2011

MERGER AND ACQUISITION

Members: Tran, Thuy Duong Dinh, Duy Hung Ha, Dang Vu Vu, Khac Xuan

University of Economics and Business, VNU Hanoi Faculty of International Business and Economics Class: QH-2008-E (Honors Program) Group 1 Instructor: Dr. Nguyen, Thi Kim Anh

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TABLE OF CONTENTS

LIST OF ABBREVIATIONS ............................................................................................ 2 Introduction ........................................................................................................................ 3 CHAPTER 1 ...................................................................................................................... 4 M&A OVERVIEW............................................................................................................ 4 1.1. 1.2. Definition and M&A forms ................................................................................. 4 Motives and problems of M&A .......................................................................... 5

CHAPTER 2 ...................................................................................................................... 6 OVERVIEW OF M&A IN THE WORLD ........................................................................ 6 2.1. 2.2. History of M&A .................................................................................................. 6 Recent trends in M&A ........................................................................................ 8 Worldwide M&A Activity: Number & Value of Announced Transactions 8 Regional trends ............................................................................................ 9 Assessment................................................................................................. 11

2.2.1. 2.2.2. 2.2.3.

CHAPTER 3 .................................................................................................................... 12 M&A ACTIVITIES IN VIETNAM ................................................................................ 12 3.1. 3.2. 3.3. Difference between Vietnam and international definitions .............................. 12 Current situation ................................................................................................ 13 Assessment ........................................................................................................ 16

CHAPTER 4 .................................................................................................................... 18 VIETTEL AND VINACONEX....................................................................................... 18 4.1. 4.2. The 700 million VND deal between Viettel and Vinaconex ............................ 18 Opportunity in crisis .......................................................................................... 19

CHAPTER 5 .................................................................................................................... 20 CONCLUSION ................................................................................................................ 20 LIST OF REFERENCES ................................................................................................. 21

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LIST OF ABBREVIATIONS

M&A: VCG: FDI: WIR: TFS: USA/ U.S: EU:

Merger and acquisition Vinaconex Stock Foreign direct investment World investment report Thomson Financial Services United States of America European Union

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Introduction

Merger and acquisition, hereafter called M&A, is one type of economic activities, which has appeared, and developed in the world for a long time, but for Vietnamese, M&A term just becomes popular recently. Surely M&A is not a perfect tool for investment, but a wise choice if one company wants to enhance its market power. With advantages of high economic growth and stable politic environment, Vietnam, which is evaluated to be an Asia dragon in the future, is a promising land for foreign investments. M&A appears to be a favor of foreigners when making investment decision in Vietnam. It is expected to develop more in terms of quantity and value. This paper is written on a purpose of summarizing and reviewing M&A activities in the world in general and in Vietnam in particular. It consists of four chapters. The first chapter is to review M&As definition, its form, the motives and risks of M&A. Trends of M&A in a period ranging from 1897 to 2010 is described in detailed in chapter 2, followed by overview about M&A in Vietnam mentioned in chapter 3. The last chapter analyses a real case by taking Viettel and Vinaconex as an example.

