Assessing the Financial Situation of the Target Business

Indeed, M&A inevitably has to face quite complicated issues such as tax, accounting, asset conversion, profit sharing, responsibility for settling unpaid debts of merged companies, resolving surplus labor, corporate culture, environmental protection, post-merger issues to increase the value of the company... to attract investors. Consulting experts will perform all of this work on behalf of the parties, from financial issues to contacting competent licensing agencies, and legal procedures. The more experienced the consultants are, the more likely the M&A process will proceed smoothly and quickly.

1.7.4. Target business evaluation

1.7.4.1. Assessment of the financial situation of the target enterprise

Before conducting an M&A, the M&A recipient needs to assess the financial status of the target company. To assess the financial status of a company, it is necessary to first review both the financial statements and tax declarations of the company over a period of time to be able to assess the current financial status and future financial trends of the target company. The M&A recipient must make sure that the figures have been audited by a reputable and prestigious auditing company. It should not accept a sketchy financial assessment or a composite profile, because they may be based on figures provided by the M&A recipient company. Therefore, in order to have a comprehensive and correct view of the financial situation of the company, the buyer or the merging party, in addition to analyzing the figures in the financial statements, needs to rely on many documents and conduct assessments with many different coordination methods to be able to answer the following questions: Is the company in a healthy financial condition? Do the financial statements match the tax returns?

Are the company's operations and sales in line with the industry average?

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1.7.4.2. Valuation of target business

When conducting M&A with another company, what is the most profitable purchase price? And the valuation of the company will also affect the decision to "buy or abandon" this deal. Therefore, the parties involved in the M&A deal are often very interested in the valuation of the company.

Normally, the parties in an M&A transaction have different ways of assessing the value of the M&A enterprise: the seller tends to value his company at the highest possible level, while the buyer will try to pay the lowest possible price. To come up with a fair and acceptable price, experts have proposed many methods of valuing enterprises and each method gives a different answer, the highest number can be far from the lowest number. However, in M&A activities, the value of an enterprise is "determined" with a number of subjective assumptions, different from the price which is the value of the buyer and the seller. The price the buyer is interested in is the final price at which the buyer and the seller can meet. The purpose of valuation of the buyer and the seller is only to calculate the value with a number of relatively reasonable subjective assumptions, but will be beneficial to them as a starting point for M&A negotiations. Buyers will leave this quantitative work to appraisers, but the final price of the deal is often determined by qualitative factors.

In the methods of enterprise valuation, the greatest value of the enterprise is the human being, which is often not taken into account - a shortcoming in the valuation methods. Therefore, human resources, organizational management system, and corporate culture are factors that are not easy to quantify but are convincing qualitative values in M&A negotiations. However, the buyer or the merger cannot take lightly the quantitative valuation of the enterprise because that is the starting price.

for an M&A deal. Experts often use the following business valuation methods:

 P/E ratio (Price on Earnings Ratio) : This is a coefficient indicating the relationship between the market price of a stock and the income it brings, showing the price that investors are willing to pay for one dong of profit earned from that stock. For example, P/E = 25 means that investors are willing to pay 25 dong to earn 1 dong of profit from this stock. Investors will compare the P/E of companies in the same industry. If the P/E of a company is higher than the average, it means that the market expects this company to make a profit in the near future. The higher the P/E of a company, the higher the market's expectations for the company's profits, thus attracting more investors. On the contrary, investors have little or no expectation of the company's ability to make a profit, so the price they are willing to pay when buying stocks is low, leading to a low P/E index, showing that the price of this stock is on a downward trend. In M&A activities, the buyer or acquirer can compare the average P/E of stocks in the industry to determine a reasonable purchase offer.

 Enterprise value to sales ratio (EV/Sales): The EV/Sales ratio compares the value of a company to its sales revenue. This valuation method extends the price to sales value by using market capitalization[24] instead of enterprise value. The lower the EV/Sales ratio, the more interested investors are because the future revenue of the company will be better than the present. In M&A, the buyer or acquirer can compare this ratio with other companies in the industry and will offer a price at a multiple of revenue.

 Replacement costs : In some cases, M&A is based on considering the cost of establishing a business from scratch versus buying an existing one. For example, if we simply calculate the value of a business including all fixed assets, equipment and staff. In theory, the acquiring business can

It is possible to negotiate the acquisition of an existing enterprise at the above value or to establish a new, similar enterprise to compete. Obviously, to build a new enterprise will take a long time to assemble a good management and personnel team, purchase assets and find customers, not to mention having to compete with existing enterprises in the market. However, this method is also difficult to apply to service industries, where the most important assets are people and the method is mainly based on ideas.

