Mergers and Acquisitions function as a double-blade that can create or destroy a company. At worst, a disastrous deal can cost the company millions of dollars. On the other hand, smart transactions can accelerate a company’s gain in the market over its competitors, propelling it to the front of the race. Over the last ten years, Vietnam has witnessed billion-dollar M&A deals driven by strong foreign interest in the M&A market and divestment of various state-owned enterprises. If anything, Vietnam’s appetite for M&As is increasing. However, the M&A lands of Vietnam are also littered with examples of failures. This article will outline the main risks associated with M&A in Vietnam and general advice on how to avoid them.
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Difference in domestic and international Mergers and acquisitions regulations
One of the main risks of Mergers and acquisitions “collapses” is the legal risk that leads to disputes and litigation that cost both time and money. Most of the conflicts occurred because Vietnamese and international laws have different regulations. Therefore, from the beginning, it is necessary to have a clear agreement in order to identify legal risks and avoid any mistakes from the two parties. In the context of Vietnam’s increasing integration, trade disputes are inevitable. Therefore, in this challenge, the more thoughtful the equipment of legal knowledge, the more beneficial it will be.
Financial reports transparency
Investors often complain about the transparency of financial reports and online data room when assessing potential mergers in Vietnam. Kevin Snowball, chief investment officer at PXP Asset Management, pointed out that investors are worried about under-the-table transactions that might take place at SOEs, “where people might just sell the shares to their friends”. Other issues include the willingness, or lack of, group leaders to meet international investors and provide transparent details on their finance, operations, and strategies.
Regarding financial reports, Vietnamese accounting standards contain vast differences to the International Financial Reporting Standards (IFRS), making it harder for overseas investors to make sense of a Vietnamese company’s earnings and losses. There are also no official requirements to release corporate information in English, which can also discourage investors abroad.
Failed Cultural integration
Deloitte has estimated that failed cultural integration is a primary cause in about 30 percent of failed M&As. Bain & Company also identified cultural integration as the number one cause of Mergers and acquisitions failure. This is especially true in Vietnam, when sometimes companies are so blinded by the potential for market growth from a merger that they do not take into account other human and cultural factors.
The first common mistake within the Vietnamese market is short-cutting the M&A process. Anyone who has lived through an M&A knows that it can be a long, unpredictable, and sometimes uncomfortable journey where potential risks abound. Most of the time, local vendors are not sufficiently prepared for the extensive time and effort an M&A deal requires while foreign investors breach overly optimistic timelines.
Also, during the formulation of the deal structure, parties often overlook the closing and post-closing steps of the deal, where cultural integration plays a crucial role. It usually takes months, maybe even years, for two cultures to mesh and find common ground. Claiming victory prematurely can frustrate workforces and create conflicts among the leaders
Vietnamese people still have a strong Asian culture in thinking and acting, considering the company as their “child” so they rarely want to sell it. Therefore, many domestic enterprises are still wary of M&A activities or tend to get tangled up in overly complex and inflexible deal structures. The choice of structure can depend on a number of factors such as the regulatory framework in Vietnam, the type of acquisition, type of business activities, the relationship between the target and buyer… In case of foreign investors, the existing foreign ownership restrictions and conditions can significantly impact M&A deal structures. Thus, it is important that foreign investors ensure the proposed structure works from a Vietnam perspective and be open to considering alternatives at an early stage. (Related article: What you need to know about mergers & acquisitions in Vietnam)
Practices to avoid Mergers and acquisitions mistakes
- Focus on cultural integration post-merger
Instead of getting caught up in the technical aspects of the integration, how well the organizations handle the “human” aspect can make or break the deal. Post-merger cultural integration can be achieved by creating a workstream that identifies what is shared between the two organizations and how to create common ground. A cultural workstream ensures both entities respect each other’s values. Also clarify expectations around new leadership to facilitate integration. This is important for Vietnamese companies where leadership styles are culturally different from foreign organizations. Clearly communication expectations lets leaders know when and how to adjust their behavior to drive integration.
- Measure the truth
Regularly survey the field to get an honest assessment of how the integration is progressing. Mediate your expectations and anticipate potential risks along the way. When events are unfolding rapidly in an Mergers and acquisitions, we tend to demonstrate greater biases and make more assumptions. To figure out how well the organization is handling the integration, it is important to keep all levels of organization on board and encourage open dialogue so the middle leadership does not feel left out.
- Prepare documents in advance
Encourage the vendor to start collating documents for due diligence purposes at least four weeks in advance of when they will be required given the lack of online date among Vietnamese companies. Otherwise, expect the deal timeline to drag.
- Select domestic arbitrators
The ability to communicate with and gain support of the court in the country is one of the advantages of including domestic arbitrators. Domestic arbitrators can bridge the gap between international regulations and domestic Mergers and acquisitions laws in Vietnam while anticipating potential legal risks along the way. The use of domestic arbitrators thus helps businesses reduce costs and facilitate progress during integration.