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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... Merger an

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

ABSTRACT iii

TÓM TẮT v

TABLE OF CONTENTS vii

LIST OF TABLES AND FIFURES x

INTRODUCTION 1

1 Background 1

2 Problem discussion 2

3 Objectives and Aims 4

4 Research questions 5

5 Scope of work 5

6 Methodology 5

7 Data sources and processing 5

8 Significance 6

9 Limitations 6

10 Expected results 7

11 Thesis structure 7

CHAPTER 1: LITERATURE REVIEW 9

1.1 Rationales of Merger and Acquisition 9

1.1.1 Definition and classification of M&A 9

1.1.2 Business valuation 10

1.1.3 Financing M&A 11

1.1.4 Motives behind M&A 13

1.2 Guidelines for successful acquisitions 15

1.2.1 Pitfalls of acquisitions 15

1.2.2 Execution of acquisitions 17

1.3 Managing acquired companies 19

1.4 Conceptualization and emerged frame of reference 23

1.4.1 Conceptualization 23

1.4.2 Emerged frame of reference 25

CHAPTER 2: METHODOLOGY 27

2.1 Research purpose 27

2.2 Research approach 28

2.3 Research strategy 29

2.4 Data collection method 30

2.5 Sample selection 32

2.6 Data analysis 33

2.7 Reliability and validity 34

CHAPTER 3: DATA PRESENTATION AND ANALYSIS 36

3.1 Company presentation 36

3.1.1 Ho Guom Garment JSC 36

3.1.2 Chien Thang Garment JSC 39

3.2 The situation leading to the acquisition 41

3.2.1 Post-integration change of Vietnam garment and textile industry 41

3.2.2 HOGARSCO – Expansion for development 43

3.2.3 CHIGAMEX – A poorly-managed and loss-making company 46

3.3 Execution of the acquisition of CHIGAMEX by HOGARSCO 50

3.4 Managing the acquired company - CHIGAMEX 52

3.4.1 Restructuring CHIGAMEX 52

3.4.2 Transferring competencies and realizing economies of scope 58

3.4.3 Post-acquisition performance of CHIGAMEX 60

3.5 A summary on main findings from the case study 61

CONCLUSIONS AND IMPLICATIONS 64

Appendix 1 – Interview Guide (English version) 73 Appendix 2 – Interview Guide (Vietnamese version) 74

Table 2.2: Relevant situations for different research strategies 29

Table 2.3: Six sources of evidence, strengths and weaknesses 30

Table 2.4: Case study tactics for four design tests 34

Table 3.1: Information on HOGARSCO’s factories 37

Table 3.2: HOGARSCO’s performance from 2002-2006 (VND billion) 38

Figure 1.1: Emerged frame of reference 26

Figure 2.1: An overview of the methodology chapter 27

Figure 3.1: Sales percentage by main export markets of HOGARSCO 38

Figure 3.2: Sales percentage by categories of products 38

Figure 3.3: HOGARSCO’s performance from 2002-2006 (VND billion) 39

Figure 3.4: Major export markets of Chigamex 41

Figure 3.5: Pre-acquisition organizational structure of CHIGAMEX 47

Figure 3.6: Overview of holding rate among companies 52

Figure 3.7: Post-acquisition organizational structure of CHIGAMEX 54

Merger and Acquisition

Ho Guom Garment Joint Stock Company Chien Thang Garment Joint Stock Company Vietnam National Textile and Garment Corporation

Joint Stock Company

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 outline of the thesis

1 Background

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

For the last 30 years, M&A activities have increased constantly in both number and average size [DePamphilis, 2005] In a very competitive and global environment various reasons can account for companies undertaking 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 Herndon, 1999] More specifically, operating synergies are often mentioned as drivers for merging

By combining complementary skills and resources both partners’ economies of 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

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 still comparably high Even though there have been examples of extremely successful mergers there are findings that 50-80% underperform their industry peers and fail to earn 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 business strategies impossible to merge [DePamphilis, D., 2005] Furthermore, the degree of relatedness of businesses, as well as the distance

in business or corporate culture is crucial factors to take into consideration [Child et al., 2001; Gancel 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 interest rates, strong and rapid equitisation and “hot” stock markets Similarly, market, cost, competitiveness, government and synergies are often mentioned as drivers for merger and acquisitions in Vietnam The presence 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 opposed to cooperative 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 CHIGAMEX acquisition Mergers, by contrast, aim 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 outcomes are ensured for both parties

