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Greater Strength To Compete BetterMergers and acquisitions are becoming popularas businesses look to strengthen competitiveness now that Vietnamis a World Trade Organization memberBy staff writersMergers and acquisitions are a form of direct investment where investors spend money to acquire a company or merge their operations with existing businesses to boost their competitiveness. This activity is expected to pick up strongly now that Vietnam is a World Trade Organization member, as businesses merge to increase competitiveness.It is accepted that many weak businesses will not survive the torrid times ahead and they should end their existence with some grace by bowing to the inevitable and merging with stronger ones or accept to be bought outright. In addition, many foreign investors may want to buy shares of Vietnamese enterprises, while local businesses also have the need to sell part of their shares to form partnership or ease the financial burden.Definite trendIn recent years, acquisitions and mergers have been a mainstay of business news. Kinh Do Corp., a confectionery maker, has acquired the Wall’s ice cream business from Unilever and a major stake in the soft drink company Tribeco. The Saigon Finance Joint Stock Company has merged with a commercial joint stock bank in Danang to form Viet A Bank.A noted case of acquisition recently was that of a foreign company by a local business. Donacorp in Dong Nai Province bought the foreign-owned Cheerfield Vina for only US$1. Cheerfield Vina has invested US$3.6 million in producing shoe sole forms, but incurred debt of VND34 billion (US$2.2 million) and faced bankruptcy after three years of operation. According to Pham Duc Binh, Donacorp general director, the company studied the possibility of restoring Cheerfield Vina’s business and believes it can earn some money after liquidating its debt and selling it.Even foreign-invested enterprises in Vietnam have taken to merging. LG Electronics Vietnam and LG MECA Electronics have merged to form a stronger company. National Panasonic has merged its two subsidiaries in Vietnam to form a single company for better management and to meet the greater competition.Merging and acquisition activities are often seen in the production sector due to the pressure to cut production costs. The principle is that when a company can produce on a large scale, it is able to reduce production costs significantly. Banks can merge with each other to increase their financial strength. Mergers in this sector are greatly expected in the near future.According to the State Bank of Vietnam’s requirement, a commercial bank must have charter capital of at least VND1 trillion (US64 million) by the end of 2007. Banks that fail to reach this level must be dissolved or merged. At present, more than 80% of the commercial banks in Vietnam have capital below this level. Financial experts have forecast that about 20% of the banks will not be able to satisfy the capital requirement, and will have to merge or face dissolution.In the State corporate sector, the Government also has plans to restructure State-owned enterprises to boost their competitiveness. Besides equitization, diversification of ownership, contracting out and dissolution, many SOEs have been merged to form strong corporations, such as the Vietnam Coal and Mineral Industries Group and Vietnam Textile and Garment Group.Great demandAccording to the Investment and Urban Development Joint Stock Company (IDJ), the first company to specialize in brokering business acquisitions in Vietnam, there is a great demand for acquisitions in Vietnam. There are some 300,000 businesses in the country, and 42% of them will have to be merged or sold if they want to avoid bankruptcy due to poor management and low financial capacity in the face of the expected fierce competition ahead. Among these businesses are many operating in the real estate, production and mining sectors.The trading of business brings great benefits to participants. On the part of sellers, owners of some businesses can sell their factories or operations which they do not want to continue due to losses, financial difficulties, changing business conditions or strategies or other reasons. On the part of investors or buyers, besides saving costs and time spent on building factories and brands, recruiting staff and workers, applying for investment licenses, developing distribution and market and approaching customers, they can inherit the brand and even enjoy the profit of the enterprises offered for sale.In particular, this activity will help investors minimize risks for their investment. It also has great social significance, as a successful deal can save an ailing business from bankruptcy, maintain the prestige of its owner and keep jobs for its workers.Realizing the great demand, IDJ has set up a website — www.muabandoanhnghiep.com.vn — to help buyers and sellers meet and deal with each other. The site lists hundreds of businesses needing to sell shares or facilities. Tran Trong Hieu, director of IDJ, says the company plans to develop an English version for the site to serve foreign investors, as he forecast their great demand for buying stakes in Vietnamese enterprises.Hieu has an ambition to expand business to all cities and provinces in Vietnam to meet the demand of the emerging market that he believes will have great potential. IDJ, with initial capital of VND100 billion, plans