Cash-strapped local businesses hunting for foreign M&A deals

Cash-strapped local businesses hunting for foreign M&A deals

Michael Han, head of SK Group’s representative office in Vietnam, told VIR the crisis has created both opportunities and challenges for M&A in Vietnam. Local deals now look more attractive but they may have to compete with other markets globally.

In the first quarter of 2020, the whole country saw 2,523 instances of capital contribution and share purchases by foreign investors with a total value of capital contributions reaching $2 billion, up 53 per cent against the same period last year and capturing nearly 34 per cent of the total registered capital, according to data by the Foreign Investment Agency under the Ministry of Planning and Investment.

It is apparent that Vietnam saw a rise in M&A activities in the first quarter of the year before the coronavirus pandemic intensified. According to Han, the COVID-19 outbreak has clearly impacted the market and there are two groups of investors opting to take two very different paths. First, some institutional investors have been “cashing out”, as evidenced by recent severe fluctuations in the stock market. Second, some strategic investors could see an opportunity to enter the market. Perhaps they are the ones who have been driving up activity during the first quarter of 2020.

Masataka Sam Yoshida, head of the Cross-border Division and CEO of Vietnam RECOF Corporation, questioned if the “increased deals” are the ones which started after the pandemic situation arose. It is also true that the global M&A market was enjoying a boom of sorts until the beginning of 2020 and there should have been various transactions under the water.

“As everyone knows, M&A transactions need a certain amount of time prior to completion, and it should be said that those which are being completed at the moment should have been started some time ago at least before the pandemic situation became recognised in China for the first time,” said Sam Yoshida.

The number of M&A transactions is a lagging indicator, so the slowdown in activity from mid-February until COVID-19 is under control will inevitably be reflected gradually in the statistics from mid-April onwards.

According to lawyer Truong Thanh Duc, chairman of BASICO law firm, many listed companies are experiencing falling share prices due to the health crisis. This creates opportunities for wealthy foreign buyers to cherry pick target companies at bargain prices.

He noted that most overseas investors are in a better position to overcome the impact of COVID-19 than Vietnamese firms, most of which are especially vulnerable and small with limited financial capacity.

“If COVID-19 persists for a long time, there is a high likelihood that more local companies will be taken over by buyers,” said Duc. “When the pandemic is over, Vietnam is expected to see a sizeable upturn in M&A as foreign buyers capitalise on the country’s economic prospects.”

According to RECOF’s expert, the “destiny” of M&A is that buyers and sellers are always on the opposite sides of the coin. The most obvious aspect of this is valuation but the economic situation of each country or global market overwhelming “each side of the coin” will affect the behaviour of both buyers and sellers.

In other words, when the financial situation allows the number of buyers to increase, sellers will fade out as they start to enjoy the more positive economic environment (even with the potential buyers being in the same sector), and vice versa.

“Having said this, this situation often does not apply to international transactions like the ones between Vietnam and Japan, as Japanese companies are becoming more and more attracted to the growing economy of Vietnam as well as the markets that Vietnamese companies possess in their domestic market,” the RECOF representative noted.

It is true that the negative impact of the COVID-19 crisis will inevitably affect some Japanese investors for a limited period. However, the fact is that several Japanese investors will be keen to expand to foreign markets, given the shrinking of the Japanese domestic market, not only because of the coronavirus but also from the issues arising from the fall in population that they were already facing prior to the crisis.

In addition, many cash-strapped Vietnamese companies may need funding to overcome their difficulties which will eventually create more opportunities for foreign investors to buy strong companies at reasonable prices.

It is clear that M&A activity has experienced obstacles as the pandemic impedes site visits and physical face to face meetings between buyers and sellers. Meanwhile, social distancing measures needed to contain the COVID-19 virus will be particularly disruptive to the M&A market.

According to SK Group’s Han, “We have been looking at a few deals in Vietnam. They are in a relatively early phase, so we prefer not to speculate on the likelihood of closing or the timing, but we are in a promising position.”

As the trajectory of the COVID-19 crisis is uncertain, SK Group is now closely monitoring the situation. Vietnam has done a world-class job in limiting the outbreak but for the economy to get back to normal, the group also has to see how other regions of the world recover.

As the prolonged health emergency has shifted the M&A process online, RECOF is increasingly conducting marketing via their website, mail, and magazine, and is hosting teleconferences using various media rather than physically visiting sellers and buyers.

However, for a real alliance and to realise the fundamental synergies between the two parties which are the aggregate of human elements in an M&A transaction, it is crucial for people from both sides to meet up, get to know each other, and make crucial decisions on a more personal level.

“In this context, RECOF will only be able to collect as much information as possible until the time a meeting could be set at the sellers’ place,” said Sam Yoshida.