Luận văn a study on merger and acquisition in vietnam the case of ho guom and chien thang garment companies

Vu Thi Thu Minh A STUDY ON MERGER AND ACQUISITION IN VIETNAM - THE CASE OF HO GUOM AND CHIEN THANG GARMENT COMPANIES MASTER OF BUSINESS ADMINISTRATION THESIS Hanoi - 2007... First a br

Vu Thi Thu Minh

A STUDY ON MERGER AND ACQUISITION

IN VIETNAM - THE CASE OF HO GUOM AND CHIEN THANG GARMENT COMPANIES

MASTER OF BUSINESS ADMINISTRATION THESIS

Hanoi - 2007

2 Problem discussion in hình he ưản

3 Objectives and Aums

CHAPTER 1: LITERATURE REVIEW

1.1 Rationales of Merger and Acquisition

I.I.I Definition and classification of M&A

1.12 Bnsinsssvaluatien cover 1.13 Financing M&A ăn nhan hieu re 1.14 Motiyes behind M&A nhe hHhhhhnreeeree

1.2 Guidelines for suecessfl aoquisitions

3.3.1 Post-integration change of Vietnam garmcnt and (exilc industry 41

3.23 CHIGAMEX A poorly-managed and loss-making company 46 3.3 Execution of the acquisition of CHIGAMEX by HOGARSCO 50

3.4.2 Transferring competencies and roslizing economics of scope 58 3.43 Post-acquisilion perfornuanee oF CHIGAMEX 6Ù 3.5 A summary on main findings from the case study „61

vill

Table 2.3: Six sources of evidence, sirenglhs and weaknesses

Table 2.4; Case study tactics for four design test

Table 3.1: Information on HOGARSCC”s factories c cà soneiiieoiee Table 3.2: HOGARSCO’s performance from 2002-2006 (VND billion) .0

Eigure 1.1: Emterged frame of referenee « «+

Figure 2.1: An overview of the methodology chapter

Figure 3.1: Sales percentage by main export markets of IOGARSCO

Figure 3.2: Sales percentage by categories of products

Figure 3.3: HOGARSCO"s performance from 2002-2006 (VND billion)

Figure 3.4: Major exporl markets of Chigamox

Figure 3.5: Pre-acquisition organizational structurc of CHIGAMEX Figure 3.6; Overview of holding rate among companies

Figure 3.7: Post-acquisition organizational structure of CHIGAMEX

LIST OF ABBREVIATIONS

M&A Merger and Acquisition

HOGARSCO — Ho Guom Gannent Joint Stock Company

CHIGAMEX — Chion Thang Garment Joint Stock Company

VINATEX Vietnam National Textile and Garment Corporation

INTRODUCTION

This first part is intended to give an introduction to the area of research First a

brief background discussion regarding merger and acquisition (M&A) will be provided, followed by the problem discussion, leading to the objectives and aims,

then research questions, scope of work, significance, and the limitations of the study

will be presented and finally the oudline of the thesis,

1 Background

In today’s business world, mergers and acquisitions play an important and undisputable role in crealing a sustainable competitive advanlage Although there have always been historical merger and acquisition waves often in the periods of high economic growth rates, dectine in interest rates and rise in stock markets, M&A pained its importance in recent years,

For the last 30 years, M&A activilics have increased constantly in both number and average size [DePamphilis, 2003] In a very competitive and global cnvironment various reasons can account for companies undeitaking these deals, often involving extremely high financial payments Market-, cost-, competitive- or government drivers [Child et al., 2001] can all influence a company’s decision to opt for M&A

as the primary mean to quickly increase revenues [Galpin and Hemdon, 1999] More specifically, operating synergies are often mentioned as drivers for merging,

Ry combining complementary skills and resources both partners’ economics af scale and scope can benefit, by spreading fixed costs for instance Moreover, financial synergies, diversification aims, tax advantages, pursue of market power as well as empire building can represent reasons to engage in such costly ventures [DePamphilis, 2005] Generally, the justification for acquisitions lies in the potential value they are anticipated to create in the future (Child et al, 2001] Consequently, the combined value of both merged companies should be higher than the sum of the individual companies Theoretically, this value creation through

Introduction

mergers can be reached by using both companies’ assets more effectively by the

combined firms than by the target and bidder separated (Child et al., 2001)

Although M&As almost seem to represent a part of everyday business life and the majority of multinational enterprises undertake more than one during their development, the risks associated are slill comparably high, Piven though there have beon examples of extremely succossfid mergers thore are findings that 50-80% uaderperform their industry pecs and fail to cam the expected financial returns [DePamphilis, D., 2005] Reasons for acquisition failure can range from overoptimistic estimates of the target company’s value which result in extensive overpaying; over slow integration of all operational levels in the post-acquisition phase; poor, clashing tusiness strategies impossible 10 merge [DePamphilis, D., 2005] Furthermore, the depree of relatedness of businesses, as well as the distance

in business or corporate culture is crucial factors to take into consideration [Child et

at., 2001; Gancet et al., 2002),

Vietnamese enterprises have been integrating into the global trend of rise in M&A

