LITERATURE REVIEW
Rationales of Merger and Acquisition
In business or economics, a merger is a combination of two companies into one larger company Such actions are commonly voluntary and involve stock swap or cash payment to the target Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a
"merger" rather than an acquisition is done purely for political or marketing reasons
An acquisition, also known as a takeover, is the buying of one company (the
‘target’) by another An acquisition may be friendly or hostile In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer
Acquisition usually refers to a purchase of a smaller firm by a larger one
Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity This is known as a reverse takeover
Mergers can be classified into: ắ Horizontal mergers take place where the two merging companies produce similar product in the same industry ắ Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine ắ Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company ắ Conglomerate mergers take place when the two firms operate in different industries
The completion of a merger does not ensure the success of the resulting organization; indeed, many mergers (in some industries, the majority) result in a net loss of value due to problems Correcting problems caused by incompatibility- whether of technology, equipment, or corporate culture- diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities by one of the partners
Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture These problems are similar to those encountered in takeovers For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate
The five most common ways to valuate a business are asset valuation, historical earnings valuation, future maintainable earnings valuation, earnings before interest taxes depreciation and amortization valuation and shareholder's discretionary cash flow valuation Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value These values are determined for the most part by looking at a company's balance sheet and/or income statement and withdrawing the appropriate information The information in the balance sheet or income statement is obtained by one of three accounting measures such as a notice to reader, a review engagement or an audit
Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for Most often this information is expressed in a Letter of opinion of value when the business is being valuated for interest's sake There are other, more detailed ways of expressing the value of a business These reports generally get more detailed and expensive as the size of a company increases; however, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies Various methods of financing an M&A deal exist: ắ Payment by cash: Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders alone A cash deal would make more sense during a downward trend in the interest rates Another advantage of using cash for an acquisition is that there tends to lesser chances of earning-per-share dilution for the acquiring company But a warning in using cash is that it places constraints on the cash flow of the company ắ Financing capital: This may be borrowed from a bank, or raised by an issue of bonds Alternatively, the acquirer's stock may be offered as consideration
Acquisitions financed through debt are known as leveraged buyouts (only if they take the target private), and the debt will often be moved down onto the balance sheet of the acquired company ắ Hybrids: An acquisition can involve a combination of cash and debt, or a combination of cash and stock of the purchasing entity
Types of financing an acquisition can be as follows: ắ The buyer buys the shares of the target company being purchased Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going business, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment ắ The buyer buys the assets of the target company The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage A disadvantage of this structure is the tax imposed on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders
These motives are considered to add shareholder value: ắ Economies of scale: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit ắ Increased revenue/Increased market share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices ắ Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts Or, a manufacturer can acquire and sell complementary products ắ Synergy: Better use of complementary resources ắ Taxes: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability In some countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company ắ Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothes the stock price of a company, giving conservative investors more confidence in investing in the company However, this does not always deliver value to shareholders ắ Resource transfer: resources are unevenly distributed across firms [Barney,
1991]; the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources ắ Increased market share can increase market power: In an oligopoly market, increased market share generally allows companies to raise prices Note that while this may be in the shareholders' interest, it often raises antitrust concerns, and may not be in the public interest
However, these motives are considered not to add shareholder value: ắ Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger ắ Manager's hubris: Manager's overconfidence about expected synergies from
M&A which results in overpayment for the target company ắ Empire building: Managers have larger companies to manage and hence more power ắ Manager's compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share, which hurts the owners of the company; although compensation is linked to profitability rather than mere profits of the company ắ Vertical integration: Companies acquire part of a supply chain and benefit from the resources However this does not add any value because as one end of the supply chain may receive product at a cheaper cost, the other end now has lower revenue In addition, the supplier may find more difficulty in supplying to competitors of its acquirer because the competition would not want to support the new conglomerate
In summary, a merger can happen when two companies decide to combine into one entity or when one company buys another while an acquisition always involves the purchase of one company by another Synergy is the logic behind mergers and acquisitions, the functions of synergy allow for the enhanced cost efficiency of a new entity made from two smaller ones Acquiring companies use various methods to value their targets An M&A deal can be executed by means of a cash transaction, stock-for-stock transaction or a combination of both Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations.
Guidelines for successful acquisitions
Acquisitions have long been a popular vehicle for expanding scope of the organization However, despite this popularity, there is ample evidence that many acquisitions fail to add value for the acquiring and acquired companies and, indeed, often end up dissipating value The below figure is drawn from a Mercer Management Consulting’ study of 150 acquisitions worth more than USD 550 million (1990 - 1995) [J.Warner, J.Templeman and R.Horn, 1995]
Why do so many acquisitions apparently fail to create value? There appear to be four major reasons: (i) companies often experience difficulties when trying to integrate divergent corporate culture, (ii) companies overestimate the potential economic benefits from an acquisition, (iii) acquisitions tend to be very expensive, and (iv) companies often do not adequately screen their acquisition targets
1.2.1 Pitfalls of acquisitions 1.2.1.1 Difficulties with post-acquisition integration
Having made an acquisition, the acquiring company has to integrate the acquired business into its own organizational structure Integration can entail the adoption of common management and financial control systems, the joining together of operations from the acquired and the acquiring company, or the establishment of linkages to share information and personnel When integration is attempted, many unexpected problems can occur Often they stem from differences in corporate cultures After an acquisition, many acquired companies experience high management turnover, possibly because their employees do not like the acquiring company’s way of doing things It has been suggested that the loss of management talent and expertise, to say nothing of damage from constant tension, can materially harm the performance of the acquired unit [J.P.Walsh, 1998]
Even when companies achieve integration, they often estimate the potential for creating value by joining together different companies They overestimate the strategic advantages that can be derived from the acquisition and thus pay more for the target company than it is probably worth This tendency has been attributed to hubris on the part of top management Top managers typically overestimate their ability to create value from an acquisition, primarily because rising to the top of a corporation has given them an exaggerated sense of their own capabilities [R.Roll,
Acquisitions of companies whose stock is publicly traded tend to be very expensive
When a company bids to acquire the stock of another enterprise, the stock price frequently gets bid up in the acquisition process This is particularly likely to occur in the case of contested bids, in which two or more companies simultaneously bid for control of a single target company Thus, the acquiring company must often pay a premium over the current market value of the target
The debt taken on to finance such expensive acquisitions can later become a noose around the acquiring company’s neck, particularly if interest rates rise Moreover, if the market value of the target company prior to an acquisition was a true reflection of that company’s worth under its management at that time, a premium of 50% over this value means that the acquiring company has to improve the performance of the acquired unit by just as much if it is to reap a positive return on its investment Such performance gains, however, can be very difficult to achieve
One reason for the failure of acquisitions is management’s inadequate attention to pre-acquisition screening [P.Haspeslagh and D.Jemison, 1991] They found that many companies decide to acquire other firms without thoroughly analyzing the potential benefits and costs After the acquisition has been completed, many acquiring companies discover that instead of buying a well-run business, they have purchased a troubled organization
To avoid pitfalls and make successful acquisitions, companies need to take a structured approach with three main components: (i) target identification and pre- acquisition screening; (ii) bidding strategy; and (iii) integration [L.L.Fray, D.H.Gaylin, and J.W.Down, 1984; C.W.L.Hill, 1984; D.R.Willen, 1985;
Haspeslagh and Jemison, 1996; P.l.Angslinger and T.E.Copeland, 1996]
Thorough pre-acquisition screening increases a company’s knowledge about potential takeover targets; leads to a more realistic assessment of the problem involved in executing an acquisition and integrating the acquired company into acquiring company’s organizational structure, and lessen the risk of purchasing a potential problem company The screening should begin with a detailed assessment of the strategic rationale for making the acquisition and identification of the kind of enterprise that would make an ideal acquisition candidate
Next, the company should scan a target population of potential acquisition candidates, evaluating each according to a detailed set of criteria, focusing on: (i)
Financials position, (ii) Product market position, (iii) Competitive environment, (iv) Management capabilities, and (v) Corporate culture Such an evaluation should enable the company to identify the strengths and weaknesses of each candidate, the extent of potential integration problems, and the compatibility of the corporate cultures of the acquiring and the acquired companies
The company should then reduce the list of candidates to the most favored ones and evaluate them further At this stage, it should sound out third parties, such as investment bankers, whose opinions may be important and who may be able to give the list after this process should be the acquisition target
The objective of bidding strategy is to reduce the price that a company must pay for an acquisition candidate The essential element of a good bidding strategy is timing
For example, a company always looks for essentially sound businesses that were suffering from short-term problems due to cyclical industry factors or from problem localized in one division Such companies are typically undervalued and thus can be picked up without payment of 40% or 50% premium over current market value
With good timing, a company can make a bargain purchase
Despite good screening and bidding, an acquisition will fail unless positive steps are taken to integrate the acquired company into the organizational structure of the acquiring one Integration should centre on the source of the potential strategic changes of the acquisition – for instance opportunities to share marketing, manufacturing, procurement, R&D, financial, or management resources
Integration should also be accompanied by steps to eliminate any duplication of facilities or functions In addition, any unwanted activities of the acquired company should be sold Finally, if the business activities are closely related, they will require a high degree of integration In the case of a company, whose strategy is one of unrelated diversification, the level of integration can be minimal However, a company requires greater integration if its strategy is concentration on a single business and expansion.
