Vertical M&A deals on the rise

The report by the Vietnam Competition Authority under the Ministry of Industry and Trade announced last week at the second ASEAN Competition Conference shows that M&A deals in the past were mainly done horizontally.

In particular, foreign companies often entered the Vietnamese market through M&A deals with local firms active in same fields. This is a new strategy for market penetration, rather than direct investment as before.

However, the number of vertical M&A transactions is picking up, especially among domestic enterprises. The main purpose is to take advantage of the input material supply to improve business efficiency, or to make use of available distribution systems to reduce costs.

Alan Phan, chairman of Viasa Investment Fund, said agriculture has always been the basic industry of Vietnam, and that markets like the U.S., Europe and China need supply of raw materials. Therefore, producers there said they want to acquire Vietnamese companies in this sector provided that prices are agreeable.

Tran Phuong Lan, head of the division for competition supervision and management under the Vietnam Competition Authority, said the Vietnam Competition Law had no control on vertical business concentration, while this form of economic concentration would emerge soon. Market share is currently the only criterion to determine whether a business has concentration of economic power or not.

Banking-finance and consumer goods are expected to record strong growth in M&A activity in near future, according to the report.

Specifically, under the scheme for restructuring the system of credit institutions in 2011-2015, the Government encourages and creates favorable conditions for credit institutions to carry out M&A deals on a voluntary basis to increase scale and competitiveness.

Therefore, the report predicts the market will witness more voluntary mergers among banks. This sector currently has the largest volume and value of M&A transactions.

According to Nexus Group, as of September 2011, the total value of M&A in the banking-finance sector had accounted for 55% of the total value of all M&A deals in 2011.

M&A activity in the consumer goods sector is also forecast to keep growing in 2012 and the following years. It is because Vietnam is a market with a young population and surging incomes, while local enterprises are facing financial distress, urging them to seek foreign investors.

The total value of M&A deals last year was put at US$6.2 billion, with the consumer goods industry accounting for over US$1.2 billion via 26 transactions.