CURRENT SITUATION OF MERGERS AND ACQUISITIONS IN THE BANKING SECTOR IN VIETNAM IN THE PERIOD 2015-2023.... Situation of mergers and acquisitions in banking sector in Vietnam in the perio
The urgency of the research
Mergers and Acquisitions (M&A) refer to the process of combining companies through various transactions, with acquisitions being the most common, where one company purchases another and takes over ownership This strategic activity enables businesses to lower investment costs, consolidate their strengths, and leverage the advantages of all parties involved, ultimately gaining a competitive edge in the marketplace.
Mergers and Acquisitions (M&A) are increasingly recognized as effective strategies for businesses to reorganize their structures, unify human resources, and optimize advanced scientific and financial assets Particularly in the banking and finance sector, M&A has emerged as a significant trend that enhances the competitiveness of commercial banks This approach not only boosts the competitive edge of these institutions but also leads to improved outcomes, often rescuing struggling banks from potential bankruptcy.
From 2015 to 2023, Vietnam's financial and banking industry faced significant challenges amid global economic integration and technological advancements This competitive landscape led to an increase in mergers and acquisitions among commercial banks During this period, the banking sector underwent substantial transformations to embrace digital transformation and adapt to scientific and technological developments The rise of smart devices and online banking services revolutionized transactions between banks and customers, resulting in cost, time, and effort savings for both parties.
Mergers and acquisitions (M&A) are crucial in the banking industry, as they enable banks to meet legal requirements, enhance capital scale, and ensure capital safety By engaging in M&A, banks can attract more capital and skilled talent, develop advanced information technology systems, expand their business activities, and increase market share This strategic approach not only provides economies of scale but also boosts operating efficiency and profitability Recognizing the significance of this trend, I have chosen to research "The current status of mergers and acquisitions in the banking sector in Vietnam from 2015 to 2023."
Literature review
Mergers and acquisitions (M&A) have been a significant aspect of business since the late 19th and early 20th centuries, with their introduction to Vietnam occurring in 1997 Over the years, extensive research has focused on M&A activities, particularly within the banking sector Notable studies in Vietnam have contributed to the understanding of this critical area in the business landscape.
Bank mergers and acquisitions (M&A) are essential for enhancing the competitiveness of Vietnamese commercial banks, as highlighted by Luong Thi Thanh Thuy (2010) The study reviews global and regional M&A activities, emphasizing their necessity in Vietnam's banking sector It primarily analyzes the competitiveness of Vietnamese banks and examines M&A activities from 2009 onwards, but lacks a detailed evaluation of specific deals and their impacts Consequently, while the research underscores the importance of M&A for competitiveness, it does not provide a thorough analysis of the successes and limitations of individual transactions.
The article "Development of Mergers and Acquisitions Activities in Vietnam's Banking and Finance Sector" by Nguyen Thi Dieu Chi (2013) examines the factors influencing M&A activities in Vietnam's banking and finance sector, considering both external and internal elements Utilizing a Probit model, the study analyzes financial data from 22 institutions, focusing on the probability of M&A engagement based on seven independent variables: equity, revenue, assets, profits, profit-to-equity ratio, bad debt, and total outstanding debt The findings highlight the positive effects of M&A on business performance post-transaction, specifically within the banking sector from 2007 to 2013 However, the research is limited by its outdated timeframe, which does not reflect current market trends and economic changes.
The study "Business Performance of Vietnamese Commercial Banks After M&A" by Nguyen Quang Minh (2016) employs a quantitative model to assess the impact of mergers and acquisitions (M&A) on the business performance of Vietnamese commercial banks, specifically SHB and HD Bank Utilizing the DEA method and Malmquist index, the research reveals a significant decline in business performance post-M&A, notably reflected in decreased stock prices The author also suggests several strategies to enhance the performance of these banks following M&A activities However, the study's limitation lies in its narrow focus on only two banks, SHB and HD Bank, which may affect the generalizability of the findings.