Managing acquired companies
It has been noted, in previous parts, that acquisition, as merger, is the principal vehicles by which companies enter new product markets and expand the size of their operations [M.S.Salter and W.A.Weinhold, 1979] Earlier, strategic advantages and disadvantages of merger and acquisition have been discussed together with guidelines for successful acquisition to avoid its pitfalls Now it is time to consider how to design structure and control systems to manage new acquisitions This issue is important because many acquisitions are unsuccessful, and one of the main reasons is that many companies do a very poor job of integrating new company into their corporate structure [F.T.Paine and D.J.Power,
The first factor that makes managing new acquisitions difficult is the nature of the businesses a company acquires If a company acquires businesses closely related to its existing businesses, it should find it fairly easy to integrate them into its corporate structure The controls already being used in the acquiring company can be adapted to the acquired company To achieve gains from synergies, the companies can expand its task forces or increase the number of integrating roles, so that acquired companies are drawn into the existing structure
If managers do not understand how to develop connection among companies to permit gains from economies of scope, the newly-acquired company will perform poorly It has been argued that this is why the quality of management is so important A company must employ managers who have the ability to recognize the synergies among apparently different companies with various corporate cultures, and so derived benefits from acquisitions and mergers [G.D.Bruton, B.M.Oviatt, and M.A.White, 1994] However, if companies acquire unrelated businesses only to operate them as a portfolio of investments, they should have no trouble managing the acquisitions
Implementation problems are likely to arise only when corporate managers try to interfere in businesses they know little about or when they use inappropriate structure and controls to manage the new business and attempt to achieve the wrong kinds of benefits form the acquisition
Therefore, strategic managers need to be very sensitive to the problems involved in taking over companies through mergers and acquisitions Even when acquiring closely related businesses, new managers must realize that each business has a unique culture or way of doing things Over time new management can change the culture and alter the internal workings of the company, but this is a difficult implementation task Besides, the bureaucratic costs of changing a culture are often enormous because the top management team and the organizational structure have to be changed in order to change the way people behave
Most companies consider acquisition when they are generating financial sources in excess of those necessary to maintain a competitive advantage in their business
The question they must obstacle is how to invest the excess resources in order to create value The acquiring company can manage to create value for the acquired companies in three main ways: (i) by restructuring poorly-run enterprises; (ii) by transferring competencies among enterprises; and (iii) by realizing economies of scope
An acquiring and restructuring strategy rests on the presumption that an efficiently managed company can create value by acquiring inefficiently and poorly managed enterprises and improving their efficiency
Improvements in the efficiency of an acquired company can come from a number of sources First, the acquiring company usually replaces the top management team of the acquired company with a more aggressive one Second, the new top management team is encouraged to sell off any unproductive assets and elaborate headquarters to reduce staffing level Third, the new top management team is also encouraged to intervene in the running of the acquired businesses to seek out ways of improving the units’ efficiency, quality and innovativeness, and customer responsiveness Fourth, to motivate the new top management team and other employees of the acquired unit to undertake such actions, increases in their pay may be linked to increases in the performance of the acquired unit In addition, the acquiring company often establishes performance goals for the acquired company that cannot be met without significant improvements in operating efficiency It also makes the new top management team aware that failure to achieve performance improvements consistent with these goals within a given amount of time will probably result in their lost of jobs This system of rewards and punishments established by the acquiring company gives the new managers of the acquired enterprise every incentive to look for ways of improving the efficiency of the unit under their change
Companies seek out to acquire enterprises related to their existing business by one or more value creation functions, such as manufacturing, marketing, materials management, and R&D They may want to create value by drawing on distinctive skills in one or more of their value creation functions in order to improve the competitive position of the acquired enterprises Alternatively, they may acquire a company in the same business area in the belief that some of the skills of the acquired company can improve the efficiency of their existing value creation activities If successful, such competency transfers can lower the costs of value creation in one or more of company’s businesses or enable one or more of company’s business to undertake the value creation functions in a way that leads to differentiation and a premium price
For such a strategy to work, the competencies being transferred must involve activities that are important for establishing a competitive advantage All too often companies assume that any commonality is sufficient for creating value
Economies of scale arise when two or more business units or companies share resources such as manufacturing facilities, distribution channels, advertising campaign, R&D costs, and so on Each business unit or company that shares resources has to invest less in the shared functions [D.J.Teece, 1980] For example, the costs of a garment company’s manufacturing, advertising and sales in major products are low because they are spread over a wide range of products
Additionally, such a strategy can utilize the capacity of certain functions better For instance, by producing the components for the assembly operations of two companies in the same industry, a component-manufacturing plant may be able to operate at greater capacity, thereby realizing economies of scale in addition to economies of scope Thus, a corporate strategy based on economies of scope can help both acquiring and acquired company attain a low-cost position in each of businesses in which they operates Acquiring to realize economies of scope can, therefore, be a valid way of supporting the generic business-level strategy of cost leadership
However, as with competency transfers, realizing economies of scope is possible only when there are significant commonalities between one or more of the value creation functions of a company’s existing and new activities Moreover, managers need to be aware of that bureaucratic costs of coordination necessary to achieve economies of scope within a company often outweigh the value that can be created by such a strategy [C.W.L.Hill and R.E.Hoskisson, 1987] Consequently, the strategy should be pursued only when sharing is likely to generate a significant competitive advantage in one or more companies.