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CHAPTER 1

M&A OVERVIEW

Graph 1.1: FDIs forms 1.1. Definition and M&A forms

Merger and acquisition is one type of foreign direct investment beside green investment if we classify FDI in term of investment strategy. Chapter one just covers cross-border M&A, which happens when one company merges or acquires with an existing private local firm,0 0whose owner is a foreigner. One special thing of M&A is a change in control and management after merging or acquiring. When talking about merger and acquisition, people usually use M&A as a phrase. In fact, merger and acquisition are slightly different, therefore sometimes make confusion. Cross-border merger is an establishment of new entity or an amalgamation into an existing firm after assets and operations of local and foreign firms are combined (World Investment Report 2000). It can be classified into two types: consolidation and statutory merger. The consolidation is a merger when a new company is formed by consolidating assets and operation from two companies. Meanwhile, only one company survives in a case of statutory merger to become a newly established company assuming all of the debt and equity of the other firm that ceased to be a legal entity (WIR 2000). Differently from merger, cross-border acquisition occurs when one company acquires a controlling stake, usually more than 10% equity, the least level to gain influence on the
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acquired companys operation, in an existing local or foreign affiliate (WIR 2000). There are three types of acquisition. If the acquiring company buys all equity from the acquired, we call the full (outright) acquisition. In this case, only the acquiring firm will survive while the acquired will stop its operation. The other kinds are majority acquisition if buying 50-99% equity and minority if purchasing 10-49% equity. Besides, cross-border M&A can be functionally classified into horizontal, vertical and conglomerate M&A. In horizontal M&A, the merger occurs between two companies, which share the same market, type of products and were once competitors in order to achieve synergies, reach greater market power and so on; while in a case of merging two firms, which are in different yet related markets to reduce uncertainty and transaction costs, we call vertical M&A. The last form is a conglomerate M&A. To diversify risk and deepen economies of scope, one firm will choose to merge with another which is in unrelated activities. 1.2. Motives and problems of M&A

M&A benefits both parties involved. Not only does it helps large companies to cut down investment costs, but also prevent the weak ones from bankruptcy. Besides, new entities established after M&A have potential and advantages to grow and gain competitive advantages in markets. In addition, M&A is a wise choice for enterprises, which want to enlarge scale, catch up business opportunities or even win lager market share. For companies which want to develop new products, M&A is a key to open barriers to entry market with low costs, low start-up risk level. Those firms also can take advantages of management capability, technology and available distribution channel, which partly determine business success. Besides benefits, firms getting involved in M&A activities also face challenges and risks. The acquirer might overestimate and then overpay for acquired firm. In addition, new firms fall into troubles of different financial and control systems, or even have to deal with debt burdens. It is no doubt that new entity will rearrange organization, and number of workers will be pushed into trap of unemployment.

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CHAPTER 2 OVERVIEW OF M&A IN THE WORLD In this part, we review history of M&A from 1897 to 2008 and then make an analysis of M&A trend in recent period. All of the below statistics are based on data provided by: 2.1. Thomson Financial Services (TFS) http://www.imaa-institute.org/ History of M&A

The economic history has been divided into Merger Waves based on the merger activities in the business world as: First wave: 1897-1904, as known as Merging for Monopoly

During this phase merger occurred between companies, which enjoyed monopoly over their lines of production like railroads, electricity . The first wave mergers that occurred during this time period were mostly horizontal mergers that took place between heavy manufacturing industries. Reasons for ending:

Majority of the mergers that were conceived during the 1st phase ended in failure since they could not achieve the desired efficiency. The failure was fuelled by the slowdown of the economy in 1903 followed by the stock market crash of 1904. The legal framework was not supportive either. The Supreme Court passed the mandate that the anticompetitive mergers could be halted using the Sherman Act. Sherman Act could be used to attack anticompetitive mergers. For example: J.P. Morgan merged U.S. Steel with Carnegie Steel and

more than 700 small steel firms. The resulting mega-steel company controlled about 80% of the steel production in the United States Second wave: 1916-1929, as known as Merging for Oligopoly

The 2nd wave mergers that took place were mainly horizontal or conglomerate in nature. Te industries that went for merger during this phase were producers of primary metals, food products, petroleum products, transportation equipment and chemicals. Reasons for ending:
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The October 29, 1929 stock market crash and the Great Depression played an important role in ending this wave. For example: Ford was integrated from the finished car back through

steel mills, railroads and ore boats to the iron and coal mines. The 1929 Crash and the Great Depression ended this wave. Third wave: 1965-1969, called Conglomerate Mergers

The mergers that took place during this period were mainly diversified conglomerate mergers. The Bidder firms in the third wave merger were smaller than the Target Firm. Reasons for ending:

This wave ended with the plan of the Attorney General to split conglomerates in 1968. The poor performance of the conglomerates also contributed in this collapsing. For example: International Telephone & Telegraph was a typical

successful case of this wave. During the 1960s and 1970s, under the leadership of its CEO Harold Geneen the company rose to prominence as the archetypal conglomerate, deriving its growth from hundreds of acquisitions in diversified industries. Forth wave: 1981-1989, as known as The Megamerger