activities, especially when Vietnam is in the context of high economic growth rates, low interesl rates, strong and rapid equilisation and “hol” stock markets, Similarly, markel, cost, competitiveness, government and synergies arc often mentioned as drivers for morger and acquisitions in Vietnam The prescace of conglomerate and group of companies in Vietnam has indicated a condensed strength and has shown the willingness for integration into globally competitive economies

business world, More precisely they represent options that aim at a very high

degree of integration, as apposed 1a cooperalive agreements and joint ventures

Generally speaking, acquisitions refer to a shift in the controlling ownership of a company that is taken over by another company This can occur both through share purchases or other forms of the target’s equity as well as asset purchases, The acquired firm can still exist as a legally-owned subsidiary of the acquiring

company, as is the case of CLIIGAMEX acquisition Mergers, by contrast, am at

“total integration of two or more partners into a new unified corporation” (Child, 2001] They are usually coined by a consensual environment, where beneficial ouloomes are ensured for both parlies

Acquisitions, however, can alsa take place in a hostile setting, where the target’s management is passed over and the shares are purchased agamst the wishes of the

target company [DePamphilis, 2005] Generally, acquisitions offer a certain degree

of choice concerning the magnitude of integration, which mergers do nol permit

Moreover, acquisitions are mostly known to be unequal partnerships [Child et al, 2001] Although the tems mergers and acquisitions are often used interchangeably,

they entail very different concepts

Horizontal acquisition takes place where the acquiring and acquired companies produce similar product in the same industry There is a long-standing debate in the economics and finance literature on the motives for horizontal acquisition, Firm management usually cites expected improvements in productive efficiencies or synergies like scale economies and elimination of overlapping facilities as the key reasons for undertaking horizontal acquisitions On the other hand, some economists express concer [hal by teducing the number of firms in an industry, horizontal acquisition increase markel power of customers and supplicrs of the acquiring firm’s industry, Thus, horizontal acquisitions may be undertaken primarily to exploit the increased market power and gain at the expense of

customers and/or suppliers.

Introduction

In the context of global rise in M&A activities and the necessity of M&A in the development of Vietnamese companies, the study would provide international knowledge of M&A and analyze a practical acquisition case of HOGARSCO and CHIGAMEX in order to draw some successful lessons for other companics in Vietnam, therefore, the title of the thesis would be finalized as “A study on merger and acquisition im Vietnam — The case of Ho Guom and Chien Thang garment companies”

Companies such as HOGARSCO have been choosing a strategy of horizontal acquisition to consolidate their competitive advantage Vietnam National Textile and Garment Corporation (VINATEX) arranged the horizontal acquisition of Chien

Thang Garment JSC by Ho Guom Garment JSC in order to help CHIGAMEX

overcome the edge of bankruptey By pursuing horizontal acquisition, both

TIOGARSCO and CHIGAMEX can obtain economies of scale or secure export

market for their producis Afler acquisition, the Iwo companies will be able 10

improve their competitiveness and market visibility

3 Objectives and Aims

The abjectives of the thesis are as below

> Firstly, to provide a better understanding of M&A, its rahionales and international guidelines for M&A

® Secondly, ta review the recent upward trend in Mé&:A activities and the context

of Victnam garment and textile indnatry in 2007 to raise the demand of M&A

v Thirdly, to apply theory into case study of Ho Guom and Chien Thang garment companics to show advantages, disadvantages, successes, limitations

of the acquisition that help these two companies get inside picture of this

acquisition

> Fourthly, to draw out some conclusions and suggestions for M&A activities in

‘Vietnam.

Finally, the thesis aims to introduce intemational standards and practices in making M&A and apply them inlo a case study in order lo provide a beller understanding of M&A activities in garment scolor and lessons learnt from a succcasfull acquisition in

Vietnam

4 Research questions

In order ta roach this purpose, the following roscarch questions hava been developed

> Why do Vietnamese garment companies conducl acquisitions?

> How can an acquisition in VieInamese garment sector happen?

> How can an acquiring company manage an acquired company?

5 Scope of work

Mergers and Acquisitions can be studied from a vanety of angles Due to time constraints, the study will focus only on the two Vietnamese garment companics and the acquisilion of one company by the olher one

G Methodology

The methodology practiced in the thesis is a combination of deduction approach, qualitative method, case sludy strategy The sindy applied [he theory in analyzing a case study with dala collected from qualitative interviews The methodology will be

described in detail in Chapter 2

7 Data sources and processing

Among six sources of evidence for collecting dala including documentation,

archival records, interviows, dircel obscrvalions, parlicipant observation and

physical artifacts, intorviow was chosen as the most significant source of case study

due to its positive aspects Documentation and archival records were used as

supporting data sources, Data analysis in this research follows three steps; data

> To the enterprises: the study provides them a better understanding of why they should take M&As, how M&As occur and how they can effectively manage acquired enterprises in order to make a successfull acquisition The case study

where experiences of success are shared would help enterprises

9 Limitations

The topic M&A is generally not well documented in Vietnam, especially M&A activities seem to be rather new in Vietnam so the researcher has not found best practices concemmg M&A in textile and garment industry This thesis will

concentrate on investigating the case of two garment companies one year after the

acquisition

The research will not evaluate the correctness of the Vinatex’s decision in favor of HOGARSCO to take the acquisition of CHIGAMEX, since various specific factors influence it and these are not the focus of this study.

