In recent years, Mergers & Acquisitions (M&A) have gained significant attention in the Vietnam market. As the country’s economy continues to grow and integrate into the global market, M&A activities have become a prominent strategy for companies to expand their operations, increase market share, and capitalize on emerging opportunities. Vietnam’s favorable business environment, robust economic growth, and liberalization policies have made it an attractive destination for local and foreign investors alike. This has contributed to a surge in M&A activities across various sectors, ranging from finance and banking to manufacturing and technology. As businesses seek to navigate this dynamic landscape, understanding the intricacies of M&A in Vietnam has become crucial for achieving growth, competitiveness, and sustainable success.
In brief
The Foreign Investment Agency has reported that Vietnam continues to attract foreign investment, with nearly USD 5.45 billion in capital recorded in the first quarter of 2023. This demonstrates the growing appeal of Vietnam as an investment destination, thanks to its strong economic growth. Sectors such as technology, media, and telecommunications are expected to see increased deal-making due to digitalization, while the automotive and industrial manufacturing sectors may experience divestments related to sustainability. Vietnam has taken steps since 2015 to strengthen its legal framework and improve market governance, resulting in better government management in areas such as taxation, competition, and e-commerce. These measures include closing tax loopholes, implementing stricter investment and competition rules, and establishing clear frameworks for e-commerce.
Businesses in most industries or growth stages have difficulty raising capital. The process of raising capital in the past two years has often been prolonged because investors have become more cautious, requiring more information and detailed financial data to verify their investment thesis. As a result, the probability of success of M&A transactions becomes more fragile than ever.
Key legal issue
Businesses in most industries or growth stages have difficulty raising capital. The process of raising capital in the past two years has often been prolonged because investors have become more cautious, requiring more information and detailed financial data to verify their investment thesis. As a result, the probability of success of M&A transactions becomes more fragile than ever.
The Vietnam Standard Industrial Classification categorizes business activities and determines the necessary licenses, permits, and regulations for operating businesses. It also provides guidelines for foreign investors interested in specific sectors.
Restrictions on foreign investment are based on business activities and include limits on foreign ownership and conditions imposed on foreign investors, such as shareholding or operational requirements. These restrictions are determined by both international treaties and domestic laws.
Examples of foreign investment restrictions include: foreigners can only own up to 99.99% of the capital of an advertising business, foreign-invested enterprises can only purchase buildings for their own use and cannot sublease them to others, foreign owners of 100% foreign-owned banks must have at least USD 10 billion in assets, and foreign investors in hospital projects must invest at least USD 20 million.
As a result, foreign investors face more challenges in conducting M&A transactions and cannot easily acquire target companies and assets like local investors. This measure helps protect local businesses that may not have the resources to compete with multinational corporations, allowing them time to grow and succeed.
Legal basis resolving the M&A deals
a. Law on Investment
The 2020 Law on Investment in Vietnam, which came into effect in 2021, brought about significant changes. It allows the Vietnamese investment registration authority to challenge “sham” transactions by investors in court and potentially shut down the operations of the target companies. This poses a risk to any deal structure that tries to bypass foreign investment restrictions.
Another option for foreign investors is to directly consult with Vietnamese regulators and seek exceptions to foreign investment restrictions through pilot programs or special waivers. This is a safer alternative to coming up with creative deal structures. However, this option may only be feasible for larger and more influential foreign investors who have the capability to engage with high-level government officials.
