Mergers and acquisitions at local firms split opinions

The M&A Forum held by VIR annually is the biggest of its kind in Vietnam Photo: Le Toan

A contrary opinion states that greater foreign involvement would be nothing other than a benefit, as it would enhance the competitiveness of domestic companies by allowing them to access know-how and advanced technologies.

At a press conference held by Vietnam Investment Review (VIR) last week in Hanoi to prepare for an annual Merger & Acquisition (M&A) Forum on August 8 in Ho Chi Minh City, market insiders expressed the belief that the increase in M&A activities in Vietnam was a positive sign for the economy, especially during a period where local companies are struggling with the economic downturn.

“I know many people are concerned that foreign companies will gradually dominate the local market in many industries, but that is not an issue. The investment of foreign investors in domestic companies will stimulate the growth of these companies,” Do Van Su, head of the Foreign Investment Agency’s Foreign Investment Division, said at the press conference.

Over the past five years, the value of M&A deals in Vietnam has rocketed, with a five-fold growth in their value, from $1.08 billion in 2009 to $5.1 billion in 2012, according to statistics presented at the forum. M&A deals involving foreign investors accounted for 66 per cent of total M&A value since 2009.

This trend continued in 2013, as foreign investors increased their interest in Vietnam.

In the first half of this year, ten of 14 M&A deals involved foreign companies underscoring the increasing trend for foreign investment in to Vietnam via M&As, according to Stoxplus Joint Stock Company, a domestic company specialising in supplying data on financial and stock markets.

A typical case in point was Thailand’s Siam Cement Public Company Limited earlier this year acquiring an 85 per cent stake in Vietnam’s largest construction material manufacturer, the Prime Group. Taiwan-based Uni-President last year acquired a 44 per cent stake in Vietnamese firm Tribeco, when this drink maker was facing the danger of bankruptcy, to become the controlling shareholder. Carlsberg Breweries bought out Hue Brewery Limited, which is today the number one beer company in central region of Vietnam.

Encouraging M&As trends, but still restricted in sensitive industries

Su at the Foreign Investment Agency admitted that M&As were a growing investment trend across the world, and were in line with the traditional green-field investment mode. Responding to questions from the local press over concerns that foreign companies were gaining greater control over domestic companies, he said that the increase of cross-border M&As in Vietnam was natural.

Currently, the Ministry of Planning and Investment is even studying the trend of cross-border M&As to encourage foreign investment into Vietnam through this investment mode.

In fact, the government has already issued regulations to prevent the control of foreign companies in industries which are directly related to national security, such as the sectors of finance and banking, aviation and energy distribution.

Dr. Nguyen Anh Tuan, Editor in chief of VIR, and former deputy director of the Foreign Investment Agency, said the current legal framework was sufficient to prevent the penetration or dominance of foreign companies in sensitive industries.

For example, foreign companies are not allowed to acquire more than a 30 per cent stake in a local airline or bank. In terms of port infrastructure, the government only allows foreign companies to hold less than a 50 per cent stake in a port project.

Pharmaceuticals are an even harder industry to break into because foreign drug companies are not allowed to sell their products directly to the market, but must go through local distributors.

“Anytime you try to compete in an industry like healthcare where most of the local players are government owned, there are bound to be barriers,” Fred Burke, managing partner of Baker & McKenzie law firm, said in report on Cross-Border M&A Trends released in April.

However, there is no restriction for foreign investors in other industries like property, logistics and fast moving consumer goods.

Nhu Dinh Hoa, general director of Bao Viet Securities Company, said while the domestic economy was uncertain, it offered lots of M&A opportunities in these industries as many of domestic companies wanted to find new partners.

“Frankly, domestic companies mostly prefer to sell stakes to foreign investors in order to take the advantage of the foreign companies to further expand their markets,” said Hoa.

The cases of Mekong Capital

Mekong Capital is a private equity firm focusing on Vietnam. Since launching the first fund in Vietnam in 2002, the firm has invested in dozens of domestic companies through the acquisition of stakes. Or in other words, M&As are its core business activity.

The firm not only contributes capital but also adds experience and extensive knowledge of best practices for post-investment value creation.

Chris Freund, managing partner of Mekong Capital, during the course of working closely with more than 20 investee companies on post-investment value creation projects, said the firm had continuously refined its approach by identifying what was working, what was not working, and what was missing.

“Leaders at domestic companies usually think that they understand the market, but they don’t. After investing in a company, we support them to make a marketing plan, long term strategy, supply chain and logistics chain,” said Freund.

At real estate company Nam Long, for instance, Mekong Capital made the company to focus its business model on a single business line, affordable housing, during a period where the luxury segment suffered from oversupply. So far, the company completed its 2012 to 2017 planning for EHome, yielding approximately 13,000 affordable housing units in total across eight projects, with about 2,000 units launched annually.