1. Mergers and Acquisitions (M&A)
M&A is the activity of acquiring control of a Company through a merger or an acquisition between companies to own all or part of that Company.
- Mergers: refer to the merger of one or more companies with another company without forming a new legal entity. All assets, interests, rights, or obligations of the merged enterprise will be received by the merging company and the merged company will cease to exist. Generally, the merge is used for companies of the same type and size.
- Acquisitions: In the past, when talking about an acquisition, most people thought of one company acquiring another. However, now, this concept has broadened considerably. Accordingly, an individual or organization gains control of another business through forms such as the acquisition of a private enterprise, receiving the transfer of contributed capital of a limited liability company, receiving the transfer of voting shares of a joint stock company, registering to buy shares slips of listed companies, or receiving the transfer of the entire real estate business project. As for the takeover of the Company, the controlled Company retains its legal status. For a private enterprise, the purchase and sale of a private enterprise will be associated with the registration of a change of ownership of a private enterprise, multiplied by the Enterprise Law provisions.
M&A deals are all about gaining control of the merged or acquired business, not just owning assets or shares. M&A often brings many benefits to organizations and individuals such as: helping to expand market share, achieving better business performance, minimizing the number of workers needed, reducing unnecessary costs, improving financial resources, making the most of the technologies, allowing the transfer of the brand, shortening the time to market access.
2. The process of making an M&A deal
There is no specific, precise process for an M&A deal, especially in the M&A market in Vietnam. However, M&A deals are usually implemented according to the following process, which includes 3 (three) main phases:
Phase 1: Pre-M&A
For this stage there are usually two steps: Step 1 is to define the target audience and Step 2 is due diligence and valuation.
In Step 1, individuals and organizations that aim to carry out M&A deals can be collectively referred to as the Party wishing to gain control or the Buyer, who will rely on its business orientation, desires, and assessments to determine the target company. They must have a clear and detailed strategy for defining the target company and completing the transaction. This is also a key condition for the decision on whether to carry out M&A deals.
Accordingly, the initial approach to the target company usually takes a long time, sometimes it takes about 3–4 years, but there are also cases where it only takes a few months until the Buyer identifies the Target Company. After that, the buyer and the target company enter a more in-depth research stage (Step 2) so that they can decide together in Phase 2.
To proceed with Step 2 of Phase 1, it is common for the parties to jointly sign non-disclosure agreements, or agreements in principle on transactions along with payments to ensure the interests of the target company and guarantees as well as easier access to documents and information of the Party Buying for the target companies.
Depending on its needs, the Buyer may conduct its due diligence procedure or require a functional and experienced organization to carry out due diligence reviews such as:
- Financial regulation: focus on checking compliance with accounting standards, capital transfer, provisioning, loans from organizations and individuals, cash flow stability, checking depreciation of fixed assets, and the ability to recover debts.
- Legal regulation: focus on assessing all and in detail legal issues related to legal status, capital contribution situation and status of members, company shareholders, legal rights and obligations of target audiences.
- Labor, technical, and/or other appraisals.
These appraisals often take place at the same time to provide the most comprehensive reports. However, some difficulties may exist if the access of the buyer to information and documents provided by the target company is limited such as the issuance of incomplete appraisal assessments and reports, thus leading to incorrect decision and valuation of the target company. Or simply performing a certain type of due diligence may not always achieve the expected results.
The result of Phase 1 will help to decide whether to proceed to Phase 2, to value the target company, and to determine the form and structure of the transaction.
During this period, the target company can also perform due diligence as listed above to correct errors and determine responsibilities that may arise if a transaction is made, but also to identify key points that may be decisive to the selling price or the success of this deal.
Although it is only one of the steps in the overall process of an M&A deal, the results of Phase 1 play a key role for buyers and target companies to help them understand the objectives, their difficulties, and the advantages in the process of making transactions.
Phase 2: Signing
This stage, also known as the stage of negotiating, signing, and executing M&A transactions, can go through two steps: negotiating transaction details, signing a Purchase and Sale Contract (also known as SPA), and completing the legal procedures of the transaction.
Accordingly, based on the detailed appraisal results at Stage 1, the buyer will determine the target transaction type to serve as a basis for SPA negotiations.
It should be noted that the parties to the transaction define specific objectives in terms of selling prices and costs, post-M&A commitments, transaction execution roadmaps, and the handling of any issues that arise.
After the two parties have agreed and signed the SPA, the completion of relevant procedures will be carried out by the two parties according to the contract such as the adjustment of business registration information, the transfer of asset ownership, the payment, the route of reception of the target company, commitments, and support of the seller.
Phase 3: Post-M&A
At this stage, the buyer will take the final step of the M&A deal, which is to restructure the business. This phase usually takes place over an extended period and will be performed sequentially with careful consideration to not overly disrupt the business dynamics of the target companies, which may result in the purchase not reaching the objectives set at the time of execution.
Resolving legal and financial issues will be a top priority to address the outstanding issues that have been left unresolved. In addition, the buyer will restructure factors related to human resources, policies, and processes as well as corporate culture and other issues.
3. Roles and Challenges for Vietnam’s M&A Market
M&A does not only help companies to reduce their investment and operating costs but also promotes the development of competitive advantages for companies in the market. Moreover, for companies operating at a loss, this is also a solution for them to overcome their business’ drawbacks, increasing the opportunities for market expansion and increasing market share.
On the other hand, it is necessary to pay attention to challenges from other aspects such as the challenges posed by the legal system, the challenges posed by the parties to the transaction, and finally the challenges posed by the intermediaries. Concerning the challenges posed by the legal system, M&A activities are scattered in different legal documents. Moreover, these are only generally regulated with no detailed system. This will make it difficult for the parties involved in the transaction and the state management agencies to control M&A activities.
As for the challenges posed by the parties in the transaction, each party will want to gain more rights for their side. Therefore, for the parties to agree on rights and obligations, it is necessary to converge many objective and subjective factors.
Finally, there are many securities, financial advisory, audit, and legal services firms participating as intermediaries in the M&A transaction relationship. However, as noted, challenges such as those from the legal system, personnel, data database, or capacity are making these firms unable to become real intermediaries that allow buyers and sellers to meet.
At PLF, we provide legal due diligence services for M&A deals in the most dedicated way to ensure the interests of our clients.