The 4th wave merger started from 1981 and ended by 1989. Size and prominence of acquisition targets were much larger than before. Mergers took place between the oil and gas industries, pharmaceutical industries, banking and airline industries. Foreign takeovers became common with most of them being hostile takeovers. Corporate Raiding, congeneric mergers were popular during this period. Reasons for ending:

The 4th Wave mergers ended with anti-takeover laws, Financial Institutions Reform and the Gulf War. Fifth wave: 1992-2000, as known as Strategic restructuring

This wave was inspired by globalization, stock market boom and deregulation. The fifth wave merger took place mainly in the banking and telecommunications industries. Most of merger cases were in form of cross-border mergers. They were mostly equity financed rather than debt financed. Long-term strategy were emphasized than immediate financial gains Reasons for ending:
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The 5th Wave Merger ended with the burst in the stock market bubble. Economy slowdown also interrupted its development. Rank Year The Top Deals (Largest M&A Transactions) Purchaser Vodafone PLC Pfizer Exxon Citicorp SBC Communications Vodafone Group Bell Atlantic BP Qwest Communications Worldcom Airtouch Purchased Transaction value (in million USD) 183,000 90,000 77,200 73,000 63,000 60,000 53,360 53,000 48,000 42,000

1 2 3 4 5 6 7 8 9 10

1999 1999 1998 1998 1999 1999 1998 1998 1999 1997

Mannesmann Warner-Lambert Mobil Travelers Group Ameritech Corporation AirTouch Communications GTE Amoco US WEST MCI Communications

Table 2.1: Top largest M&A transactions In top 10 largest deals in this wave, there are six of them belong to giants in communication industries. Sixth wave: 2003-2008

The most popular forms were shareholder activism, private equity, and leveraged buyout. This wave still needs more researches for more details.

2.2.

Recent trends in M&A

2.2.1. Worldwide M&A Activity: Number & Value of Announced Transactions

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Graph 2.2: Value of transactions (in billion USD) The above figure shows the tendency of M&A during a period of 15 years. The third and fourth waves have their peaks in 1989 and 1999. However, both of the quantity and value of M&A cases have dropped after 1999. In 2002, total announced value was just around 1500 billion US dollar. Then, the sixth wave appeared and pushed the value about fourfold. Although the economic depression again returned worldwide M&A to a grey sky, there were signs for completed recovery.

2.2.2. Regional trends Around 80% of world wide M&A activity is concentrated in the EU, USA and increasingly, in Asia. Target analysis The USA was home to most firms targeted in 2006 (about 11,000 targeted companies), followed by the EU (10,000) and Asia (9000). The geographical distribution has not changed typically from 2000, however Asia has also emerged with more importance.

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Graph 2.3: Evolution of total M&A deals by target region (2000-2006) Bidder analysis US firms were the most bidders in 2006 (nearly 12,000 deals), followed by EU (10,000). In spite of the fact that Asia could not compare to US or EU, the world witnessed Asias improvement in entering the stage for recent years.

Graph 2.4: Evolution of total M&A deals by bidder region (2002-2006)

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2.2.3. Assessment The 1990s merger wave peaked in 2000 (1998 in USA). A new wave appeared since 2003 but values are lower Strong growth of Asian M&A as percentage of world total, measured by number of deals. Aggregate value of Asian M&A remains relatively low

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CHAPTER 3 M&A ACTIVITIES IN VIETNAM

3.1.

