Local businesses in foreign bid risk

Park Jun-Yong, a South Korean lawyer from Linden Investment Co., Ltd. predicted, “We will see more mergers and acquisitions (M&A) than before because of market restructuring, not just because prices will go down.”

The coronavirus outbreak has disrupted supply chains, causing the closure of several manufacturing facilities worldwide and the restructuring of many industries. Clearly, decision-makers have no test playbook to navigate the unprecedented global health and financial crisis, pushing them into action quickly to survive the crisis and accelerate the eventual recovery. For companies with strong balance sheets, M&A will play a major role during that time.

According to data from the Foreign Investment Agency under the Ministry of Planning and Investment, in the first four months of this year, 32.9 per cent of overseas investment, reaching $2.48 billion, was in capital contributions and shares purchased by foreign investors. This included around 100 cases of capital contribution and share purchase by the Chinese. Meanwhile, Thai and Japanese backers also made an impact with a number of deals.

Truong Thanh Duc, a lawyer from Basico Law Firm, said that the data only reflects the tip of the iceberg, as the number of actual deals could be higher, and there are more to come. He also predicted that some local companies may reduce in value significantly during the pandemic, allowing large-cap buyers to quickly buy in. He went on to say that for 2020, in terms of M&A attraction, real estate will continue to be a big magnet for investors. In addition, other industries and fields such as industrial production, services, construction, and energy are also attractive for M&A deals thanks to the relocation of production from abroad into Vietnam and the high demand.

The increasing domestic demand due to rapid population growth and urbanisation has had a big impact on M&A in the services and consumer goods sectors. The private equity industry, which is sitting on billions of US dollars, may be one beneficiary of the drastic de-rating across markets, but they will also have their hands full managing existing portfolios.

South Korea, Singapore, Thailand, China, and Japan should be willing to take up the opportunity, and competition among these powerful buyers will be fierce, thereby creating more opportunities for Vietnamese companies with a proven track record.

Michael Han, head of South Korean-backed SK Group’s representative office in Vietnam spoke to VIR. “The attractiveness of Vietnam and its tremendous growth potential is not new,” he said. “Singapore, Thailand, and China have been the traditional powerhouse investors in Vietnam, with South Korea and Japan being the relative newcomers. We have seen increasing competition in certain sectors and I would not be surprised if more deals are sold via an auction process.”

Warrick Cleine, chairman and CEO of KPMG in Vietnam and Cambodia said that the types of investors looking at Vietnam are private equity funds and multinational corporations, especially from Japan and South Korea. “They are more familiar with short-term economic shocks, and invest for the longer term. Vietnamese companies seeking foreign partners need to be realistic about valuation and flexible about the timing and process. It is a much more difficult market than it was three months ago,” Cleine said.

While there will be winners and losers, observers are concerned that panic will lead to a raft of “opportunistic” M&A activity in the short term as smaller businesses struggle to survive. There is a valid concern that others may take advantage of market volatility to profit.

Global consulting firm FTI suggested in its COVID-19 M&A report that companies should also prepare for a potential unwanted approach by understanding the factors that make them vulnerable to such overtures. “Beyond the financial incentive offered by a premium, shareholders may view the lack of a viable strategy or a reliable management team as good reasons to sell the company,” it noted.

Amid the new situation, the Vietnam Chamber of Commerce and Industry submitted various proposals to the prime minister late last week, in which it requested the government should delay M&A deals during the crisis in order to avoid leaving local businesses vulnerable to hostile takeover bids from foreign investors. The proposal is said to be necessary and urgent at this time while many other countries are seeking tighter scrutiny of acquisitions.

Duc from Basico Law Firm warned that Vietnam could face punitive tariffs, origin fraud, and illegal transshipment if they fail to regulate businesses’ activities after M&A deals are completed.

Some of Europe’s biggest economies have announced intentions to protect domestic companies by increasing scrutiny of foreign investments. These tactics typically involve tighter regulations at the deal screening level, including closer attention to industry-specific transactions, and relaxed thresholds for blocking cross-border investments entirely.

Some measures have been implemented in direct response to the COVID-19 pandemic, but others are the result of long-planned reforms.