M & A one solution to growth of SMEs - the case of gateway securities and Morgan Stanley Singapore

LIST OF FIGURESNa m e s Figure 1.1: M &A Process Figure 1.2: Strategic Planning and Organization Figure 1.3: Identifying the Targets process Figure 1.4: Negotiating a Definitive Agreemen

VIETN AM N A T IO N A L UNIVE RSITY, HANOI

M A ST ER OF BU S I N E S S A D M IN IS TRA TIO N THE SIS

Supervisors: Dr Ta Ngoc Cau

1.1.4 Ho w to perform M e r g e r s and Acquisitions transaction 7

1.1.5 O v er vi e w ab ou t M e r g e r s and Acquisitions transactions 1 1

21

1.2.3.2 Pr o b le m s associated with financial institutions 17 1.2.3.3 Limitations associated with financial policy 17 1.2.4 M er g er s and Ac qu isi tio n s motivation for SM Es 18

2.1.2 Introduction o f V ie tn a m Securities Industry 23

2.2 M & A A N D T H E C H O I C E O F G A T E W A Y S E C U R I T I E S ’S

S T R A T E G Y T O D E V E L O P

2.2.1 External and Internal analysis in Securities Industry to

define O pp o rtu ni tie s and Th reats.

2.2.1.1 External Ana lys is in Securities Industry 28

2.2.1.2 Internal Analysis in Securities Industry - Five

A C Q U I S I T I O N T R A N S A C T I O N

3.1 Strategy o f Morg an Stan ley/Gateway Securities - effects to

o pe r a ti n g fields.

3.1.1 Strategy o f M o rg an Stanle y/Ga tew ay Securities 58

3.1.3 Ev aluation key success factors o f Morga n

Sta n ley /G a te wa y Securities.

3.1.3.1 Strength o f Morga n Stanley as a Leading

For the purpose o f this thesis, the following abbreviations apply:

M &A : Mergers and Acquisitions

SMEs : Small and Medium Enterprises

FDI : Foreign Direct Investment

SOEs : State Owners Enterprises

I IoSTC : Hochiminh Securities Trading Center

HaSTC : Hanoi Securities Trading Center

LIST OF FIGURES

Na m e s

Figure 1.1: M &A Process

Figure 1.2: Strategic Planning and Organization

Figure 1.3: Identifying the Targets process

Figure 1.4: Negotiating a Definitive Agreement processFigure 1.5: M & A transactions in the world

Figure 1.6: M &A Supplier - follow industry (up to Q l-2008)Figure 1.7: M & A transactions in Vietnam industries (%)Figure 1.8: Typical M&A transactions in Vietnam

Figure 2.1 : Asean Economic Statistics — 2007

Figure 2.2: V ietnam ’s GDP by sector

Figure 2.3: Top subscribers holder

Figure 2.4: Top trading volume implementer

Figure 2.5 : Gateway Securities Structure

Figure 2.6: G D P and real GDP Growth rates o f VietnamFigure 2.7: Annual inflation rate o f Vietnam

Figure 2.8: Saving rate comparing with real GDP

Figure 2.9: FDI in Vietnam Overview

Figure 2.10: Market capitalization o f Vietnam

Figure 2.1 1 : SOE reforms are strengthening the private sectorFigure 2.12: Number o f registered trading account

Figure 2.13: Some typical securities firms

Figure 2.14: Increasing in number o f companies

Figure 2.15: Formal markets - trading overview

Figure 2.16: fixed cost in comparison with other competitors

Figure 2.1 7: human resources demand o f hot field for Q4/2007

Figure 2.1 8: human resources supply o f hot field for 0 4 /2 0 0 7

Figure 2.19: Requirement capital according to Securities Law

Figure 2.20: Services providers’ comparison

Figure 2.21: 2007 - Securities companies ranged by Chartered Cap

Figure 2.22: 2007 - Revenues from operation activities in VND mill

Figure 2.23: Compare G atew ay’s activities with competitors

Figure 2.24: M&A Transaction history'