HD bank without considering other commercial banks Besides, the research period is from 2014 onwards and it is not new compared to the present time, in 2023
“Mergers and acquisitions activities of commercial banks in Vietnam” (Vuong Thi Minh Duc, 2018) The author used qualitative methods to research aspects of
This article examines commercial bank mergers and acquisitions (M&A) in Vietnam from 2011 to 2016, highlighting the current state of these activities and offering recommendations for future M&A strategies until 2025 However, the study's limitation lies in its focus on the 2011-2016 period, as significant changes in Vietnam's economy and the banking sector have occurred since then, particularly due to the impact of the COVID-19 pandemic starting in 2020 As a result, the evolving dynamics of M&A in Vietnam's banking sector post-2016 have not been addressed.
Research on mergers and acquisitions (M&A) in Vietnam's banking sector has significantly advanced both theoretical understanding and practical applications of M&A activities.
Most of the research in Vietnam delves into a specific aspect of M&A activities, some works mention mergers and acquisitions of commercial banks Research period is until 2016.
Research gaps
Research gaps for student to continue to clarify are:
Research clearly on the difficulties and advantages of mergers and acquisitions in the banking sector in the period before, during and after the Covid-19 period + Practically:
Refers to all banking M&A deals that took place during the research period
Status of M&A activities in the banking sector in Vietnam from 2015-2023 and presents several outstanding deals, thereby providing appropriate recommendations.
Research objectives
+ Systematize the rationale for mergers and acquisitions activities in the banking sector, giving personal views on this activity
+ Assessing the status of banking M&A activities in Vietnam in the period 2015-
2023, especially with fluctuations during the Covid 19 epidemic outbreak
+ Propose recommendations and implications for the banking sector in Vietnam to
Scope of the research
About space: Bank mergers and acquisitions activities in Vietnam
Research Methodologies
With the research problem on the status of mergers and acquisitions in the banking sector in Vietnam in the period 2015-2023, I use qualitative research methods, specifically including the following methods:
The dialectical and historical materialist methods of Marxism-Leninism analyze bank mergers and acquisitions (M&A) as dynamic phenomena that evolve continuously This perspective emphasizes the interconnectedness of M&A activities with broader economic contexts and current events, allowing for a comprehensive study of the underlying principles and trends that govern these financial processes.
+ Logical reasoning method: Research basic theoretical issues about banking M&A activities, evaluate the current situation and make suggestions and recommendations
Analyzing and synthesizing information involves interpreting data and identifying actual causes The collected data will be organized into tables and charts, allowing for a clear comparison of different stages throughout the analysis process.
+ Statistical and descriptive method: using collected data to describe the situation of banking M&A activities in Vietnam
+ Case study method: Using several specific deals to clearly analyze the situation of bank mergers and acquisitions and the advantages, disadvantages, and lessons for bank M&A activities in Vietnam.
Research contribution
+ Systematize theoretical issues and give personal opinions on mergers and acquisitions activities in the banking sector (concepts, objectives, characteristics, classification, methods, process, and factors affecting)
+ Research the practice of mergers and acquisitions in the banking industry in Vietnam and clarify a few specific deals, thereby drawing strategies for M&A activities in Vietnam
Between 2015 and 2023, the mergers and acquisitions (M&A) landscape in Vietnam's banking sector has seen significant activity, characterized by various deal types and strategic methods Notable transactions have reshaped the industry, leading to enhanced competitiveness and operational efficiencies among banks These M&A activities have not only transformed individual institutions but have also had a broader impact on the national economy, fostering stability and promoting growth within the financial system Overall, the evolving M&A dynamics in Vietnam's banking sector reflect a response to both local and global economic challenges, positioning the industry for future resilience and development.
+ Evaluate the results, remaining problems and causes of those problems based on the personal perspective of the student
+ Propose solutions and give recommendations for M&A activities in the banking sector in Vietnam
Research on banking mergers and acquisitions (M&A) in Vietnam has significantly contributed to both the theoretical framework and practical understanding of these activities within the sector, shaping future developments By analyzing M&A activities from 2015 to 2023, students can consolidate their theoretical knowledge and express personal insights on the mergers and acquisitions of commercial banks Additionally, this research enables an evaluation of the current state of banking M&A in Vietnam, particularly in relation to economic fluctuations during this period.
7 impact of the Covid 19 pandemic, and providing assessments of student about banking M&A activities in Vietnam during this period.