It will be necessary to interview more relevant persons, preferably from CIIGAMBX, lo deeply understand the company insight and to display a

Teprescntalive image of the post-acquisilion situation

The efforts within the empirical as well as the analytical part will be concentrated

on CITIGAMEX There is no presentalion and analysis of MOGARSCO" post-

acquisition performance in this sludy

10 Expected results

The study introduces the ralionales of merger and acqnisilion, Ihe motives behind mergers and acquisitions, the global practices of cxocuting a merger or an acquisition and managing acquired firms

The study raises a case study of acquisition: The acquisition case of Chien Thang,

Garment JSC by Ilo Guam Garment JSC which will indicate (i) the reasons why Io

Guom has taien this acquisition, (ii) the steps Ho Guom has cxpoticnced to acquire Chien Thang and (ili) the way Ho Guom has managed the acquired firm

successfully

Finally, the shuẩy draws oul some conclusions on the case of To Guom and Chien Thang and bes! practices from this case for lessons learnt inchnding suggestions for successful mergers and acquisitions

11 Thesis structure

The thesis is divided into three main paris including introduction, content and conclusion parls, The introduction part raiscs the necessity of the roscarch, rescarcher’s objectives and aims, problem statement, scope of work, data sources and processing, methodology, thesis’s significance, limitations of research and expected results Content part begins with literatwe review, then option of

Introduction

methodology, and ends with data presented and analyzed through the case study Finally, conclusions and suggestions are drawn out from the case study

The figure below visually shows the outline of chapters in the thesis in order to

enable the readers to get a better picture of the thesis

CHAPTER 1: LITERATURE REVIEW

The previous part provided the background and the problem discussion of the area

of this study, leading down to the specific research questions In this chapter, literature related ta the research questions will he reviewed Available theories relevant io the three research questions will be presented in the same sequential order as stated research questions

1.1 Ratlonales of Merger and Acquisition

LI Definition and classification af M&A

In business or economics, a merger is a combination of two companies into one larger company Such actions are commonly voluntary and involve stock swap or cash payment to the targel Stock swap is often used as il allows the shareholders of the (wo companies 1 share the risk involved in the deal A merger can rescmble a takeover bul resull in a new company name (oflen combining the names of the original companies) and in new branding; in some cases, terming the combination a

“merger" rather than an acquisition is done purely for political or marketing reasons

An acquisition, also known as a takcover, is the buying of one company (the

“target’) by another, An acquisition may be friendly or hostile, In the former case, the companies cooperate in negotiations; in the Iatter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer Acquisition usually refers to a purchase of a smaller firm by a larger one Sometumes, however a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity This is

known as a teverse takeover

Mergers can be classified into:

> Conglomerate mergers take place when the two firms operate in different

industries

The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers (in some industries, the majority) result in a net loss of value due to problems Correcting problems caused by incompatibility- whether of technology, equipment, or corporate cultwe- diverts resources away from new investment, and these problems may he exacerbated by inadequale research or by concealment of losses or liabilities by one of the partners Overlapping subsidiaries or redundant staff may be allowed to continue, creating, inefficiency, and conversely the new management may cut too many operations or personnel, losing experise and disrupting employee culture These problems are sunilar to those encountered in takeovers For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separale, or prevent the deterioration of shareholder value more than if the

companics were scparalc

112 Business valuation

The five most common ways to valuate a business are asset valuation, historical earnings valuation, future maintainable earnings valuation, earnings before interest taxes depreciation and amortization valuation and shareholder's discretionary cash flow valuation Professionals who valuate businesses generally do not use just one

of these methods but a combination of some of them, as well as possibly others that are not mentioned ahove, in order lo obtain a more accurate value These values are determined for the most part by looking al a company's balance sheet and/or income statement and withdrawing the appropriate information The information in the balance sheet or income statement is obtained by one of three accounting, measures

such as a notice to reader, a review engagement of an audit

Accurate business valuation is onc of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for Most often this information is expressed in a Letter of opinion of value when the business is being valuated for interest’s sake There are other, more detailed ways of expressing the value of a business These reports generally get more detailed and expensive as the size of a company increases; however, this is not always the case as there are many complicated industries which require more

allention to detail, regardless af size

L113 Financing M&A

Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies Various methods

of financing an M&A deal exist:

> Payment by cash: Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders alone A cash deal would make more sense during a downward trond in the interest rales Another advantage of using cash for an acquisition

is thal there tends to lesser chances of carning-por-share dilution for the acquiring company But a warning in using cash is that it places constraints on

the cash flow of the company,

Literature Review

} Financing capital: This may be borrowed from a bank, or raised by an issue of honds, Allernatively the acquirer's stack may be offered as consideration Acquisitions financed through dcbl are known as leveraged buyouts (onty if they take the target private), and the debt will often be moved down onto the balanve sheet of the acquired company

> Hybrids: An acquisition can involve a combination of cash and debt, or a

combination of cash and stock of the purchasing entity

‘Types of financing an acquisition can be as follows

> The buyer buys the shares of ihe target company being purchased Ownership control of the vompany in tum conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities avcrued by that business over its past and all of the risks that company faces in its commercial

environment

> The buyer buys the assets of the target company The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation This type of transaction leaves the target company as an emply shell, if the buyer buys oul, the entire asscls A buyer oflen structures the transaction as an assct purchasc to "chemy-pick” the assets that it wants and leave out the assets and liabilities that it does net, This can be patticulaily important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage A disadvantage of this structure is the lax imposed on transfers of the individual assots, whereas slack transactions can frequantly be struchured as tike-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the

buyer and to the seller's shareholders.

