vietnam national university, HANOI school of business Vu Thi Thu Minh A STUDY ON Merger and acquisition IN VIETNAM - THE CASE OF ho guom AND CHIEN THANG garment COMPANIES master of business administration thesis Hanoi - 2007 TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS ACKNOWLEDGEMENTS .v TABLE OF CONTENTS. vii LIST OF TABLES AND FIFURES .2 3 Objectives and Aims.5 5 Scope of work .5 7 Data sources and processing.7 CHAPTER 1: LITERATURE REVIEW .1 Rationales of Merger and Acquisition .1 Definition and classification of M&A .2 Guidelines for successful acquisitions .1 Pitfalls of acquisitions.2 Execution of acquisitions.3 Managing acquired companies.19 vii TIEU LUAN MOI download : skknchat@gmail.1 Restructuring poorly-run enterprises .3 Realizing economies of scope.4 Conceptualization and emerged frame of reference.2 Emerged frame of reference.4 Data collection method.7 Reliability and validity .34 CHAPTER 3: DATA PRESENTATION AND ANALYSIS.1 Ho Guom Garment JSC .2 Chien Thang Garment JSC .2 The situation leading to the acquisition .1 Post-integration change of Vietnam garment and textile industry .2 HOGARSCO – Expansion for development .3 CHIGAMEX – A poorly-managed and loss-making company.3 Execution of the acquisition of CHIGAMEX by HOGARSCO.4 Managing the acquired company - CHIGAMEX .2 Transferring competencies and realizing economies of scope .3 Post-acquisition performance of CHIGAMEX.5 A summary on main findings from the case study.61 CONCLUSIONS AND IMPLICATIONS.64 viii TIEU LUAN MOI download : skknchat@gmail.71 Appendix 1 – Interview Guide (English version) .73 Appendix 2 – Interview Guide (Vietnamese version) .74 ix TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES AND FIFURES Table 2.1: Three different research purposes.2: Relevant situations for different research strategies.3: Six sources of evidence, strengths and weaknesses.4: Case study tactics for four design tests.1: Information on HOGARSCO’s factories.2: HOGARSCO’s performance from 2002-2006 (VND billion) .1: Emerged frame of reference .1: An overview of the methodology chapter .1: Sales percentage by main export markets of HOGARSCO .2: Sales percentage by categories of products .3: HOGARSCO’s performance from 2002-2006 (VND billion) .4: Major export markets of Chigamex.5: Pre-acquisition organizational structure of CHIGAMEX .6: Overview of holding rate among companies.7: Post-acquisition organizational structure of CHIGAMEX .54 x TIEU LUAN MOI download : skknchat@gmail.com LIST OF ABBREVIATIONS M&A Merger and Acquisition HOGARSCO Ho Guom Garment Joint Stock Company CHIGAMEX Chien Thang Garment Joint Stock Company VINATEX Vietnam National Textile and Garment Corporation JSC Joint Stock Company xi TIEU LUAN MOI download : skknchat@gmail.com Introduction INTRODUCTION This first part is intended to give an introduction to the area of research. First a brief background discussion regarding merger and acquisition (M&A) will be provided, followed by the problem discussion, leading to the objectives and aims, then research questions, scope of work, significance, and the limitations of the study will be presented and finally the outline of the thesis. 1 Background In today’s business world, mergers and acquisitions play an important and undisputable role in creating a sustainable competitive advantage.
Although there have always been historical merger and acquisition waves often in the periods of high economic growth rates, decline in interest rates and rise in stock markets, M&A gained its importance in recent years. For the last 30 years, M&A activities have increased constantly in both number and average size [DePamphilis, 2005]. In a very competitive and global environment various reasons can account for companies undertaking these deals, often involving extremely high financial payments. Market-, cost-, competitive- or government drivers [Child et al., 2001] can all influence a company’s decision to opt for M&A as the primary mean to quickly increase revenues [Galpin and Herndon, 1999].
More specifically, operating synergies are often mentioned as drivers for merging. By combining complementary skills and resources both partners’ economies of scale and scope can benefit, by spreading fixed costs for instance. Moreover, financial synergies, diversification aims, tax advantages, pursue of market power as well as empire building can represent reasons to engage in such costly ventures [DePamphilis, 2005]. Generally, the justification for acquisitions lies in the potential value they are anticipated to create in the future [Child et al.
Consequently, the combined value of both merged companies should be higher than the sum of the individual companies. Theoretically, this value creation through 1 TIEU LUAN MOI download : skknchat@gmail.com Introduction mergers can be reached by using both companies’ assets more effectively by the combined firms than by the target and bidder separated [Child et al. Although M&As almost seem to represent a part of everyday business life and the majority of multinational enterprises undertake more than one during their development, the risks associated are still comparably high. Even though there have been examples of extremely successful mergers there are findings that 50-80% underperform their industry peers and fail to earn the expected financial returns [DePamphilis, D.
Reasons for acquisition failure can range from overoptimistic estimates of the target company’s value which result in extensive overpaying; over slow integration of all operational levels in the post-acquisition phase; poor, clashing business strategies impossible to merge [DePamphilis, D. Furthermore, the degree of relatedness of businesses, as well as the distance in business or corporate culture is crucial factors to take into consideration [Child et al., 2001; Gancel et al. Vietnamese enterprises have been integrating into the global trend of rise in M&A activities, especially when Vietnam is in the context of high economic growth rates, low interest rates, strong and rapid equitisation and “hot” stock markets. Similarly, market, cost, competitiveness, government and synergies are often mentioned as drivers for merger and acquisitions in Vietnam.
