Merger and acquistion in Vietnam securities sector identify motives nennefits and obstacles Luận văn thạc sĩ

By TRUONG NU PHUONG LOAN MERGER AND ACQUISITION IN VIETNAM SECURITIES SECTOR IDENTIFY MOTIVES, BENEFITS AND OBSTACLES Ology: Finance – Banking Ology code: 60.31.12 MASTER’S THESIS Advi

By TRUONG NU PHUONG LOAN

MERGER AND ACQUISITION IN VIETNAM SECURITIES SECTOR IDENTIFY MOTIVES, BENEFITS AND OBSTACLES

Ology: Finance – Banking Ology code: 60.31.12 MASTER’S THESIS

Advisor PhD Nguyen Thu Hien

HO CHI MINH CITY 2010

Nguyen Thu Hien, my thesis advisor, for her valuable advises and support throughout every stage of my study

Secondly, I am also grateful for the suggestions and comments from my friends, colleagues, relatives during the time of study

Thirdly, I would like to extend deep senses of gratitude to all of my teachers who have taught and guided me throughout the period of MBA Program at University

of Economics Ho Chi Minh City

Fourthly, I would like to thank my family for the constant encouragement and moral support given to me throughout my studies

Lastly, this study paper is the meaningful gift to my mother who always expects

me to progress in the life

Ho Chi Minh City, Vietnam

October, 2010

Truong Nu Phuong Loan

stock market, M&A has just appeared and been developing for 10 years in Vietnam Although, it has not had a long development history, the M&A activity has obtained certain critical development milestones as there have been more and more companies choosing M&A as a way to expand business, and achieve objectives of business growth as well This researching topic aims at exploring and discovering the motives, potential benefits, and obstacles of the M&A activities of the companies in the securities sector in Vietnam

In order to achieve the set targets of the research, it was started by studying relevant basic theories of the international researchers on the motives, potential benefits and obstacles of the M&A activity

Researching method used was namely the qualitative and quantitative approach The data of the quantitative method was done by researching 32 securities companies in Ho Chi Minh City

The results of relevant tests showed that the companies paid more attentions to the motives of improving operation management, market penetration, penetration into new market, as well as efficiency factor

The results of relevant test also showed that the most critical obstacle to which the companies of the securities sector in Vietnam did face with were those of regulatory and administrative procedures

ABSTRACT ii

TABLE OF CONTENTS iii

LIST OF FIGURES vii

LIST OF TABLES vii

LIST OF ABBREVIATIONS xi

CHAPTER I : INTRODUCTION 1

1.1 General background 1

1.2 Research objective 4

1.3 Scope of study 5

.CHAPTER II: LITERATURE REVIEW 6

2.1 General views 6

2.2 Characteristics of Merger and Acquisition waves in the USA 7

2.3 Research theories on merger motives 10

2.4 Concept of Synergy as a Main Motive for M&A 12

2.5 Obstacles preventing M&A activities 17

2.6 Vietnam M&A activity review – 2009 19

2.7 M&A in Vietnam securities sector in indispensable .22

3.2 First phase – Qualitative research 29

3.2.1 Interview 29

3.2.2 Build questionnaire 29

3.2.3 Pilot testing 30

3.3 Second phase – Quantitative research 31

CHAPTER IV: RESULT 32

4.1 Sample profile 32

4.2 Results of qualitative research step 33

4.3 Group of factors 34

4.3.1 Measurements scales of variables “Motives, benefits of M&A in Vietnam securities sector” 34

4.3.2 Measurements scales of variables “Obstacles of M&A in Vietnam securities sector” 35

4.4 Exploratory Factor Analysis 37

4.4.1 Measurement scales of “Motives, benefits of M&A in Vietnam securities sector” 38

4.4.2 Measurement scales of “Obstacles of

4.5.1 Measurement scales of “Motives, benefits of

M&A in Vietnam securities sector “ 44

4.5.2 Measurement scales of “Obstacles of M&A in Vietnam securities sector” 50

4.6 Observing variances and Cronbach’s Alpha after reliability analysis 54

4.6.1 Result of Cronbach’s Alpha for factor of “Motive, benefits of M&A activity” 54

4.6.2 Result of Cronbach’s Alpha for factor of “ Obstacles of M&A activity” 57

4.7 Descriptive statistic of motives, benefits and obstacles of M&A activity .60

4.7.1 Number of years experience factor 61

4.7.2 Chartered capital factor 62

4.7.3 Profit before tax factor 66

4.7.4 M&A dynamic factor 67

CHAPTER V : CONCLUSIONS 73

and measuring the reliability of the scales 74

5.1.2 Exploration of obstacles of M&A after analyzing the factors and measuring the reliability of the scales 75

5.1.3 Result of Descriptive statistics and ANOVA test on classification variables 76

5.2 Limitation of research .77

5.3 Recommendations 78

REFERENCES 79

APPENDICES Error! Bookmark not defined APPENDIX 1: SURVEY QUESTIONNAIRE – ENGLISH 81