One notable change introduced by the 2020 Law on Investment relates to M&A approval. Foreign investors who acquire shares in Vietnamese companies with land use rights in certain areas, such as islands, border and coastal commune-level areas, and areas impacting national defense and security, now require approval from the investment authority. This requirement presents two practical challenges. Firstly, the target company must declare its land use rights and provide supporting documents for evaluation by the investment authorities. Secondly, the M&A approval process may face potential rejections or delays due to an unclear process where the investment authority consults the Ministry of National Defense and the Ministry of Public Security regarding security and national defense conditions before granting approval for the M&A.
b. Competition Law
Vietnam introduced a fresh Competition Law in 2018, which became active in July 2019. One of its main objectives is to mandate the reporting of economic concentration resulting from various activities like mergers, acquisitions, joint ventures, etc., provided they meet specific criteria set by the law. These criteria involve the total asset value, total revenue, combined market share of the involved parties, as well as the value of the transaction. Different thresholds apply to M&A deals involving credit institutions, insurance companies, and securities firms. It is noteworthy that this framework covers both domestic and international transactions.
c. E-commerce Regulations
Starting from 2022, foreign investment in Vietnam’s top-five e-commerce companies has been subjected to approval from the Ministry of Public Security. This requirement gives the ministry control over these companies based on factors like website visits, sellers, transactions, and transaction value. However, the Ministry of Industry and Trade has not yet released the list of these companies.
In the case of M&A transactions involving projects, the transfer of ownership for project companies, land, or project development rights may be limited if they hold significant value that requires thorough evaluation of the owners. Once a project investor obtains preliminary approval, it becomes challenging for another investor to enter without undergoing the same evaluation process. These regulations lead to foreign investors facing increased scrutiny and numerous approval and requirement procedures. Consequently, only serious investors seeking appealing opportunities in Vietnam can fulfill these conditions, thereby improving the quality of investors and the sophistication of their targets.
Challenges that M&A deals are facing
a. The first and most important difficulty is that investors are shifting their investment appetite to sustainable profitable business models.
In the face of recession pressure and economic instability, most PE/VC funds seek investment opportunities in profitable businesses and ignore businesses with negative returns. Or, focus your portfolio on businesses that will be profitable in less time. Businesses with breakeven points after 3-4 years receive less attention than businesses that will reach breakeven points after 1-2 years. This is a huge disadvantage for businesses that intend to raise capital because compared to the same period last year, consumer demand is still low, along with a number of cost components that remain high.
This reflects the general context that Vietnamese businesses are facing: difficulties in revenue growth, narrowing profit margins; enterprises facing difficulties in 2022 are now even more difficult to recover in 2023. With the business situation in the current period, it is difficult for enterprises to convince investors of outstanding growth prospects, as well as future profits.
b. Besides, most businesses have difficulty in negotiating business valuation.
Normally, two common methods to determine the business value in M&A deals include: market approach – using valuation multiples of companies, dealing correlation, and the discounted cash flow (DCF) method – based on projections of future cash flows.
Market approach is often used by PE/VCs because it is simpler than the DCF method. In the context of a difficult global economic situation, the valuation multiples of listed companies are currently decreasing significantly. While reaching an agreement between the parties on valuation multiples can easily be based on the reference of listed companies, deciding when to use the results of the period as the basis for the revaluation. This is a difficult problem that businesses face in the negotiation process. Using the declining business results of 2023 as a basis for valuation will be detrimental to the seller.
On the other hand, if the valuation is based on part or all of the business results estimate in 2024 and capital is poured in the form of convertible bonds (convertible loans) or disbursement based on KPIs after the deal (earnouts), enterprises will face a high risk that business results in 2024 will not meet expectations when the economy is currently unstable.
c. In short
Valuation negotiations, especially the use of at-time business results as the basis for valuation, will continue to be a challenge for M&A deals until the macro economy recovers again.
Conclusion
In conclusion, the M&A market in Vietnam during the first half of 2023 has witnessed significant growth and promising opportunities. The thriving economy, favorable investment environment, and government support have attracted both domestic and foreign investors to engage in M&A activities across various sectors. While challenges such as regulatory complexities and cultural differences remain, the market has shown resilience and adaptability. With the continued efforts to improve transparency, strengthen legal frameworks, and promote sustainable development, the M&A market in Vietnam is poised for further expansion in the coming years, cementing its position as an attractive destination for investors seeking lucrative opportunities in Southeast Asia.
HMLF is always available to offer assistance in understanding the procedures with authorities.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: miller@hmlf.vn