Conceptualization and emerged frame of reference
The previous section reviewed literature and presented theories relevant to the research purpose and the research questions stated in chapter one Based on that theoretical review, this section will illustrate the conceptualization of the research questions and pictorially showed in an emerged frame of reference
The idea of building a conceptual framework is to explain, either graphically or in narrative form, the main things to be studied This means that it is the current version of the researcher’s map of the territory being investigated, and it specifies who and what will and will not be studied The conceptualization will further assist in forming an interview guide, which will enable data collection [Miles &
1.4.1.1 Research question 1: Why do Vietnamese garment companies conduct acquisition?
There are a number of theories described in literature on rationales for mergers and acquisitions The following theories are chosen since they correspond well with my research problem ắ Mergers, Acquisitions, and other restructuring activities, DePamphilis (2005) ắ The basis of Mergers and Acquisitions, Investopedia Tutorial (2006)
1.4.1.2 Research question 2: How can acquisition in Vietnamese Garment Sector happen?
When investigating how acquisition in Vietnamese Garment Sector happens the following theories have been chosen to use since they correspond well with the research problem ắ Successful Acquisition Planning, L.L Fray, D.H.Gaylin and J.W.Down (1984) ắ Making it happen: How to execute an Acquisition, D.R Willensky (1985) ắ The complete guide to mergers and acquisitions – process tools to support M&A integration at every level, Galpin, T J and Herndon, M (2000)
1.4.1.3 Research question 3: How can an acquiring company manage an acquired company?
When investigating on management of acquired companies theories from several authors will be used and the following theories are chosen since they correspond well with the research problem ắ Managing Acquisitions, P.Haspeslagh and D.Jemison (1991) ắ Growth through Acquisition: A Fresh look, P.L.Anslinder and T.E.Copeland
(1996) ắ The management of international acquisitions, Child, J.; Faulkner, D and Pitkethly, R (2001) ắ Successful mergers, acquisitions and strategic alliances – How to bridge corporate cultures, Gancel, C.; Rodgers, I and Raynaud, M ( 2002)
The previous section provided a conceptualization of the research questions This section will provide a graphic illustration of the frame of reference in order to illustrate how they correlate and how they serve to answer the research purpose
The emerged frame of reference is pictorially presented in Figure 1.1, and is constructed by me
Rationales of Mergers and Acquisitions
Economies of scale through reducing duplication and lowering costs
Increase revenue or market share due to absorbing major competitors
Synergy to better use of complementary resources
Reduction of tax liability due to buying loss makers
Geographical or other diversification to smooth a company’s earnings and stock price
Resource transfer to create value
Increased market share can increase market power
Avoiding pitfalls of acquisitions difficulties with integration overestimating benefits expensive acquisitions inadequate screening
Execution of acquisitions pre-acquisition screening bidding strategy integration
- replacement of top management team, sales off unproductive assets, reduction of staffing level
- improvement in efficiency, quality, customer responsiveness and innovativeness
- motivation through increases in pay linked to increases in performance
Transferring competencies between acquiring and acquired companies
Figure 1.1: Emerged frame of reference
METHODOLOGY
Research purpose
Most research can be classified into one of the following three different purposes: exploratory, descriptive and explanatory research [Reynolds, 1971]
Table 2.1: Three different research purposes
Exploratory -When a problem is difficult to limit -When know little about the area in the field of the study
-To gather as much information as possible about a specific subject using many different sources
Descriptive - To gather information when investigating a total or random sample
-To develop careful descriptions of different patterns expected during the exploratory stage
Explanatory -When look for a cause and effect relationship
-To develop a theory used to explain the empirical generalizations that was developed in the descriptive stage
Source: Reynolds, 1971; Eriksson and Wiedesheim-Paul, 1997; Patel and Davidson, 1994;
Considering the above stated research purpose, this study explores, describes and somewhat also explains about M&A, execution of an acquisition in Vietnam and how to manage an acquired company in garment sector
The study is exploratory as the researcher had limited knowledge about the area of the research, and also wanted to gain a deeper understanding of the research area
The study is however mainly descriptive as the area studied with already existing information Also, the thesis aim is to describe garment companies and how they involved in acquisitions On answering research questions, explanatory stage is partly started the through explaining relationships between different variables.
Research approach
When implementing research there are different ways to address the research purpose such as deduction or induction approach, and also qualitative or quantitative method
An inductive research is based on empirical data; accordingly, the theories and models are set up based on different phenomena in reality while a deductive approach allows the researcher use existing theories and experiment them with different methods [Eriksson and Wiedesheim-Paul, 1997]
The deductive approach is chosen for the study follows because using existing theories to reach the research purpose would be more efficiently Empirical studies would be conducted based on theories and used to set an emerged framework of reference for data analysis
A qualitative research refers to studies of gathering and analyzing detailed data of ideas, feelings and attitudes, commonly used when trying to receive thorough information, which enables the researcher to gain a deep understanding of a single case study or a limited number of objectives The empirical data cannot be easily transformed into numbers, but would rather be described in words [Yin and Ibid,
A quantitative study relates to studies of gathering and analyzing numerical and statistical data, mostly used when trying to gain a broad understanding of the research problem, which enables the researcher to draw generalized conclusions based on the collected information and present the findings in the form of numbers
This study would follow a qualitative approach in order to be easily deal with the research problem and research questions This approach is suitable to obtain deep understanding of M&A in Vietnam and how to manage an acquired company in garment sector That the data would be analyzed in words rather than in numbers was another reason of why this approach is the best alternative for my thesis.
Research strategy
There are a number of approaches which a researcher can choose when conducting an empirical data collection Depending on the research questions, to which extent the researcher has control over behavioral events and to what degree the focus is on contemporary events, the researcher can choose among an experiment, a survey, archival analysis, history and case study
Table 2.2: Relevant situations for different research strategies
Strategy Form of research questions Requires control over behavioural events
Experiment How, Why Yes Yes
Survey Who, What, Where, How No Yes many/ How much Archival
Who, What, Where, How many/ How much
History How, Why No No
Case study How, Why No Yes
As the case study is generally superior when how and why questions about a specific topic are answered, when control over the relevant behaviors is not required and when research focuses on contemporary events, it would be the most suitable to be used as a research strategy It is believed that case study would enable to obtain a better understanding of M&A in Vietnam and management of an acquired company in garment sector
The study is also based on present occurrences which are another motive for choosing case study as research strategy In this study, a single case study on two garment companies would be conducted to collect data.
Data collection method
As referred in the qualitative field of research [Yin, 1994], there are six sources of evidence for collecting data including documentation, archival records, interviews, direct observations, participant observation and physical artifacts The advantages and disadvantages of each different data collection method are presented in Table 2.3
Table 2.3: Six sources of evidence, strengths and weaknesses
Source of evidence Advantages Disadvantages
Documentation - Stable: can be reviewed repeatedly
- Unobtrusive: not created as a result of the case
- Exact: contains exact names, references, and details of an
- Biased selectivity: if collection is incomplete
- Reporting bias: reflects (unknown) bias of author
- Access: may be deliberately event
- Broad coverage: long span of time, many events and settings blocked
- Accessibility due to privacy reasons
Interviews - Targeted: focuses directly on case study topic
- Insightful: provides perceived casual inferences
- Bias due to poorly constructed questionnaires
- Inaccuracies due to poor recall
- Reflecxibility: interviewee gives what interviewer wants to hear
- Reality: covers events in real time
- Contextual: covers context of event
- Reflexibility: event may proceed differently because it is being observed
- Cost: hours needed by human observers
- (Same as for Direct Observations)
- Insightful into interpersonal behavior and motives
- (Same as for Direct Observations)
Bias due to investigators’ manipulation of events
It was stated that interview is one of the most significant source of case study as it is targeted and insightful These reasons would lead to the choice of interviews for data collection Documentation and archival records such as company profile and annual reports of relevant parties in the study were also used as supporting data sources
Interviews can be conducted in three different forms: open-ended, focused and structured The study only conducted focused interviews in a conversational manner via an interview guide (see Appendix) Each interview took approximately 45-60 minutes One face-to-face interview and one telephone interview were conducted to relevant respondents at Ho Guom and Chien Thang garment companies In order to conduct these interviews effectively, interviewees were sent a short background of the thesis and interview guide via e-mail, so the respondents would be able to prepare for the interview and all interviews reached expected results.