Acquisitions, however, can also take place in a hostile setting, where the target’s management is passed over and the shares are purchased against the wishes of the target company [DePamphilis, 2005] Generally, acquisitions offer a certain degree

of choice concerning the magnitude of integration, which mergers do not permit Moreover, acquisitions are mostly known to be unequal partnerships [Child et al., 2001] Although the terms 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 concern that by reducing the number of firms in an industry, horizontal acquisition increase market power of customers and suppliers 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

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 companies in

Vietnam, therefore, the title of the thesis would be finalized as “A study on merger and acquisition in 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 bankruptcy By pursuing horizontal acquisition, both HOGARSCO and CHIGAMEX can obtain economies of scale or secure export market for their products After acquisition, the two companies will be able to improve their competitiveness and market visibility

3 Objectives and Aims

The objectives of the thesis are as below:

¾ Firstly, to provide a better understanding of M&A, its rationales and international guidelines for M&A

¾ Secondly, to review the recent upward trend in M&A activities and the context

of Vietnam garment and textile industry in 2007 to raise the demand of M&A

¾ Thirdly, to apply theory into case study of Ho Guom and Chien Thang garment companies to show advantages, disadvantages, successes, limitations

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

¾ Fourthly, to draw out some conclusions and suggestions for M&A activities in Vietnam

Finally, the thesis aims to introduce international standards and practices in making M&A and apply them into a case study in order to provide a better understanding of M&A activities in garment sector and lessons learnt from a successful acquisition in

Vietnam

4 Research questions

In order to reach this purpose, the following research questions have been developed

¾ Why do Vietnamese garment companies conduct acquisitions?

¾ How can an acquisition in Vietnamese garment sector happen?

¾ How can an acquiring company manage an acquired company?

5 Scope of work

Mergers and Acquisitions can be studied from a variety of angles Due to time constraints, the study will focus only on the two Vietnamese garment companies and the acquisition of one company by the other one

6 Methodology

The methodology practiced in the thesis is a combination of deduction approach, qualitative method, case study strategy The study applied the theory in analyzing a case study with data 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 data including documentation, archival records, interviews, direct observations, participant observation and physical artifacts, interview 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

reduction, data display, conclusion drawing and verification Details on data

collection and analysis are shown in Methodology Chapter

8 Significance

The study has made some certain contributions to the economy in generally and the

enterprises in particularly

¾ To the economy: the study shows both motives and de-motives behind M&As

and their influences to the overall economy The successful acquisition in the

case study has contributed to the acceleration of M&A activities in Vietnam

indicating a condensed strength and the willingness for integration into

globally competitive economies

¾ 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 successful 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 concerning 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 CHIGAMEX, to deeply understand the company insight and to display a representative image of the post-acquisition situation

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

on CHIGAMEX There is no presentation and analysis of HOGARSCO’ acquisition performance in this study

post-10 Expected results

The study introduces the rationales of merger and acquisition, the motives behind mergers and acquisitions, the global practices of executing 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 Ho Guom Garment JSC which will indicate (i) the reasons why Ho Guom has taken this acquisition, (ii) the steps Ho Guom has experienced to acquire Chien Thang and (iii) the way Ho Guom has managed the acquired firm successfully

Finally, the study draws out some conclusions on the case of Ho Guom and Chien Thang and best practices from this case for lessons learnt including suggestions for successful mergers and acquisitions

11 Thesis structure

The thesis is divided into three main parts including introduction, content and conclusion parts The introduction part raises the necessity of the research, researcher’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 literature review, then option of

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 to the research questions will be reviewed Available theories relevant to the three research questions will be presented in the same sequential order as stated research questions

1.1 Rationales of Merger and Acquisition

1.1.1 Definition and classification of 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 target Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal A merger can resemble a takeover but result in a new company name (often 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 takeover, 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 latter 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 Sometimes, 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 reverse takeover

Mergers can be classified into:

¾ Horizontal mergers take place where the two merging companies produce

similar product in the same industry

¾ Vertical mergers occur when two firms, each working at different stages in the

production of the same good, combine

¾ Congeneric mergers occur where two merging firms are in the same general

industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company

¾ 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 culture- diverts resources away from new investment, and these problems may be exacerbated by inadequate 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 expertise and disrupting employee culture These problems are similar 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 separate, or prevent the deterioration of shareholder value more than if the companies were separate

1.1.2 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 above, in order to obtain a more accurate value These values are determined for the most part by looking at 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 or an audit

Accurate business valuation is one 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 attention to detail, regardless of size

1.1.3 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:

¾ 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 trend in the interest rates Another advantage of using cash for an acquisition

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

¾ Financing capital: This may be borrowed from a bank, or raised by an issue of

bonds Alternatively, the acquirer's stock may be offered as consideration Acquisitions financed through debt are known as leveraged buyouts (only if they take the target private), and the debt will often be moved down onto the balance sheet of the acquired company