Figure 2.25: Capital Structure o f new company - Morgan

Stanley/Gateway Securities

Figure 3.1 : capacities o f new com pany compare with other providers

Figure 3.2: Morgan Stanley/Gateway Income Statement

Figure 3.3: Financial Performance within industry on 2008

Figure 3.4: Financial Performance within industry on 2007

394142444647515457

57

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I N T R O D U C T I O N

1 Necessity o f the Thesis

Vietnam Economy as other emerging economies has transformed in two decades o f rapid It has opened its door to the outside world and liberalized its economy There emerge high competition within industry, between domestic enterprises and foreign enterprises

How to win in competition, to exist and develop in the high competitive environment as Vietnam? This is the problems with every Vietnamese firms, especially with Small and Medium Enterprises, who lack o f capitals, resources, technologies in compared not only with bigger domestic but also with foreigner companies, that are strongly penetrating into Vietnam economy

My thesis will analyze the case o f Morgan Stanley/Gateway Securities JSC, the mergers and acquisitions transaction result between Morgan Stanley Singapore - one official mem ber o f Morgan Stanley and Gateway Securities one mall securities enterprise, to explain why Gateway has chosen mergers and acquisitions as their way to growth and comment how this strategy affected on it

2 Research Purpose

This thesis based on the strengths and weakness, the opportunities and threats that Gateway have to face, to find that mergers and acquisitions is one o f good ways to implement their problem in operation in a emerging and high completion market like securities industry o f Vietnam

My analysis o f Morgan Stanley/Gateway Securities JSC leads me to the conclusion that with a small and medium company in emerging market like Vietnam, mergers and acquisitions is the good choice to help company growth

by taken full advantages o f one bigger company that have strong resources

I

3 Research Scope

Thesis only centers to analyze the existed problems o f Gateway Securities JSC

as the reason lead the managers o f company choose mergers and acquisitions

as a way to develop and growth in competitive environment o f industry, economy and results after followed this way

4 Methodology

The methodology will be base on by collecting data as: statements, reports from newspapers, magazines, and announcements o f companies and other state departments like General Statistic Office or State Securities Commission and Ministry o f Finance , reviewing all the studies related to competitive strategies

5 Contribution o f the T h esi s

The student hopes this thesis will contribute one significant thing to other students who are interested in researching on the competitive strategy in future and choice one suitable strategy for company

C H A P T E R 1 - L I T E R A T U R E R E V I E W

1.1 G E N E R A L C O N C E P T O F M E R G E S AN D A C Q U I S I T I O N S

1.1.1 M er ge r s and Acquisitions Definitions.

Mergers & acquisitions (M & A ) refers to the management, financing, and strategy involved with buying, selling, and combining companies, they are one

o f the popular topics in business today [Michael E.S.Frankel, 2007]

Mergers & acquisitions is a comm only used term however its meaning can vary depending on the context Often the term are incorrectly used unchangeable or the group name M & A is used

The key principle is to create shareholder value over and above that o f the sum

o f the two companies Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A

This rationale is particularly alluring to companies when times are tough Strong companies will act to buy other companies to create a more competitive, cost-efficient company The companies will come together hoping to gain a greater market share or to achieve greater efficiency Because

o f these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone

Distinction between Mer ger s and Acquisitions.

Mergers

A merger takes place when two or more firms com bine to form a single

enterprise, owned by a single set o f stockholders to a single management staff

Mergers are classified according to how the merger takes place, the

m anagem ent’s attitudes toward the merger and relationships between the

3

m erging parties The two major means by which firms merge are the sales o f assets or the sale or exchange o f stock Mergers may increase profitability by reducing costs, improving cooperation, removing ineffective management or eliminating competition.