Sample selection
As mentioned above, a single-case study has been conducted to gather the most appropriate empirical data The case study was based on interviews with two persons in two different garment companies
In order to find appropriate companies for the case study, desk research was used to find information about companies and their line of business The researcher managed to look for an acquiring company -Ho Guom Garment JSC- a prestigious company doing business efficiently in both domestic and foreign markets covering a great part of Vietnamese garment export revenue; and an acquired company -Chien Thang Garment JSC- which have had problems in management and operation The two companies would suite research problem and purpose since they are involved in the same industry; and the acquisition of Chien Thang by Ho Guom is considered as a typical case of acquisition in Vietnam The first interview was set up with General Director of Ho Guom Garment JSC and she, in turn, introduces another suitable interviewee - Deputy General Director of Chien Thang Garment JSC.
Data analysis
Data analysis implies examining, categorizing, tabulating or otherwise recommending the collected data Every research should involve a general analytical strategy in order to come in terms with what to analyze and why The type of data received has a great impact on the quality of the findings The strength of the data and the ability to draw any conclusions from the collected data depends so much on how the data is analyzed [Yin, 1994] Furthermore, the main goal of data analysis is to treat the evidence fairly, to produce compelling analytic conclusions and to rule out alternative interpretations The researcher should choose between two general analytical strategies: theoretical propositions and case description
As earlier stated, when analyzing the data collected from the interviews the intentions are to find answers to the research questions A qualitative data analysis focuses on data in the form of words and consists of three simultaneously different activities [Miles and Huberman, 1994], namely: ắ Data reduction: The process of focusing, selecting, abstracting, simplifying and transforming the data to organize the data so that final conclusions can be verified and drawn ắ Data display: The process of taking the reduced dada and displaying it in an organized, compressed way so that conclusions can be more easily drawn ắ Conclusion drawing and verification: The process of commenting, explaining, and deciding what things mean by the researcher through noting regulations, patterns, explanations, possible configurations, casual flows, and propositions
The analysis of the data in this research follows three above steps For each research question, in purpose to reduce data, case analysis was conducted by comparing the data with literature brought up in the conceptualization After the data was analyzed, the research questions were answered and conclusions were then drawn based on the findings.
Reliability and validity
When conducting scientific research, validity and reliability are two important factors that determine the trustworthiness of collected data These instruments for measurement are considered to increase the trust of the research [Eriksson and Wiedersheim-Paul, 1997] It is so important to judge the research quality and therefore, four commonly used tests namely construct validity, internal validity, external validity and reliability are proposed when establishing the quality standard of a research [Yin, 1994]
Table 2.4 displays practical tactics for handling four tests to increase quality standards when conducting case study research
Table 2.4: Case study tactics for four design tests
Tests Case Study Tactics Phases of Research in
Which Tactics Occurs Construct Validity - Use multiple sources of evidence
- Have key informants review draft case study report
Internal Validity - Do pattern matching
External Validity - Use replication logic in multiple-case analysis
Reliability - Use case study protocol
- Data collection Source: Yin, 1994, pg 33
When establishing construct validity the researcher makes sure that correct operational measures are utilized for the concepts being studied, and objective judgment is used to collect the data In order to increase the construct validity of this study as much as possible, evidences have been collected from multiple sources including interviews, archival records and documentations All the sources of evidence have been made citations Draft thesis has been reviewed by the supervisor and fellow academic students as well
External validity refers to the establishment of the domain to which the findings of a study can be generalized The external validity is enhanced in the study due to the fact that analytical generalizations have been made based on the findings
Reliability is concerned with how reliable and accurate the research methods and techniques for collecting data are The procedures of the research in this thesis have thoroughly explained in order to increase the reliability Additionally, a structured approach has been followed in this thesis since each chapter is based on the previous one The interview guide was designed to reduce the risks of influencing the respondents in any way However, when interpreting the answers some personal bias may have influenced the reliability negatively The results of the study could have been affected of the researcher’s attitudes and knowledge All the interviews were conducted in Vietnamese and then translated into English, which could contribute a little negative effect on the reliability
I have tried to be as objective as possible when handling and evaluating the gathered information Using a tape recorder during interviews would help remember the interviews better It also gave researcher the possibility to listen to the interviews many times and avoid misunderstandings The reliability could be lowered by the fact that the interview guide was sent in advance However, it is believed that the nature of questions was written in a way that did not lead the respondent to miss relevant information If the interview was to be repeated with the same interview guide and respondents, it still might not lead to the same results because subjectivity is always involved in personal interviews.
DATA PRESENTATION AND ANALYSIS
Company presentation
Founded in 1993, after being equitised in 2001, Ho Guom Garment JSC (HOGARSCO) -a member of Vietnam National Textile and Garment Corporation (VINATEX) – has been specializing in manufacture, trade, import and export of garment products Besides, HOGARSCO has expanded to new business areas including building office and trade centres for lease, investment in training and education and so on
HOGARSCO has the head quarter at the address of 201 Truong Dinh Street, Hoang Mai district Total area of production are 42.000m 2 including 4.000m 2 of material and accessories storage, 2.200m 2 of finished product storage, 800m 2 of cutting room, 800m 2 of office area, and 82.000m 2 of other land
Originating from a small factory with more than 200 workers and 100 machines, now, HOGARSCO owns four factories in Hanoi, Hung Yen, Hai Phong and Ha Tay including seven manufacturing units, with 3600 workers, 2490 machines and total capacity reaches up to 10 million products annually HOGARSCO’s factories have passed Target Compliance Audit in October, 2002 On August 14 th 2007,
HOGARSCO celebrated 14-year foundation anniversary and inaugural band cutting for Garment Factory 7 at Quoc Oai - Ha Tay Details about scale of manufacturing are presented in Table 3.1
Table 3.1: Information on HOGARSCO’s factories
Type of garment Capacity per year (pcs)
201 Truong Dinh, Ha Noi Unit 1 450 320 Small orders
Km 22 Highway 5, Ban Yen Nhan, Hung Yen Unit 2 800 500 Woven garment (jacket, trousers, coat, blouse)
Polo shirt, shirt, under-wear)
Km 84 Higway 5A, An Hung, AnHai, Haiphong Unit 5 600 500 Woven garment (jacket, trousers, coat, blouse)
Unit 6 150 100 Woven garment (shirt, blouse)
Quoc Oai Industrial Zone, Ha Tay (launched on 14 th August 2007)
Main product categories are jacket, pants, skirt, blouse, jeans, shirt, and children’s wear, T-shirt, vest And other products are dress, short, suits, ski-wear, underwear, cap, and gloves HOGARSCO uses very good types of fabric such as micro fiber,
PU lamination, cotton, denim, polyester, polyamide, ramie, spandex, lioncel, linen, silk imported from Korea, China, Indonesia, Taiwan, Hong Kong, Thailand, Australia, Italy, etc
HOGARSCO’s main export markets are America, EU and Japan And its products have been exported to 50 countries Sales percentage by customers and categories of products contributing to its turnover are shown in Figure 3.1&3.2
Figure 3.1: Sales percentage by main export markets of HOGARSCO
Figure 3.2: Sales percentage by categories of products
Not only orders of export garment processing but HOGARSCO has obtained direct export garment orders (FOB) from world-known fashion firms such as Target Stores – America and Tchibo - Germany with the annual quantity reaches up to millions of garment products Achievement in export and some important figures of HOGARSCO’s performance are displayed in Table 3.2 and visualized in Figure 3.3
Table 3.2: HOGARSCO’s performance from 2002-2006 (VND billion)
Turnover Export value Import value
Figure 3.3: HOGARSCO’s performance from 2002-2006 (VND billion)
HOGARSCO has gained ISO 9002 – Quality Management System Accreditation in
2003 HOGARSCO has gained many prizes by Ministry of Trade for export achievement for many years Marking the achievements that the staffs and workers of HOGARSCO have gained in the period of 2002- 2006, the Party and the State have offered the 2 nd class Labor Order to the Company and the 3 rd class Labor Order to General Director -Ms Ninh Thi Ty.