¾ 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:

¾ The buyer buys the shares of the target company being purchased Ownership

control of the company in turn 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 accrued by that business over its past and all of the risks that company faces in its commercial environment

¾ 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 empty shell, if the buyer buys out the entire assets A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not This can be particularly 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 tax imposed on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders

1.1.4 Motives behind M&A

These motives are considered to add shareholder value:

¾ 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

¾ Increased revenue/Increased market share: This motive assumes that the

company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices

¾ 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

¾ Synergy: Better use of complementary resources

¾ 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 tax motive of an acquiring company

¾ Geographical or other diversification: This is designed to smooth the earnings

results of a company, which over the long term 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

¾ Resource transfer: resources are unevenly distributed across firms [Barney,

1991]; the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources

¾ Increased market share can increase market power: In an oligopoly market,

increased market share generally allows companies to raise prices Note that

while this may be in the shareholders' interest, it often raises antitrust concerns, and may not be in the public interest

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

¾ 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 lower cost than those associated with a merger

¾ Manager's hubris: Manager's overconfidence about expected synergies from

M&A which results in overpayment for the target company

¾ Empire building: Managers have larger companies to manage and hence more

power

¾ 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

¾ Vertical integration: Companies acquire part of a supply chain and benefit

from the resources However this does not add any value because as one 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 functions 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 executed by means of a cash transaction, stock-for-stock transaction or a combination of both Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations

1.2 Guidelines for successful acquisitions

Acquisitions have long been a popular vehicle for expanding scope of the organization However, despite this popularity, there is ample evidence that many acquisitions fail to add value 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, (iii) acquisitions tend to be very expensive, and (iv) companies often do not adequately screen their acquisition targets

1.2.1 Pitfalls of acquisitions

1.2.1.1 Difficulties with post-acquisition integration

Having made an acquisition, the acquiring company has to integrate the acquired business into its own organizational structure Integration can entail the adoption of common 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

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 It has been suggested that the loss of management talent and expertise, to say nothing of damage from constant tension, can materially harm the performance of the acquired unit [J.P.Walsh, 1998]

1.2.1.2 Overestimating economic benefits

Even when companies achieve integration, they often estimate the potential for creating value by joining together different companies They overestimate the strategic advantages that can be derived 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 because rising to the top of a corporation has given them an exaggerated sense of their own capabilities [R.Roll, 1986]

1.2.1.3 The expense of acquisition

Acquisitions of companies whose stock is publicly traded tend to be very expensive When a company bids to acquire the stock of another enterprise, the stock 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 acquiring company must often pay

a premium over the current market value of the target

The debt taken on to finance such expensive 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 it is to reap a positive return on its investment Such performance gains, however, can be very difficult to achieve

1.2.1.4 Inadequate pre-acquisition screening

One reason for the failure of acquisitions is management’s inadequate attention to pre-acquisition screening [P.Haspeslagh and D.Jemison, 1991] They found that many companies decide to acquire other firms without thoroughly analyzing the potential benefits and costs After the acquisition has been completed, many acquiring companies discover that instead of buying a well-run business, they have purchased a troubled organization

1.2.2 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.H.Gaylin, and J.W.Down, 1984; C.W.L.Hill, 1984; D.R.Willen, 1985; Haspeslagh and Jemison, 1996; P.l.Angslinger and T.E.Copeland, 1996]

1.2.2.1 Pre-acquisition screening

Thorough pre-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 risk of purchasing a potential problem company The screening should begin with a detailed assessment

of the strategic rationale for making the acquisition and identification of the kind of enterprise that would make an ideal acquisition candidate

Next, the company should scan a target population of potential acquisition candidates, evaluating each according to a detailed set of criteria, focusing on: (i)

Financials position, (ii) Product market position, (iii) Competitive environment, (iv) Management capabilities, and (v) Corporate culture Such an evaluation should enable the company to identify the strengths and weaknesses of each candidate, 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 them further At this stage, it should sound out third parties, 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

1.2.2.2 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

Despite good screening and bidding, an acquisition will fail unless positive steps are taken to integrate the acquired company into 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 unrelated diversification, the level of integration can be minimal However, a company requires greater integration if its strategy 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 vehicles by which companies enter new product markets and expand the size of their operations [M.S.Salter and W.A.Weinhold, 1979] Earlier, strategic advantages and disadvantages of merger and acquisition have been discussed together with guidelines for successful acquisition to avoid its pitfalls Now it is time to consider how to design structure and control 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 easy to integrate them into its corporate structure The controls already being used in the acquiring company can

be adapted to the acquired company To achieve gains from synergies, the companies can expand its task forces or increase the number of integrating roles, so that acquired companies are drawn into the existing structure