Research structure
In addition to the introduction, conclusion, references, and appendices, the research is structured into 3 chapters:
THEORETICAL BACKGROUND ON MERGERS AND
Concepts, Objectives, Characteristics and Classification of mergers and
Mergers and Acquisitions (M&A) involve the integration of two companies into a single entity, as described by Donald M DePamphilis in his work on restructuring activities This process can include one company taking over another, effectively "eating" it, which highlights the strategic nature of M&A in the business landscape Ultimately, M&A facilitates the union or acquisition of companies to enhance growth and market presence.
Acquisition refers to the purchase of assets, such as a factory or an entire company, while a merger involves the combination of two or more companies, resulting in the assets and capital of the selling company becoming part of the buying company.
8 although there will be certain changes on the part of the buying company, this company will keep the same name
Mergers and Acquisitions (M&A) refer to the consolidation of companies or assets through various financial transactions, including mergers, acquisitions, and asset purchases In a merger, two companies of similar size combine to form a new entity, eliminating the original companies' ownership and securities Conversely, acquisitions involve one company purchasing another to enhance economic profits, scale, and market dominance, without creating a new entity or altering stock structures.
Therefore, Acquisitions can be understood as one business purchasing another business and they will become a unified business Acquisitions can exist in two forms: stocks acquisitions and assets acquisitions
Mergers involve the combination of two or more companies, resulting in the transfer of all assets, rights, obligations, and legal interests to form a new entity This process can lead to the dissolution of both original companies or the termination of the merged entity.
M&A brings many benefits to both parties involved, so there are also some specific objectives that investors aim for, which makes them participate in an M&A deal
Mergers and acquisitions (M&A) enable acquiring entities to minimize risks and costs associated with customer acquisition while expanding their market reach Additionally, these transactions enhance financial resources, human capital, and distribution networks, while also consolidating customer databases and relationships A key motivation for companies engaging in M&A is to reduce competition and strengthen their market position through increased business scale.
Merging with or acquiring another entity allows the combined organization to achieve key objectives, such as alleviating competitive pressures in the market, mitigating financial challenges associated with low liquidity or bankruptcy risks, and creating a fresh environment for developing human resources and strategic initiatives.
Firstly, the form of the transactions: M&A transactions are divided into 2 forms: Stock purchase and Asset purchase
A stock purchase occurs when an acquiring business (the "Acquirer") purchases the stock of the target business (the "Target"), thereby assuming both its assets and liabilities This transaction typically allows for the automatic transfer of most contracts held by the target, including leases and permits, making stock purchases generally simpler than asset purchases.
An asset purchase involves the acquirer buying specific assets from a target business, with payment made directly to the seller Despite the sale, the legal ownership of the entity remains with the seller, while the purchaser acquires individual assets like equipment, licenses, goodwill, customer lists, and inventory.
Secondly, method of payment: There are three methods of payment: cash, securities and combination of cash and securities
When a company is confident that the value of the acquired business's shares will increase post-synergy, it opts for a cash payment This cash can come from the acquirer's existing funds or through a debt issuance.
In mergers and acquisitions (M&A), the acquiring firm opts for a securities offering when it lacks strong confidence in the deal Following the M&A, shareholders of the target company are compensated with shares of common stock, preferred stock, or debt instruments from the acquiring firm.
Depending on the different conditions, objectives, situations of both acquirer and target, each M&A deal will use different methods of payment
The classification of a merger as friendly or hostile is determined by the perspective of the target company's board of directors In a friendly merger, the board actively negotiates and accepts the offer, while in a hostile merger, the board seeks to thwart the merger attempt Understanding the management's attitude is crucial in assessing the nature of the merger.
M&A is classified by the relatedness of business activities of the parties to the combination: They are Horizontal M&A, Vertical M&A, and Conglomerate M&A
Horizontal M&A is when one company merges with or acquires another company that is in the same line of business, often competitors
Vertical M&A occurs when a company merges with or acquires another company within the same production line but at different stages of the supply chain, such as a supplier merging with a customer.
