Potential M&A targets must be determined before the M&A transaction is concluded based on the assessment criteria, the goals and the compatibility between the buyer and the seller based on each party’s specific context and the general context of the economic market.
Vietnam is increasingly becoming a target for M&A deals, as well as a field for concluding it. Its openness to investment markets and its key position in the “China plus one strategy“1 make it an ideal place to gain market share.
1. Vietnamese M&A reality: Potential but many ended up failure
Although Vietnamese companies are less inclined to remain the target of these agreements and are increasingly the buyers2, Vietnam remains a dynamic scene for global business operations. This attractiveness is also reflected in the number of M&A deals concluded in Vietnam and their financial value. For example, as of October 2023, there are 265 signed deals worth USD 4.4 billion3, with an average value of each deal of about USD 54.5 million.
However:
Reality shows that not all M&A deals are successful. Worse still, some are real failures in that the newly merged entities do not generate any profits or market share. According to some studies, more than half of all M&A deals are unsuccessful, if not outright failures4.
There are many reasons for these failures:
Broken commitments, unreliable asset valuations, lack of synergy, contractual disagreements, legal disputes, lack of cash flow, etc.
Although the responsibility for these failures does not lie entirely with the potential of the targeted entities assessed by acquiring companies, which are keen to enjoy preexisting access to consumers, locations, and distribution channels to Vietnam, M&A deals often fail because of a mismatch between assessed and effective potential.
Targeting a company therefore implies a real technical examination of its capacity to expand market share, but also to integrate the group operationally.
2. Setting your M&A criteria
An M&A deal is not an end in itself. This agreement must be capable of serving a market share expansion project (by following the paths mapped out by the target companies with their customers), or of combining existing production resources with new technologies or new processes. It is therefore important not to see an M&A deal as a static transaction, as it must lead to rapid and effective exploitation of the potential of the target entities.
In this respect, the potential assessment must be in line with your selection criteria, such as:
Company’s capabilities
The company’s ability to adapt to the acquiring company’s commercial objectives while ensuring that intermediaries and customers are treated in a manner consistent with the group’s values and commercial image.
Location
The company’s location can be a decisive factor in terms of supply and image, but also in terms of its connection with a specific tax regime or a particular local authority.
Sector
Even if the sector in which a company operates is public and visible information, it is important to ensure that the company is familiar with the customs and practices in the sector concerned, and that it is in contact with the target intermediaries. This information will make it possible to define precisely the target company’s position within a specific sector, and whether this position is in line with the acquiring company’s development objectives.
Size
The size of a company can have an impact on its volume of business in a given market, but this is not an intangible rule. A small, highly promising company in a niche sector may enjoy a better competitive position than a large company struggling to renew its business.
Legal and commercial environment
this general criterion broadly covers the combination of the above criteria: defining this environment will allow a general appraisal of the company’s commercial advantages as well as its structural constraints (a very narrow market sector, a product or service that is heavily taxed for export, difficulties in accessing certain supply infrastructures).
The main goal of the Seller
it should be noted that the seller’s goals also significantly affect the success of the M&A transaction. Maintaining the core personnel of the target company is necessary to ensure the stability of the company after the transaction, but it also means that there will be hidden risks.
If the Seller’s goal is to completely release their responsibility from the target company for hidden transactions that have been performed or to implement goals that directly affect the company’s operations later, it will be a concern big risk for the buyer.
3. Assessment of local competition
One of the key factors influencing the decision to enter into an M&A agreement is to draw the competitive landscape around the target company.
This environment can be determined based on the following points in particular:
- Identify the main competitor’s company and compare their market share, pricing strategy, product offer and marketing visibility;
- Identify recent changes in the relevant market, and the structural factors driving these changes;
- Determine the target company’s medium- to long-term strategy for adapting to these structural changes;
- Identify the main long-term threats to the target company’s competitiveness (depletion of raw materials, forthcoming changes in legislation, changes in compliance standards, emergence of new resources, etc.);
- Identify potential merger negotiations between global competitors for a defensive M&A strategy on local targets.