APPENDIX 2: SURVEY QUESTIONNAIRE – VIETNAMESE 88

APPENDIX 3: LIST OF M&A DEALS FOR SURVEY 95

APPENDIX 4: LIST OF INTERVIEWEES 102

Figure 2.2: M&A target in Vietnam Percentage of announced deals

by the top five most active industry sectors .21

Figure 2.3: M&A deals in Vietnam securities sector from 2007 to now 25

Figure 3.1: Research model 28

Figure 3.2: Qualitative research 31

LIST OF TABLES Table 1.1: Announced M&A deals 2

Table 2.1: Common Theories of What Causes Mergers and Acquisitions 14

Table 2.2: Commonly Citied Reasons for M&A Failure 17

Table 2.3: Deal Activity Summary .20

Table 2.4: M&A deals in Vietnam securities sector 24

Table 4.1: Characteristic of samples 32

Table 4.2: Descriptive Statistics in Motives, and Benefits 36

Table 4.3: Descriptive Statistics in Obstacles 37

Table 4.5: Extracting Component Analysis with Varimax rotation with scale of “Motives, benefits of M&A activities in securities sector” .39

Table 4.6: KMO and Bartlett’s test with scales of “ Obstacles of M&A

in Vietnam securities sector .41 Table 4.7: Extracting Component Analysis with Varimax rotation

with scale of “ Obstacles of M&A activities in securities sector” 41

Tables 4.8: Results of Reliability analysis on Cronbach’s Alpha

Table 4.14: Results of Reliability analysis on Cronbach’s Alpha

Benefits of M&A activity ” 56

Tables 4.23: Descriptive statistic of “ Motives and Benefits of

M&A activity” 57 Tables 4.24: Results of Cronbach Alpha’s for factor of “ Obstacles

of M&A activity” 59

Tables 4.25: Descriptive statistic of “ Obstacles of M&A activity” 60

1 ANOVA : Analysis of Variance

2 EFA : Exploratory Factor Analysis

3 KMO : Kaiser - Meyer - Olkin Measure of Sampling Adequacy

4 M&A : Merger and Acquisition

5 SPSS : Statistical Package for the Social Sciences

6 U.S : United States

CHAPTER I: INTRODUCTION

1.1 General background

In January 2010, Vietnam concluded three years of membership in the World Trade Organization Membership infused a new spirit into the business environment in the country and also facilitated higher visibility for Vietnam as an international trading partner and as an investment destination Membership status has also motivated Vietnamese enterprises to evolve and to adopt international best practices in order to maintain their rate of development and their competitiveness against current and future entrants of foreign competitors

To raise funds for the economy to facilitate economic growth, Vietnamese government has issued many policies attracting foreign investment Government decree 139, which became effective on 1 January 2008, removed limit on foreign ownership ratios in Vietnamese companies except in relation to public listed companies where the 49% cap remained in place along with a 40% cap in public non-listed companies In addition, sector specific limitations, most importantly in telecoms, financial services and other services remained in place Besides, the development of stock market in Vietnam also attracts funds from local investors, who used to choose gold, foreign currencies and real estates to be only choices before the introduction of stock market

Interest in Merger and Acquisition has remained extremely high in Vietnam during

2008 Successful domestic companies have been increasing open to deal making as they pursue expansionist strategies, while companies struggling to cope with the changing economic environment were more open to discussion regarding the scale

of equity stakes to domestic and foreign suitors The number of deals between Vietnamese companies doubled in comparison to 2007

Table 1.1 Announced M&A deals

Announced M&A deals – Target region/ Nation

2008 2007 % change 2008 2007 %

change

US $ Million Number of deals

Worldwide 2.395.960 4.169.287 -29.6 39.597 43.817 -9,6 USA 986.283 1.570.848 -37.2 9.165 11.296 -18.9 China 104.253 75.390 38.3 2.983 2.587 15.3 South East Asia 75.176 75.675 -0.7% 2.065 2.001 3.2 Vietnam 1.009 1.719 -41.3% 146 108 35.2

Source: Thomson Reuters, Pricewaterhouse Coppers Research

Financial services are a strong case for Mergers and Acquisitions, especially in securities sector The explosion in the number of securities companies over the past

10 years creates an intensely competitive market place for the small players in a country where number of investors is still limited In addition, the impact of global financial crisis on Vietnamese stock market has cold the market down sharply This lead to a drop of VNI from 1103.88 points to 315.62 at the end of 2008 Trading volume also reduced sharply during this period from 1.239.692.000.000 VND dong

to 406.560.000.000 VND dong The reduction of trading activities has brought loss

to many securities companies and some of them have to either cut down their services and lay off staffs, or find ways to merge with other companies to survive

There are over 100 securities companies in Vietnam market where of individual brokerage clients is still limited, where few new listing of companies are taking place so that the investments are unattractive Many newly established securities firms and even some of the well established ones with relatively large brokerage bases, are looking for a strong financial institution to take a minority stake in them

in order to gain access the investor’s expertise, offshore client base and their funding resources Foreign investors for their part still see Vietnam as an attractive, developing market but in general are moving cautiously and will not willing to pay the sorts of multiples seen in past securities company Merger and Acquisition transactions

In addition, the State Securities Commission has decided to stop granting license for the establishment of securities companies because of the quantity inconsistent with quality Thus, the investors continue to “hunt” Because they believe that the Vietnam securities market is a new market for investment Specifically, the transaction fees in Vietnam securities companies are higher than developed countries With the technology available these organization will participate in the exploitation of Vietnam’s securities market better

From 2005 to present, the Mergers and Acquisitions in Vietnam securities section trend to increase both the quantity and value of transaction, with participation from abroad organization In fact, many securities companies have transferred successful, for example: Morgan Stanley has bought stake of Huong Viet Securities Company and renamed to Morgan Stanley Gateway Securities JSC, Golden Bridge has bought