If managers do not understand how to develop connection among companies to permit gains from economies of scope, the newly-acquired company will perform poorly It has been argued that this is why the quality of management is so important A company must employ managers who have the ability to recognize the synergies among apparently different companies with various corporate cultures,

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

Implementation problems are likely to arise only when corporate managers try to interfere in businesses they know little about or when they use inappropriate structure and controls to manage the new business and attempt to achieve the wrong kinds of benefits form the acquisition

Therefore, strategic managers need to be very sensitive to the problems involved in taking over companies through mergers and acquisitions Even when acquiring closely related businesses, new managers must realize that each business has a unique culture or way of doing things Over time new management can change the culture and alter the internal 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 maintain a competitive advantage in their business The question they must obstacle is how to invest the excess resources in order to create value The acquiring company can manage to create value for the acquired companies in three main ways: (i) by restructuring poorly-run enterprises; (ii) by transferring competencies among enterprises; and (iii) by realizing economies of scope

1.3.1 Restructuring poorly-run enterprises

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

Improvements in the efficiency of an acquired company can come from a number of sources First, the acquiring company usually replaces the top management team of the acquired company with a more aggressive one Second, the new top management team is encouraged to sell off any unproductive assets and elaborate headquarters to reduce staffing level Third, the new top management team is also encouraged to intervene in the running of the acquired businesses to seek 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 top management team aware that failure to achieve performance improvements consistent with these 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

1.3.2 Transferring competencies

Companies seek out to acquire enterprises related to their existing business by one

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

competitive position of the acquired enterprises Alternatively, they may acquire a company in the same business area in the belief that some of the skills of the acquired company can improve the efficiency of their existing value creation activities 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

1.3.3 Realizing economies of scope

Economies 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 companies in the same industry, a component-manufacturing plant may be able to operate at greater capacity, thereby realizing economies of scale in addition to economies of scope Thus, a corporate strategy based on economies 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

However, as with competency transfers, realizing economies of scope is possible only when there are significant commonalities between one or more of the value creation functions of a company’s existing and new activities Moreover, managers need to be aware of that bureaucratic 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.L.Hill and R.E.Hoskisson, 1987] Consequently, the strategy should be pursued only when sharing is likely to generate a significant competitive advantage in one or more companies

1.4 Conceptualization and emerged frame of reference

1.4.1 Conceptualization

The previous section reviewed literature and presented theories relevant to the research purpose 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 it specifies 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 & Huberman, 1994]

1.4.1.1 Research question 1: Why do Vietnamese garment companies conduct

acquisition?

There are a number of theories described in literature on rationales for mergers and acquisitions The following theories are chosen since they correspond well with my research problem

¾ Mergers, Acquisitions, and other restructuring activities, DePamphilis (2005)

¾ The basis of Mergers and Acquisitions, Investopedia Tutorial (2006)

1.4.1.2 Research question 2: How can acquisition in 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

¾ Successful Acquisition Planning, L.L Fray, D.H.Gaylin and J.W.Down (1984)

¾ Making it happen: How to execute an Acquisition, D.R Willensky (1985)

¾ The complete guide to mergers and acquisitions – process tools to support M&A integration at every level, Galpin, T J and Herndon, M (2000)

1.4.1.3 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

¾ Managing Acquisitions, P.Haspeslagh and D.Jemison (1991)

¾ Growth through Acquisition: A Fresh look, P.L.Anslinder and T.E.Copeland (1996)

¾ The management of international acquisitions, Child, J.; Faulkner, D and Pitkethly, R (2001)

¾ Successful mergers, acquisitions and strategic alliances – How to bridge corporate cultures, Gancel, C.; Rodgers, I and Raynaud, M ( 2002)

1.4.2 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 research purpose The emerged frame of reference is pictorially presented in Figure 1.1, 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

„ Resource transfer to create value

„ Increased market share can increase market power

Guidelines for successful acquisitions

Avoiding pitfalls of acquisitions

„ difficulties with integration

Management of acquired companies

„ Restructuring of acquired companies:

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

- improvement in efficiency, quality, customer responsiveness and

innovativeness

- 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

This chapter presents the methodology practiced for the thesis Throughout the 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

Figure 2.1: An overview of the methodology chapter Source: Foster, 1998, pg 81

2.1 Research purpose

Most research can be classified into one of the following three different purposes: exploratory, descriptive and explanatory research [Reynolds, 1971]