L14 Motives behindM&4

These motives are considered to add shareholder value:

> Economies of scale: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the

company relative to the same revenue stream, thus increasing profit

> Increased revenue/lncreased market share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capluring increased markt share) to sel prices

v Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts, Or, a manufacturer can acquire and sell complementary products

> Synergy: Better use of complementary resources

> Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability In some countries, rules are in place to limit the ability of profitable companies to “shop” for loss making companies, limiting the lax molive of an acquiring company

> Gengraphteal ar other diversification: This is designed to smooth the carnings results of a company, which over the long texm smoothes the stock price of a company, giving conservative investors more confidence in investing, in the company However, this does not always deliver value to shareholders,

> Resource transfer: resources are unevenly distributed across firms [Bamey, 1991], the interaction of target and acquiring firm resources can create value through cilher overcoming information asymmelry or by combining scarce resources

> Increased market share can increase market power: In an oligopoly market,

increased market share generally allows companies to raise prices Note that

Literature Review

while this may be in the shareholders’ interest, it often raises antitrust

concerns, and may not be in the public interest

Llowever, these motives are considered not to add shareholder value:

} Diversification: While this may hedge a company against a downturn in an

individual industry it fails to deliver value, since it is possible for individual

shareholders to achieve the same hedge by diversifying their portfolios at a much lawer cost than those associated with a merger

> Manager's hubris Manager's ovorconfidence about expected synergies from

M&A which resnlts in overpayment for the target conipany

> Empire building Managers have larger companies to manage and hence more

power

} Manager's compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share, which hurts the owners of the company, although compensation is linked to profitability rather than mere profits of the company

> Vertical integration Companies acquire part of a supply chain and benefit

from the resources However this docs not add any value because as onc end of

the supply chain may receive product at a cheaper cost, the other end now has lower revenue In addition, the supplier may find more difficulty in supplying

to competitors of its acquirer because the competition would not want to

support the new conglomerate,

In summary, a merger can happen when two companies decide to combine into one entity or when one company buys another while an acquisition always involves the purchase of one company by another Synergy is the logic behind mergers and acquisitions, the fimctions of synergy allow for the enhanced cost efficiency of a

new entity made from two smaller ones Acquiring companies use various methods

to value their targets An M&A deal can be execuicd by means of a cash transaction, stock-for-stack transaction or a combination of balh Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenme momentum from a neglect of

day-to-day operations

12 Guidelines for successful acqui

Acquisitions have long beon a popular vehicle for expanding scnpe of the organization However, despite this popularity, there is ample evidence thal many acquisitions fail to add valuc for the acquiring and acquired companies and, indeed, often end up dissipating value The below figure is drawn from a Mercer Management Consulting’ study of 150 acquisitions worth more than USD 550 million (1990 - 1995) [J Warner, J.Templeman and R.Horn, 1995]

Why do so many acquisitions apparently fail to create value? There appear to be four major reasons: (i) companies often experience difficulties when trying to integrate divergent corporate culture, (ii) companies overestimate the potential economic benefits from an acquisition, (i) acquisitions tend to be very expensive, and (iv) companies otten do not adequately screen their acquisition targets

121 Pitfalts of acquisitions

1.2.1.1 Difficulties with post-acquisition miegration

Having made an acquisition, the acquiring company has to integrate the acquired business into its own organizational stucture Integration can entail the adoption of commen management and financial control systems, the joining together of operations from the acquired and the acquiring company, or the establishment of linkages to share information and personnel When integration is attempted, many

unexpected problems can occur Often they stem from differences in corporate

Literature Review

cultures After an acquisition, many acquired companies experience high management turnover, possibly because their employees do not like the acquiring company’s way of doing things, Tl has becn suggested that the loss of management talont and oxpettise, to say nothing of damage from constant tension, can materially harm the performance of the acquired unit [J.P.Walsh, 1998]

Fven when companies achieve integration, they often estimate the potential for creating valuc by joining together different companies They ovcrcslimalc the stratogic advantages thal can be dorived from the acquisition and thus pay more for the target company than it is probably worth This tendency has been attributed to hubris on the part of top management Top managers typically overestimate their ability to create value from an acquisition, primarily becanse rising to the top of a corporation has given them an exaggerated sense of their own capabilities [R Roll, 1986]

Acquisitions of companics whose slack is publicly lrared lend to be very expensive