Ac quisitions

An acquisition is the purchase by one company o f a substantial part o f the assets or securities, normally for the purpose o f restructuring the operations o f the acquired entity The purchase may be a division o f the target firm or a substantial part o f the target’s voting shares Bids are sometimes directed towards the acquiring firm ’s own shareholders, as in a minority buyout or in a leveraged buyout (LBO) For example, where a group o f investors, typically involving the firm ’s own management, acquires all the outstanding voting shares

1.1.2 A b o u t Synergy.

Synergy is the magic force that allows for enhanced cost efficiencies o f the new business Synergy takes the form o f revenue enhancement and cost savings By merging, the companies hope to benefit from the following:

• S taff reductions - As every employee knows, mergers tend to mean jo b losses Consider all the money saved from reducing the num ber o f staff members from accounting, marketing and other departments Job cuts will also include the former CEO, who typically leaves with a compensation package

Economies o f scale - For example, whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs Mergers also translate into improved purchasing power to buy equipm ent or office supplies - when placing

larger orders, companies have a greater ability to negotiate prices with their suppliers.

• Acquiring new technology - To stay competitive, companies need

to stay on top o f technological developments and their business applications By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge

• Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings A merge may expand two companies' marketing and distribution, giving them new' sales opportunities A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones

1.1.3 T y p e s o f Mergers and Acquisitions.

Varieties o f Mer ger s

There are some types o f mergers that are distinguished by how the m erger is financed According to Chiu, X.C.,(2000) each has certain implications for the companies involved and for investors:

Purchase Mergers - As the name suggests, this kind o f merger occurs when one com pany purchases another The purchase is made with cash or through the issue o f some kind o f debt instrument; the sale is taxable Acquiring companies often prefer this type o f merger because it can provide them with a tax benefit Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price o f the assets can depreciate annually, reducing taxes payable by the acquiring company We will discuss this further in part four o f this tutorial

• Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity The tax terms are the same as those o f a purchase merger.

From the perspective o f business structures, there is a whole host o f different mergers Here are a few types, distinguished by the relationship between the two companies that are merging:

Horizontal Merger - Two companies that are in direct competition and share the same product lines and markets

• Vertical merger - A customer and company or a supplier and company Think o f a cone supplier merging with an ice cream maker

M arket-extension merger - Two companies that sell the same products

In an acquisition, as in some o f the merger deals above, a company can buy another company with cash, stock or a combination o f the two Another possibility, which is comm on in smaller deals, is for one company to acquire

all the assets o f another company Company X buys all o f Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before) O f course, Company Y becomes merely a shell and will eventually liquidate or enter another area o f business.

Another type o f acquisition is a reverse merger, a deal that enables a private com pany to get publicly-listed in a relatively short time period A reverse

m erger occurs when a private company that has strong prospects and is eager

to raise financing buys a publicly-listed shell company, usually one with no business and limited assets The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares

Regardless o f their category or structure, all mergers and acquisitions have one com m on goal: they are all meant to create synergy that makes the value o f the combined companies greater than the sum o f the two parts The success o f a merger or acquisition depends on whether this synergy is achieved

1.1.4 How to perform Mer ger s and Acquisitions transaction.

The acquisition or merger o f businesses is a complex process which should be understood by all parties involved It is essential to have a qualified team in place, working with company owners and managers to develop the objectives and strategy for that company

It is also important to bear in mind that a buyer and seller do not need to be at the same stage in this process when they first enter into communication Sellers and buyers may identify and approach target companies which are not actively pursuing the possibility o f acquiring or being acquired

There are four main processes to run Mergers and Acquisitions transaction, which both the “buyer” and “seller’’ have to consider

7

Figure 1.1: M & A Proc es s Strategic Planning and Organ izat ion

Figure 1.2: Strategic P la n ni ng and O r g a n iz a t io n

Companies need to determine their strategic objectives very early, as they form the foundation for all that follows

For buyers, M&A is nearly always a strategic, a.s opposed to a financial, decision They typically desire to strengthen th eir competitive position by acquiring products, technology, distribution or in-place customers Sellers may desire to exit their company for financial purposes, o r they may determine that they cannot continue on a desired strategic path witlhout combining resources with an acquirer

These strategic objectives lead directly to the next planning step A potential buyer should develop acquisition criteria which define what kind o f target company will help them meet their strategic goals.