to increase the capital to VND1 trillion by allying with investment funds in the U.S. and Hong Kong. The company also buys ailing businesses to restructure them for better operations or selling to investors.ProblemsAccording to experts, acquisitions and mergers may face a problem, namely the lack of senior managers to run the new business so formed.Another problem is businesses’ lack of knowledge about mergers and acquisitions and the unclear information about the businesses to be merged or acquired. In addition, there are no specific regulations governing these activities, such as the Law on Fighting Monopoly and how to evaluate the company to be merged or acquired. Nguyen Ngoc Bich, a legal expert, says disputes may arise when shareholders of the two parties disagree on the terms of merging or the price of shares.Foreign investors engaged in merging and acquisition may face the problem of shareholding. In principle, the Investment Law does not restrict foreign investors to invest directly in Vietnamese companies, except for those operating in conditional sectors. However, at present, the current rule still restricts the capital contribution and share purchase by foreign investors at less than 30% of the charter capital of an enterprise. The rule, contained in Decision 36/2003/QD-TTg on capital contribution and share purchase in Vietnamese enterprises by foreign investors, is causing a bottleneck in the procedure for the transfer of enterprises. Lawyer Nguyen Dinh Nha from the Vision law firm says the file for company acquisition by one of his clients is being held at the HCM City Department of Planning and Investment on the grounds that there are no guidelines to make a decision.Tran Trong Hieu, says a Singapore company is ready to spend US$75 million to buy a company that owns a real estate project in Vinh Phuc Province but it does not seem to be able to get the necessary permission.In some cases, foreign investors have to give funds to other people to buy the over-the-limit shares in the company they want to acquire. This poses risks for the investors because the surrogate buyers may not want to continue to cooperate and disputes may arise.Authorities have pledged to amend this rule to comply with the Investment Law and Vietnam’s commitments to the WTO. The Ministry of Planning and Investment’s study board for state enterprise reform and development is drafting regulations on business acquisition, whose scope is expected to expand to foreign businesses. The regulations will also allow the acquisition of State-owned enterprises with large capital, as long as they are not enterprises where the State must hold a stake and the enterprises are not in the equitization category. The current rule allows the acquisition of SOEs with capital of less than VND5 billion. Strong Player Plans New MovesKinh Do Corporation’s achievements during 2006 were capped by the State’s recognition of its success with the presentation of the Labor Order, 3rd class, at a ceremony held at the Opera House in HCM City on December 30. Here, the company’s management talks with the Weekly about its strategies for growth.Kinh Do had an eventful year in 2006. What was best in the company’s performance? Mr. Tran Kim Thanh, Kinh Do chairman: Business grew by 30% as in previous years, but I think that the success is greater, as we have listed on the stock exchange, put into place better management methods and gained good management experience.The 30% growth rate is quite high for a business in the confectionery trade. Our sales reached nearly VND2 trillion (US$125 million), with profit of VND230 billion (nearly US$14.4 million). We paid taxes totaling VND120 billion (US$7.5 million) and provided jobs for 6,000 people.Vietnam has joined the World Trade Organization. How have you been preparing for international integration?I think global integration will create many opportunities for businesses. We find it more favorable for our own business. First, we have to import large volumes of materials for confectionery production. With integration, tariffs will fall, so we can reduce production costs. Meanwhile, other countries must also implement their commitment for tariff cuts, so our products will be more competitive and we can export more and expand our market.To take advantage of this opportunity, last October we started construction of two large-scale confectionery and soft drink factories in the Vietnam-Singapore Industrial Park in Binh Duong Province. The projects, with combined capital of VND660 billion (over US$40 million), will produce high-end confectioneries and soft drinks for the local market and export.This year, we will build the Tribeco soft drink factory in the northern province of Hung Yen with an investment of VND100 billion (US$6.25 million).Kinh Do shares increased non-stop last year. Was this up to your expectation?After more than a year of being listed on the stock exchange, Kinh Do shares have attracted great investor interest and its price is now four times the original price. This shows the profitability and strong growth potential of our company. Some foreign investment funds have also picked up Kinh Do shares because they realize that we have long-term business strategies. So, the rise in the share price is up to our expectation.Kinh Do has recently participated in many apartment, office and commercial building projects. Are you increasing investment in the real estate sector?Mr. Tran Le Nguyen, Kinh Do general