The presence of conglomerate and group of companies in Vietnam has indicated a condensed strength and has shown the willingness for integration into globally competitive economies. 2 Problem discussion Due to the competitive environment of rapid change and aligned constant need for growth and development, companies have to exploit organic sources of expansion as well as external ones in order to compete. The options range according to the degree of integration that is established among individual enterprises. Mergers and acquisitions are two common and prevailing means for company growth in today’s 2 TIEU LUAN MOI download : skknchat@gmail.com Introduction business world.
More precisely they represent options that aim at a very high degree of integration, as opposed to cooperative agreements and joint ventures. Generally speaking, acquisitions refer to a shift in the controlling ownership of a company that is taken over by another company. This can occur both through share purchases or other forms of the target’s equity as well as asset purchases. The acquired firm can still exist as a legally-owned subsidiary of the acquiring company, as is the case of CHIGAMEX acquisition.
Mergers, by contrast, aim at “total integration of two or more partners into a new unified corporation” [Child, 2001]. They are usually coined by a consensual environment, where beneficial outcomes are ensured for both parties. Acquisitions, however, can also take place in a hostile setting, where the target’s management is passed over and the shares are purchased against the wishes of the target company [DePamphilis, 2005]. Generally, acquisitions offer a certain degree of choice concerning the magnitude of integration, which mergers do not permit.
Moreover, acquisitions are mostly known to be unequal partnerships [Child et. Although the terms mergers and acquisitions are often used interchangeably, they entail very different concepts. Horizontal acquisition takes place where the acquiring and acquired companies produce similar product in the same industry. There is a long-standing debate in the economics and finance literature on the motives for horizontal acquisition.
Firm management usually cites expected improvements in productive efficiencies or synergies like scale economies and elimination of overlapping facilities as the key reasons for undertaking horizontal acquisitions. On the other hand, some economists express concern that by reducing the number of firms in an industry, horizontal acquisition increase market power of customers and suppliers of the acquiring firm’s industry. Thus, horizontal acquisitions may be undertaken primarily to exploit the increased market power and gain at the expense of customers and/or suppliers. 3 TIEU LUAN MOI download : skknchat@gmail.com Introduction In the context of global rise in M&A activities and the necessity of M&A in the development of Vietnamese companies, the study would provide international knowledge of M&A and analyze a practical acquisition case of HOGARSCO and CHIGAMEX in order to draw some successful lessons for other companies in Vietnam, therefore, the title of the thesis would be finalized as “A study on merger and acquisition in Vietnam – The case of Ho Guom and Chien Thang garment companies”.
Companies such as HOGARSCO have been choosing a strategy of horizontal acquisition to consolidate their competitive advantage. Vietnam National Textile and Garment Corporation (VINATEX) arranged the horizontal acquisition of Chien Thang Garment JSC by Ho Guom Garment JSC in order to help CHIGAMEX overcome the edge of bankruptcy. By pursuing horizontal acquisition, both HOGARSCO and CHIGAMEX can obtain economies of scale or secure export market for their products. After acquisition, the two companies will be able to improve their competitiveness and market visibility.
3 Objectives and Aims The objectives of the thesis are as below: ¾ Firstly, to provide a better understanding of M&A, its rationales and international guidelines for M&A. ¾ Secondly, to review the recent upward trend in M&A activities and the context of Vietnam garment and textile industry in 2007 to raise the demand of M&A. ¾ Thirdly, to apply theory into case study of Ho Guom and Chien Thang garment companies to show advantages, disadvantages, successes, limitations of the acquisition that help these two companies get inside picture of this acquisition. ¾ Fourthly, to draw out some conclusions and suggestions for M&A activities in Vietnam.
4 TIEU LUAN MOI download : skknchat@gmail.com Introduction Finally, the thesis aims to introduce international standards and practices in making M&A and apply them into a case study in order to provide a better understanding of M&A activities in garment sector and lessons learnt from a successful acquisition in Vietnam. 4 Research questions In order to reach this purpose, the following research questions have been developed. ¾ Why do Vietnamese garment companies conduct acquisitions? ¾ How can an acquisition in Vietnamese garment sector happen? ¾ How can an acquiring company manage an acquired company? 5 Scope of work Mergers and Acquisitions can be studied from a variety of angles. Due to time constraints, the study will focus only on the two Vietnamese garment companies and the acquisition of one company by the other one.
6 Methodology The methodology practiced in the thesis is a combination of deduction approach, qualitative method, case study strategy. The study applied the theory in analyzing a case study with data collected from qualitative interviews. The methodology will be described in detail in Chapter 2. 7 Data sources and processing Among six sources of evidence for collecting data including documentation, archival records, interviews, direct observations, participant observation and physical artifacts, interview was chosen as the most significant source of case study due to its positive aspects.
Documentation and archival records were used as supporting data sources. Data analysis in this research follows three steps: data 5 TIEU LUAN MOI download : skknchat@gmail.com Introduction reduction, data display, conclusion drawing and verification. Details on data collection and analysis are shown in Methodology Chapter. 8 Significance The study has made some certain contributions to the economy in generally and the enterprises in particularly.
¾ To the economy: the study shows both motives and de-motives behind M&As and their influences to the overall economy. The successful acquisition in the case study has contributed to the acceleration of M&A activities in Vietnam indicating a condensed strength and the willingness for integration into globally competitive economies. ¾ To the enterprises: the study provides them a better understanding of why they should take M&As, how M&As occur and how they can effectively manage acquired enterprises in order to make a successful acquisition.