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Why M&A into Vietnam will be a trendy activity for foreign investors?

by Inside Out

Vietnam is expected to welcome a growing wave of dealmaking involving Japanese companies and investors as the pandemic subsides.

Speaking at the Vietnam M&A Forum 2020 last week, Masataka “Sam” Yoshida, head of the Cross-border Division of RECOF Corporation and CEO of RECOF Vietnam Co., Ltd. – said that investment via mergers and acquisitions (M&A) into Vietnam will be a trendy activity for Japanese companies which have the potential to last for years to come.

“The first trigger for such an opinion is the destiny for Japanese companies to find new markets to expand outside their own country,” Yoshida said.

Most sectors in Japan are already well matured – for instance, almost one-third of the Japanese population is over 65 years old, making the Japanese average age almost 20 years older than the Vietnamese equivalent.

“The second trigger is using M&A as a growth strategy, which is backed up by the abundant accumulated cash during the last 20 years – reaching $2.34 trillion as bank deposits with almost zero interest rate,” he said. “Pushed by shareholders’ requirements to make use of money, it has started to flow into the M&A market which made its highest record in 2019 by over 4,000 deals in all types of M&A. This means there were more than 4,000 active and successful Japanese investors,” he said.

Indeed, Yoshida noted that there are a growing number of M&A transactions between Japanese investors and companies in most of countries in Southeast Asia. Among them, Vietnam recorded the highest number ever with 33 transactions last year.

In the past, due to the size of businesses, Vietnam was often outside the top three countries in this regard, but in 2019 it reached an amount of $389 million – 2.8 times higher than in 2017 and, for the first time, ranked just behind Indonesia in second.

During the first 10 months in 2020, there were 21 transactions publicly announced between Japan and Vietnam, ranking second in number after Singapore. Although there was an on-year 25-per-cent decline, given that the total of outbound Japanese deals dropped by 33 per cent during this period, the Vietnamese decline was both smaller than the average and also less than most other countries. In terms of transaction value, Vietnam was ranked second at a value of $282 million.

“We can say that the interest from Japanese investors towards Vietnam continues to be strong even in the pandemic situation, and the background of a slowdown of investment is purely a timing issue,” Yoshida insisted.

In fact, there has been a surge in Japanese-driven M&A deals across the world over the last five years. In 2019, all categories recorded a historical high. In 2020, the domestic M&A market was hit by COVID-19 with a 4-per-cent on-year dip up to October. However, the Japanese market already bottomed out in May, and now the monthly number has almost recovered to the previous year’s level.

Outbound M&A was particularly hard hit and has been slow in recovering, with on-year decline of around 33 per cent up to last month mainly due to worldwide border restrictions.

“From a Japanese point of view, their companies already have very little to do in a market like Thailand. There are already about 5,500 Japanese companies in the country and it is too late to enter. As for somewhere like Myanmar, there are fewer than 400 Japanese companies and so conservative investors still have to wait and see carefully regarding appropriate timing,” Yoshida said.

On the other hand, Vietnam, with more than 2,000 Japanese companies in the country, will continue to attract them. New Japanese Prime Minister Suga Yoshihide is following the policy of his predecessor and demonstrated his commitment to Vietnam by choosing the country as his first destination to visit while in the role. “This endorsement to Vietnam will create an enormous impact to the Japanese companies’ future strategies,” Yoshida explained.

“Once the hurdle of anti-pandemic restrictions on business activities are removed, a big wave of Japanese companies waiting to make progress on investment procedures will rise,” he said.

The Vietnamese government has streamlined the merger and acquisition (M&A) process to encourage investment in new sectors of the economy. And for foreign investors that see establishing a business in Vietnam as too cumbersome, the M&A route provides a unique solution to many obstacles.

“With an M&A, investors can enjoy preexisting access to consumers, locations, and distribution channels. This local knowledge can prove critical to successful operations within Vietnam’s vibrant but rapidly changing investment environment”, Sophie Dao, Partner of GBS, an investment consulting firm in told Vietnam Insider.

According to Sophie, investors should also decide on whether the process will be a merger or an acquisition. A merger is when two companies join to form one company by transferring assets, rights, obligations and interests to the merged company and therefore terminating the merging companies.

Acquisitions require a change in ownership and are typically in the form of existing share purchases or new shares but also involve acquiring assets. For non-public companies, liability mainly stems from the failure to meet with the provisions set out in the agreement.

One of the advantages of executing a merger is that there are few restrictions. They are also an ideal option for investors that are time-constrained and without needing to step up a company.

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