director: It’s true that we have embarked on a new path, which is developing real estate along with confectionery production. This year, we plan to open the luxury commercial center and apartment complex HungVuong Plaza in District 5, HCM City. We have just started work on an office, apartment and shopping complex on three hectares on Cong Hoa Street with an investment of VND1.12 trillion (US$70 million). We are also considering investment in an office building in the center of District 1 and a luxury apartment project in District 2.Our strategy is to concentrate on large-scale property projects to meet the rising demand in the downtown area.Why are you interested in this sector when many investors have lost heavily in the freezing of the sector, and there are many competitors?We nurtured a plan to invest in real estate as early as the first days of Kinh Do. However, we have focused on food because the policy for private investment in the property sector has not been very liberal and the market conditions have not been favorable. But we think now is the right time for investment. Vietnam has joined the WTO and many foreign businesses, especially multinationals, will have a demand for offices. Many local businesses also want offices in the downtown to enhance their image. Meanwhile, the supply is not enough to satisfy the demand, and office rents are rising. The same thing is happening in the housing and commercial center sectors.In addition, we have mobilized funds in the stock market. So, we must use the funds effectively to win the confidence of investors. For the immediate future, we plan to open the eight-story commercial building of the Hung Vuong Plaza in the middle of this year. Nearly all the space in the building has been leased by big tenants like Parkson and Megastar Media. The apartment section will be completed this year, but 70% of apartments have been sold. But surely it’s not easy to find locations and capital to develop these projects?We have favorable conditions to invest in real estate. We have built up our Kinh Do brand into a prestigious name, so HCM City authorities have confidence in our capacity and allocate big projects to us. Many banks and investment funds have also provided capital for our projects. Some banks are ready to provide big loans for customers to buy apartments and houses in our projects. We believe that we will fare as well in real estate as we have in food.Some of Kinh Do’s subsidiaries will be merged this year. Can you give us details of this move?We plan to list on the international stock exchange over the next two or three years, specifically on the Singapore Stock Exchange. But to be eligible for listing we must have a large-scale operation. So, we will merge affiliated food companies to increase our stature and attract the interest of international investors.How will the merging be implemented?This year we will merge North Kinh Do into Kinh Do Corp. Then we will merge food production subsidiaries. With this move, we expect to become a leading food company in Vietnam and a big player in the business in Southeast Asia. We will try to reach a capital level of trillions of dong by the time we list on the international exchange.Kinh Do has also been active in acquiring other companies. What are the results and what is the plan for the future?We have acquired Wall’s ice cream from Unilever and part of the soft drink company Tribeco. We have been successful in turning the ice cream unit into a profitable business. As regards Tribeco, it’s a new acquisition, so no immediate result is available. We are investing funds and technology to increase the production capacity of the company and diversify its products. We have also restructured Tribeco to boost its competitiveness.We will acquire some other food companies if we find good business opportunities. We will also increase alliances and partnerships with local and foreign businesses to boost our strength.Besides real estate and food, what future business areas are you interested in?The financial market holds a great attraction for us.Reported by Quoc HungA Profile of Kinh Do Corp.After 13 years of operation, Kinh Do has achieved steady growth, with nine subsidiaries, seven food, soft drink and confectionery factories and the real estate business, and total charter capital of VND849.5 billion. Its 2006 sales are estimated at VND2 trillion (US$125 million), and profit at VND230 billion (US$14.4 million). Tax payment is VND120 billion (US$7.5 million).Kinh Do has an extensive distribution network, with 25 bakeries, 215 distributors and 65,000 retail outlets. The company holds a 40% share of the local confectionery market. Its products are exported to more than 30 countries, mainly the U.S., France, Canada, Germany, Taiwan, Singapore, Japan and Malaysia.In 2005, Kinh Do was selected among the top 500 retailers in Asia-Pacific and one of the top 10 retailers in Vietnam. Over the past 10 years, it has been selected as one of the top 10 producers of High-Quality Vietnamese Goods and one of the 100 leading brands in Vietnam. In August 2006, Customer Insights rated Kinh Do as top among 10 Vietnamese brands with good growth prospects.Kinh Do has investment from big funds like Vietnam Venture Ltd., VinaCapital, Prudential, Temasek (Singapore), Asia Value Investment and VF1. In July 2006, it formed a partnership with the food conglomerate Cadbury Schweppes to prepare for expansion after Vietnam became a WTO member. 123doc.vn