Difference between Vietnam and international definitions

According to the Vietnamese Enterprise Law: Merger (Article 153): Merger is an action in which one or some identical companies (merged companies) may merge with other companies (merging companies) by transferring all its assets, right, obligations and legal benefits to the merging companies, simultaneously stopping the operation of the merged companies (target companies). Acquisition (Article 152): Acquisition is an action in which two or some identical companies (acquired companies) may acquire into a new

company(acquiring companies) by transferring all assets, rights, obligations and legal benefits to the acquiring companies, simultaneously stopping the operation of the acquired companies. According to the Investopedia dictionary: Merger: is an action in which some companies (same size) agree to establish a new company rather than maintaining possession and operation of the old companies. The securities of the old companies will be removed by those of the new company. Acquisition: is an action in which acquiring companies will purchase an acquired company (Target Company). In the legal angel, the acquired company will go the end and its business operation will belong to the acquiring companies; securities of the acquired company will continue to transact in the market. Therefore, the Vietnamese Merger definition is equivalent to International Acquisition definition; and the Vietnamese Acquisition definition is equivalent to International Merger definition. In conclusion, the Vietnamese M&A definition is

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inconsistent with International ones; and it may create some misunderstanding when we compared with other M&A transactions in the world. 3.2. Current situation

In the recent years, while the M&A activities in the world have had a sign of decrease, in both of the number and the value of transactions. According to the data of Thompson Reuters, in 2009, the value of M&A transaction was 1,630 billion USD, decreased by 39.2% compared to 2008; the number of transactions was 30,830, went down by 10.4% compared to 2008.

International M&A activities

50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 2007 SOURCE: AVALUE VIETNAM 2008 2009 4500 4000 3500 3000 2500 2000 1500 1000 500 0

Transactions Value

Graph 3.1: International M&A activities However, the situation of Vietnamese M&A activities have experienced the reverse direction. The statistical figures of Avalue Vietnam, PWC said that both the quantity and quality of Vietnamese M&A transactions have increased dramatically. Calculated to 2009, the number of transactions has stepped up rapidly; but their values have seen a reduction in the recent two years. It has proved that almost of these M&A transactions were small-and-medium-types.

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M&A activities in Vietnam

2000 1800 1600 1400 1200 1000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 0 50 100 Transactions Value 150 200 250

SOURCE: AVALUE VIETNAM

Graph 3.2: M&A activities in Vietnam In fact, the scale of those 2009 M&A transactions was less than 5 millions USD or from 5 to 20 millions USD. These activities often belong to the partners of the large stateowned companies which have had a slow pace of equalization.

Value of M&A transactions in Vietnam

Less than 5 millions USD Between 5-20 millions USD Over 20 billions USD

SOURCE: AVALUE VIETNAM

Graph 3.3: Value of M&A transaction in Vietnam In Vietnam, if based on the properties of business deals, there are four forms of M&A: Foreign enterprises acquired the Vietnamese ones (40%)
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Foreign enterprises acquired the foreign ones (15%) Vietnamese enterprises acquired the foreign ones (5%) Vietnamese enterprises acquired the Vietnamese ones (40%)

Properties of M&A activites

15

40

A- Foreign enterprises acquired the foreign ones B- Foreign enterprises acquired the Vietnamese ones C- Vietnamese enterprises acquired the foreign ones D- Vietnamese enterprises acquired the Vietnamese ones 40 5

SOURCES: AVALUE VIETNAM

Graph 3.4: Properties of M&A activities

Besides, if based on the industries, almost of M&A transactions has focused on Industry (35%) and Finance- Banking (21%). In reality, real-estate has been a new field in which it attracted a numerous investors.

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Industries involved in M&A activities

7 21 9 Real-Estate Information Technology- Media 1 1 3 Industry Industry- Energy Industry- Food Pharmaceutical

Consumer goods
Distribution 16 35 Finance

SOURCES: AVALUE VIETNAM

Graph 3.5: Industries involved in M&A activities 3.3. Assessment

Generally, M&A activities in Vietnam have become an attractive place in the recent years. Yet, if viewed on a comprehensive angel, M&A activities have only been a small weight in the total amount of investment in Vietnam (approximately 5%). Meanwhile, this figure in other countries has fluctuated from 30 to 40%; it proved that Vietnamese M&A activities have experienced a starting stage of the development. Almost of M&A transactions in Vietnam were a friendly relationship (not because of a hostile purpose). The large number of M&A transactions in Vietnam has occurred parallel with the participation of many foreign elements. That means Vietnamese have considered M&A as an important channel to attract the foreign investment capital. However, Vietnamese enterprises recently have started to take part in M&A activities; using it as a tool to invest domestically and abroad. That is a good sign of Vietnamese economy.

