Consolidation lending to confidence in M&A market

What was your overview of Vietnam’s merger and acquisition (M&A) arena in 2021?

Masataka “Sam” Yoshida, head of the Cross-border Division of RECOF Corporation and CEO of RECOF Vietnam Co., Ltd

Last year was a challenging one for the market. Lengthy shutdowns of major economic centres interrupted production and disrupted the recovery of M&A activities, especially in the cross-border transactions.

We saw transactions being delayed, not only because of the travel restrictions but also because of uncertainty around the potential impact on the performance of the target companies. As site visits and in-person meetings were largely suspended, the basic logistics of executing a transaction also became a challenge.

Fortunately, we then noticed an uptick in M&A transactions as the lockdown was lifted and the economy re-opened in the fourth quarter of 2021. Deals that managed to hold together during the past year have demonstrated investors’ belief in the long-term potential of the Vietnamese economy.

Due to low lending rates and negative growth, analysts predict that businesses will seek alternate sources of growth, resulting in a rise in M&A deals. Is this a likely direction?

One thing we noticed during the last two years was the increased presence of major Vietnamese corporate groups in the M&A market, while non-Vietnamese investors have not been able to invest actively. The consolidation in many industries helped these major local groups to firmly establish their positions and maintain their growth despite the slowdown in the economy, partly because of divestment and restructuring of the weaker players.

From now on, interest rates have already started to move up globally, but the growth potential of the Vietnamese economy remains huge and more non-Vietnamese investors will start investing here again, making the market more activated.

How can M&A activities contribute to the economic development of the country?

Over the past decade, M&A has played an important part in Vietnam’s capital market. Companies that had capital constraints explored opportunities to access funds, reducing risk and capital outlay, while companies that were financially well-placed co-invested with large strategic partners to collaborate on shaping new market offerings.

In addition to large sources of capital, successful transactions also provided technology transfer and management capability to domestic companies. Taking the consumer goods and retail sector as an example, there has been a transition from small-scale retail shops towards a more branded scene of big international retail chains across Vietnam, coupled with the emerging e-commerce industry.

Generally speaking, companies engage in M&A activities because they see opportunities for benefits, either through higher productivity or economies of scale, which would help lower prices for consumers and eventually improve Vietnam’s economy overall.

It seems that perception of M&A here has changed dramatically among government bodies in a positive way. Authorities have now improved turn-around times and responsiveness, while working towards improving the legal environment for businesses.

What are some solutions to develop the market here in a transparent and professional manner?

Vietnam has been actively enhancing the legal framework for activities in the past few years. However, investment policy and legal corridors still need to be improved to attract more and more investment capital. Firstly, M&A transactions in Vietnam are largely governed by different laws such as those on enterprises, investment, and competition. Conflicts or differences in various laws concerning the same issues may confuse investors. Vietnam, therefore, needs to build a unified legal corridor system for M&A.

Secondly, interpretations of the laws also pose a challenge for investors as interpretations are frequently made by the authorities, whose views may vary among cities and even among officials. This lack of consistency among administrative bodies should be improved.

Thirdly, the procedure for approving transactions in Vietnam is cumbersome, as most transactions need to be approved by several authorities, which in practice can take many months – especially if the deal is related to a conditional business. These procedures do need to be reduced. Quality of information is also a common issue for foreign buyers, as target companies do not always have an organised information system or apply best accounting practices. Insufficient or inadequate disclosure of information from the target companies may break the deals or put investors at risk. Therefore, it is necessary for policies to create a transparent information disclosure system.

What are the prospects of M&A in Vietnam for 2022?

Talking about Vietnam-Japan M&A deals in particular, the highest record was hit in 2019 and a trend to continue recording high was well built up at that time, so from then onwards it was expected to be brighter than ever. But business travel restrictions damaged the market by one-third in terms of the number of transactions in both 2020 and 2021.

Although two-thirds of the volume was maintained by the big Japanese players already present in Vietnam, the amount that disappeared was from smaller Japanese companies that were willing to make their initial entries to Vietnam via M&A deals. These companies are still waiting for the release of some restrictions to start the already-planned procedures. The number of deals that are pending will certainly come up to fill the gap created during the last two years.

Overall, we remain bullish on the level of M&A activities in Vietnam in 2022 as mobility restrictions have eased and vaccination rollouts have accelerated across the country. A greater variety of deals will be undertaken as businesses go back to usual and the economy is expected to bounce back soon.