49 percent stake of Click &Phone Securities company, RHB Bank (Malaysia) has bought 49 percent stake of Vietnam Securities company OSK investment bank BHD, a wholly-owned unit of OSK Holding Bhd, withdrew its agreement to acquire

a 49% stake in Seabank Securities JSC, a securities brokerage firm, for 220.5 billion Vietnamese dong

Latest business, A purchase by Woori Investment and Securities Company (Korea)

of 10 percent of the Bien Viet Securities J.S.C(CBT) ‘s charter capital Not only foreign partner but also domestic investors or large corporations are interested in this field Specifically, in July 2009, the PetroVietNam insurance corporation’s acquisition of 19 million stake equivalent to 66.58 percent of charter capital in the PSI securities company Seamico Securities PCL (SS) acquired a 25% stake in Thanh Cong Securities JSC(TC), a securities brokerage firm, and a majority-owned unit of Thanh Cong Textile Garment Investment Trading JSC, for 77.683 billion Vietnamese dong Concurrently, SS was granted an option to raise its stake to 49% from 25%, by acquiring a further 24% stake in TC Vietnam State owned Tan Binh Import-Export Corp acquired a 10% stake in Cholon Securities JSC, from Cholon

Investment and Import-Export Co (7.2%) and Cholimex Food JSC (2.8%) In March

2009, the Vietnamese government (VG), announced that it was seeking a buyer for its 13% stake in its Vietinbank Securities Co (VS) unit Concurrently, VG planned

to divest its 14.9% stake in VS to the public in an equity carveout transaction Ocean group acquired a 59% interest, or 8.9 million ordinary shares, in Ocean Securities Joint Stock Company

In addition, the private investors are interested in this field Mr Tran Minh Tien acquired a 42.86% stake in Royal Securities Corp, a securities brokerage firm, Mr Trinh Van Tuan acquired a 16.92% stake in VietNam International Securities JSC, a securities brokerage firm, from Ms Nguyen Thi Thu Trang

The above analysis shows that the takeover market in Vietnam has been very active recently and will be very potential in the future, especially for the securities sector Therefore, this thesis focuses on identifying the motives, benefits and obstacles of mergers and acquisition activities going on in the securities sector of Vietnam with

a purpose to find out the factors behind the growing trend of M&A in securities sector and provide recommendations to the policy makers to encourage the development of this important sector of the economy

1.2 Research objective

The objective of this thesis is to identify motives that foster Vietnamese securities companies to do merger and acquisition, potential benefits of Merger and Acquisition, and also obstacles preventing securities companies in doing Merger and Acquisition successfully Specifically, it attempts to investigate the following questions:

1 What are motives that foster local firm to do Merger and Acquisition?

2 What are potential benefits that enable merged firms to be more advantage?

3 What are obstacles that have been preventing securities companies in doing merger and acquisition successfully?

1.3 Scope of study

Due to the complication of Merger and Acquisition activities, time constraint as well as the limitation of Merger and Acquisition information, this study only focuses on M&A transactions involving listed companies that are located in Ho Chi Minh City

CHAPTER II: LITERATURE REVIEW

2.1 General views

Merger and acquisition activities are nowadays a common phenomenon in many industries Numerous M&A deals in diverse industries are reported in press releases every week M&A activities change market structures, market share, and the depth

of competition in a market The amount of money at risk, the volume of the deals that are closed, and the prevalence of M&A across all industries in almost all regions in the world, gives M&A its eminent role in business administration theory

In general, the quest for growth in a company can be realized with either one of the two growth strategies, namely organic or inorganic growth strategy Organic growth strategy, also called “internal growth strategy”, refers to the growth of revenue, market share, and the size of a company independently without acquiring or cooperating with another company Inorganic growth strategy, sometimes called “ external growth strategy”, is the growth of a company through cooperation or concentration or both In recent years the management of many companies turns to external instead of internal growth strategic to demonstrate growth due to time and resource disadvantages over competitors and ostensible synergies they see between other companies and their own External growth strategy can be subdivided into cooperation and concentration based on the binding intensity between the companies involved Binding intensity measure the level at which the resources, actions, and autonomy of decision of a company are restricted, due to a contractual arrangement with another company As shown in Fig I, there are two types of concentration – mergers and acquisition Although the terms “ merger” and “ acquisition “ (M&A) technically have different meanings, they are most often confused or used as synonyms

Merger: A combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm Although the

buying firm may be a considerably different organization after the merger, it retains its original identity

According to Gaughan, a merger is a combination of two companies in which only one company survives and the merged company ceased to exit, whereby the acquiring company assumes the assets and liabilities of the merged company

An acquisition, also known as “takeover”, is the buying of a company the

"target” by another or the purchase of an asset such as a plant or a division of

a company The premise to M&A is that it is the panacea to fast growth in a

market It is much easier for companies to generate revenue growth by simply adding the annual revenues of acquisition targets to theirs than improving the profitability of an overall enterprise

2.2 Characteristics of Merger and Acquisition waves in the USA

M&A activity has been being seen for long, starting from the years at the end the