Chien Thang Garment JSC (CHIGAMEX), founded in 1968, is a member of Vietnam National Textile and Garment Corporation (VINATEX) specializing in manufacture, trade, import and export of high quality garment products In addition, there are the other business aspects such as producing, exporting, importing, trading garment accessories and services, training sewing workers, trading real estates, offices, hostels…
In the head quarter of 22 Thanh Cong street, Hanoi, there are 24 sewing lines, 4 embroidery machines and one lather glove factory In Thai Nguyen factory, there are also 10 sewing lines Furthermore, there is a sewing training school and stores in Hanoi Chigamex also have sub-factories including Le Truc Garment JSC with 9 sewing machines and 3 embroidery machines, Khai Hoan Garment Embroidery Co
Ltd., with 8 sewing lines and 8 embroidery machines, and Bac Kan Garment Co
Main products are jackets, blouses, blazes, vest, dresses, suits, pants, shorts, sport- wears, shirts, T.-shirt, polo shirt, lather gloves, especially for women Its annual turnover is 25 million USD with the total of 3000 employees, 200 office staff and
2800 workers; and 2303 units of machines Its capacity was 1.8 million of pieces per year, equivalently to basic jacket
Chigamex has gained ISO 9001 – Quality Management System Accreditation
Chigamex also has gained 1 st Class Labor Honor by President of Socialist Republic of Vietnam Chigamex has gained many prizes by Ministry of Trade for export achievement for many years
Its main export markets are Spain, Hong Kong, Japan, America, Korea, and Taiwan
And its major customers are Mango, Maxport, Itochu, Mitsui, Fleet Street, Amerex, Young Shin, Pan Pacific, Woobo, Maha, Hadong, Fantex The Figure 3.4 displays its major markets’ contribution to its turnover
Figure 3.4: Major export markets of Chigamex
The situation leading to the acquisition
3.2.1 Post-integration change of Vietnam garment and textile industry
Vietnam has become an official member to the World Trade Organization since November 2006 The textile and apparel enterprises have really integrated into the world market mechanism with a lot of opportunities and challenges Viet Nam textile and apparel enterprises are being inequitably behaved as compared with the competitors in the United States' marketplace because the quota mechanism is still maintained by the U.S side until the beginning of the year 2007 and then replaced by the monitoring mechanism which makes both importers and investors so worried
Being aware of such harsh business environment, a majority of the enterprises in the garment and textile industry have actively undergone a vigorous change in order to stay existence and take the advantage of opportunity for development Almost of the state-owned enterprises have been equitised, restructured the fund ownership and management, and changed the operation method Many enterprises have made efforts and creation in building their suitable business strategy targeting the intensification of long-term competitiveness, such as enhancement of production management level; stepping up scientific and technological capability; computerization of management activities and development of those items with high added values; construction of the brands and distribution systems; development of human resources and corporate culture Owing to such efforts, the enterprises have made great successes in doing business and positively contributed to the production and export growth of the whole industry
These evolutions have positively contributed to bringing about a growth step of 22% of the whole industry in 2006 and 31% in September, 2007; have created a firm premise for the whole industry to accomplish this year's export plan of USD 7.5 billion assigned by the Government [Vinatex, 2007]
Many enterprises have attained high business growth levels in the domestic and export markets Enterprises have got sales turnover of above VND 1,000 billion and growth rate more than 20% in 2006 such as Viet Tien, 10-10, Nha Be, Thanh Cong, etc Many enterprises have got growth rate above 40% such as Hoa Tho, Thien Nam, Phu Bai, Phuong Dong, Phuoc Long, Thai Nguyen, Truong Giang, Viet Thang, Song Hong, etc The enterprise with the great export turnover in 2006 is Viet Tien Garment (153 million USD) Those enterprises with export turnovers of approximately 100 million USD comprise Nha Be, Garment 10, 10-10, etc [Vinatex, 2006]
Aside to these typical enterprises, there still remains a not small part of enterprises in the industry that are still being at a loss The labor productivity of many enterprises is still lower than 30-50% compared to the average level of the regional enterprises Many enterprises have not established brands in the market and around 90% of the industry's enterprises are still unfamiliar with three letters of ERP (enterprise resource planning) Meanwhile, our competitors have no rest from being grown up and more vigorous China' s textile and apparel industry is set to carry out the strategy for quality grade enhancement, soon to be released from quotas in
European market in early 2008 and in the United States in early 2009 In parallel, other Asian countries' textile and apparel industries, such as Pakistan, India, Bangladesh, Sri Lanka, Cambodia, etc are accelerating with an ambition of doubling their export turnovers in four years 2006-2010 Therefore, saving these inefficient enterprises from loss and future bankruptcy should be taken into consideration
Ho Guom Garment Joint Stock Company (HOGARSCO) -the former was Garment Workshop 2 belonging to Confectimex’s Services Factory- was established in 1993
To carry out the guideline for equitisation of the State-owned enterprises by the Ministry of Industry's (currently the Ministry of Industry and Trade) and Viet Nam National Textile and Garment Group (VINATEX), in the year 2000 Ho Guom Garment Company conducted equitisation of the whole enterprise, being one of the first VINATEX's member enterprises in the Northern region carried out equitisation and business worked effectively
Immediately after the equitisation, HOGARSCO began its restructuring of the organization, renovated the management mechanism, expanded the production and business operations, and enhanced the joint ventures and associations with various units inside and outside the sector Until now, HOGARSCO has been continuously growing its size and production capacity In 1993, HOGARSCO had only 1,020 m 2 workshop site constructed on an area of 524 m 2 at 201 Truong Dinh, Hanoi and had only 100 units of machinery and equipments with more than 200 workers in 2-shift working In August 2007, HOGARSCO had three more new, spacious and highly industrial nature production bases in three provinces Hung Yen, Hai Phong, Ha Tay with total area rising up to 26,000m 2 (increased by 52 times), and 2,500 units of machinery and equipments (increased by 27 times), total employees increased by 13 times Results from production and business are continuously going up with annual growth rate of 70% The revenues in 1994 only hit VND 942 million, and then in
2006 hit VND 171 billion The workers' average income has been stably improved, over VND 1.3 million per month in 2006 doubled in comparison to 1993
In the period of acceleration of the investment strategy, keeping in the front of the potential United States marketplace and the international economic integration of Viet Nam Textile and Apparel Industry from 1996-2005, HOGARSCO made use of the advantage of relations and available potentiality to rapidly take the initiative in investment in land of nearby provinces, machinery procurement and local recruitment in order to strengthen production and business capability; especially production of high export value items
From the enterprise's equitisation until now, total investment value has grown up to VND 250 billion The investment activities originating from the real requirement of production and business have much influence on the company’s performance creating fresh production capacity
The Garment Factory 7 in Quoc Oai, Ha Tay province has total investment level of VND 35 billion Spacious workshops, system of air ventilation and cooling, advanced machinery and equipments were officially put into operations in April,
2007 Under the circumstance of labor shortage for the garment sector, HOGARSCO set the policy that production together with occupational training
For the time being, only simple items are produced here, such as trousers of children and adults ordered by client Mango (Spain) The Company's goal is to recruit and train 600 workers at the end of this year HOGARSCO continues to invest in installation of the hanging conveying system, integrity, modern specialized machines in order to produce suits in the second quarter, 2008