Similarly, a seller should define the characteristics o f a desirable buyer, and develop a selling plan to guide them in approaching potential buyers

identi fying the Targets

Figure 1.3: Identifying the Targets process

At this point in the process both the buyer and seller will distribute their respective acquisition criteria or Selling M emorandum through their contacts

or those o f their agents Depending on the strategies chosen, this initial distribution may be very widespread, or limited, pending identification o f high priority targets

It is important for both buyers and sellers to require binding (on themselves and any outside advisors) confidentiality agreements concerning any data which is released, both now and later in the process

The buyer and seller, as well as their agents, will then go through the process

o f identifying potential buyer or seller “targets” , using established networks, as well as searching through the vast mountain o f available information which modern technology has created

Appr oac hin g Potential Targets

9

Executives o f buying and selling companies may contact the identified priority targets directly or through an agent, which may have several benefits.

For a selling company, using an agent has the obvious advantage o f maintaining the confidentiality o f their com pany’s availability on the market, thus maintaining the internal morale o f the company through some o f the early exploratory discussions

Buyers will be gathering available public information on any companies they wish to approach, as well as analyzing the available selling material from their target Typically a buyer will want more information on a target company than the seller wants to release, resulting in early negotiations and discussions centered on access to information

Figure 1.4: Negotiating a Definitive A gr eem en t process

Negotiation o f a Definitive Agreement can be time consuming, and will typically divert senior management attention from the running o f their respective businesses, which should remain their highest priority It is helpful for both buyers and sellers to have a “quarterback” for this phase, who can handle team coordination, and can optimize the time use o f senior executives, who must remain involved This “quarterback” (who may be internal or external) can also facilitate negotiations by proposing “straw-man” options and positions which might not be appropriate for the respective company principals

When a definitive agreement has finally been negotiated to the satisfaction o f the buyer and seller, a formal “closing” will normally be held Often the final financial terms will not be known exactly at that time, and the agreement will specify how the settlement will be affected by a strict accounting taken as o f that date Deals have been broken at the closing table, so the teams should be prepared to respond to issues even at this point After closing is complete, and the signatures are dry, the acquiring company must then build on the foundation o f the Definitive Agreement to build a healthy and profitable new expanded operation.

1.1.5 O v er v ie w about Mergers and Acquisitions transactions.

M ergers and Ac quisitions in the wor ld.

Tr adi ng value ( U S D mil) total in n u m b e r

Figure 1.5: M & A tran sac tions in the world

Source: Price Waterhouse Cooper

Industry Tratling value Ranking M a r k e t Number of

Figure 1.6: M & A S u p p l ie r - follow industry (up to Q l - 2 0 0 8 )

Source: Thomson Financial - 2008

Mer gers and A c qu is iti o n s in V ie tn am

Figure 1.7: M & A tra n sa ct io n s in Vie tnam industries (%)

Source: Price Waterhouse Cooper -2008

13

Date Buyer Seller Industry

Malaysia

Vietnam Securities

J S C (V S E C )

Securities

and Investment Com pany

Omni Saigon Hotel Restaurant

1.2 M E R C E R S AN D A C Q U I S I T I O N S M O T I V A T I O N FOR SM E s.

1.2.1 Small and Medium Enterprises ( S M E s) definitions.

Small and Medium Enterprises (SMEs) is one important group o f companies

in national, they could be defined or distinguished from the other by number o f employees that they used or by their capital level

There are deferent criteria to define type o f SMEs in each country, each region

For example, according to European Commission, one company that called as medium when they have 50 to 250 employees and their balance sheet total o f €

10 to 43 millions

In Vietnam they defined SMEs follow number o f employees, as in definition, small enterprises: engaging up to 49 employees, medium size enterprises: engaging up to 299 employees

Now, SMEs become are socially and economically important in each economy

by their contributions to entrepreneurship and innovation, prov iding jobs,

sharing to Gross Domestic Product (GDP)

1.2.2 Enterprise growth strategy and methodology.

In managing Small and Medium Enterprises (SMEs), a company can take growth, stabilization or even extract strategy to influence its responses to both external competitive advantage and internal strength

The main two themes addressed here are as follows After SMEs set their development objective as a growth strategy, how should they choose the appropriate method o f achieving this goal o f the growth If SMEs decide to meet their strategic goals by Mergers and Acquisitions (M&A), what mode o f M&A