19th century M&A activity was first recorded in the transition period from the competitive capitalism to the monopoly capitalism with the forming of giant industrial group of companies in 1895- 1905 This was known as the period of capital mobilization of the world economy in line with the fast development of economic powerful countries, such as the U.S, and some European countries Mainly driven by the overproduction, which resulted in the weakness of demand and declining in selling price, many U.S companies conducted the horizontal mergers in order to create huge production lines And thus, the M&A was known since then

Following the U.S market, the UK market happened to have M&A transactions in the 60 decade of the 20th century M&A has been also being recorded in other European markets since the years of 1980 This situation was explained as a result

of the globalization of the world economy and the impact of the USA economy to the others’

Moving into the 21st century, a new M&A wave happened with more diversified forms and bigger size This wave did not limit within the developed economies, but also cover the emerging economies, such as Korea, China, Singapore, India, Vietnam and Middle East region…

As such, with the history of more than 100 years, the characteristics of Merger and Acquisition waves in the USA are divided into five waves as follows:

1895-1903: The creation of the great oil, steel, and other trusts, sometimes called

the “Merging for monopoly” wave The First World War was the cause ceasing the first wave

1920 -1929 : Consolidation in many industries, sometimes called the “ Merging for

oligopoly” wave The second wave began in the late of 1910s and continued until

1929 when the stock market crashed

1960-1973 : Emergence of conglomerate firms and other diversifying acquisition,

sometimes called the “ Conglomerate merger” wave This period was witnessing the birth of groups of companies, and multi-national companies in the world economy Many companies of the U.S started to make investment in other countries to enjoy the favorable taxation policies, reduction of trade technical barriers and transportation cost…This wave was stopped in the years of the beginning of the

1970, when there were a decline of Dow Jones index, and energy crisis

1978- 1989 : The fourth wave isn’t neatly captured in a single phrase, but included

large components of hostile takeovers, bust –up and refocusing of conglomerate firms, and leveraged buyouts.Any company might also be acquired if being unable

to utilize its strength to survive M&A of this period happened between banks, aviation, oil and gas, and pharmaceutical companies

1992 – Present: Strategic restructuring wave

Perhaps comparable takeover booms occurred in other countries at about the same time ( or at other times), but if so, no scholar has mentioned this, to may knowledge Cross- border transactions were a distinct minority We don’t know what proportion U.S takeover activity was of the world total during the prior waves- no one kept good international data But the failure to collect data is telling – apparently there wasn’t enough activity to justify collecting it

In contrast, the current wave has a distinctly international flavor Many of the signature transactions – including Daimler’s acquisition of Chrysler to form DaimlerChrysler and Vodafone’s acquisition of Mannesmann- were either entirely outside the United Stated or involved a non –U.S party The $180 billion Vodafone – Mannesmann transaction, between two non- US firms, is the largest in history Autos, telecoms, telecom and internet equipment, airlines, oil, and metals ( notably copper and aluminum) are example of industries where worldwide consolidation is driving intensive takeover activity In banking, the mergers mostly remain domestic( perhaps because banking is highly regulated), but domestic consolidation

is increasing driven by international competition European takeover activity, fueled

by the adoption of a true single market with a single currency, has soared to $ 630 billion in announced transactions in 1998 and $ 1.6 trillion in 1999.It wouldn’t surprise me if European takeover in dollar volume probably for the first time ever

Writ broad, the increasingly international flavor of takeovers is an inevitable accompaniment to the international growth of securities market The United States economy is a shrinking portion of the world economy and the U.S stock market, as strong as it has been, is a shrinking part of the world market, measured by market capitalization No surprise, the, that U.S takeover are a shrinking share of the

worldwide total The international flavor of merger activity will almost surely be even more prominent in the next wave, and its predecessor as the last distinctly American merger wave

By reviewing the above mentioned six periods of the M&A, it is understood that the waves of the M&A were all to have certain connection with the development of the economy, especially when the stock market hit the mark

2.3 Research theories on merger motives

Although the decision to merge is often driven by a complex pattern of motives that cannot be put into a single approach, academic research has developed some major theories that help to explain underlying motives and assumptions However, a final answer to the motivations behind the merger has not been found, as it is difficult for economic researchers to identify the sources of gains with their coarse information set (Andrade, Mitchell et al.2001) This paper tries to shed additional light on this topic by suggesting that the influence of industry concentration should be considered in the academic research of merger motives In the following, we briefly introduce the three theories we test and explain how these motives can be identified

by observing capital market reactions of stakeholder firms

The first theory is the efficiency or synergy theory It states that mergers are

executed to achieve synergies, compromising financial synergies (lower cost of capital), operational synergies (combination of operations and knowledge transfer) and/or managerial synergies (when the acquirer’s management possesses superior management skills and abilities) In fact, synergies are often cited as a key argument

to improve productive efficiency and to justify management actions (Porter 1987) Capron (1999) argues that cost synergies are often driven by asset divestitures (physical assets and cutback of personnel), while revenue- enhancing synergies emphasize the redeployment of resources to improve the company’s ability to

generate earning Empirical research shows that a relationship between the net present value of synergies and announcement day return exists, although revenue-enhancing synergies are not valued as highly as cost – reduction synergies (Comment and Jarrell 1995, Walker 2000, Houston , James et al.2001) Fee and Thomas (2004) find evidence consistent with improved productive efficiency andbuying power as sources of gains to horizontal mergers Andrade and Satfford (2004) highlight that mergers are an effective means for industries with excess capacity to rationalize and induce exit To identify a productive efficiency motive in firm mergers, empirical research suggest examining capital market reactions (Eckbo