Table 2.1: Three different research purposes

Research Case Purpose

Exploratory -When a problem is

difficult to limit -When know little about the area in the field of the study

-To gather as much information

as possible about a specific subject using many different sources

Descriptive - To gather information

when investigating a total

or random sample

-To develop careful descriptions

of different patterns expected during the exploratory stage

Data Collection

Sample Collection

Data Analysis

QUALITY STANDARDS FOR RESEARCH

(Validity/ Reliability)

Explanatory -When look for a cause

and effect relationship

-To develop a theory used to explain the empirical

generalizations that was developed in the descriptive stage

Source: Reynolds, 1971; Eriksson and Wiedesheim-Paul, 1997; Patel and Davidson, 1994; Patel and Tebelius, 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 study 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 research questions, explanatory stage is partly 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, 1994]

A quantitative study relates to studies of gathering and analyzing numerical and statistical data, mostly used when trying to gain a broad understanding of the research problem, which enables the researcher to draw generalized conclusions based on the collected information and present the findings in the form of numbers

This study would follow a qualitative approach in order to be easily deal with the research problem and research questions This approach is suitable to obtain deep understanding of M&A in Vietnam and how to manage an acquired company in garment sector That the data would be analyzed in words rather than in numbers was another reason of why this approach is the best alternative for my thesis

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

Strategy Form of research

questions over behavioural Requires control

events

Focuses on contemporary events

many/ How much Archival

Analysis

Who, What, Where, How many/ How much

Source: Yin, 1994

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

2.3

Table 2.3: Six sources of evidence, strengths and weaknesses

Source of

evidence Advantages Disadvantages

Documentation - Stable: can be reviewed

repeatedly

- Unobtrusive: not created as a

result of the case

- Exact: contains exact names,

references, and details of an

- Retrievability: can be low

- Biased selectivity: if

collection is incomplete

- Reporting bias: reflects

(unknown) bias of author

- Access: may be deliberately

event

- Broad coverage: long span of

time, many events and settings

blocked

Archival

records

- (Same as for Documentation)

- Precise and quantitative

- (Same as for

Documentation)

- Accessibility due to privacy

reasons

Interviews - Targeted: focuses directly on

case study topic

- Insightful: provides perceived

- Reflexibility: event may

proceed differently because it

- Insightful into cultural features

- Insightful into technical operations

- Selectivity: unless broad coverage

- Availability Source: Yin, 1994

It was stated that interview is one of the most significant source of case study as it is targeted and insightful These reasons would lead to the choice of interviews for data collection Documentation and archival records such as company profile and annual reports of relevant parties in the study were also used as supporting data sources

Interviews can be conducted in three different forms: open-ended, focused and structured The study only conducted focused interviews in a conversational manner via an interview guide (see Appendix) Each interview took approximately 45-60 minutes One face-to-face interview and one 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 background of the thesis and interview guide via e-mail, so the respondents would be able to prepare for the interview and all interviews reached expected results

2.5 Sample selection

As mentioned above, a single-case study has been conducted to gather the most appropriate empirical data The case study was based on interviews with two persons in two different garment companies

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

a great part of Vietnamese garment export revenue; 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 Vietnam The first interview was set 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

-2.6 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 great impact on the quality of the findings The strength

of the data and the ability 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 treat the evidence fairly, to produce compelling analytic conclusions and to rule out alternative interpretations The researcher should choose between two general analytical strategies: theoretical propositions and case description

As earlier 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 Huberman, 1994], namely:

¾ Data reduction: The process of focusing, selecting, abstracting, simplifying

and transforming the data to organize the data so that final conclusions can be verified and drawn

¾ Data display: The process of taking the reduced dada and displaying it in an

organized, compressed way so that conclusions can be more easily drawn

¾ Conclusion drawing and verification: The process of commenting, explaining,

and deciding what things mean by the researcher through noting regulations, patterns, explanations, possible configurations, casual flows, and propositions

The analysis of the data in this research follows three above steps For each 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

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, internal validity, external validity and reliability are proposed when establishing the quality standard

of a research [Yin, 1994]

Table 2.4 displays practical tactics for handling four tests to increase quality standards when conducting case study research

Table 2.4: Case study tactics for four design tests

Tests Case Study Tactics Phases of Research in

Which Tactics Occurs

Construct Validity - Use multiple sources of

evidence

- Estabish chain of evidence

- Have key informants review draft case study report

Reliability - Use case study protocol

- Develop case study database

- Data collection

- Data collection Source: Yin, 1994, pg 33

When establishing construct validity the researcher makes sure that correct operational measures are utilized for the concepts being studied, and objective judgment is used to collect the data In order to increase the construct validity of