Types of M&A transactions in Vietnam
Mergers and Acquisitions (“M&A”) has long become a popular term. M&A transactions not only bring benefits to the parties involved, such as increasing the efficiency of business operations or reducing or eliminating competitive pressures from competitors but also become an effective channel for capital mobilization for the economy, promote the process of renovating the growth model, restructuring the economy, and equitizing state-owned enterprises. Despite being affected by the COVID-19 pandemic, the M&A market in Vietnam still has grown strongly with many successful deals. In the first 10 months of 2021 alone, the M&A market attracted USD 8.8 billion, up 17.9% compared to 2020 and 13.7% compared to 2019.[1] M&A is not just a potential playground for domestic investors but also a good opportunity for foreign investors.
This article analyzes each of the three most common types of M&A transactions in Vietnam: asset purchases, share/contribution purchases, and mergers.
Assets Purchases
This first type of transaction is when the buying company purchases tangible and/or intangible assets of the target company. It is often used when the buyer only wants to obtain a single business unit, division, or subsidiary of the target company.
The buyer often selects this type of M&A transaction since it provides a great deal of freedom to “pick and choose” the assets and liabilities (cherry-picking). In other words, the buyer can avoid certain hidden or unknown liabilities. Nevertheless, asset purchases also have some drawbacks: (i) identifying the target company’s assets and writing documents to transfer them can be a complex and time-consuming process, (ii) valuing assets takes time, especially intangible assets such as brands, market share, culture, etc., (iii) foreign investors are not allowed to hold the right to use real estate such as land under Vietnamese law.
Share/Capital Contribution Purchases
In Vietnam, many M&A deals are done by the sale and purchase of shares (for joint-stock companies) or contributed charter capital (for limited liability companies) of the target company. The traded shares or capital contribution can be ones of existing shareholders/members or new ones issued/mobilized by the company. Thus, respectively, different entities will participate in the transaction: the buyer can be an individual, legal entity – another company, and the seller can be the shareholders or members of the target company or the target company itself. From a regulatory standpoint, this type of transaction is considerably more straightforward. Because the assets and liabilities of the target company are just changing hands, there is no need to go through the time-consuming formalities of assignment and third-party consent. The buyer’s capital in the company means that it becomes the owner of the target company’s assets and liabilities. This fact also points out the disadvantage of this M&A structure: the buyer may run into liabilities that can cause “unforeseen disputes” (environmental, tax, third-party litigation).
Mergers
A merger of enterprises means an act whereby one or several enterprises transfer all of its/their property, labor, rights, obligations, and legitimate interests to another enterprise and at the same time, terminate the existence of the merged enterprises. The target company’s owners may be paid in cash, the buyer’s shares, or a mix of the two when the merger is completed. One of the benefits of completing a merger is the lack of constraints. They are also a great alternative for investors who do not have a lot of time. The size of the merged company is the key constraint imposed by government officials. It is crucial to figure out what percentage of the market share the newly merged business would control.
In order to conduct an M&A transaction, investors still need to pay attention to many other factors. However, we hope that this article has helped investors get an overview of the methods of an M&A transaction.
[1] Bao Linh. (2021, December 9). Diễn đàn M&A Việt Nam 2021: Cơ hội trong thị trường bùng nổ. Ministry of Planning and Investment Portal. Retrieved February 25, 2022, from https://www.mpi.gov.vn/en/Pages/tinbai.aspx?idTin=52435&idcm=188
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