1983, Fee and Thomas 2004, Sharur 2005) According to relevant literature on this topic, the positive impact of synergies and productive efficiency gains is reflected in positive capital market evaluations for target and acquiring companies following merger announcements In contrast, share price reactions of rival companies are not clearly determinable as both positive and negative excess returns can be argued For example, if the merging parties achieve a more efficient production/ market positioning, then rivals should be worse off as competitive disadvantages result (Schumann 1993) The opposite effect occurs if the merger induces a positive signal indicating that the rivals are able to copy the efficiency gain of the merging companies (e.g better production routines)

The second theory is the monopolistic collusion theory, which argues that

mergers (horizontal and conglomerate mergers) are executed to improve market positioning and to gain market power Trautwein (1990) summarizes that the monopoly theory’s evidence appears to be weak, as most studies show that the primary reason for mergers is not to achieve monopoly power This is confirmed by recent studies For example, Fee and Thomas (2004) found in their investigation of upstream and downstream product- market effects only little evidence for monopolistic collusion Evidence on the monopoly consequences of mergers can be identified by observing target, acquirer and rival reactions As an improvement of market positioning is achieved, there should be a positive wealth gain to target and

acquirer shareholders Competitors should also benefit through collusive mergers since the positioning of all companies in the industry is improved This is because collusion mergers have a tendency to limit output, raise product prices and/ or lower factor prices (Chatterjee 1986) However, a positive riva Reaction in itself cannot definitively prove monopolistic collusion motives (Stillmann 1983, Eckbo and Wier 1985)

The third line of reasoning focuses on the explanation for why mergers often

destroy wealth of bidding shareholders It includes the agency theory (managers who maximize their own utility) and hubris theory (overestimation of management’s abilities) Empirical studies show that at least part of the large price increases in the target firm shares are attributed to a general wealth transfer from bidder to target Roll (1986) argues that hubris is necessary to explain why mangers

do not abandon unfavorable takeover offers, also since reflection would suggest that such bids are likely to represent positive errors in valuation Seyhun (1990) finds that mergers are value destroying for acquiring firms and conclude that takeovers are motivated by agency problems or hubris Walking and Long (1984) find that the existence or absence of managerial resistance to a takeover bid is directly related to the target management’s personal wealth changes induced by takeovers

2.4 Concept of Synergy as a Main Motive for M&A

The main motive behind each and every M&A deal that is consummated is based on the concept of synergy Synergy, therefore can be seen as the lynchpin of every M&A deal Synergy can be defined as the combination of two elements, A and B, to produce a greater result or where the sum of the results of the single elements A and

B is far smaller than that of the whole A+B together- the well-know 1+1= 3 effect

It infers that M&A generates greater value for shareholders by capitalizing on foreseeable synergetic benefits between two companies In general, there are two main forms of synergy: operating and financial synergy Operating synergy can

furthermore be divided into revenue- enhancing and cost- reducing synergies Revenue- enhancing synergies refer to the opportunity to increase total sales significantly by cross-selling of products, and having access to an already installed customer base along with restricted distribution channels Cost-reducing synergies stem from economies of scale and scope effects that the organization then has The economies of scale effect describes the decrease in cost per unit due to a significant increase in total output For example, underutilized production plants can be used at full capacity and the fixed cost per unit will drop because the total fix cost will now

be spread over many units In contrast, economies of scope is the ability of a firm to utilize one set of resources to deliver a broader range of products and service Example are the elimination of unnecessary duplicative job positions, departments, production plants, etc Financial synergy describes the possibility of a reduction in the weighted cost of capital of an acquiring firm if the cash flow streams of two companies are negatively correlated because of the low risk of insolvency that results as outcome of the merger

The problem associated with synergy as a non plus ultra argument for a merger is the quantification of its value in monetary term, e.g dollars or euro The models that are used to calculate the value of synergies, such as net present value, are often subject to a wide array of bias First, management often underestimates the time it will take to capture the synergies between two companies Due to underestimation

of the time periods, the net present values of synergies are substantially overestimated Second, the acquirer’s lack of critical information about the target and failure to conduct a bottom-up synergy analysis normally leads to synergy estimations that are far from reality The management of many companies fails to understand that the mere existence of synergies between two companies and the ability to derive financial gains from them by making use of the existing synergies are two different things Because of the problems associated with the quantification and objectivity of synergies, vague and meaningless organizational terms are used

in merger proposals to highlight the benefits of a merger decision to shareholders

Although synergy is stated first and foremost as the main reason for an M&A deal, there are many other motives According to Napier, the motives to instigate a merger can be grouped in two classes: value – Maximizing and non-value maximizing motives An M&A deal is value – Maximizing when the main motives

is to create value for shareholders for example through cost reduction, gaining foothold in new geographic markets or the efficient use of underutilized resources Non –value maximizing motives describe dales that are primarily driven by other reasons, such as the zeal to maintain a market position, increase market share, management prestige or empire building goals Non –value maximizing deals reduce the shareholder value in a company and are not economically sound although they are overtly presented by management to shareholders as a sound economic decision According to Levinson, managers engage in acquisitions out of the mere fear of obsolescence In public view, managers who acquire other companies are perceived as successful, decisive, challenging, and very vibrant, so those who do not engage in acquisitions feel the pressure to emulate those who do Other managers envision M&A as the best way to publicly exercise their power and social status by engaging in the amusing empire building game

