It is often the perfect match. Small- and medium-sized enterprises (SMEs) keen to expand as more foreign firms seek opportunities to increase their existing business through buying stakes in local firms.
“SMEs are getting involved in a record level of deals to either buy-in or sell-out,” said Nguyen Van Tuynh, CEO of Dai Viet Securities Company (DVSC), at a mergers and acquisitions (M&A) seminar held last week in Ho Chi Minh City.
The pace of M&A is slowly increasing with just 32 cases last year, valued at $7.6 million each on the average.
The sale and purchase of vendor shares and the dilution via new share issuances have become a favourite over share swaps and assets purchases.
For example, Vietnam Export Import Commercial Joint-Stock Bank (Eximbank) last week named its 17 domestic strategic partners in Ho Chi Minh City raising $250 million, eight times higher than its face value price and increasing its chartered capital to $175 million.
The partners acquired a 17.8 per cent stake of Eximbank.
“A large chunk of cash is available in this emerging economy. As in most mergers, the buyers argue that the acquisitions will make the new company more competitive and efficient by giving it greater economies of scale and stem future demand problems,” Tuynh said.
Last week, DVSC, Sacombank Securities Company, VinaCapital and Eurocapital Securities Company successfully bought into leading Vietnamese seafood exporters, Minh Hai Jostoco with the total value over $20 million.
Tuynh said: “At present, there are many fragmented industries which contain large numbers of under-capacity SMEs. Many of them need to consolidate if they are to become competitive. Additionally, reducing costs and increasing financial capacity are major concerns for them. Thus, great opportunities exist in the banking, financial services, consumer goods, textile, and retail industries.”
There a lot more catalysts for the development of this new trend, one being the appearance of three new M&A websites.
Owned by IDJ Financial, the website www.muabandoanhnghiep.com.vn is witnessing 15 to 20 postings a day for enterprises with a need to buy or sell their firms.
“The biggest deal successfully traded through IDJ recently was a $12.5 million manufacturing business in central Vietnam,” Tran Trong Hieu, IDJ finance director said.
“Through our experience in financial investment and web management, we think that the most important part of M&A deals are the evaluation process before decision making stage,” he added.
Two other young websites for small-scale M&A activities have been developed by ICE and Tiger Invest that also allow users to register or post information on the website with a fee of $20 or a portion of the deal value.
But, the hottest deals happening in Vietnam up to now are not counted among these three new players.
Japan’s Daii-chi Life’s acquisition of the whole Bao Minh CMG took a lot of public attention.
Beyond that, the long list of acquired five-star hotels from Hanoi to Ho Chi Minh City by VinaCapital Hospitality continues to grow after the Hilton, Metropole and Novotel in Hanoi and Omni in Ho Chi Minh City were purchased.
Legend, one of Vietnam’s most prominent five-star hotels, is battling interest from many big players including VinaCapital and other large investment funds, said a source.
“As favourable economic conditions look set to continue, M&A activities involving foreigners will increase this year,” said Nguyen Thi Bich Van, deputy director of Foreign Investment Agency, under the Ministry of Planning and Investment.
“Up to now, foreign acquisitions have been few and far between as Vietnam’s current laws and policies restrict acquisition behaviour. The areas and methods for using foreign capital will inevitably undergo profound changes as Vietnam performs its commitments to the WTO through granting national treatment to foreign enterprises. That alone will stimulate the pace of foreign acquisition in Vietnam,” said Van.
While the Vietnamese Government is preparing to formulate some important laws and regulations to encourage foreign investors to merge with and acquire unlisted Vietnamese companies, the whole business community has expressed their opinions.
Gide Loyrette Nouel’s Jesse Lieberman said: “There is an absence of laws discussing some common creative mechanisms found outside of Vietnam.”
In practice, many foreign investors who set up joint ventures in Vietnam do so in areas which have a cap on the percentage of foreign investment that will be lifted according to the WTO commitment schedule.
Anticipating a time when they will be able to hold larger shares of their joint ventures, many foreign investors draft sophisticated mechanisms giving them larger participating interests of the company when legally possible.
It is worth noting that HSBC increased its Techcombank stake to 15 per cent from 10 per cent recently. But at this moment, a lot of foreign banks are still watching the games or waiting for approval from the government.
Lieberman said: “If the foreign investor in such a company wishes to assign his participating interest to another foreign investor, will the company still have the option of having a higher level of foreign participating interest than listed in the WTO commitments? Or will the participating interests in the company have to reflect the limitations in the WTO commitments when shares are sold?”
“We still would feel more comfortable if the law took these mechanisms into consideration. Even in practice, sometimes there is reluctance to enforce provisions of a charter which are not clearly explained in Vietnamese law.”
Chris Freud, founder of leading equity investment Mekong Capital, said: “This change would be an extremely positive development that would allow foreign private equity investors to complete buyouts in Vietnam. Therefore the amount of private equity investment would increase significantly.
“It is much more likely that big international private equity groups would become more active in Vietnam as well.”
According to Freud, about 70 per cent of private equity investments outside of Vietnam are “buy-outs” in which the investor buys control from more than 50 per cent of the shares of the investee company and then implements improvements.
Only about 30 per cent of private equity investment outside of Vietnam is “growth-capital” in which the private investor holds a minority of the investee company.
Besides that, the removal of the 30 per cent foreign ownership limit on unlisted companies would help those companies to attract strategic partners from other areas. This might help add a lot of value to the companies in which they invest.
To support M&A activities, Mekong Capital is organising a business plan contest for those who want to start up a company that will be sold at least $20 million within five years.
Freud said: “The new changes regarding M&A matters will provide even more incentive for Vietnamese entrepreneurs to start-up their own companies in Vietnam. After they establish a successful business, they can potentially realise significant capital gains by selling the whole company to a foreign strategic investor.”