15

There are some factors behind mergers and acquisitions transactions that involve and affect to co m pany’s strategy, including:

G r o w t h strategy: is when an enterprise aims at a much higher standard than before, this targeted standard is market share or sales necessarily increase

A firm could implement a growth strategy by developing internally or merging with external businesses, according to three methods, including:

Increasing the number o f points o f sale to gain new customers;

Improving existing products or creating new but similar products to maintain present customers and attract new' customers, and

• Taking over a competitor or a forward/backward-related company through a merger

[Aldag Stearns, 1991 p 204]

G rowth as improvement in the operation o f an organization, including more revenue, increase staffing and market share Growth can be achieved by direct expansion, mergers with similar firms or diversification Present/future competitors cannot easily maintain alliances, especially when the two involved parties differently value the relationship Competition is always dynamic and strategies should be similarly dynamic, allow ing change in organization and implementation

A stability strategy: focuses on m aintaining a company's market share The

primary goal o f such a strategy is to strengthen the company internally An extraction strategy seeks to solve existing problems, increase management efficiency and layoff workers or withdraw funds from certain business units

1.2.3 Problems o f SIMEs.

1.2.3.1 Problem within S M E s.

Capital shortage and weak financial structure: Most SMEs are family- owned businesses that cannot easily raise capital from capital markets and external sources.

• High private loan ratio, financially risky: SMEs loan ratio is as high as 25.5%, indicating relatively poor financial health

Insufficient security: SMEs lack immovable property, and cannot easily make a debt by movable property's guarantee SM Es have no reliable source o f help

• Weak accounting systems, incomplete financial reports: SMEs suffer from a shortage o f accounting professionals SM Es prepare two sets o f financial reports for internal and external use to evade taxes

• Unable to gain complete information about loans: Owners o f SMEs tend not fully to understand the channels through which loans are available, and they miss out on soft loans

• Besides financial weakness as main problems them, S M L Ỉ S are known as lacking o f resources like: human, technology, management, market and productivity

To Conclusion, most SMEs are small and owned/operated by families, so their ability to raise capital is usually limited Additionally, their internal accounting systems are weak, and these companies do not provide complete financial reports nor provide p roof o f solvency SMEs therefore tend to be able to obtain less capital from the financial system than large enterprises Accordingly, SMEs always face the pressure o f raising capital and maintaining capital at an appropriate level The inability to raise capital and the limited channels to external capital are serious problems faced by SMEs

1.2.3.2 Prob lems associated with financial institutions.

Đ A i H Ọ C Q U Ổ C G I A H À M 0 : ,

T R U N G T Á M T H Ò N G TIN THU V I c N j

-— -N um erous loan items, a low credit line, and high cost o f credit: Banks burden SMEs by requiring onerous applications to be m ade for small loans.

• Conservative attitude tow ards loans because o f the high risk o f bad debt:

SM Es are limited by budget and audit policies, and the conservative attitudes

o f banks and financial institutions to lending money

Insufficiency o f financial service branches: SM Es are nationwide, but branches o f institutions that provide financial services are too few

1.2.3.3 Limitations ass oci at ed with financial policy.

Almost SM Es cannot raise m oney from the market Many medium enterprises have a strong potential to raise capital from the capital market, but are prevented by financial policies from going public

Limited capital, imperfect financial structure: The new security law allows SMEs to go public through a reporting system that allows them to raise capital from the market Small com panies can obtain loans from banks, but when middle-sized firms want to become large, they typically require more capital than the bank can offer

1.2.4 M er ge r s and Ac q u is i ti on s mo ti va tio n for S M E s

Mergers and acquisitions motivation theories are o f two kinds - value maximization and non-value-m axim ization Theories based on value maximization include efficiency theory, information and signaling theory, the market pow er hypothesis, and the financial motivation hypothesis; theories based on non-value m axim ization include shareholder and managers and the free cash flow hypothesis

The motivation for M &A is to add value to the new com pany as compared with the com bined value o f the m erged companies The main purpose o f M &A behavior is to gain economic benefit follows: the total value o f the new

company after M&A is exceeds the total value o f the two original companies [Brealey, Richard A & Stewart C Myers, 1988],

