General

Insights on the Post-Covid M&A Market in Vietnam

Trường Lăng

August 26, 2022

General

Insights on the Post-Covid M&A Market in Vietnam

Trường Lăng

August 26, 2022

Along with the development of the economy, the M&A market in Vietnam shows high stability, even strong growth in 2021, despite the difficulties caused by the Covid epidemic. Investors now have a favorable outlook on the market’s prospects in the near future thanks to these encouraging signs.

An Overview of the M&A Market in Vietnam (1996-2021)

Although the “Doi Moi” reforms in 1986 brought right away a number of significant changes in Vietnam’s economy, the country’s merger and acquisition market did not fare as well. Even after the accession to ASEAN in 1995, there were fewer than ten transactions each year, more than 90 per cent of which were under $5 million. Even after the country joined ASEAN in 1995, fewer than ten transactions occurred annually, with the majority of those valued at under $5 million.

The number of M&A transactions in Vietnam increased dramatically from just a few per year from 1996 to 2004 to an average of over 150 per year between 2005 and 2013. The average transaction size increased significantly, with 90 transactions totaling more than $50 million.
In the 2014-2021 period, the annual average deal count increased more than three-fold to over 450. The number of transactions also increased significantly, more than doubling from 2005 to 2013 to 196 transactions valued at over $50 million. Despite Covid-19’s severe effects, M&A activity rebounded strongly in 2021, with a record year in deal volume (651 deals) and value ($8.8 billion), in line with global M&A trends and laying the groundwork for accelerated M&A growth in 2022 and beyond.

Current Top Buyer Countires

Previously, M&A activities were mainly driven by foreign investors, namely from Thailand and Korea with large deals; and Singapore and Japan with small and medium-sized deals. However, the year 2020 has shown the rise of domestic investors with large transactions: 166 deals with a total value of up to $2.2 billion.

This could be explained by the impact of the Covid pandemic on foreign investors, particularly in the short term, causing them to be more cautious in investing while Vietnamese companies were still in desperate need of capital and investment to survive and develop during the pandemic.

Top Sectors

Consumer staples, finance, and real estate are the top three sectors attracting M&A activity, accounting for 55%-60% of total transaction value in recent years and are expected to continue in the future.

Information technology entered the top 5, propelled by investors in private equity and venture capital who bet on Vietnam’s booming internet market, with the internet penetration rate doubling from 35% in 2011 to 70% in 2021.

Future Outlook

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As Covid-related restrictions have been relaxed, Vietnam’s economy is expected to strongly recover as the fastest-growing economy in ASEAN.
Currently, two emerging trends are expected to guide the M&A market in Vietnam. One is the divestment of investors in order to balance the investment portfolio and ensure growth and profitability in the long term. The other is the deep integration of environmental, social, and governance (ESG) criteria into Vietnam’s M&A market. Investors use these criteria to assess risk and identify value creation opportunities. It is anticipated that more capital will be mobilized to invest in the transition to green energy sources as a result of the commitment of numerous businesses and private investment funds to reduce carbon emissions, opening up opportunities for M&A activities.

Major domestic investors have an optimistic view of Vietnam’s M&A market for 2022. M&A is becoming a popular choice for domestic corporations because this strategy helps them quickly access new business areas, expand market share, and add talent and expertise after the transactions take place successfully.

Despite recent concerns about the continued outbreak of the Covid-19 epidemic, Vietnam is still an attractive M&A market for foreign investors, especially Japanese and Korean. Some investors have taken advantage of technology not only to find new targets but also to communicate with the management teams of the businesses to strengthen and develop the relationship between the parties. Most of the meetings between buyers and sellers are currently conducted via online platforms. At the same time, foreign investors are tending to request information through a virtual data room (VDR) and see it as an alternative to in-person due diligence. In addition, instead of a 100% buyback, a phased investment approach including an “earnout” mechanism was implemented in many transactions.

Regarding investment funds, they continue to take advantage of the highly promising M&A market in Vietnam. Private equity funds will continue to have access to a variety of business opportunities with appealing entry-level valuations as a result of the pandemic-related crisis’s current fluctuations.

Suggestions from Viettonkin

Below are some tips Viettonkin has collected on conducting M&A activities in Vietnam. For more information, feel free to contact us right away.

  • Overseas investors in developing countries such as Vietnam tend to be overly attracted to the apparent “bargains” they can get through M&A. But even when you are entering a new market, fundamental business principles still hold true. Always investigate the cause of the declining asset value and/or the reason the business owner is selling. If the business has a healthy P&L and a positive growth trajectory but the market conditions are momentarily unfavorable or it is cash-strapped, these are signs that an investment is feasible. However, should there be signs of unprofitability or mismanagement leading to a sale, investors should proceed with great caution;
  • Exercise financial due diligence with great attention to the Vietnam Accounting Standards (VAS), which differ from IFRS in several important respects. Many Vietnamese companies, especially private enterprises and/or limited liability companies, still maintain the habit of maintaining a double-book system, in which tax-reported financials and actual internal financials show some differences;
  • It is best to conduct multiple site visits with the help of a local consultant. In a complex and emerging market context such as Vietnam’s, a thorough, structured deal process in which all internal and external stakeholders are involved and interviewed should always be preferred over top-down, executive-handshake deals;
  • Top M&A industries are all conditional business categories under Vietnamese regulations. In other words, as foreign investors, you will need specific licenses other than the general Investment Registration Certificate and the Enterprise Registration Certificate in order to conduct business activities in these fields. Since the process to apply for these licenses could take several months to years, it is best to factor this into your deal timeline and seek the support of a local legal expert to aid you through the ordeal.

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