More German investors have been making plans to expand to and in Vietnam. How important are mergers and acquisitions (M&A) in this?
|Marko Walde |
Based on dynamic economic development, a young population, and global integration, we see many new market access opportunities across a range of sectors. These cover goods, services, and investment, especially automobiles, green energy, electronics, IT, food processing, and healthcare.
The recent foreign direct investment statistics results of the first half of 2019 showed the interests of German companies in Vietnam: There were 11 German-invested projects with the total investment capital of $9.1 million in that time, and the sectors range from trading and consulting services to chemical production.
M&A could be a solution for German companies which intend to establish businesses or invest in Vietnam. With M&A, we think that German companies could enjoy the existing access to consumers, distribution channels, and partners. Basically, M&A is a suitable way for equitisation, either full or partial, of state-owned enterprises in Vietnam.
But from our point of view, M&A is in general the most challenging way for a market entry. To minimise the risks, companies must do a due diligence before entering into an agreement or a financial transaction with another party. This investigation or audit of a potential investment or product is aimed to confirm all facts, including the review of financial records and could give the whole picture of any company that garners interest, the real business value of it, and the risks included. The reliability of due diligence in Vietnam is still in doubt so that we see there is still a big risk for investors.
What sectors are German investors most interested in for M&A deals amid enforcement of the new EU-Vietnam Free Trade Agreement (EVFTA)?
Two major examples of typical German M&A deals in Vietnam include Zott in the dairy sector and STADA in pharmaceuticals.
The M&A deal of Zott hit $30 million in 2017 and they acquired Delys, a local importer and distributor, a long-term partner of Zott. Afterwards they founded Zott Vietnam Co., Ltd. which has two offices, one in Ho Chi Minh City and one in Hanoi.
Last December, STADA, a pharmaceutical company based in Germany, announced increased investment in Pymepharco. STADA now indirectly holds a 72 per cent stake in the Vietnamese pharmaceuticals manufacturer. Pymepharco is currently the second-largest producer of prescription generics and shows the strongest growth among the five most important pharmaceutical companies in the country. Through increased investment, STADA has established an excellent basis for the group’s continued expansion here.
The EVFTA offers more opportunities for companies on both sides. This will happen through removing tariffs, reducing regulatory barriers and red tape, ensuring protection of geographical indications, opening up services and public procurement markets, and making sure the agreed rules are enforceable. EU and German companies can enjoy protection of investment with trade facilitations and increase such funding into Vietnam. In order to make use of these benefits, German companies should be well prepared and informed on the regulation and on the terms in the signed agreement.
The Vietnamese government has made legal improvements to accelerate M&A investment. Are they enough to create new motivation for the M&A market in the future?
We have seen the encouragement of the government in improving the investment environment of Vietnam, showing their commitment in supporting foreign investors while doing business here. For the long term and for the purposes of sustainable development as well as increasing competitive advantages, the legal and regulatory framework of many sectors as well as the economic policies should be improved further.
Vietnam must sharpen the rules of responsibility (in cases that the outcomes of due diligence are not in line with the real circumstances) and set an effective court procedure, like arbitration courts, so that the investor can enforce his rights. The country should also increase the commercial presence of foreign equity share in sectors like automobiles, logistics, telecommunications, and health-related services.
A recent government report outlined that Vietnam intends to adjust the foreign ownership cap in automobile joint ventures to not exceed 50 per cent, which we think is against the spirit of free trade and closer economic ties. It must be noted that this critical point might constrain international investment and even slow down the ratification process of FTAs.