When a company bids to acquire the stack of another enterprise, the stack price

frequently gets bid up in the acquisition process This is particularly likely to occur

in the case of contested bids, in which two or more companies simultaneously bid for control of a single target company Thus, the acquixing company must often pay

a premium over the current market value of the target,

The debt taken on to finance such expeusive acquisitions can later become a noose around the acquiring company’s neck, particularly if interest rates rise Moreover,

if the market value of the target company prior to an acquisition was a true reflection of that company’s worth under its management at that time, a premium of 50% over this value means that the acquiring company has to improve the

performance of the acquired unit by just as much if itis to reap a positive return on ils investment Such performance gains, however, can be very difficult to achieve L214 Inadequate pre-acquisition screening

One reason for the failure of acquisitions is management’s inadequate attention to

pre-acquisition screening [P.Haspeslagh and D.Iemison, 1991] They found that

many companies decide to acquire other firms without thoroughly analyzing the potential benefits and costs After the acquisition has heen completed, many acquiring companies discover that inslead of buying a well-run business, they have

purchased a (roubled organization

122 Execution of acquisitions

To avoid pitfalls and make successful acquisitions, companies need to take a structured approach with three main components: (i) target identification and pre- acquisition screening; (ii) bidding strategy, and (iii) integration [L.L.Fray, D.HGaylin and ILWDown, 1984: CW.LIHI, 1984; D.R.Willen, 1985: TTaspestagh and Jemison, 1996: P.1.Angsiinger and T.T.Copeland, 1996]

1.2.2.1 Pre-acquisition screening

Thorough prc-acquisition screening increases a company’s knowledge about

potential takeover targets, leads to a more realistic assessment of the problem involved in executing an acquisition and integrating the acquired company into

acquiring company’s organizational structure, and lessen the tisk of purchasing a polential problem company The screening should begin with a detaited assessment

of the siralogic rationale for making [he acquisition and identification of the kind of enterprise that would make an ideal acquisition candidale

Next, the company should scan a target population of potential acquisition candidates, evaluating each according to a detailed set of criteria, foousing an: (1)

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Financials position, (ii) Product market position, (ii) Competitive environment, (iv) Management capahilities, and (v) Corporate cullure, Such an evaluation shonld cnable the company (o identify the strengths and woaknesses of cach candidale, the extent of potential integration problems, and the compatibility of the corporate cultures of the acquiring and the acquired companies

The company should then reduce the list of candidates to the most favored ones and evaluate thom futher At this stage, it should sound out third partis, such as investment bankers, whose opinions may be important and who may be able to give

the list after this process should be the acquisition target

12.2.2 Bidding strategy

The objective of bidding strategy is to reduce the price that a company must pay for

an acquisition candidate, The essential element of a good bidding strategy is timing, For example, a company always looks for essentially sound businesses that were suffering from short-term problems due to cyclical industry factors or from problem localized in one division, Such companies are typically undervalued and thus can be

picked up without payment of 40% or 50% premium over current market value

With good timing, a company can: make a bargain purchase

1.2.2.3 Integration

Despile good serccning and bidding, an acquisition will fail unless positive steps are taken to integrate the acquired company inlo the organizational structure of the acquiring one Integration should centre on the source of the potential strategic changes of the acquisition for instance opportunities to share marketing, manufacturing, procurement, R&D, financial, or management resources Integration should also be accompanied by steps to eliminate any duplication of facilities or functions In addition, any unwanted activities of the acquired company should be sold Finally, if the business activities are closely related, they will

require a high degree of integration In the case of a company, whose strategy is one

of unrelaied diversification, the level of integration can be minimal TMowever, a company Toquires graalor integration if ils stralogy is concentration on a single business and expansion,

1.3 Managing acquired companies

It has been noted, in previous parts, that acquisition, as merger, is the principal vehictes by which companies enter new product markets and expand the size of their operations [M.S.Saller and W.AWeinhold, 1979] arlicr, stralegic advantages and disadvantages of merger and acquisition have buon discussed together with guidclines for snocessful acquisition to avoid its pitfalls Now it is

time to consider how to design structure and contiol systems to manage new

acquisitions This issue is important because many acquisitions are unsuccessful, and one of the main reasons is that many companies do a very poor job of

integrating new company into their corporate structure [F.T Paine and D.J Power, 1984]

The first factor that makes managing new acquisitions difficult is the nature of the businesses a company acquires, If a company acquires businesses closely related to its existing businesses, it should find it fairly casy to integrate them into its corporate structure The controls already being used in the acquiring company can

be adapted to the acquired company To achiove gains from synorgics, the companics can expand ils task forces or increase the number of integrating roles, sơ that acquired companies arv drawn into the existing structure

Tf managers do nat understand how to develop connection among companics ta permit gains from economics of scope, the newly-acquired company will perform poorly It has been argued that this is why the quality of managcment is so important A company must employ managers who have the ability to recognize the

synergies among appaently different companies with various corporate cultures,

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and so derived benefits from acquisitions and mergers [G.D.Bruton, B.M.Oviatt, and M.A White, 1994] Towever, if companies acquire unrelated businesses arly to operate them as a portfolio of investments, they should have no Irouble managing the acquisitions

Implementation problems are likely lo arise only when corporale managers try to interfere in businesses they know little about ar when they use inappropriale structure and controls to manage the new business and attempt to achive the wrong

