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Social distancing adversely affects M&A

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The total value of share purchases and capital contribution made by foreign investors in the first four months of this year dropped by 57.8% year-on-year. The negative result goes against many predictions that foreign investors, urged by the Covid-19 pandemic,  would forcefully step up their efforts to acquire local firms.

The year to date has rarely witnessed prominent mergers and acquisitions (M&A). Deals in this field have so far mainly sealed by partners that have established a long presence in Vietnam. The majority of the successful deals this year have been prepared for a long time or stricken by investors well-versed in the domestic market.

Old faces

In the end of April, ADM announced its acquisition of Gold Farm, a business with a factory producing animal feed in Dong Nai Province.

Regarding another deal, Duy Tan Group sold 70% of its stake in the company’s five subsidiaries to SCG Packaging (SCGP) of SCG.

In the retail industry, SK Group has recently made known its investment worth US$410 million in acquiring 16.26% of VinCommerce’s stake which belonged to Masan.

Other M&A transactions in Vietnam are in the fields of renewable energy, logistics, real estate, industrial production and services.

Forecasts go wrong

Vietnam has traditionally been known for her investment environment which is said to be safe and stable, even before the outbreak of Covid-19. Even when the pandemic went wild globally, Vietnam remains a destination offering favorable conditions for investors to pour their money in M&A deals. Remarkably, when the first attack of the coronavirus occurred here, quite a few domestic enterprises were faced with difficulties and had to be closed. Fears grew then that foreign investors would soon flood the local market to realize their schemes for acquiring Vietnamese enterprises.

What has actually happened proves that these predictions are incorrect, at least for now. According to the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment, during the first four months of this year, the value of share purchases and capital contribution made by foreign investors declined sharply by 57.8% year-on-year, reaching only US$1 billion. The number of M&A deals also plummeted to 1,151 transactions, a fall of 64.1%.

The above figures also indicate the falling trend in 2021. Last year, 6,141 deals were inked by foreign investors to buy shares of domestic businesses, totaling US$7.47 billion, a decline of 37.6% and 51.7%, respectively, over 2019.

The ratio of M&A value to Vietnam’s total foreign investment also dropped from 40.7% in 2019 to 26.2% in 2020.

The realty industry is among the sectors
that have seen hectic M&A activities

The causes

Masataka Yoshida, global director of transnational M&As of Recof Corp. and general director of Recof Vietnam, argues that as travel from nation to nation is restricted by the pandemic, field studies and detailed appraisal as well as the decision making process become more difficult to investors. Several customers of Recof have even cancelled some deals although they had reached agreements on them previously.

“[Japanese] investors do not pour money in countries they cannot set foot on,” says Mr. Yoshida. To the majority of Japanese companies, direct contacts are an essential part of the negotiation process, he adds. This was the reason that some Japanese investors nullified deals even though they had discussed with Vietnamese owners four times via Zoom in which they agreed on the deals.

Aside from Covid-19, there is another reason which has cut the number of M&A deals: the flotation and capital divestment tasks have lagged behind schedule. A report prepared by the Department of Corporate Finance under the Ministry of Finance shows that although the 2016-2020 period had ended, 89 State-owned enterprises did not complete their flotation plans in accordance with Decision 26/0219/QD-TTg by the Prime Minister.

In reality, Vietnamese enterprises’ demand for capital is great, particularly during the recovery time following Covid-19. However, there have been cases in which domestic enterprises offered too high a price.

On the other hand, the transparency of the firm in question was low. So was its readiness to allow foreign partners to engage in corporate affairs. These hurdles have hindered the progress of M&A, decelerating their pace.

According to a PwC study, in previous economic crises, businesses capable of making M&A deals were able to forge ahead compared with their counterparts in the same industries.

By Quoc Hung

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