Table 2.1 : Common Theories of What Causes Mergers and Acquisitions

Operating Synergy Improve operating efficiency through

economies of scale or scope by acquiring a customer, supplier, or competitor

Financial Synergy Lower cost of capital

Diversification

New Products/ Current Markets

New Products/New Markets

Current Products/New Markets

Position the firm in higher growth products

or markets

Theory Motivation Market Power Increase market share to improve ability to

set prices above competitive levels

Strategic Realignment

Technological Change

Regulatory and Political Change

Acquire capabilities to adapt more rapidly

to environmental changes than could be achieved if they were developed internally

Hubris (Managerial Pride) Acquires believe their valuation of target

more accurate than the market’s causing them to overpay by overestimating synergy

Buying Undervalued Assets ( Q-Ratio) Acquires assets more cheaply when the

stock of existing companies is less than the cost of buying or building the assets

Mismanagement (Agency Problems) Replace managers not acting in the best

interests of the owners

Market Timing Issuing shares when acquirer’s stocks are

overvalued and use this fund to acquire the less overvalued target

Managerialism Increase the size of a company to increase

the power and pay of managers

Tax Consolidations Obtain unused net operating losses and tax

credits, asset write-ups, and substitute capital gains for ordinary income

Source : Mergers, Acquisitions and other Restructuring activities, Third Edition, Donald DePamphilis

Case study : Pfizer Acquires Pharmacia to Solidify Its Top Position

In 1990, the European and U.S markets were about the same size, by 2000, the U.S market had grow to twice that of the European market This rapid growth in the U.S market propelled American companies to ever increasing market share positions In particular, Pfizer moved from 14th in terms of market share in 1990 to the top spot

in 2000 With the acquisition of Pharmacia in 2002, Pfizer’s global market share

increased by three percentage points to 11% The top ten drug firms controlled more than 50 percent of the global market, up from 22 percent in 1990

Pfizer is betting that size is what matters in the new millennium As the market leader, Pfizer was finding it increasingly difficult to sustain the double-digit earnings growth demanded by investors Such growth meant the firm needed to grow revenue by $3-$5 billion annually while maintaining or improving profit margins This goal became more difficult due to the skyrocketing costs of developing and commercializing new drugs Expiring patents on a number of so-called blockbuster drugs (i.e, those with potential annual sales of more than $1 billion) intensified pressure to bring new drugs to market

Pfizer and Pharmacia knew each other well They had been in a partnership since

1998 to market the world’s leading arthritis medicine and the seventh largest selling drug globally in terms of annual sales in Celebrex The companies were continuing the partnership with second generation drugs such as Bextra launched in the spring

of 2002 For Pharmacia’s management, the potential for combining with Pfizer represented a way for Pharmacia and its shareholders to participate in the biggest and fastest growing company in the industry, a firm more capable of bringing more products to market than any other

The deal offered substantial cost savings, immediate access to new products and markets, and access to a number of potentially new blockbuster drugs Projected cost savings were $1.4 billion in 2003, $2.2 billion in 2004, and $2.5 billion in 2005 and thereafter Moreover, Pfizer gained access to four more drug lines with annual revenue of more than $1 billion each, whose patents extend through 2010 That gives Pfizer a portfolio, including its own, of 12 blockbuster drugs The deal also enabled Pfizer to enter three new markets, cancer treatment, ophthalmology, and endocrinology Pfizer expected to spend $5.3 billion on R&D in 2002 Adding Pharmacia’s $2.2 billion brings combined company spending to $7.5 billion

annually With an enlarged research and development budget, Pfizer hopes to discover and develop more new drugs faster than its competitor

On July 15, 2002, the two firms jointly announced they had agreed that Pfizer would exchange 1.4 shares of its stock for each outstanding share of Pharmacia stock or $45 a share based on the announcement date closing price Pfizer stock The stock value of the transaction on the announcement was $60 billion The offer price represented a 38% premium over Pharmacia’s closing stock price of $32.59 on the announcement date Pfizer’s shareholders would own 77% of the combined firms, and Pharmacia’s shareholders, 23% The market punished Pfizer, sending its shares down $3.42, or 11%, to $23.78 on the announcement date Meanwhile, Pharmacia’s shares climbed $6.66, or 20%, to $39.25

2.5 Obstacles preventing M&A activities

Why do Mergers and Acquisitions often fail to meet expectation?

Overpaying, Slow Integration, and Poor Business Strategies

There are many reasons given for the failure of takeovers to meet expectations Figure 3 identifies 7 of the most commonly cited reasons ranked by the number of studies in which they are mentioned The top three include overestimation of synergy or overpaying, the slow pace of post –merger integration, and a flawed strategy Conversely, acquiring firms that tend not to overpay, focus on rapid integration of the target firm, and have a well- thought –out strategy tend to meet or exceed expectation

Table 2.2 : Commonly Cited Reasons for M&A Failure

Overestimating synergy/ Overpaying Harper and Schneider( 2004)

Boston Consulting Group( 2003) Henry (2002)

Bekier, Bogardus, and Oldham (2001)

Chapman,Dempsey, Ramsdell, and Bell (1998) Agrawal and Jaffe (1999)

Rau and Vermaelen (1998) Sirower (1997)

Mercer Management Consulting (1998) Hillyer and Smolowitz (1996)