Conglomerate M&A is when the acquirer and target are in unrelated industries or engaged in unrelated activities For example, a company involved in the real estate business acquires an entertainment company
Methods of mergers and acquisitions
Mergers and acquisitions methods encompass the strategies and plans a business employs to execute M&A deals, which can include friendly and hostile takeovers The choice of method varies depending on the specific type of business involved, highlighting the importance of tailored approaches in the M&A process.
A friendly takeover occurs when a target company's management and board of directors consent to a merger or acquisition by another company The process begins with the potential acquirer engaging in informal discussions with the target's top management, leading to an agreement on essential terms To facilitate a smooth acquisition, the acquirer commits to refraining from further investments in the target's stock for a designated period, ensuring that the takeover proceeds amicably.
A friendly takeover fosters a mutually beneficial agreement, as all parties collaborate towards a common objective that enhances value for everyone involved This approach ensures that the target company avoids negative repercussions from defensive tactics against a bid, ultimately facilitating the creation of a more cohesive organization after the acquisition.
A hostile takeover occurs when an individual or entity seeks to acquire a company without the consent of its board of directors, making it a more challenging and costly process compared to a friendly takeover This aggressive approach can involve strategies such as a bear hug, proxy contest, or tender offer.
A bear hug is a strategic acquisition approach where an acquirer offers to purchase a target company's shares at a significant premium over the current market price The process begins with the acquirer reaching out to the target's board members to formally initiate discussions regarding the acquisition.
In a "bear hug" acquisition strategy, the buyer publicly announces their intention to acquire the target company, emphasizing a generous offer price to garner support from shareholders outside the board This disclosure aims to pressure the board of directors, as they are required to act in the best interests of shareholders, making it difficult to reject the proposal without valid justification Additionally, information about the deal is shared with other shareholders to further encourage them to influence the board's decision.
The bear hug method is employed by acquirers who perceive a target company as undervalued, allowing shareholders to benefit from the premium between the bid and market prices of the target's shares This strategy not only boosts the target company's stock price but also enhances the acquirer's negotiating leverage while deterring potential competitors from pursuing the same target.
A proxy contest occurs when a group of shareholders collaborates to secure enough proxies to influence a corporate vote In the context of mergers and acquisitions (M&A), this strategy involves convincing current shareholders to oust the company's management, facilitating a smoother takeover process for the acquirer.
A bidder can propose a board replacement and initiate a special shareholders' meeting, often accompanied by a robust public relations campaign aimed at directly soliciting shareholder support Shareholders will receive proxies, which they can sign and submit to a designated collection point, such as a brokerage or bank, to participate in the voting process.
Proxy contest method is often used in the case that participating parties are competitors of each other
A tender offer is a public proposal made by an acquirer to all shareholders of a publicly traded company, inviting them to sell their shares at a specified price within a set timeframe This price typically includes a premium over the current market value and may depend on a minimum or maximum number of shares sold When shareholders accept the offer, they benefit from receiving a higher cash amount compared to selling their stocks in the market Following the acquisition, the acquirer gains the authority to restructure the target company and modify its management in line with their strategic objectives.
Tender offers are frequently employed in hostile takeovers, typically targeting weaker companies However, there are instances where larger firms are acquired by smaller competitors, leveraging the backing and mobilization of third parties.
Process of mergers and acquisitions
To carry out a merger and acquisition deal, businesses need to go through the following 10 phases:
Figure 1.1 Mergers and Acquisition process
Source: compiled by the author 1.3.1 Develop an acquisition strategy
To successfully acquire a target, businesses must develop a comprehensive strategy that clearly defines their expectations and goals This involves conducting both external and internal analyses to determine competitive positioning, leading to the creation of a SWOT analysis A well-articulated mission statement should summarize the findings from the external analysis In setting objectives, companies should utilize quantitative metrics for both financial and non-financial performance Subsequently, they can select a suitable business strategy and formulate an implementation plan along with a functional strategy Finally, effective strategic controls are essential, requiring businesses to monitor performance, implement incentive systems, and make necessary adjustments to ensure alignment with their goals.
Acquirers identify potential targets by first establishing primary selection criteria, focusing on the industry and transaction size They then refine their initial list using secondary criteria, which include market segment, product line, profitability, leverage, market share, and cultural compatibility.