Kinds of benefits form the acquisition

Theroforo, stralegie managers need lo be very sensitive lo the problems involved in taking over companics through mergers and acquisitions Even when acquiring closely related businesses, new managers niust realize that each business has a unique culture or way of doing things Over time new management can change the culture and alter the intemal workings of the company, but this is a difficult implementation task Besides, the bureaucratic costs of changing a culture are often enormous because the top management team and the organizational structure have

to be changed in order to change the way people behave

Most companies consider acquisition when they are generating financial sources in

excess of those necessary to maintam a competitive advantage in their business

The question they must obstacle is how to invest the excess resources in order to create valuc The acquiring company can manage to create value for the acquired companies in thre main ways: (i) by restructuring poorly-run cnlerprises, (ii) by transferring competencies among, enterprises; and Gii) by realizing cconomics of

scope,

13.1 Restructuring poorly-run enterprises

An acquiting and restructuring strategy rests on the presumption that an efficiently managed company can create value by acquiring inefficiently and poorly managed enterprises and impraving their efficiency

Improvements in the efficiency of an acquired company can come from a number of sources First, the acquinng company usually replaces the top management team of the acqnired company with a more aggressive one Second, the new top management icam is cnequraged to sell off any unproductive sssols and claborate headquarters ta reduce staffing level Third, the new top management team is alsa encouraged fo intervene in the running, of the acquired businesses to seck out ways

of improving, the units’ efficiency, quality and innovativeness, and customer responsiveness Fourth, to motivate the new top management team and other employees of the acquired unit to undertake such actions, increases in their pay may

be linked to increases in the performance of the acquired unit In addition, the acquiring company often establishes performance goals for the acquired company that cannot be met without significant improvements in operating efficiency It also makes the new lop management team aware thai failure to achieve performance improvements consistent with thesc goals within a given amount of time will probably result in their lost of jobs, This system of rewards and punishments established by the acquiring company gives the new managers of the acquired enterprise every incentive to look for ways of improving the efficiency of the unit

under their change

13.2 Transferring competencies

Companies seck out to acquire enterprises related to thcir cxisling husiness by øne

or more value creation functions, such as manufacturing, marketing, materials management, and R&D, They may want to create value by drawing on distinctive

skills in one or more of their value creation functions in order to improve the

Literature Review

competitive position of the acquired enterprises Alternatively, they may acquire a company in the same business area in the belief thal same of the skills of the acquired company can improve the cfficicncy of their existing valuc creation activitics, If successful, such competency transfers can lower the costs of value creation in one or more of company’s businesses or enable one or more of company’s business to undertake the value creation functions in a way that leads to

differentiation and a-premium price

For such a strategy to work the competencies being transferred must involve activities that are important for establishing a competitive advantage All too often companies assume that any commonality is sufficient for creating value

13.3 Realizing economies of scope

Econamies of scale arise when two or more business units or companies share resources such as manufacturing facilities, distribution channels, advertising campaign, R&D costs, and so on, Each business unit or company that shares resources has to invest less in the shared functions [D.J.Teece, 1980] For example, the costs of a garment company’s manufacturing, advertising and sales in major products are low because they are spread over a wide range of products Additionally, such a strategy can utilize the capacity of certain functions better For instance, by producing the components for the assembly operations of two companics in the same industry, a component-manafacturing plant may be able lơ operate at grealar capacily, therchy realixing cconnmics of scale in addition io cconomics of scope Thus, a corporate strategy based on economics of scope can help both acquiring and acquired company attain a low-cost position in each of businesses in which they operates, Acquiring to realize economies of scope can, therefore, be a valid way of supporting the generic business-level strategy of cost leadership.

Llowever as with competency transfers, realizing economies of scope is possible only when there are significant commomalilies between one or more of the value creation functions of a company’s existing and new aclivitics Moreaver, managers need to be aware of that burcaueratic costs of coordination necessary to achieve economies of scope within a company often outweigh the value that can be created

by such a strategy (C.W.LHill and REHoskisson, 1987] Consequently, the strategy should be pursued only when sharing is likely to generate a significant competitive advantage in one or more companies

14 Conccptualization and emerged frame of refcrence

141 Conceptuatization

The previous section reviewed literature and presented theories relevant to the research puxpose and the research questions stated in chapter one, Based on that theoretical review, this section will illustrate the conceptualization of the research questions and pictorially showed in an emerged frame of reference

The idea of building a conceptual framework is to explain, either graphically or in narrative form, the main things to be studied, ‘This means that it is the current version of the researcher's map of the territory being investigated, and 1t specities who and what will and will not be studied, The conceptualization will further assist

in forming an interview guide, which will enable data collection [Miles &

Literature Review

» Mergers, Acquisitions, and other restructuring activities, DePamphilis (2005)

>» The basis of Mergers and Acquisitions, Investopedia Tutorial (2006)

1412 Research question 2: Ilow can acquisition ia Vietnamese Garment Sector

happen?

