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|Vietnam remains on the radar of foreign buyers although COVID-19 pandemic drag down M&A activities|
In the first eight months of 2020, there were over 4,804 cases of capital contribution and share purchases worth $4.93 billion, equalling 51.8 per cent of last year's period, according to the Foreign Investment Agency under the Ministry of Planning and Investment.
It was believed that Vietnam’s mergers and acquisitions (M&A) activities would pick up in numbers over the second half of 2020 as Vietnam grapples with successfully containing the pandemic.
However, a slight resurgence of COVID-19 infections in Vietnam has been dominating domestic and international news over the past few weeks, leading to a possible dampening of such activities in the very near future.
Le Viet Anh Phong, financial advisory leader of Deloitte Vietnam, told VIR that the return of COVID-19 in Vietnam will undoubtedly have a temporary negative impact on the M&A activities, especially for cross-border deals. The uncertainty associated with the coronavirus may require investors to be more prudent, especially when it comes to the recovery shape, resilience of the business model, and ultimately discount on valuation as well as tougher terms.
Physically, cross-border travel has become highly restricted and may continue to do so in any new normal. These restrictions will affect deal execution, where physical observations and face-to-face negotiations are still the norms and are not likely to change overnight. These factors will prolong the deal process and make it more difficult to complete for the foreign investors, Anh Phong explained.
“This, however, will offer local investors a clear home run advantage. We believe that this presents a great opportunity for the financially sound local investors to be bold with their M&A strategies,” said Anh Phong.
Meanwhile, Masataka Sam Yoshida, head of the Cross-border Division and CEO of Vietnam RECOF Corporation, told VIR that this wave of coronavirus has raised concerns among foreign buyers. “Nevertheless, we expect the Vietnamese government to continue to apply necessary measures to control this new outbreak as effectively as it did early this year,” Yoshida said.
The local community is now accepting and becoming familiar with the requirements of mandatory social distancing and quarantines, Yoshida added. The response from the government and the community in combination with the acceleration of multiple stimulus packages and public investment execution will help Vietnam’s economic recovery continue (as the only one having positive GDP growth among ASEAN countries), even though the speed of the recovery is probably slowing down, according to Yoshida.
In cross-border M&A settings, despite the governments’ efforts to start up exchange of travellers, travel restrictions together with isolation or quarantine requirements are still effective, making it the highest obstacle for business travellers to travel in or out Vietnam to facilitate M&A processes.
Insiders agree it is hard for foreign investors without a daily presence in Vietnam to make up their minds to carry out a substantial investment without meeting up and shaking hands with their counterparts in Vietnam, as well as making visits to offices, factories, and other sites.
“Online meetings and virtual data rooms have helped to consummate necessary M&A steps but negotiations will have to be stopped in a situation where the ‘last mile’ procedure is left until the physical meeting-up is realised,” Yoshida explained. “Thus, as long as entry restrictions are kept up, there will be a slowdown period in M&A activities. Once these restrictions are lifted, a rush of negotiations for investments will finally contribute to and be crystalised as a form of growth in Vietnam's economy.”
Despite the challenges of the pandemic, Deloitte’s Phong said that they continue to observe strong interest from the foreign investors. Strategic investors from countries such as Japan, South Korea, Thailand, and Singapore are continuing to seek growth and new market presence outside of their existing key markets, which may be lacking in growth and are severely impacted by COVID-19. The clear diversification trend of the global supply chain will boost the confidence and motivation of these investors.
He added that the tremendous effort of the government to contain the first wave and the swift coordinated responses on the resurgence are highly recognised by the international community. This, together with the passing of the EU-Vietnam Free Trade Agreement and important laws on investment, enterprises, and public-private partnerships strongly reinforce the credibility of Vietnam as a safe and stable investment destination. All of these will place Vietnam in an advantageous position in the region to bounce back strongly in the new normal.
“The private equity players still have a lot of dry powder but exposure to Vietnam is rather limited. Whilst these players have spent more time in the last few months reviewing their existing portfolio, I expect these will be more active in seeking sizable opportunities in Vietnam. KKR-led investment into Vinhomes is a good example for such interest,” Phong stated.
Importantly, the pandemic may help narrow the valuation gap that has generally been observed in the last few years in the high growth market of Vietnam. Instead, the focus of the sellers are moving toward financial resilience, synergies, and exponential growth potential post-pandemic, which are more aligned with investors’ intention.
RECOF’s Yoshida said that as the coronavirus pandemic has wreaked havoc on global supply chains, not only do Japanese manufacturers but others across the globe are looking to de-risk from China. Japan recently has been reported to be paying about ¥12 billion ($113 million) to 30 companies to increase production in Southeast Asia, in the first round of a multi-billion-dollar programme to diversify its supply chains after COVID-19 and worsening relations between the US and China.
Among Southeast Asian countries, Vietnam is likely to be in a good position as many firms have been focusing on the nation’s young and rapidly-growing domestic market. Investors also credit Vietnam for its stable political leadership and ability to contain the coronavirus outbreak, although the nation has recently seen a spike in cases again. Vietnam’s success in raising participation in the global supply chain, especially with the EU by trade agreements coming into force this summer, has been providing a valuable advantage for firms seeking to diversify their supply chain.
“The second half of this year will no doubt continue to be challenging, but we think Vietnam could be seeing Japanese investors divided into two groups,” Yoshida says. “One group of investors will be those who would want to follow the traditional way of wait-and-see after the worst is over. The other group, increasing among our customers, will be those who would want to grasp this opportunity to take advantage of having less competing buyers not for the purpose of buying cheap but for the purpose of exploring the best partner for their valuable expansion in the region.”
During the first half of 2020, Japanese companies’ overseas investment had fallen by 33 per cent (at $106 billion) compared to the same period last year. However, at the same time, Japanese companies’ deposit amount increased by 19 per cent (reaching over $2.4 trillion), which is likely to be invested in order for Japanese companies to recover drops in investment during the pandemic as well as to realise their planned expansion in the regions.
Thus, when these investments will restart depends on the timing and how soon the biggest hurdle for investors (entry to the country with isolation or quarantine) will be relaxed, Yoshida concluded.