuan

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