Bradley, Desai, and Kim ( 1988) McKinsey & Company ( 1990)

Slow pace of integration Carey and Ogden (2004)

Coopers and Lybrand ( 1996) Anslinger and Copeland ( 1996) Mitchell ( 1998)

Business Week ( 1995) McKinsey & Company ( 1990)

Poor strategy Mercer Management Consulting ( 1990)

Bogler ( 1996) McKinsey & Company ( 1990) Salter & Weinhold ( 1979)

Poor of payment Sanford Bernstein & Company ( 2000)

Loughran & Vijh ( 1997) Sirower ( 1997)

Poor post – merger communication Mitchell ( 1998)

Chakrabarti ( 1990)

Conflicting corporate cultures Mercer management Consulting ( 1998)

Hillyer and Smolowitz ( 1996)

Weak core business McKinsey & Company ( 1990)

Anslinger and Copeland ( 1996)

Source : Mergers, Acquisitions and other Restructuring activities, Third Edition, Donald DePamphilis

2.6 Viet Nam M&A activity review-2009

Slow start but a strong finish to the year is an observed evidence about M&A in Viet Nam in 2009 Overall M&A values and volumes appear to have returned to a growth path in Q4 2009, giving grounds for optimism for 2010

The decline in deal volumes and values in the last quarter of 2008, especially with respect to inbound activities flowed over into the first half of 2009 with low inbound deal volumes and lower average valuations impacting overall M&A figures despite the higher volume of domestic deals The low level of M&A transactions in dollar terms during the first half of 2009 was followed by a more positive second half of the year, particularly the fourth quarter, contributing to a small, positive overall growth in deal values compared to 2008, whilst the rate of growth in deal volumes accelerated compared to prior periods Contrary to various announcements stating that equitisation would resume in 2009, no significant deals were initiated by the government with respect to State Owned Enterprises which impacted average deal sizes during the year, as did investor caution which led to a greater focus on small/ medium sized deals

The strong pick-up in deal volumes in the second half of 2009 was driven by domestic deals, although the average deal size for domestic M&A was very low (where information was made public) Significantly, fourth quarter deal activity saw higher numbers of inbound deals and much higher average deal sizes indicating growing confidence amongst international companies, especially those from Asia,

in the global recovery in general and in the robustness of the Vietnamese economy

in particular Another notable trend is the increase in deals conducted by private

equity firms including a small number of larger deals which appears to reflect more favorable valuation multiples and also the ongoing need amongst some of the larger private Vietnamese companies for expansion capital

Table 2.3: Deal Activity Summary

2009 2008 Change (%) Deal value

Source: Thomson Reuters, PricewaterhouseCoopers research

Figure 2.1 Vietnam Deal Activity 2008-2009 by quarter

Figure 2.2: M&A target in Vietnam Percentage of announced deals by the top five most active industry sectors

Overall we believe that access to M&A related information is improving in

Overall we believe that access to M&A related information is improving in Vietnam and we expect further improvements going forwards as the number of public companies increase and interest in M&A continues to rise

During 2009, the industrial sector accounted to almost a quarter off all announced M&A deals targeting Vietnamese companies, up from 15% in 2008 The share of deal volumes attributable to the energy and power sector increased from 7% in 2008

to 17% in 2009 whilst that related to the financial sector fell from 22% to 12% Despite the growth in the number of deals in the consumer staples sector, its share

of the total fell from 10% in 2008 to 7% in 2009 The split in deal volumes, particularly the number of deals involving Pertrovietnam during 2009 which contributed to the high percentage of deals in the energy and power sector, appears

to reflect a growing trend amongst major Vietnamese conglomerates to restructure

their organizations, remove smaller competitors through acquisition/merger and expand their operations into new sectors of the economy This led to the particularly high volumes in industrials, energy and power and materials The decline in financial services deals largely reflects the global turmoil in this sector which meant that deals in economies such as Vietnam were off the agenda for most major financial institutions

2.7 M&A in Vietnam securities sector is indispensable

While many securities companies (Securities) is falling into a difficult position Losing, many foreign financial institutions are now looking the Vietnam Securities Companies via share purchase, merger is increased clearly

Most companies tend to merge was founded in late 2006- a time when the stock market in the strong period However, they are small companies, weak finance resources Therefore, the capital contribution of financial institutions in the world will strengthen management capacity, operational experience, and competitiveness Wave of selling shares in the company stock has a long simmering fire but it’s really exciting this year since before the new signals on the resilience of the market First time, the number of securities companies were racing mushroomed from a few company now place the number had reached more than 100 companies But do not expect to in 2008, the market downturn of the stock company under its charter capital from VND 50-300 billion face difficulties Because of no turnover, hiring costs, office costs…Vietnam Securities Companies stand at the edge of the abyss If they don’t look for partners to sell their share, they will certainly be bankrupt Recipes too, even companies that will spend all of an executive, administrator for the foreign partners to reach an agreement if appropriate

In fact, many securities companies have transferred successful, for example: Morgan Stanley has bought stake of Huong Viet Securities Company and renamed

to Morgan Stanley Gateway Securities JSC, Golden Bridge has bought 49 percent stake of Click &Phone Securities company, RHB Bank (Malaysia) has bought 49 percent stake of Vietnam Securities company OSK investment bank BHD, a wholly-owned unit of OSK Holding Bhd, withdrew its agreement to acquire a 49% stake in Seabank Securities JSC, a securities brokerage firm, for 220.5 billion Vietnamese dong

