Amid the current economic slowdown, what is your outlook for the merger and acquisition (M&A) market, and which sectors do you foresee continuing to draw in investor interest?

Pham Ngoc Bich, managing director of Corporate Finance at Ho Chi Minh Securities

This year posed significant challenges for the global economy, chiefly due to the US Federal Reserve’s interest rate hikes aimed at curbing persistent inflation, and the geopolitical risks emanating from conflicts in Ukraine and the Middle East. These factors have notably dampened business activities globally, particularly impacting the real estate and industrial manufacturing sectors.

This downturn has substantially reduced consumer purchasing power worldwide, including in Vietnam. Despite these headwinds, Vietnam remains a beacon of growth in the developing world, thanks to its competitive labour costs, industrial land prices, and energy rates. The ongoing trend of international manufacturers diversifying their production to ASEAN countries, reducing their reliance on China, further bolsters Vietnam’s position.

With its burgeoning middle class, rapid urbanisation, and consistent public investment in infrastructure, Vietnam’s economic growth rate surpasses that of other developed Asian nations such as Japan, South Korea, Malaysia, and Thailand.

Why are M&A activities predominantly focused on unlisted companies, with private equity (PE) funds as the main buyers? What is your view on the M&A trends among listed companies?

The Vietnamese stock market is currently undergoing a downturn, influenced by various factors including a stagnant real estate market, a spike in bad debts among commercial banks, a decline in consumer spending, and adverse developments related to corporate bonds.

These elements have significantly heightened the risks associated with investing in Vietnam’s listed stocks, particularly for international indirect institutional investors. The majority of listed companies in Vietnam are relatively small in scale and their governance standards do not align with international norms, presenting high risks.

This landscape necessitates that international investors, including major multinational corporations and large pension funds, approach the Vietnamese market through seasoned international investment professionals who are adept at navigating the increasingly complex investment risks, in line with the PE model.

These PE funds prioritise direct investments, allowing them greater control and the opportunity to enhance the quality and value of businesses. Their aim is to scale these enterprises to a level that is attractive for acquisition by multinationals or for listing on major global investment platforms with stable, appealing profits for large pension funds worldwide.

This approach to M&A investment is witnessing a robust growth trajectory in Vietnam. While M&A deals in listed companies present additional challenges, including regulatory compliance and sensitivity to market price fluctuations, the core strategy of PE investment lies in acquiring stakes in unlisted companies, fostering growth, and eventually divesting upon the company’s initial public offering or listing

Has there been a noticeable trend in the valuation of Vietnamese businesses, and what are the primary obstacles impeding the success of M&A transactions?

The current valuation of Vietnamese businesses seeking M&A is indeed lower than in previous years. This decline can be attributed to global economic factors such as high interest rates, reduced purchasing power, a shrinking market, and prevailing high debt levels. This is a reality that needs to be acknowledged and addressed in the landscape.

Multiple factors contribute to the derailment of deals. A key issue is the lack of attractiveness of the businesses being offered, failing to meet the stringent investment criteria of potential buyers in aspects like scale, profitability, and competitive edge. Additionally, shifts in the intentions of either buyers or sellers often lead to the abandonment of deals.

A significant challenge arises when there is a lack of alignment between the two parties, especially in terms of valuation and transaction conditions.

What specific measures are required to engage more significant investments from European and American investors?

There is an increasing amount of dry powder available for investment in Vietnam, both for funds and multinationals. However, finding opportunities that meet the scale and attractiveness required by these investors remains a significant challenge.

The cultural and business affinities of Vietnam with Asia predominantly shape the current investment trends. However, there has been a recent shift with major US and European investors increasingly focusing their investments in Asia, establishing regional offices in places like Hong Kong and Singapore. Some even employ professionals of Vietnamese descent in Asia to assist in their M&A pursuits in Vietnam.