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The system law regulations related to M&A activities has operated unclearly and inconsistently, created some difficulties for the enterprises. Specifically, M&A activities have been taken place under the operation of Competition Law, Enterprise Law, Investment Law, and Securities Law; however, such documents are not apparent on both two sides: (1) procedures, principles, price-estimation, rights and obligations of participated parties; (2) financial problems, human resources, post M&A issues...

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CHAPTER 4

VIETTEL AND VINACONEX

4.1.

The 700 million VND deal between Viettel and Vinaconex

Viettel spent 700 billion VND buying 35 million shares of Vinaconex at a price of 20,000VND/share, almost double price of Vinaconex share on HASTC at that time. With a simple calculation, Viettel Telecom seems not to be master in the field of civil construction and real estate investment, and lost nearly 300 billion VND.

Graph 4.1: Vinaconex stock

Source:http://www.cophieu68.com/chartsymbol.php?id=vcg

However, the transaction was carried out when the stock market was at its lowest point; and after the sale, Vinaconex stock rised triplely in three months. That means Viettel earned a huge profit although they purchased at double price before. A financial professional analyzed: Although the volume of Vinaconex Stock (VCG) listed on HASTC nearly 150 million, but the purchasing of 35 million shares at a price around the 10,000VND/share was almost impossible. The market was so sensitive, the sudden large

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demand will push prices up and investors will hold VCG and wait for higher price. Thus, buying 35 million shares at 20,000 VND/share was acceptable at that time. With the transaction, Viettel now is holding 18.9 percent of Vinaconex's stakes and it revealed plans to purchase more stakes in the corporation. In 2009, Viettel and Vinaconex also established the Vinaconex-Viettel Finance Joint Stock Company. 4.2. Opportunity in crisis

Legal capital of 1,500 billion VND in 2008 was a tight shirt with Vinaconex compared with their own projects. Vinaconex invested in nearly 50 projects with total capital of billions of VND, for example: North An Khanh urban area (Hanoi), Thao Dien District (District 2, Ho Chi Minh City), the Trade Center Site, Cam Pha Cement Plant All big projects need a huge capital. Plan of raising capital from 1,500 billion to 1,850 billion VND was accepted in shareholders meeting. However under downward trend of stock market, selling shares on stock market was extremely risky. From the perspective of Viettel, this was a gold opportunity because Viettel had large capital surplus. Direct negotiations to purchase Vinaconex shares, Viettel became the second largest shareholder with 18.9% and to appoint representatives to join the Executive Board of Vinaconex. Viettel bought 35 million shares of Vinaconex at doubled price. In term of Vinaconex, not only do they have more capital to develop their projects, but Viettel trademarks, telecommunications infrastructure, mobile in Vietnam, Laos and Cambodia will contribute to increase value of projects invested by Vinaconex. The combination between two companies shows that although being in the crisis, there is still investment opportunity available. This case also demonstrats the strength of internal resources of Vietnam enterprises, when combined together.

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CHAPTER 5 CONCLUSION

Although M&A activities are relatively new for Vietnamese enterprises and firms, as predicted, it will predominate for next years. In this paper, the successful deal between Viettel and Vinaconex was taken as an example. Nonetheless, no one can ensure that in reality, every M&A deal will achieve success. Enterprises and firms might face difficulties in negotiation process; or even when negotiation succeeds, maters in management after M&A are what they have to deal with. To take full advantage of M&A, therefore, enterprises should pay attention on careful preparation before and after joining in these activities.

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LIST OF REFERENCES

1. International Investment Report 2000 2. Vietnam Enterprises Law 3. Report: M&A Vietnam 2009 and prospect in 2010 A Value Company 4. Data from Thomson Financial Services (TFS) 5. http://www.imaa-institute.org/ 6. Vinaconnex stock: http://www.cophieu68.com/chartsymbol.php?id=vcg

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