1.3.3 Search for potential acquisition targets
To successfully select target businesses for acquisition, companies must rely on key criteria established in the initial phase of their evaluation process.
The acquirer initiates contact with companies that align with its search criteria and demonstrate potential value, aiming to gather additional information and assess the target company's openness to a merger or acquisition.
The method of initial contact in a potential acquisition is influenced by several factors, including the size of the company, the existence of direct communication between the acquirer and the target, the public or private status of the target company, and the acquirer's timeline for finalizing the transaction.
Once the acquirer initiates contact with the target, a positive dialogue may lead the target to request significant documentation This information allows the target to thoroughly assess the buyer's acquisition intentions, enabling them to make informed decisions moving forward.
After creating multiple valuation models for the target company, the acquirer can formulate a reasonable offer Following the initial offer, both companies engage in detailed negotiations This negotiation phase involves four overlapping activities: conducting due diligence, refining the valuation, structuring the deal, and developing a financing plan.
Due diligence is a comprehensive process initiated once an offer is accepted, focusing on verifying or refining the acquirer's valuation of the target company This involves a thorough examination and analysis of various aspects of the target's operations, including financial metrics, assets and liabilities, customer base, and human resources.
Upon successfully completing the appraisal process, both parties will create a purchase and sale contract This agreement will outline the type of contract chosen, while integration planning will also focus on addressing human resources, as well as customer and supplier concerns that arise during the ownership transition.
1.3.9 Financing strategy for the acquisition
While the acquirer typically investigates financing options for a deal before engaging with the target, the specifics of the financing strategy are ultimately determined only after the purchase and sale contract is finalized.
After two parties gain their necessary approvals, they will assign customer and vendor contracts and then complete the acquisition/ merger
17 agreement The management teams of the target and acquirer work together on the process of merging the two companies.
Evaluation of mergers and acquisitions
Evaluating mergers and acquisitions is crucial for businesses, as it allows them to assess the process before, during, and after the deal This thorough evaluation provides valuable insights, lessons, and experiences that can inform future projects and decision-making.
In trading, the acquirer aims to purchase the target at the lowest price, while the target seeks to sell at the highest price, necessitating a fair valuation based on specific criteria and appropriate methods Two primary valuation methods utilized for assessing the target are the Discounted Cash Flow (DCF) method and the comparables method.
1.4.1 Discounted cash flow (DCF) method
Discounted Cash Flow (DCF) is a widely used valuation method that estimates the worth of an investment by analyzing its future cash flows In mergers and acquisitions (M&A), DCF helps determine the target company's value based on projected cash flows The two primary approaches in DCF analysis are the Free Cash Flow to Equity (FCFE) method and the Free Cash Flow to the Firm (FCFF) method.
The general formula to calculate discounted cash flow is as follows:
Cash flow for the period (CF) refers to the payments investors receive for holding a specific collateral asset, such as bonds or stocks, over a designated timeframe The discount rate (r), used in business valuation, is typically represented by the Weighted Average Cost of Capital (WACC) for that particular business.
18 n: Number of periods – each cash flow will be associated with a period of time, usually a month, quarter, or year, etc
FCFE (Free Cash Flow to Equity) is the cash flow for the period owned by shareholders after considering capital expenditures for asset investments and debt principal payments
FCFE = - (Net Income + Depreciation and Amortization – Δworking Capital) – Gross Capital Expenditures + (New Preferred Equity Issues – Preferred Dividends + New Debt Issues – Principal Repayments)
If FCFE < 0, it means the business is spending more money than it is generating from its operations
When Free Cash Flow to Equity (FCFE) is greater than zero, it indicates that the business is generating more income than its expenditures This positive outcome reflects the company's operational efficiency and its ability to generate profits, signaling a healthy financial status.
Free Cash Flow to the Firm (FCFF) is the cash generated by a business that is accessible to all capital providers, including creditors, preferred shareholders, common shareholders, investors, and convertible bondholders Often referred to as unencumbered free cash flow, FCFF indicates the surplus cash available to a business without any debt obligations.
FCFF = [Earning before Interest taxes (1 – Tax rate) + Depreciation and Amortization – ΔWorking Capital] – Gross Capital Expenditures
If FCFF