Failed M&A deals in Vietnam and lessons for the involved parties

1.What is M&A?

M&A is an abbreviation for the phrase "Mergers and Acquisitions". It is a term used to describe the ownership control activities of companies and corporations through the process of merging or acquiring another company in the market. Typically, M&A deals are used as a business strategy in expanding scale, improving performance and promoting growth.

M&A is a merger or acquisition activity between two or more businesses.

Benefits of M&A activities:

- Expanding business’ scale, entering new markets, diversifying products and services, thereby gaining larger market share.

- Saving business costs by taking advantage of the aggregated resources to improve operational efficiency.

- Improving financial resources through increased revenue and profits, helping businesses access investment opportunities and enhance financial transparency.

- Taking advantage of new technologies as well as intellectual assets from other companies to gain a competitive advantage in the market.

Challenges of M&A activities:

- Financial risks when M&A deals fail to achieve the expected results, leading to financial losses or inability to pay investment debts.

- Conflict in management leading to conflicts of interests and opinions between the Board of Directors of the companies.

- Incompatible corporate cultures causing disagreements in the working and operating process, affecting overall productivity.

- Legal procedures and regulations related to M&A are often complicated, time-consuming and costly.

It is apparent that despite significant benefits, M&A still carries potential challenges that can be obstacles for businesses to participate. Therefore, it is crucial for companies to hold a comprehensive knowledge about M&A and exercise carefully throughout the M&A process.

2.Failed M&A Deals in Vietnam

In Vietnam, besides the famous M&A deals that have been carried out successfully, many deals have failed and caused considerable losses for businesses. Let's take a look at some of these unsuccessful M&A deals below.

a) VinaCapital and Ba Huan:

The collaboration between Vinacapital Investment Fund and Ba Huan Joint Stock Company is one of the famous M&A deals in Vietnam with many controversies arising during the process of performing transactions. This is one of many events witnessing conflicts between the investment fund and the company receiving the investment.

The collaboration between VinaCapital and Ba Huan faced several controversies leading to failure.

In February 2018, Vietnam Opportunity Fund (VOF), managed by Vinacapital, invested $32.5 million to buy Ba Huan Company’s shares. The two sides continued to cooperate afterwards and VOF planned to invest additional capital in Ba Huan within the next 12 months.

However, in August 2018, Ba Huan sent a document to the Prime Minister, requesting to terminate the collaboration agreement with Vinacapital, alleging that VOF intended to take control over the company and the Ba Huan brand. Accordingly, Ba Huan noticed discrepancies between the Vietnamese agreements and the previously signed English contract version that could be detrimental to the brand. Two key issues were:

- Vinacapital self-imposed a return on investment of 22% a year (three times higher than the interest rate of bank loans).

- If Ba Huan fails to achieve the expected business results, they must repay the accumulated investment capital with an interest rate of 22% or transfer a minimum of 51% of the company's shares to VinaCapital.

Although Vinacapital alleged that the two contract versions have the same content and declared that there was no intention of taking over Ba Huan, Ba Huan claimed that Vinacapital delayed in taking any action and created difficulties upon receiving the request to terminate the collaboration.

Eventually, Ba Huan and Vinacapital decided to amicably part ways after a period of negotiation, ending the collaboration after 6 short months. As a result, Ba Huan lost the opportunity to receive $ 32.5 million and Vinacapital was negatively influenced in terms of image.

b) Aqua One and WHA Utilities and Power Public Company Limited (WHAUP):

Another M&A deal in Vietnam that did not success is the transaction between Aqua One Company of Ms. Do Thi Kim Lien (also known as Shark Lien) and the Thai company WHA Utilities and Power Public Company Limited (WHAUP).

In 2020, WHAUP acquired 34% of the Song Duong Water Pant Company’s shares. Under the contract, if the Duong River failed to apply for an investment certificate to increase the capacity of the project, Aqua One would be obligated to buy all the above shares from the Thai company. In this transaction, Aqua One acts as a guarantor for Song Duong company in fulfilling the obligation to provide the revised registration document.