To conclusion, M&A is motivated by the desire to gain synergy, which can

generally be divided into three categories - operational, financial and managerial:

Operational synergy provides the advantage o f reduced cost by increasing the efficiency o f production or organization Increasing production efficiency is essential to realizing economies o f scale and increasing organizational efficiency is essential to reduce trading costs

In reality, most SMEs grow by opening new branches, perhaps because finding M&A targets is difficult This work suggests, however, that SMEs size opportunities immediately When the economy is experiencing hard times, mergers and acquisitions can be most profitable An SME with a long-term growth plan should not wait for the economy to return to its peak, when no company will be willing to sell itself Nevertheless, branching is less complicated and remains a fine method o f growth as long as the company follows its planned growth strategy

• Financial synergy includes the diversification o f risk and reducing the cost o f capital Risk, according to classical asset theory, is diversified when a company enters an unrelated market segment or industry by multiple M&As The company thereby reduces the variability o f profit, and the total value o f the new company exceeds the sum o f the individual entities

In the case o f SMEs, firms can offer reciprocally finance to meet urgent needs and thus create a coinsurance effect that reduces the possibility o f bankruptcy following M&A and become more willing to loan at a lower cost o f capital, because the future cash flow is less risky, and the risk o f bad debt is lowered

I lence, it increases the solvency o f a company after M&A

19

Although M&A introduces risks associated with cultural integration, SMEs can reduce such risks by thoroughly evaluating candidates for acquisition More M&A benefits SMEs in the long run.

• Managerial synergy is o f two types - differential efficiency and inefficient management theory: According to differential efficiency theory, if the management o f firm A, whose operational efficiency is lower than the standard for the industry, acquires firm B, which has efficient management, then the efficiency o f firm A is raised to the level o f that o f firm B According

to inefficient management theory, if the target company's managers are operating below their potential, but the owner o f the target company cannot replace them, M&A enables the target company to replace their inefficient managers

CH AP T E R 2 - THE CASE OF GATEWAY SECURITIES

AND MORGAN S T A N L E Y SINGAPORE.

However, high inflation continues to be a major concern: Consumer prices rose to a new 15-year high o f 21.4%, inflation a main threat to V ietnam ’s rising prosperity and credibility o f Communist Party government

Beside this, there is some rem arkable points o f Vietnam Economy, including:

r*()ne politically stable countries in the region

> Implementation o f wide ranging reforms creates a strong basis for sustainable economic developm ent and growth

^C o m p etitiv e advantages are becoming more apparent - hard-working, highly literate, young and ambitious workforce

^ M o d e rn iz in g and improving efficiency o f Stated O w ner Enterprises (SOEs), its encourage private sector participation, for example: Private Company, Join Stock Company, Co-operation

> Strengthening financial sector: bank, finance company, securitiescom panies ; and improving environment for FDI

21

Vi etnam Indo Thailand Malaysia

From 1999, when the first Vietnam Securities Firm was founded in, to 2007, Securities Industry o f Vietnam increased strongly There are more than 30 company was established and operated in that time.

In 2007, with the booming o f finance market depend on need o f equitisation process and plentiful saving o f people as well as foreigner’s investment, Securities Industry quickly became important industry in contribution to GDP, creation more and more job and effect on all other industries

At the end o f 2007, there w;as 67 securities companies was operating in Vietnam, main operating profit o f securities firm consist in some operation including:

■ Securities brokerage:

This is a most profitable operation for Vietnam securities firms in that period,

at the end o f 2007, total number o f subscribe are 349,400, increased 228% in compared with 2006; total trading value are 281,694 VND billions

2.1.2 Introduction o f Vietnam Securities Industry.

In 2007, securities companies, who operated for long time, almost get high number o f subscribe rates, top a performance in number o f subscribes are listed in the Figure 2.3:

Figure 2.3: T o p subscribers holder

Source: State Securities Commission

23

Trading volume is up from VND billions 40,297 in 2006 to 281,694 VND

billions at the end o f 2007, high trading volume rate is also held by companies

w ho have a large number o f subscribe as VCBS, SSI, ACBS

Figure 2.4: T o p tra d in g v o l u m e im ple m en te r

Source: State Securities Commission

■ In ves tm en t advisory:

Including

- Customer Advisory: in securities firms, this operation almost associate with

brokerage action, as: market reports, analysis reports or listed co m pany’s

database sh arin g

- Equitisation Advisory and Underwriting: some big company like SSI,

A C B S concentrated on this activity, how ever profit from this activity is so

small in contribution to company

- Average underwriting fee o f 100bps.