When investigating how acquisition in Vietnamese Garment Sector happens the following theories have been chosen to use since they correspond well with the research problem

» Successful Acquisition Planning, L.L Fray, D.H.Gaylin and J.W,Dowm (1984)

> Making it happen: How to execute an Acquisition, D.R, Willensky (1985)

> The complete guide to mergers and acquisitions — process tools to suppart

M&A integration at every level, Galpin, T J and LIerndon, M (2000)

14.1.3 Research question 3: How can an acquiring company manage an acquired

company?

When investigating on management of acquired companies theories from several authors will be used and the following theories are chosen since they correspond

well with the research problem

> Managing Acquisitions, P.Haspeslagh and D.Jemison (1991)

> Growth through Acquisition: A Fresh look, P.L.Anslinder and T.E.Copeland

(1998)

> The management of intemational acquisitions, Child, J.; Faulkner, D and Pitkelhly, R (2001)

% Successful mergers, acquisitions and stratogic alliances — How lo bridge

corporate cultures, Gancel, C.;, Rodgers, I and Raynaud, M (2002)

142 Emerged frame of reference

The previous section provided a conceptualization of the research questions, This section will provide a graphic illustration of the frame of reference in order to illustrate how they correlate and how they serve to answer the tesearch purpose The emerged frame af reference is pictorially presented in Figure I.1, and is constructed by me

Rationales of Mergers and Acquisitions

Economies of scale through reducing duplication and lowering, costs

Increase revenue or market share due to absorbing major competitors

Cross selling

Synergy to better use of complementary resources

Reduction of tax liability due to buying loss makers

Geographical or other diversification to smooth a company’s earnings and stock price

Resonrce (ransfer ta create value

a Increased market, sharc can inorcasc market power

‘Avoiding pitfalls of acquisitions Execution of acquisitions

m= difficultios with intogration ® pre-acquisilion screening

= overestimating benefits = bidding strategy

= cxpensive acquisitions ® integration

= Restructuring of acquired companies

- replacement of top management team, sales off unproductive assets, reduction of staffing level

-_ improvement inefficiency, quality, customer responsiveness _ and

- motivation through increases in pay linked to increases in performance

= Transferring competencies between acquiring and acquired companies

=_ Realising economies of scope

Figure 1.1: Emerged frame of reference

Source: Author own construction, 2007

CHAPTER 2: METHODOLOGY

chapter, the different methodological perspectives are explained, together with

justifications of the choices made Finally a discussion regarding validity and reliability is provided Figure 2.1 below shows the headings brought up in this

chapter and an overview of how these fit together

Exploratory -When a problem is ~To gather as much information

difficult to limit as possible about a specific -When Inow little about | subject using many different

the area in the field of the | sources

study Descriptive -To gather information _ | -To develop careful descriptions

when investigating a total | of different pattems expected

or random sample during the exploratory stag

Methodology

Explanatory =When look for acause | -To develop a theory used lo

and effect relationship _| explain the cmpixical

generalizations that was

developed in the descriptive stage

Source: Reynolds, 1971, Eriksson and Wicdczheim-Paul, 1997; Paicl and Davidson, 1994, Patel and Tebelins, 1998

Considering the above stated research purpose, this study explores, describes and somewhat also explains about M&A, execution of an acquisition in Vietnam and

how to manage an acquired company in garment sector

The study is exploratory as the researcher had limited knowledge about the area of the research, and also wanted to gain a deeper understanding of the research area The stndy is however mainly descriptive as the area studied with already existing information Also, the thesis aim is to describe garment companies and how they involved in acquisitions On answering rescarch queslians, explanatory stage is parlly started the through explaining relationships between different variables,

2.2 Research approach

When implementing research there are different ways to address the research purpose such as deduction or induction approach, and also qualitative or quantitative method,

An inductive research is based on empirical data; accordingly, the theories and models are set up based on different phenomena in reality while a deductive approach allows the researcher use existing theories and experiment them with different methods [Eriksson and Wiedesheim-Paul, 1997]

The deductive approach is chosen for the study follows because using existing theories to reach the research purpose would be more efficiently Empirical studies would be conducted based on theories and used to set an emerged framework of reference for data analysis,

A qualitative research refers to studies of gathering and analyzing detailed data of ideas, feelings and attitudes, commonly used when trying to receive thorough

information, which enables the researcher to gain a deep understanding of a single case study or a limited number of objectives The empirical data cannot be easily transformed into numbers, but would rather be described in words [Yin and Ibid,

2.3 Research strategy

There are a number of approaches which a researcher can choose when conducting

an empirical data collection Depending on the research questions, to which extent the researcher has control over behavioral events and to what degree the focus is on contemporary events, the researcher can choose among an experiment, a survey,

archival analysis, history and case study

Table 2.2: Relevant situations for different research strategies

eyenfs ©eyenfs

Experiment | How, Why

Who, What, Where, How

Methodology

many/ How much

Who, What, Where, How

As the case study is generally superior when how and why questions about a specific topic are answered, when control over the relevant behaviors is not required and when research focuses on contemporary events, it would be the most suitable to

be used as a research strategy It is believed that case study would enable to obtain a better understanding of M&A in Vietnam and management of an acquired company

in garment sector

The study is also based on present occurrences which are another motive for choosing case study as research strategy In this study, a single case study on two

garment companies would be conducted to collect data

2.4 Data collection method

As referred in the qualitative field of research [Yin, 1994], there are six sources of

evidence for collecting data including documentation, archival records, interviews, direct observations, participant observation and physical artifacts The advantages

and disadvantages of each different data collection method are presented in Table