Depending on the target’s position in its competitive environment (market leader, followed by its competitors, or, on the contrary, a mid-market company that tends to be attentive to the solutions offered by its competitors), the M&A’s agreement valuation is likely to fluctuate.
4. Culture: an under-estimated criterion
If culture is the subject of a dedicated purpose, it is probably because it is one of the aspects of M&A deals that is sometimes overlooked, even though it is often the determining factor in their success, or at least certainly in their failure.
“Creating and implementing a strategy to successfully blend cultures is core to merger and acquisition success. Forcing one culture on another never works. Organizations can avoid falling into a cultural chasm by factoring the people aspect into M&A criteria well before the deal is signed”
says Michele Hamill, CHRO of JAGGAER, an American group that has expanded its business through a series of visibly successful acquisitions.5
History is full of situations in which, while on paper the shareholders had technical and economic convergences they needed to achieve their development goals, the impact of the M&A agreement was negative due to value and vision discrepancies.
Typical deals:
Among the many examples, Amazon intended to grow its business beyond the e-commerce space by acquiring Whole Foods in 2017. The differences in approach between the organizations (Amazon was based more on a strategy of efficiency and technical optimization, whereas Whole Foods was more concerned with ethics and maintaining a human relationship with its customers) have led to results that fall far short of their expectations.
These same differences also led to the departure of several Nest executives after the company was acquired by Google in 2014. Nest had a history of working with Apple and was more suited to a formal management style than Google’s, which is more engineer-driven and bottom-up culture.
In Vietnam, some M&A failure transactions like the Tribeco and Kinh Do deal or the Bibica and Lotte deal are also partly caused by cultural differences.
So a target company is not just a business potential to be achieved: while the M&A deal makes it a natural extension of the acquiring entity, culture is a decisive factor in sharing a common vision of management and the business objectives to be achieved.
5. Conclusion
To conclude, the best potential target for an M&A is necessarily selected based on its intrinsic economic characteristics like its market share, competitiveness, and professional environment, but these characteristics can be properly exploited and valued provided that the companies under the M&A process manage to create good relationships, and converge towards several corporate values. Internationally, the cultural issue of an M&A deal is obviously accentuated, since this divergence can be added to differences in human cultures.
At PLF Law Firm
Identifying M&A targets is paramount for the success of any merger or acquisition (M&A) transaction, for both sides to benefit till the end. However, the whole process should be processed with the help of a reliable legal business partner, to protect the company’s value, save time and efforts as well as prevent future risks arising from hidden agenda.
At PLF, we also provide a comprehensive service for Mergers & Acquisitions, supporting companies from Buy and Sell sides to handle their pre, during and post-M&A. Depending on the situation, we can flexibly tailor the legal strategy, among Restructuring, Legal Due Diligence, Banking & Finance and Deal Execution.
Contact PLF Law Firm today via email at inquiry@plf.vn or +84913 902 906 or Zalo | Viber | WhatsApp to receive a free 30-Initial Minute Consultation.
Article completion date: November 04th, 2024.
PLF Law Firm
1 the business strategy to avoid investing only in China and diversify business into other countries, or to channel investments into manufacturing in other promising developing economies.
2 https://e.vnexpress.net/news/business/economy/vietnamese-firms-no-longer-mere-targets-in-m-amp-a-deals-experts-4373245.html – Vietnamese firms no longer mere targets in M&A deals : experts
3 https://vneconomy.vn/thi-truong-ma-viet-nam-dat-gia-tri-hon-4-4-ty-usd-nam-2023.htm – Vietnam’s M&A market reached a value of more than 4.4 billion USD in 2023
4 https://vietnamnet.vn/en/only-39-percent-of-ma-deals-lead-to-success-E82856.html – Only 39 percent of M&A deals lead to success
5 https://www.spiceworks.com/hr/hr-strategy/articles/examples-merger-failure-cultural-incompatibility/ – 6 examples of Mergers failures owing to cultural incompatibility
