M&A odds growing stronger
Vietnam’s economy is expected to continue its rising momentum this year, partly attributable to robust waves of mergers and acquisitions.
Dang Thanh Son, partner at Baker McKenzie Vietnam, highlights current hurdles and difficulties in the M&A market to help the market develop in a sustainable manner.
Vietnam is one of the fastest-growing markets in Asia. According to statistics from the government, Vietnam’s economic momentum moderated to 6.76 per cent on-year in the first half of 2019.
This year, we saw the entry into force of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the signing of the EU-Vietnam Free Trade Agreement (EVFTA) – both indicating Vietnam’s potential as an investment market.
In recent years, M&A activities in renewable energy, real estate, retail, consumer goods, and food and beverages sectors remain higher than in other sectors.
In the years to come, we are confident that foreign investors will increase their investment portfolio in Vietnam. Currently, Vietnam still primarily attracts regional investors. In the coming years, investors from Japan, South Korea, Thailand, China, and Singapore will likely still remain the leaders of Vietnam’s M&A market.
From a legal perspective, the key regulations for M&A activities are provided under Vietnam’s World Trade Organization commitments, the Law on Investment (LoI), and the Law on Enterprises (LoE). Also, there are regulations relating to M&A transactions in various laws.
Unfortunately, a number of these regulations are not well developed, such as the overlapping and inconsistent regulations between the LoE and the LoI which cause delays in the progress of M&A transactions in Vietnam.
The first half of 2019 saw an increase in the number of deals and their value when compared with the second half of 2018. Investors’ rising confidence is due to a number of factors. First, free trade agreements such as the CPTPP, the EVFTA and other bilateral and multilateral agreements will create opportunities for enterprises by reducing tariffs and other trade barriers.
Second, regional geopolitics have shifted interest from traditional manufacturing markets such as China to Vietnam, and, in recent months, we saw several companies moving or considering moving their manufacturing to Vietnam. This is partially due to Vietnam’s relative financial and political stability, an area that the government considers important.
In particular, the State Bank of Vietnam has maintained active and flexible management of the exchange rate to keep the domestic market stable in the face of international pressure over the last two years.
Despite some of the inefficiencies in policies and regulations, the Vietnamese government have put in great efforts to simplify licensing processes and modernise customs clearance procedures, including adopting online systems.
Vietnam, as a market, is also appealing to investors for other reasons. Vietnam’s middle class continues to grow, driving demand for goods and services. It is also home to a young and eager population adept in IT skills. The number of individuals going online has increased significantly in the last decade with an Internet penetration rate at over 65 per cent in 2019.
As more Vietnamese people come online, this means increasing opportunities for e-commerce, fintech, and other Internet-based businesses. Currently, over 90 per cent of transactions in Vietnam are conducted through cash, and less than 40 per cent of the adult population in Vietnam have bank accounts. This shows that there is an opportunity for fintech companies to fill in the gap by providing services to the unbanked population.
Due to the lack of effective corporate governance and publicly available information of local companies, investors often find it difficult to gather comprehensive information during the identification process. This makes it more costly and difficult for foreign companies to conduct due diligence on local companies, and often, the process takes much longer than foreign investors’ expectations.
Vietnam will also need to work on developing its education sector and critical infrastructure. There is a shortage of other vocational skills, and foreign companies often must retrain Vietnamese employees in these skills.
Such training is costly and time-consuming, which may turn some foreign investors away. Furthermore, despite improvements in infrastructure, more needs to be done. Similarly, insufficient energy supply continues to be an issue as the supply of energy cannot keep up with economic growth.
From a legal and policy standpoint, the coordination mechanism between the foreign investment division and the business registration division at the provincial level does not always go smoothly, which in turn creates difficulties for foreign investors seeking an M&A approval or amendment to the target company’s investment registration certificate and the enterprise registration certificate during M&A transactions.
In banking, there is no clear guidance on fintech and other new technologies, for example, peer-to-peer lending. Likewise, M&A transactions in certain industries such as telecom, banking, and aviation may require special approval from industry regulators. However, in practice, these approvals may take a long time.
If Vietnam can tackle these challenges and turn them into opportunities, there is little doubt that Vietnam will continue to attract foreign investment, which will, in turn, drive M&A activities. VIR
Dang Thanh Son