[Vietnam M&A Outlook 2011] Fundamentals for M&A Developments in Vietnam

Pham Duc Trung, from Central Institute for Economic Managament (CIEM), explains why SOE equitisation will provide an impulse for promoting M&A activities

Sorces of M&A activities in Vietnam in the past couples of years were associated with purchases of shares from state-owned equitised enterprise (SOEs). Therefore, faciliting the pace of SOE equitisation should provide an impulse for promoting M&A activities in the country.

Notwithstanding, M&A of SOEs is a complex issue by nature as it depends on a range of specific institutional factors covering the individual requirements of involved enterprises.

Equitising SOEs created initial conditions to facilitate M&A activities, at least from the point of enriching market supply, and raising the number of SOEs partaking in M&A activities in the capacity of sellers.

The 11th Party Congress introduced some major orientations regarding SOE reforms, which highlighted  accelerating equitisation and forming some multi-ownership business groups.

The prime ministerial Decision 14/2011/QD-TTg, dated March 4, 2011 presented criteria on state owned enterprise’s classification, significantly curtailing the number of SOEs in which the state held the ruling role.

Based on such criteria, a great number of current state-owned sole-member limited liability firms are subject to intensifying ownership diversification. Investor can expect nearly a half a state-run corporations and business groups set up under prime ministerial decisions (active in diverse fields as steel and iron, petroleun, telecom, construction, proberty, cement, textile and garment, princibal chemicals, financial investment, trading, food and so on) to embrace equitisation schemes.

Once these orientations came true, a huge volume of state assets and capital would be offered up for sale. The figures raleased by the Ministry of Finance’s Corporate Finance Deparment in June 2010 showed state ownership capital at 81 out of 96 state-owned corporations and groups hit $27.6 billion and total assest value came to $73.3 billion.

Accelerated equitisation at state-owned corporations and groups in the coming period may secure great attention from the part of buyers. Though state corporations and groups did not get high appraisals in terms of business efficiency, not many investors would be reluctant when seeing their  huge asset value nad other prevaling advantages in respect to geographical position, land, and onther potantial benefits.

In fact, most of SOEs are now operating under the Enterprise Law. Vietnam is currently home to around 4,000 equitised business with the state holding dominant shares in nearly 35 percent of them and 1,200 sole-member limited firms concentrating in 96 state corporations and groups, agricultural and forest farms and public utility companies. M&A of SOEs via capital pooling and stock purchase in the new context would be eased tremendously compared to former the Law on State-owned Enterprises.

Many state corporations were in fact equitised, however, the biggest M&A cases until present were not that relevant to those SOEs. Some cases were spotted in which the very buyers were state groups and corporations. For instances, military-run telecom group Viettel acquired a stake in the leading construction group Vinaconex through the State Capital Investment Corporation-SCIC; Ha Tien 1 and Ha Tien 2 cement firms were merged; PetroVietnam Drilling and Well Services Corporation (PVD) acquired 49 percent stake of its subsidary PDI; and PetroVietnam bought 20 percent stake of Ocean Bank. In respect to foreign partners the Ministry of Finance gave the nod for HSBC to raise its stake in leading insurer Bao Viet Group and Unilever was given the green light to wholly own Unilever Vietnam by acquiring Vinachem’s stake in the joint venture.

The practice shows that equitisation of SOEs alone could not be a driving force for M&A activities. Equitised business may enrich market supply, but they themselves could hardly  become lucrative products in M&A cases. According to regulations in Decsions 14/2011/QD-TTg the state still plays a ruling role at most state-run corporations and groups. Once the state still held dominant shares, others partners could only become strategic partners or minor  partners at these business. Thereforce, these SOEs were not attractive in the eyes of investors.

Until present, parent companies of state-owned corporations and groups were yet to have a plan to offer them for sale. For crucial members of state-owned corporations and groups, M&A may break their occupational structure and internal linkages. Besides, unders Decision 14 these important members are not yet subject to conducting ownership aiversification. Thereforce, potentail M&A sellers are mainly SOEs under direct management of ministries, local goverments, SCIC or unsubstantial subsidiaries of state groups and corporations. Reality shows that these ‘offers’ were not charming in the eyes of M&A buyers.

In the upshot, we cannot neglect the economic effciency and competitiveness of SOEs when discussing M&A activities of SOEs’ porr efficiency. Some specialists even argued most SOEs would incur losses if cost estimates were properly handled. In 2007, the incremental capital output ratio (ICOR) of SOEs was 8.28 against that of 3.74 for private firms. According to the Nation Assembly Standing Committee’s supervisory outcome report in November 2009, up to 56 out of 91 state corporations and groups reported their return-on-equity (ROE) of less than 15 percent in 2008, lower than the bank deposit rate in the same year.

Business adminstration attacts particular attention from potentail M&A buyers. However, reality shows that this is a chromic drawback of SOEs which could not be addressed overnight. A lack of transparency and professinalism. Low motivation, unclear responsibilities, handling of diverse social and political duties while an appropriate support mechanism is not in place, are all factors which have long frustrated many SOEs.

For SOE equitisation to become a growth engine of M&A activities in Vietnam there needs to be a break-through in SOE reform alongside consolidation of the existing M&A legal framework. Accordingly, it would be important to:

Turn all parent companies of state corporations and groups into joint stock business; sharply reduce the number of enterprises with the state holding the ruling role. The state should hold SOEs operating in public security, defence and public utility areas, and handle essential activities for socio-economic development in particular areas and localities;

Conduct general inventory appraisals based on market prices of SOE state assets including land, resources, fixed asset and other shorts of asset;

Treat business from assorted economic sectors in enactment and enforcement of development policies equally; erase credit provision under instructions from state management bodies; the government and competent state agencies not imposing decisions on ‘loan restructuring or deadline extension’ on business or standing to pay up debts on behalf of business; SOEs should not be taken as a tool by the state in monitoring macroeconomic development tragets. Sale of state monoplished products and services should follow a competitive mechanism to ensure a healthy market performance and it is important to formulate separate legal systems govering public and private procurement activities;

Restructure and ameliorate SOE business management ownership must be separated from the state administration management, striving to establish a specialised body to exercise the state ownership right. Of equal importance are issuing regulations guiding the order and procedures relevant to decision enactment by the state owner on business operations is similar to that of other owners at SOEs and in accordance with the Enterprise Law; not using administrative decisions to trnsfer decisions by the state owner; issuing relevant legal documents governing and supervising state ownership right at SOEs; making investment and business activities of the state owner at SOEs increasingly transparent and stepping up supervision and efficiency appraisals of big SOEs, state corporations and business groups.

Source: Vietnam M&A Outlook 2011

[LARGE]                                                                    Fundamentals for M&A development in Vietnam[/LARGE]


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