Along with the investment for production technology renovation, HOGARSCO always pays attention to investment for modernization of managerial mechanism and training for human resources, assures the qualification, ability and skill of staffs and workers, enhances employees' competencies
To build up an efficient working environment in the unit, different regulations and rules within the units have been promulgated assuring the interest for the employees, guaranteeing equity, democracy in salary and bonus payment, holding on the internal unity and maintaining the industrial and civilized way of living
Along with pushing production and business, HOGARSCO is always concerned about improving working condition, assuring the industrial safety and sanitation, organizing annual health check for workers Medical and social insurance are fully paid; other compensations for night shift and over-time working are sufficiently materialized To make workers tightened with the enterprise, HOGARSCO holds well the shift-interval meals and supports a part of house rent of workers Holidays and health care days are held for the workers annually HOGARSCO also awards staffs and workers' children who have high achievements in their learning
Execution of the acquisition of CHIGAMEX by HOGARSCO
At the first quarter of 2006, when total loss and inventory of CHIGAMEX reached up to VND 42 billion, VINATEX had a Decision of delegation; accordingly, one Vietnamese garment company, of which State-owned equity was more than 50%, would take over CHIGAMEX for recovery By the time, two big Vietnamese garment companies were considered to be the take-over including Garment 10 and HOGARSCO These two companies, which their success attached to the fame of two prominent leaders – Ms Dung, General Director of Garment 10 and Ms Ty, General Director of Ho Guom – had been waiting for VINATEX’s Decision as they all regarded it as an opportunity to prove their companies’ capability
Until April 2006, State-owned equity in HOGARSCO was only 23% of the total equity that would be the reason for VINATEX’s final decision Garment 10 would take over CHIGAMEX under Ms Dung’s leadership and she became the representative for State-owned equity - 51% of total charter capital of CHIGAMEX
At that time, this Decision seemed to be reasonable as Garment 10 has been a strong brand in domestic and foreign markets However, there had been no sign of improvement since CHIGAMEX was taken over by Garment 10 Five months have passed and the situation of consecutive loss of CHIGAMEX was more serious
VINATEX began to think about the nature of CHIGAMEX’s problems and once again they reconsider HOGARSCO and Ms Ty whether she and her company can help CHIGAMEX overcome the most difficult time in its life of operation
At the beginning of November 2006, after eight months of leading CHIGAMEX, despite of so much effort, Ms Dung of Garment 10 left the company with an added loss of VND 12 billion and total loss and inventory came up to VND 54 billion It was high time for VINATEX’s next decision VINATEX had intended to sell out its equity in CHIGAMEX to HOGARSCO At that time, total value of its equity was VND 6.5 billion (equivalently to the holding rate of 51%), thus, it had to organise an auction, because according to the relevant law, the asset with the value more than VND 5 billion had to be sold in an auction VINATEX had no option except the delegation of Ms Ty as the representative of State-owned equity in CHIGAMEX from 9 th November 2006
Before that time, VINATEX conducted a meeting of CHIGAMEX’s shareholders to agree about raising charter capital and attracting strategic alliances Several months passed by, Ms Ty had totally proved her ability to VINATEX through her initial activities in order to help CHIGAMEX recover day by day and HOGARSCO became a strategic alliance of CHIGAMEX right after buying out 28% of total CHIGAMEX’s equity Nowadays, HOGARSCO’s holding rate in CHIGAMEX has rise to 66%, including 38% of State-owned equity represented by Ms Ty
Furthermore, CHIGAMEX owned 60% equity of Bac Kan Garment Co Ltd, the rest - 40% equity belonged to Bac Kan Provincial People’s Committee (PPC) At the end of 2007, HOGARSCO has decided to buy out the shares of Ban Kan PPC, thus, HOGARSCO’s holding rate in Bac Kan Garment Co Ltd would be 58% of total equity
Figure 3.6: Overview of holding rate among companies
Managing the acquired company - CHIGAMEX
After CHIGAMEX being taken over by HOGARSCO, Ms Ty became General Director of CHIGAMEX She gradually conducted restructuring of the whole company and tightened all cost in order to reduce loss She managed to settle down a new management machine removing four positions of managing directors, and now management team includes one general director, one deputy general director, and line managers The four personnel who were old managing directors became line managers Separate departments merged to form five new departments instead of ten as before, thus, the number of management positions such as managers and deputy managers decreased, respectively As a result, salary and other special compensation (including separate office, automobile and mobile cost) for such management positions were removed, thus total overhead cost reduced too Five rearranged departments includes technical department being responsible for industrial technique, mechanical and electric technique, quality control, and ISO; export-import planning department covering planning, sales and marketing; accounting department; administration, staffing and medical care have been merged to become administration and personnel department; and the last – one arisen department – is domestic sales department Personnel in these departments were rearranged and cut down by many ways depending on specific situations: (i) rotation to direct workers after three months of occupational training; (ii) transference to another garment company; (iii) early retirement; and (iv) layoffs It was seen that such ways were reasonable and materially deserved
Rearrangement of organizational structure, system of positions and human resource has cut down the number of office staff by 130 personnel; besides cases of staff who have negative reactions to layoffs, most of those resigned themselves mainly because they could not deal with big changes in short time After three months, total number of staff working in the office of CHIGAMEX has been approximately
110 personnel Despite difficulties in re-staffing, especially for such ever State- owned company like CHIGAMEX, Ms Ty did a very good work in these settlements Instead of meaningless of weekly delegation meeting, she had met each member in BOD and of management team to persuade them to agree with her decisions She has maintained an open communication in the Company, clearly explained to all employees why they should have such big changes and treated fairly to the whole staff and workers Several months later, she is respected by all employees due to her determination and contribution to the Company, especially to increase in their living standard Although all staffs staying with the Company were increased in salary of about 25% in three months, total indirect cost has still gone down and the Company had more revenue from leasing empty office
Department of Administration Hanoi Factory
Bac Kan Garment Co.Ltd
Figure 3.7: Post-acquisition organizational structure of CHIGAMEX
Source: Provided by the interviewee, 2007
In contrary to predecessors, the first thing Ms Ty did when she came to CHIGAMEX was to increase pay to workers and improve the quality of their interval-shift meals Like staff all workers’ salary increased by 20% in the first month after the take-over, and three months later, more 5% Instead of buying meals for workers from outside like before, Ms Ty organized a team to cook set- menu meals for workers in order to ensure safety and nutrition; and obviously following this way was much cheaper Thanks to her effort of persuasion, better working morale came back Staffs and workers are refreshed in their mind They have focused on their work and tried their best for common goal of the whole company – increasing revenue in order to reduce loss, that’s what predecessors wanted but did not succeed And she has done what she said, tightening cost and increasing revenue that would lead to loss reduction- after one month, instead of USD 100-thousand loss monthly, the Company only had loss of VND 100 billion in December 2006 because turnover from export processing rise up to USD 100 thousand Furthermore, Increasing in pay for workers has not only kept them with the Company but attracted more labor to come and stay Total number of direct labor has been increased of more 200 ones compared the beginning of take-over
