Bullish markets poised for rising merger and acquisition activities

Bullish markets poised for rising merger and acquisition activities, illustration photo

JFE Engineering Corporation from Japan has signed a business alliance with Binh Duong Water Environment JSC (BIWASE) and acquired 3.87 per cent of its shares at an auction held by the Ho Chi Minh City Stock Exchange.

JFE Engineering will cooperate with BIWASE on improving capacity of facilities in the water supply sector and the development of wastewater treatment and solid waste recycling/treatment business, to respond to continued demand caused by strong economic growth in Vietnam.

Arnaud Ginolin, director of consultancy Boston Consulting Group, said that dealmaking activity such as this is expected to rapidly increase in Vietnam, especially in the most bullish markets such as healthcare, banking, and education, and to some extent areas offering restructuring opportunities.

Ginolin added that deals with large Vietnamese conglomerates willing to open their capital will continue, which will enable them to pursue their expansion and capture opportunities. It might also help them tackle cash issues as many diversified groups are exposed to the pandemic.

In another recent deal, Vietnam’s Masan High-Tech Materials Corporation (MHC) will establish a strategic alliance in the tungsten industry with Japan’s Mitsubishi Materials Corporation (MMC) with the objective of developing a leading high-tech tungsten materials platform.

As part of the strategic alliance, MMC will subscribe for 110 million newly-issued ordinary shares via a private placement for a total cash consideration of $90 million. Once the transaction is completed, MMC will own 10 per cent of the fully diluted share capital and become the second-largest shareholder of MHC.

Elsewhere, GS Caltex Corporation, South Korea’s second-largest refiner by sales, signed a deal worth VND39 billion ($1.7 million) in October with VI Automotive Service, the parent company of Vietnamese car wash startup VietWash.

Under the deal, GS Caltex is set to acquire a 16.7 per cent stake in VI Automotive Service, making its first investment in the country.

Ginolin of Boston Consulting explained that while global activity in mergers and acquisitions (M&A) slowed down during the first half of 2020, it is now on the road to recovery with multiple factors to explain it. “Strategic investors are looking at repositioning their portfolio in front of the crisis. They invest in growth initiatives where they have a competitive advantage, and also divest the businesses where they face challenges because the market is impacted and they do not have sufficient scale or advantage to survive,” Ginolin said. “As a result, M&A activity will be activated on both sides. We can expect acquisitions from foreign conglomerates to accelerate as they need Vietnam as their growth relay, and some M&As of Vietnamese groups are also expected.”

Another key trend is financial institution activity, with a huge amount of cash still held by financial institutions and investment funds. In the past, Vietnam used to be considered a relatively riskier market compared to other economies – however, this year the country has proven its strengths by controlling the pandemic, and the still-positive GDP forecasts highlight how robust Vietnam’s economic fundamentals are.

Ginolin pointed out that M&A challenges remain the same as pre-pandemic, in terms of data and financial transparency, understanding the target company’s true competitive advantages, the governance and culture, and detailed regulations and market trends.

While some Vietnamese corporations are success stories that have grown and built modern organisation, governance, and systems, some others have developed thanks to the mechanical market growth without building robust foundations.

“This is where investors should conduct thorough due diligence with independent advisor support,” he said, adding that the current situation prevents foreign investors from entering Vietnam and attending management meetings and site visits.

Meanwhile Dinh Nam Hai, CEO of consultancy VIVA Business Consulting, said that the company has seen more deals entering the pipeline in the past month or so. Thanks to its open market policies, Vietnam has become a very promising destination for investment, especially for aggressive and professional investors with the wherewithal to target healthy companies for M&A. Despite disruptions caused by COVID-19, M&A has remained the preferred entry point for investors as it is the fastest route for both market entry and making profit.

Hai added that M&A deals require dedicated teams and due diligence, but due to COVID-19, restrictions on overseas investors and experts have had a dampening effect on dealmaking and benefited investors with less competition. Overall, the 2020 environment has been less impactful for powerful investors with huge funds and professional investment visions, who were slowed down, but not halted in their tracks.

Pre-pandemic, M&A activity in Vietnam was steadily growing with the total value of transactions reaching $10 billion in 2018 and $15.6 billion in 2019. However, 2020 brought a sharp decrease in global activity. As organisations gradually adapt to the new reality, experts forecast M&A deals to accelerate with businesses looking to restructure, find liquidity, and to cut their losses.

Meanwhile, those who have managed to retain a healthy balance sheet can take advantage and snatch up companies in distress, according to professional service firm Dezan Shira & Associates.