Equity Capital M a rk et (E C M ) :

- Licensed to do onshore local currency denominated underwriting & advisory

- Average underwriting fee o f 100-150bps

M erg e & Acquisition (M & A ) :

- Most attractive activity o f Investment Banking Department due to high demand o f Vietnamese companies in having strategic partner

- Average transaction fee o f 100-300bps

- Cooperate with Strategic Financing Group (SFG) & industry specialists in M&A transactions

In almost securities firm, this activity is undeveloped, even in some companies which are small scale, they d o n ’t have Investment Banking department

■ Principal inve stment

As other investors, securities firms use their own capital to invest in capital market, but d o n ’t like individual investor, the firm ’s investment is supported

by a lot analysis instrument o f themselves

It’s most profitable and risky field o f securities firm, so that some almost securities company speed up this activity, not only old and big companies, but also new companies

2.1.3 G a t e w a y Securities Introduction.

Gateway Securities Inc (GSI) was established in 2006 by a team o f dedicated Vietnamese and international business professionals and entrepreneurs who have extensive commercial experience in Vietnam and the Asia Pacific region over the last two decades

Gateway Securities founders and management team bring a wealth o f experience in portfolio investment, securities trading, banking and finance, with the chartered capital o f 20 billions VND.

Figure 2.5 : G a t e w a y Securities Structure

Co r po r a te Strategy

■ To establish a full service brokerage and investment banking firm in Vietnam to capture the outstanding growth opportunities in securities brokerage, advisory and investment banking business;

■ To establish operating branches in all major cities in Vietnam;

■ To manage Gateway according to acceptable international standards and

be a world class operator with a strong commitment to corporate governance, regulatory compliance and business integrity;

■ To enter into a strategic partnership with leading international financial institutions in order to create a global client network and share best practices

Mission Stat em ent

G atew ay ’s mission is to create investment opportunities and wealth for our clients and shareholders through expert advice, innovative solutions, outstanding execution and comprehensive access to the Vietnamese capital markets.

Products and Services

As almost other Securities firms, Gateway provides fundamental services including:

■ Securities brokerage

Gateway is a full trading mem ber o f HoSTC and HaSTC, brokerage department provides the following services:

- Equity, convertibles and fixed income brokering

- Margin lending products

- Custodian services

■ Investment advisory

Gateway Investment Advisory team provides clients with:

- Insightful and timely information on listed and unlisted companies

- Advice and guidance on capital market investment opportunities

in Vietnam

Gateway has assisted clients to invest successfully in:

- Pha Lai Thermal Power C ompany

- Navico Seafood Company

- 1 lighway No 13

- PetroVietnam Fertiliser and Chemical Company

27

■ Investment banking

According to regulations, some investment banking services that provided by Gateway like: privatization, listing on the exchanges, private placements, company valuation

But in fact, there are almost no investment banking operation fulfilled by Gateway

■ Principal investment

Gateway invests our own capital as well as that o f our business partners directly and indirectly in various industries, including utility, banking and finance, infrastructure, agriculture, real estate, and others

Gateway is committed to helping our clients and business partners develop investment strategies in the capital and real estate markets in Vietnam and overseas

2.2 1Y1&A A N D T H E C H O I C E O F G A T E W A Y S E C U R I T I E S ’S

S T R A T E G Y T O DE V E L O P

2.2.1 External and Internal analysis in Securities Industry to define

O pp ortuni ties and Threats.