On basis of right realization of staff and workers’ capabilities in CHIGAMEX, increase in pay combined with bonus for achievement has created remarkable motivation that has helped productivity and business efficiency rise Sometimes, short delivery required increase to three-shift production; however, workers were willing as they had motives if working such as overtime working payment, one more shift-interval meal and reward and reorganization for production achievement
Due to reduction in the number of management positions, some assets, which had been used by these positions, such as cars, office equipments and facilities, could be liquidated for money return Two of three cars were sold, the Company save cost of drivers’ salary and fuel Usage of Company’s transportation vehicles has been regulated that employees can use them in special cases such as marriages or funerals under agreement of General Director, thus, employees feel being respected and fairly-treated Moreover, unused machines and redundant facilities in the factory were sold off to take money Inventory was liquidated in many ways to clear warehouse for empty land, to save money to pay for warehouse keepers and finally because longer time being put in warehouse the more garments’ price devalue Finished goods in stock were classified to be sold in much cheaper price, be gifted, and be sent to sell in foreign countries or be if destroyed they were too old and worthless Plan for inventory settlement was finished before February 2007 and a lot of money was taken back
At the time of acquisition, CHIGAMEX was in the situation of lacking orders The best solution was to transfer orders from HOGARSCO to CHIGAMEX Based on HOGARSCO’s prestige, Ms Ty directly negotiated and attained export processing orders for CHIGAMEX Due to CHIGAMEX products’ quality has been good, it could make use of this advantage and needed to focus more on operating efficiency, innovativeness and especially customer responsiveness Operating efficiency can be gained form above restructuring activities and shown through reasonable organization of input, processing stage and output that cut down cost and save enterprise resources in maximum Ms Ty had well organized enterprise resources planning from setting performance goals, implementing, monitoring, optimizing resources, forecasting, measuring, evaluating performance, ensuring immediate adjustment and preventing form risks
On understanding the disorganization of procurement and input management, Ms
Ty reorganized procedure of procurement of materials and accessories and input inventory management The procedure has followed several steps: (i) composing a purchasing inquiry including information of type of input, price, quantity, and quality level; (2) submitting inquiry for General Director’s approval; (iii) planning and implementing procurement by Export-Import Planning Department; and (iv) receiving and managing input by warehouse unit Input purchased indoor or imported from outdoor has been managed based on requirements of each specific order And warehouse unit has been responsible for reporting per order and as required This way of inventory management has been suitable for manufacturing export orders and preventing from high inventory, waste, damage and loss Ms Ty had set up system of reward for input saving, in reference to HOGARSCO’s level of input usage, employees would be rewarded 50% of input value which they had saved during production Furthermore, activeness in input would help CHIGAMEX avoid the situation of missing orders and late delivery
Removing CHIGAMEX’s custom of arrogance when rejecting small orders, Ms Ty was willing to accept small orders which had often been refused by CHIGAMEX due to inefficiency or less economies of scale However, it was still efficient if CHIGAMEX could outsource small and simple export processing order and only focused on monitoring and quality control Thanks to right decision, on unseasonable time, those clients with such small orders have still been cooperating with CHIGAMEX that would prevent CHIGAMEX from lack of orders at this time
And it had ever seen that CHIGAMEX could reach break-even point in the first quarter of this year, 2007
To prevent CHIGAMEX from high inventory of output, Ms Ty has specialized products and customers for each factory and sewing line As a result, in order to save cost of transportation and avoid on-the-way loss, all materials and accessories input have been directly transported to points of manufacturing depending on specialized product and customer instead of gathering all at general stock of the head-quarter in Hanoi as before Each factory has some key customers and some current customers that would help the factory have a more stable production plan
This way of specialization would make factories be active in manufacturing and customers are more confident in product quality of CHIGAMEX
Acknowledging of market trends, some export processing orders have special requirements about specialized machines Instead of buying these machines, CHIGAMEX can share HOGARSCO’s resources of machines or can rent or borrow such machines from other garment companies As these specialized machines will become out-of-date in future, this way can prevent CHIGAMEX from waste and liquidity of assets in low price
In order to focus on developing America market, CHIGAMEX has to pass Target Compliance Audit Compliances in factories have to be periodically evaluated on production capability and workshop arrangement This responsibility now has delegated to factory managers in Thai Nguyen and Bac Kan instead of ISO unit as before Suitably arranging compliances in Thai Nguyen factory would help increase productivity and save cost
In short, mechanism of production and operation management of CHIGAMEX was refreshed after Ms Ty came There is no waste, no disorganization here in CHIGAMEX That was one of the main reasons leading to achievement in reducing loss in December 2006, reaching break-even point in the first quarter 2007 and gain profit in the next quarters of the same year
Above indicates the strategic changes in restructuring CHIGAMEX which has been done under Ms Ty’s leadership and collective efforts Until now, VINATEX has made sure that they had a right decision when choosing HOGARSCO and Ms Ty to take over CHIGAMEX The next parts will indicate how well has Ms Ty done in making use of advantages, transferring competencies and sharing resources between HOGARSCO and CHIGAMEX
3.4.2 Transferring competencies and realizing economies of scope
Ms Ty has created value to CHIGAMEX by drawing on distinctive skills of HOGARSCO’s value creation functions such as manufacturing and materials management to improve the competitive position of CHIGAMEX Alternatively, some of the skills of CHIGAMEX can improve the efficiency of HOGARSCO’s value creation functions Relatively compared, it can be seen that CHIGAMEX has more competitive advantages than HOGARSCO, which can be proved through the following evidences CHIGAMEX has a 40-year concrete history of development
A summary on main findings from the case study
In summary, main findings from case study to answer research questions are clearly illustrated in the table below in comparison with the emerged framework of reference.
The acquisition of CHIGAMEX by HOGARSCO
Rationales of Mergers and Acquisitions
Economies of scale through reducing duplication and lowering costs
Increase revenue or market share due to absorbing major competitors
Synergy to better use of complementary resources
Reduction of tax liability due to buying loss makers
Geographical or other diversification to smooth a company’s earnings and stock price
Resource transfer to create value
RQ 1: Why such company as HOGARSCO conduct the acquisition of CHIGAMEX? ắ Yes, in long term when HOGARSCO become an economic conglomerate ắ No, CHIGAMEX was not a major competitor of HOGARSCO ắ No, CHIGAMEX does not hold any part of HOGARSCO’s total equity ắ Yes, two companies maintain a long-term synergy in sharing resources ắ No, two companies use separate system of accounting ắ Yes, but in long term when two companies are in the higher level of integration ắ Yes, resources of two companies are effectively transferred to create value for both
Increased market share can increase market power ắ Yes, but in long term will have a clear picture
Guidelines for successful acquisitions ặ RQ 2: How the acquisition of a garment company such as CHIGAMEX happened?