In addition, the State Securities Commission has decided to stop granting permits for the establishment of securities companies by the number of multiple companies while not equal quality Thus, investors continue to hunt Because they believe that Vietnam stock market is an emerging market have many foreign investors

“observation” Specifically, the transaction fees in the Vietnam securities companies are higher than developed countries With the technology available to these organizations will take part in exploiting Vietnam’s stock market better

According to the measure of local experts there are many reasons to see that the trend of Mergers and Acquisition of securities companies in Viet Nam are

indispensable:

Firstly, financial markets in Viet Nam in general and M&A markets in particular, become more transparent and attract domestic investors and foreign investors Interest rates of key currencies on the world is low, contribute to boosting the organizations and individuals pour more money into company to hold share, stocks instead of sending money to the bank to get profit Cash flow of private investment funds is getting increasingly, as well as the company is listed on the trading world floor to promote M&A activity significantly, including M&A activities in securities industry

Secondly, many small scale securities companies, infrastructure invest synchronous, weak human resources,…or new establishment will think strategies

non-of merger or resell All the country has over 80 securities companies operating now,

with 300.000 accounts The strong capital, technology, human resources, reputation companies are expanding operation, makes up most of array of services Meanwhile, trading transaction don’t bring out profit as high as before Because of fierce competition, many securities companies will be loss

Thirdly, merge and acquisition of securities companies help to take full advantage

of financial strength, experience and technology of partners, especially foreign partners M&A seems to be a strategic tool for restructuring or development of securities company, after the merger, acquisition interests of the parties to get is huge That is the increase economic efficiency through increased scale of the market share, reduce fixed costs, manpower costs…The merged securities stocks also complement each other as the strength of their brand, customer base –factors that are important in the securities business

Fourthly, for organization and individuals abroad, M&A is the shortest way to entry market entry securities services market in Vietnam In negotiations to join the World Trade Organization (WTO), Viet Nam has agreed to allow vendors to provide securities services across borders certain services related to securities such

as financial information, intermediary services and support securities trading…, to establish joint venture to 49% foreign capital immediately after joining WTO

From 2007 to now, there are 43 M&A deals in Vietnam securities sector

In there:

Table 2.4 : M&A deals in Vietnam securities sector

Status Number of deals Completed 32 Intended 1 Pending 8

Status Number of deals

Withdrawn 1

Source: Thomson Reuters, PricewaterhouseCoopers research

Figure 2.3 : M&A deals in Vietnam securities sector from 2007 to now

M&A deals in Vietnam Securities sector from 2007 to now

S buyer Withdrawn

Some typical M&A deals in Vietnam securities sector from 2007 to now:

In 2008:

Technology CX planned to acquire a 49% stake in Au Lac Securities JSC, a securities brokerage firm The transaction was approved by the regulatory authority Originally, Technology CX was rumored to be planning to acquire a 49% stake in

In August, Woori Investment & Securities Co.Ltd(“Worri I&S”) of South Korea raised its stake in Bien Viet Securities JSC (“BVS”), a Hanoi-based securities brokerage firm, to 49% from 12.7%, by acquiring a further 36.3% stake for VND 107.8 billion (US$6 million) In December, BVS was renamed Woori CBV Securities Corporation Woori I&S is the leading firm in Korea operation in areas such as brokerage, securities trading, underwriting and financial services to Korean and foreign investors

In September, Great Trust Joint Stock Commercial Bank (“TrustBank”) acquired an 11% stake in DaiViet Securities Corp(“DVSC”), a Ho Chi Minh –based securities brokerage firm

In October, KT ZMICO Securities Co Ltd of ThaiLan announced that it planned to acquire an 18.88% stake in Thanh Cong Securities JSC, a Ho Chi Minh based securities brokerage firm and a majority owned unit of Thanh Cong Textile Garment Investment Trading JSC, for VND 86.1 billion (US$ 4.8 million)

In November, an investor group, including Petrovietnam Insurance JSC(“PVI”), a 59,51% owned unit of state-owned Vietnam National Oil&Gas Group (“Petrovietnam”), announced that it planned to acquire a 9% stake, or 13.5 million ordinary shares, in Petrovietnam Construction (“PVC”), a Hanoi-based provider of oil and gas infrastructure construction services and a majority-owned unit of Petrovietnam, in a privately negotiated transaction Concurrently, another investor group comprising Asian Pacific Ocean Securities JSC, Vietnam International Commercial Joint Stock Bank, Ocean Commercial Joint Stock Bank, Viet Wealth Fund Management JSC, Song Da Global Investment JSC and PVI acquired a 24.5% stake, or 36.75million ordinary shares, in PVC in another privately negotiated transaction Later in December, an investor group comprising Property Development & Investment Co Ltd, Petrovietnam Finance Investment & Consultancy JSC, and Ocean Commercial Joint Stock Bank, announced that it planned to acquire a 10.67% stake, or 16 million ordinary shares, in PVC from Petrovietnam for a total value of VND 400 billion (US$22 million), via open market transactions

CHAPTER III: RESEARCH METHODOLOGY

This is an exploratory study The main approaches to be employed are qualitative method and quantitative method as in the following model:

Building questionnaire

Pilot-testing of questionnaireQQ Collecting data

Analyzing Quantitative research

Conclusion