- Unobtrusive: not created as a _| collection is incomplete

- Exact contains exact names, _| (unknown) bias of author

references, and details of an ~ Access: may be deliberately

30

event

- Broad coverage: long span of

ume, many events and settings

blocked

‘Archival - (Same as for Documentation) | - (Same as for

records - Precise and quantitative Documentation)

~ Accessibility duc to privacy

reasons

Interviews ~ Targeted focuscs directly on _| - Bias due to poorly

case study topic constructed questionnaires

- Insightfut: provides perceived | - Response bias casual inferences - Inaccuracies due to poor

recall

- Reffeexibiliiy: interviewee

gives what interviewer wants

to hear

Direct - Reality: covers events inreal | - Time consuming

observations time - Selectivity unless broad

- Contextual: covers context of event

coverage

- Reflexibitity event may

proceed differently because it

observations = Obscrvations) Obscrvations)

- Insightful into interpersonal —_| Bias duc to investigators

behavior and molives manipulation of events

Physical - Insightful into cullural [eatures | - Sclcclivily unlesa broad

Source: Yin, 1994

It was stated that interview is one of the most significant source of case study as it is

largeied and insighiful These reasons would lead to the choice of interviews for

data collection Documentation and archival records such as company profile and annual reporis of rclevanl partics in the study were also used as supporting dala

sources

3

Methodology

Interviews can be conducted in three different forms: open-ended, focused and structured The study anly conducted focused interviews in a conversational manner via an interview guide (see Appendix} Rach interview tak approximately 45-60 minutes, One face-to-face interview and onc telephone interview were conducted to relevant respondents at Ho Guom and Chien Thang garment companies In order to conduct these interviews effectively, interviewees were sent a short backpround of the thesis and interview puide via e-mail, so the respondents would be able to prepare for the interview and all interviews reached expected results

2.8 Sample selection

As mentioned above, a single-casc study has becn conducted to gather the most appropriate empirical data The case study was based on interviews with two

petsons in two different garment companies

In order to find appropriate companies for the case study, desk rescarch was used to find information about companies and their line of business The researcher managed to look for an acquiring company -Ho Guom Garment ISC- a prestigious company doing business efficiently in both domestic and foreign markets covering

a preat part of Vietnamese garment expart revenne; and an acquired company - Chien Thang Garment JSC- which have had problems in management and operation The two companies would suite research problem and purpose since they are involved in the same industry; and the acquisition of Chien Thang by Ho Guom is considered as a typical case of acquisition in Viclnam The first intervicw was sct up with General Director of Ho Guom Garment JSC and she, in turn, introduces another suitable interviewee - Deputy General Director of Chien Thang Garment JSC.

1.6 Data analysis

Data analysis implies examining, categorizing, tabulating or otherwise recommending the collected data Every research should involve a general analytical strategy in order to come in terms with what to analyze and why The type of data received has a greal impact on the quality of the findings The slrength

of the data and the abilily to draw any conclusions from the collected data depends

so much on how the data is analyzed [Yin, 1994] Furthermore, the main goal of data analysis is to trent the evidence fairly, to produce compelling analytic conclusions and to rule out altemnative interpretations The researcher should choose between two general analytical strategies: theoretical propositions and case description

As eadlier stated, when analyzing the data collected from the interviews the intentions are to find answers to the research questions, A qualitative data analysis focuses on data in the form of words and consists of three simultaneously different

activities [Miles and [mberman, 1994], namely:

> Data reduchon: The process of focusing, selechng, abstracting, simplrying and transforming the data to organize the data so that final conclusions can be verified and drawn

> Data display: The process of taking the reduced dada and displaying it in an organized, compressed way so that conclusions can be more casily drawn

> Conclusion drawing and verification: The process of commenting, explaining, and dociding what things mean by the rescarcher through noting regulations,

patterns, explanations, possible configurations, casual flows, and propositions

The analysis of the data in this rescarch follows three above steps For cach research question, in purpose to reduce data, case analysis was conducted by comparing the data with literature brought up in the conceptualization, After the data was

33

Methodology

analyzed, the research questions were answered and conclusions were then drawn based on the findings

2.7 Reliability and validity

When conducting scientific research, validity and reliability are two important

factors that determine the trustworthiness of collected data These instruments for measurement are considered to increase the trust of the research [Eriksson and

Wiedersheim-Paul, 1997] It is so important to judge the research quality and therefore, four commonly used tests namely construct validity, intemal validity, extemal validity and reliability are proposed when establishing the quality standard

Construct Validity | - Use multiple sources of ~ Data collection |

~ Estabish chain of evidence —_| - Composition

~ Have key informants review draft case study report

Internal Validity | - Do pattern matching = Data analysis

- Do explaination-building - Data analysis

~ Do time-series analysis - Data analysis External Validity _ | - Use replication logic in = Research design

multiple-case analysis Reliability = Use case study protocol = Data collection

- Develop case study database _| - Data collection