Avoiding pitfalls of acquisitions difficulties with integration overestimating benefits expensive acquisitions inadequate screening ắ Yes, there’s some difficulties when restructuring CHIGAMEX but they are settled down ắ No, as the real value of CHIGAMEX is more than 9 times of its charter capital (Decision 2400/QĐ-TCKT of Ministry of Industry) ắ Yes, but following the decision of Vinatex and the leader is much experienced in similar case
Execution of acquisitions pre-acquisition screening bidding strategy integration ắ Yes, but unofficial ways ắ No, instead of bid, Vinatex delegated Ms Ty in
HOGARSCO as the representative of State- owned equity in CHIGAMEX and then let HOGARSCO buy more equity of CHIGAMEX for take-over ắ Yes, but in low level, mainly sharing resources and transferring competencies
- replacement of top management team, sales off unproductive assets, reduction of staffing level
- improvement in efficiency, quality, customer responsiveness and innovativeness
- motivation through increases in pay linked to increases in performance
Transferring competencies between acquiring and acquired companies
RQ 3: How to manage an acquired firm such as CHIGAMEX? ắ Rearrange top management team, reduce number of numbers of departments, managers and staff, sell of 2 cars, redundant machines and equipments, downsizing to gain empty office for lease ắ Specialization of products and customers for each factory, clear off stock by any ways, reorganize purchasing and input management, outsource simple and small orders, meet requirements of quality control and standards of big export market ắ Increase in pay for office staff and worker, pay more attention to living standard of workers, recognize employees’ effort and rewarding ắ Transfer job competent, skills of leadership and management ắ Sharing export orders, good personnel, financial resources, management experience ắ Share resources of materials and accessories, manufacturing facilities and machines, client database
Source: Author own construction based on case study, 2007
In the previous chapter, analysis of the case was conducted In this chapter, the main findings and conclusions of the study will be brought up based on theories, interviews with representatives of HOGARSCO and CHIGAMEX as well as analysis As only two companies have been investigated, it will be impossible to draw any generalized conclusions Thus, conclusions are applicable only to the two companies of investigation The findings and conclusions for each research question will be presented first, and then some general conclusions will be drawn where the research questions were answered Finally, some suggestions for companies, theory and further research will be provided
One size doesn't fit all Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions For others, separating the public ownership of a subsidiary or business segment offers more advantages At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs Investors can take comfort in the idea that a merger will deliver enhanced market power By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives Additional capital can fund growth organically or through acquisition
Meanwhile, investors benefit from the improved information flow from de-merged companies M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals
With regards to the reasons why Vietnamese garment companies conduct acquisitions, these are some main reasons: ắ Aside to typical enterprises with very high growth rate, there remains a not small part of enterprises in the industry that are still being at a loss with labor productivity lower than 30-50% compared to the average regional level ắ Making acquisitions prevents loss-making garment companies from bankruptcy ắ Making acquisition helps apply available best practices of the most efficient companies in the industry to restructure poorly-managed companies ắ Acquisitions, and then mergers can help companies in the same sector and/or industry enhance their strengths to grasp business opportunities and define their weaknesses to minimize risks in the context of globally-competitive and –integrated environment ắ Vietnam Garment and Textile Corporation played its powerful voice in the acquisitions and take-over of the industry
Generally, execution of an acquisition in Vietnam Garment Sector has not exactly followed the practices in the world There exist differences due to involvement and intervention of state-owned equity in the acquired and acquiring companies These companies have been equitised and the holding rate of government after equitisation normally is more than 50% and gradually reduces in the next stages
This acquisition has not been trapped in any of the four pitfalls mentioned in the previous part Although there did not exist any official business evaluation from relevant parties, this acquisition tend to be not expensive due to its large source of fixed assets including real estates Through her experience of take-over and post- acquisition management together with strengths of CHIGAMEX in quality and human resource, Ms Ty did not overestimate the potential economic benefits of CHIGAMEX though there was no thorough and formal screening of CHIGAMEX before acquisition Initial difficulties in integration of corporate culture were not easy to be found except for leadership since Ms Ty has brought her leadership from HOGARSCO to CHIGAMEX
With regards to the process of an acquisition in Vietnamese garment sector, these are the main steps have been used in the case CHIGAMEX: ắ The acquired company had experienced an informal pre-acquisition screening by relevant parities, mainly based on the common status quo of loss-making garment companies in the same period As the acquiring company had ever in the same situation so it was easy for its top management team to have a quick but exact screening of problems of the acquired company and how to solve them She had estimated right value of the acquired company – equivalently to 9 times more than its charter capital (Decision 2400/QD-TCKT, Ministry of Industry) If the acquired company – CHIGAMEX – had sold off one of it fixed assets like real estate, obviously, it could compensate for their loss But that was not the way it had been as real estates are not easy to be sold So if the acquired company has done business well based on sources of such assets, it will out of debts at least in 3 years ắ The acquisition in this study did not experience a formal bid but the “bidding” strategy here regarded as an internal transference of State-owned equity of an acquired company to the acquiring company as both acquires and acquiring companies are members of VINATEX This transference went through two stages First, legal representative of the acquiring company would, instead of VINATEX, hold and control State-owned equity in the acquired company to avoid the loss of control if it is forced to organize an official bid Then VINATEX would sell one part of total equity it had owned to the acquiring company due to its achievements in “saving” the acquired company And officially, HOGARSCO become the take-over of CHIGAMEX ắ Although integration should be the next step after ‘real’ take-over happened, it had not been completely like the case After acquisition, the acquiring and acquired companies are still separate legal entities They are common in leadership, organizational structure and management mechanism; however, they have independent systems of accounting which are consolidated at the end of accounting term As the acquiring company had successfully passed the similar time of difficulties like the acquired company so its leader had known how to effectively manage this acquired company after acquisition
Although the management of CHIGAMEX after acquisition has been rather the same as practical model in the world, implementation has seen a little bit different
With regards to what the acquiring company has done to mange the acquired company after acquisition, these are some main ways: ắ The acquired company has been restructured following the successful model of the acquiring company Cutting cost and increasing revenue have been two objectives of restructuring the acquired company Downsizing the company, selling off redundant assets, increasing employees’ pay, improving manufacturing and operation procedures have been useful ways to achieve these objectives ắ There has been transference of competencies between two companies such leadership, management skills and job competence ắ The two companies have realized economies of scale when sharing common resources such as human and financial resources, input resources, database of clients, and source of export orders The acquired company have applied the same model of product specialization as the acquiring company and, initially, achieved efficiency in production
In conclusion, about theory, M&A is a corporate strategy to improve efficiency and create comparative advantage Well-defined strategy & detailed plan for acquisition from preparation to implementation are necessary Pre-acquisition screening & post-acquisition integration are all important Successful acquisitions are made through (i) adequate pre-acquisition screening; (ii) reasonable expense of acquisition; and (iii) effective post-acquisition integration About the case of Ho Guom & Chien Thang, this case of acquisition can be considered as a successful and friendly acquisition About business evaluation, Chien Thang was evaluated through asset value & potential earnings This acquisition has led to the synergy and increase of market share of both acquiring and acquired companies On implementing the acquisition, the acquirer has avoided some pitfalls leading to failure of acquisitions Effective integration leads to a successful acquisition and leadership of the acquirer played a key role in the integration process
This thesis will contribute to the existing research concerning M&A, by highlighting its rationales and execution Further it is believed that the study will contribute to create a better understanding of M&A, why and how companies should conduct M&A
M&A is an immense field of research My study has only investigated a small part of this area of research and while working with this study I have found interesting issues that can be connected to this study but due to time constraints I could not incorporate it in the research, and therefore these issues are proposed for further research