Even if the M&A transaction is completed and parties start to organize their enterprises, some tough issues may still be ahead of them, and it is not always easy to predict what these might be. Perhaps the two corporate cultures might not mesh as tightly as investors would like. Perhaps it might be a workforce issue, with an extensive job overlap, resulting in the best-and-the-brightest at both companies already being headed for the exits to avoid job uncertainty.
It is wise to anticipate numerous challenges when planning to integrate merged companies. This article will outline some key challenges involved in M&A integration in Vietnam to help investors spot and resolve such problems before these will become a major threat to the company’s foundations.
1. The differences in domestic and international M&A regulations
One of the main risks of M&A failures is the legal risk that leads to disputes and litigation, which are a drain on a company’s resources and (possibly) reputation. Most of the conflicts occurred because Vietnamese laws (despite being influenced by them) have different regulations from international laws. For example, when foreign investors invest in the advertising field in Vietnam, Vietnamese Law and WTO commitments or other international treaties will govern them to which Vietnam is a member. Foreign investors are licensed to operate advertising companies, provided they have joint ventures with Vietnamese partners (no limit to foreign side). Therefore, foreign investors cannot establish a 100% foreign-invested advertising company. This affects the integration of activities between the foreign investors and the target company after completing the M&A transaction. The foreign investor will completely follow and control the target company’s form of organization and operation.
Therefore, it is necessary to have a clear agreement from the beginning in order to identify legal risks and avoid any mistakes from the two parties. In Vietnam’s increasing integration, trade disputes are inevitable. Therefore, in this challenge, the more thoughtful the equipment of legal knowledge, the more beneficial it will be in planning future merger strategies.
2. Financial reports’ transparency
Investors often complain about the transparency of financial reports when assessing potential mergers in Vietnam. Kevin Snowball, chief investment officer at PXP Asset Management, pointed out that investors are worried about under-the-table transactions that might take place at State-owned enterprises (SOEs), “where people might just sell the shares to their friends”. Moreover, group leaders might be unwilling to meet international investors and provide transparent details on their finances, operations, and strategies. Such distrust may make investment procedures unclear and problematic.
Regarding financial reports, Vietnamese accounting standards contain vast differences to the International Financial Reporting Standards (IFRS), making it harder for overseas investors to make sense of a Vietnamese company’s earnings and losses. There are also no official requirements to release corporate information in English or even require the business language to be in Vietnamese, which will increase transaction costs due to translations and further uncertainty that can also discourage investors abroad.
3. Culture shift
Deloitte has estimated that failed cultural integration is a primary cause in about 30 percent of failed M&As. Bain & Company also identified cultural integration as the number one cause of mergers and acquisitions failure. This is especially true in Vietnam, when sometimes companies are over enthusiastic about the potential for market growth from a merger that they do not consider other human and cultural factors.
The first common mistake within the Vietnamese market is short cutting the M&A process, which usually is a long, unpredictable, and sometimes uncomfortable journey where potential risks are ubiquitous due to the fluid and unpredictable nature of the market forces. It is often the case that local vendors are not sufficiently prepared for the extensive time and effort an M&A deal requires while foreign investors breach overly optimistic timelines. This will lead to a conflict as with the lack of optimism from one and too optimistic an attitude from the other will lead to an objective dissonance between the parties, which might lead to a deal being cancelled, and with it, vast resources being wasted.
Also, during the formulation of the deal structure, parties often overlook the closing and post-closing steps of the deal, where cultural integration plays a crucial role. It usually takes months, maybe even years, for two cultures to mesh and find common ground.
There is still a predominant Asian culture in the local thinking and acting, considering the company as their “child” so they rarely want to sell it, which foreign investors should respect and appreciate when dealing in Vietnam. Therefore, many domestic enterprises are still wary of M&A activities. The choice of structure can depend on several factors such as the regulatory framework in Vietnam, the type of acquisition, type of business activities, or even the relationship between the target and buyer. In the case of foreign investors, the existing foreign ownership restrictions and conditions can also significantly impact M&A deal structures. Thus, it is important that foreign investors ensure the proposed structure works from a Vietnam perspective and be open to considering alternatives at an early stage.
4. Maintaining momentum
The central challenge in merger integration revolves around sustaining momentum. Integration must occur concurrently with ‘business as usual,’ not at the expense of it. Addressing this challenge necessitates the establishment of a comprehensive set of Key Performance Indicators (KPIs) from the very beginning, encompassing both business operations and the integration process.
Overall, when planning to conduct M&A transactions, and later integrations, it is advisable to appreciate that the Vietnamese legal frame differs from the West. Along with a great potential also follows substantial differences, both cultural and administrative, which shall be appreciated to successfully conduct investments in Vietnam.