However, Song Duong was unable to fulfill the terms and 3 months after receiving the notice from WHAUP, Aqua One still did not perform the obligation to repurchase the shares as committed in the contract. Therefore, WHAUP sued Aqua One to the Vietnam International Arbitration Center.

According to many experts, the provision regarding the capacity increase in the M&A contract of the two companies was challenging to implement under the conditions of the Vietnam market at that time. However, the failure to foresee the consequences of the contract’s terms has led Aqua One into unnecessary disputes, potentially causing billions in losses and negatively affecting the company's reputation.

c) The KAfe and Cassia Investments:

The capital raising activity of The KAfe is also a failed deal for both the brand owner and the investment fund.

The failure of The KAfe is a typical lesson for start-ups when raising capital.

The KAfe is a restaurant and cafe chain that gained significant attention in the start-up community. In 2015, The KAfe successfully raised $5 million from Cassia Investments fund. However, the cooperative relationship between the two parties did not last long when the CEO of The KAfe was forced to leave the company after only one year of receiving investment due to failure to meet the conditions in the investment agreement. Half a year later, all The KAfe's stores in the chain also closed down and the brand completely collapsed.

The reason behind the breakdown of this deal was assumed to be due to the disagreement between the CEO of The KAfe and the investor. The CEO of the brand once admitted to not being firm and careful in the negotiation process with the investors, causing the brand to be inferior and the brand owner’s power was limited. This unfortunate consequence resulted from the brand's lack of experience in working with partners and failure to build a proactive financial strategy from the beginning.

3.Causes leading to failure of M&A deals

There are many different factors leading to the breakdown and failure of businesses in M&A deals in Vietnam. Among them, the following common reasons can make the M&A process difficult and fail to achieve the desired results:

• Not defining M&A objectives and strategies: Businesses that engage in M&A without clear and specific objectives and strategies before and after the transaction often struggle to evaluate efficiency and face uncertainty during the implementation process.
• Weak evaluation and valuation: Many M&A deals in Vietnam failed because the parties could not come to an agreement on the valuation or overpricing valuation which does not align with the actual value of the company.
• Not being careful in contract negotiations: In Vietnam, business owners often decide on the terms of the contract without seeking advice from professional lawyers, leading to risks and uncertainties in the M&A process that business owners may not be aware of.
• Differences in corporate cultures: Cultural differences between investment company and the target company that cannot be effectively solved can weaken the overall working capacity.
• Conflict in management: When major shareholders of the old and new leader team cannot find a common voice in managing the companies, internal conflicts may arise and even lead to power struggles.

4.Lessons from failed M&A deals

Businesses need to prepare thoroughly before carrying out M&A deals.

The famous M&A deals in Vietnam have shown that the M&A Vietnam market has the potential to develop and bring great benefits to the involved parties. However, it is also important to critically evaluate unsuccessful M&A transactions in order to draw valuable lessons from them.

• Clearly determining M&A strategy: When participating in M&A, businesses need a specific plan to determine the suitable direction for business and achieve the expected benefits. Additionally, having a clear strategy also helps businesses enhance value and attract investors.
• Thoroughly researching partners: Businesses and investors need to research and understand their partners to have the most objective and authentic assessment of the suitability and ability of M&A transactions. This also helps the parties identify the right value of the target enterprise and ensure compatibility in terms of culture, direction… to avoid conflicts later.
• Being careful in contract negotiations: In order to minimize any risks related to contract, businesses should hire professional financial and legal consultants who understand thoroughly about Vietnamese and international laws to draft good contracts and limit unfavorable terms.
• Optimizing the consolidation process after M&A: After completing the M&A transaction, the parties need to have a tight management plan and execute it diligently to ensure effective integration of systems, processes and corporate cultures.

CONCLUSION

Above, INMERGERS has reviewed some unsuccessful M&A deals in Vietnam. To achieve good results, it is important for businesses and investors to do careful research, thorough preparation and define clear orientation. In particular, seeking advice from specialized financial and legal firms will be a great help for the parties when participating in M&A.

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