2.2.1.1 External Analysis in Securities Industry

Figure 2.6: G D P and real G D P G ro w th rates o f Vietnam

Source: General Statistic Office o f Vietnam

The differentiations between GDP and real GDP primarily come from the inflation rate, this rate o f Vietnam is too high, this factor reduce the GDP to real GDP, it also influence the rate o f capital that used to invest within the total revenues According to General Statistic Office o f Vietnam, from 2004 to

2007, the annual inflation rates are often nearly 10%, but particularly reached 12.63 % in 2007

Figure 2.7: Annual inflation rate o f Vietnam

Source: General Statistic Office o f Vietnam

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Besides, the basic interest controlled by State Bank o f Vietnam is constant at 8.25% in many year also be a important factor to help the economy attract investment capital from people who want to have higher rate o f return.

One significant rate that represents investment level o f economy is the saving rate, the more saving the more potential investment capital In Vietnam, the saving rates reached 43.13% comparing with the real GDP, in the previous years, this rate are around 30 - 35%

%

2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7

3.1

Figure 2.8: Saving rate c o m p a r i n g with real G D P

Source: General Statistic Office o f Vietnam

The per capita income o f the Vietnamese population is up from US $250 in

1995 to US $835 in 2007, according to the World Bank Vietnam achieved these huge gains for its population after retaining its position among the best- performing economies in the world for the past 10 years

Foreign direct investment (FDI) both registered and implemented in Vietnam has continuously increased in recent years, in 2007, registered FDI in 2007 reached USD 20,3 billion, up to USD 8.3 billions comparing with USD 12 billion in 2006, in there implemented FDI are USD 8 billions The new signal

o f FDI was investment structure, which transferred from industry area to hotels, house for rent, tourism and hanking.

2005

l

□ Registered ■ Implemented

Figure 2.9: FDI in Vietnam O ve r vi e w

Source: General Statistic Office o f Vietnam

In 2007, one significant factor that effect to Securities industry is the boom ing

o f V ietnam ’s Capital Market, that be controlled by State Securities Commission o f Vietnam (SSC) since 1996 Under the G overnm ent’s Decree

No 75/CP o f November 28th, 1996

At August 2007, Capital Market includes a hundreds company, whose stocks are traded through three main markets including:

y Hanoi Securities Trading Center (HaSTC): 88 listed securities

M lo c h im in h Securities Trading Center (HoSTC): l l l listed securities

> O v er The Counter (OTC): where stocks o f companies in intermediate process between Initial Public Offering and Listed in Trading Centre could be traded

At the end o f 2007, the market capitalization o f Vietnam is estimated about 43.5% o f GDP, it show the constant increasing trend in the V ietnam ’s Capital

3 1

Market and at the end o f 2007 formal-market (HaSTC and HoSTC) capital is estimated o f more than USD 15 billions.

Figure 2.10: M a rk et capitalization o f Vietnam

Source: State Securities Commission

r- Political Factors.

The Equitisation Process in Vietnam began and associated with restructuring

o f large State Owners Enterprises (SOEs), reforming process o f SOEs was launched in the early 1990s as a result the “Doi Moi” policy and was undertaken in different stages, with different approaches and using different vehicles

There is significant point o f this process; this is the reduction in number o f SOEs This process was the foundation o f Securities Industry and the development o f finance instruments

The results o f this process listed below:

• 1991-1997: the number o f SOEs fell from roughly 12,000 to 5,500

• 1998-2000: reform process stalled - Asian financial crisis

• 2001-2005: reform process accelerated again - 3,350 SOEs were restructured out o f an existing 5,500 at the beginning o f 2001

• There are reportedly around 2,200 SOEs remaining with total capital o f USD31 billion, equivalent to 31% o f GDP The government intends to retain

554 SOEs

• The equitization pipeline for 2007 is estimated to reach USD10 billion

• Plan to equitize and list 71 large SOEs by 2010 adopted by the government

SOE reform continues to make solid progress

Figure 2.11: S O E reforms arc str engthening the private sector

Source: Ministry o f Finance

Becoming a official mem ber o f WTO on 7th N ovem ber 2006, Vietnam are taken interests in foreigner investors both organization and individual, they have a big capital to invest in Vietnam’s capital and become a important factor who lead the trend o f stock market on 2007

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