 Discounted cash flow method (DCF): This is an important valuation tool in M&A. DCF is a method to evaluate the attractiveness of an investment opportunity. Analysts often use this method to convert the future cash flow of a specific project to its present value, thereby assessing the feasibility of an investment project. If the future cash flow after discounting is greater than the current investment cost of the project, this may be a good investment opportunity. The purpose of DCF is to determine the present value of the enterprise based on estimated future cash flows. The estimated cash flow is discounted to the present value taking into account the enterprise's weighted average capitalization (WACC). Of course, DCF also has certain limitations because DCF is simply a calculation tool, so errors cannot be avoided. A small change in input factors can lead to a large change in the value of a company, and companies often try to adjust cash flows to achieve a certain limit. However, there are very few tools that can compete with this valuation method in terms of methodology.

1.7.4.3. Brand valuation

Brand value is an intangible factor, this value can only be determined at a relative level for enterprises that have had a long-term stable operation process and have been listed. Accurate brand valuation is extremely important in the process of negotiating and deciding on the price.

The final decision for both parties when conducting M&A. Because if the buyer or the acquirer does not accurately grasp the value of the enterprise's brand, the seller may offer a price that is too high compared to reality and it is very difficult to reach a common price. There are many ways to value a brand, the brand value can be calculated by the total value of the company's shares minus the total value of assets, or by calculating based on the total value of annual income for a period in the future. Or the brand value can also be calculated like Vietcombank's valuation by taking the average price of foreign investors submitting bids minus the total value of Vietcombank's assets. However, this is only a relative calculation because the value of assets is only determined at a certain level depending on each calculation method.

1.7.5. Post-M&A terms

The benefits from M&A deals are enormous, but they come with many difficulties that arise after M&A. Enterprises cannot avoid facing quite complicated issues such as monopoly, tax, accounting, asset conversion, profit sharing, settlement of unpaid debts of each enterprise, settlement of surplus labor, corporate culture, environmental protection responsibility, calculating post-merger issues to increase enterprise value to attract investors.

Depending on the characteristics and objectives of each M&A case, if the target company is operating well and the purpose of the merger is to acquire assets and profits, then changing the board of directors and restructuring the organization of the merged company usually does not occur. The merging company will only take over the positions in the board of directors to exercise ownership rights, while keeping the merged company and its board of directors operating normally and independently as a member company. In the opposite case, if the target company is losing money and going downhill, the merging company hopes to make a "turnaround".

In the case of “upstream” , the old management board will be replaced by a new management board, the organizational structure will be disrupted or merged directly into the departments of the new company and workers will be laid off en masse. Therefore, to avoid possible opposition from the union, the parties need to agree on the issue of reasonable compensation for employees and workers once they are laid off by the new company.

A notable point is that most M&A deals fail to integrate the cultures of the enterprises together. Corporate culture is an abstract and intangible entity, closely linked to the development history, human resources and policies of each enterprise[8], and should be included in the common assets of that enterprise. Therefore, it is not easy to find a common voice and compromise, even when the leadership of the two enterprises agree to merge. Therefore, in order to avoid potential cultural conflicts, the management board of the merged enterprise needs to carry out extensive propaganda activities on related policies and regimes for employees at all levels of both enterprises, and at the same time build for the new enterprise a strategy for integrating corporate culture with a new vision to be able to attract all human resources of the enterprise to missions that are greater than its previous local interests and culture.

1.7.6. Negotiation, signing and execution of M&A contracts

The process of negotiating and signing the M&A contract is the result of reflecting the content of the M&A transaction. The contract is the basis for the seller and buyer of the enterprise to establish terms to bind commitments and legal responsibilities with each other and with public authorities. Unlike the purchase and sale of goods and assets, the purchase and sale of enterprises does not stop at "money exchange, porridge scooped out", but the two parties also have to resolve a series of "post-M&A" issues . Each enterprise is a legal entity with different characteristics, so each M&A transaction has a different ending. Therefore, the M&A contract must be made in writing, with clear words and content covering issues such as determining the status of the enterprise.

of the buyer, seller; subject of sale; purchase price; contract security measures (guarantee/pledge/mortgage); agreements on "post-sale of enterprise" ; time of transfer; applicable law; validity... The contract should also have a detailed agreement on the time of transaction completion because the transfer of enterprise can only be carried out when certain conditions are satisfied, such as having a license from the Department of Planning and Investment, the approval decision of the board of directors... therefore, the transaction can only be completed when the seller has given the buyer the above documents.

Conclusion of Chapter I: Thus, it can be said that this process is very important for M&A activities. If the M&A contract does not fully and accurately reflect all the results of previous work, the wishes and expectations of the parties or does not minimize the risks, the work that has been done will have no value or will be greatly reduced in value, and the purpose of M&A may be negatively affected. The M&A contract is not only a legal factor, but also a harmonious combination of factors related to other M&A transactions such as finance, business, etc. Only when all related factors are completely combined, will the M&A contract truly be a tool to ensure the rights of the parties involved in the transaction. Contract negotiations can be carried out at any stage. Normally, the parties only officially negotiate when they have a certain amount of information about each other and understand each other's purposes. Signing a contract is the final stage of the M&A transaction agreement. This is when the parties have clearly understood each other as well as the purposes and requirements of each party, and clearly understood the benefits and risks when implementing M&A. The contract is the expression and recognition of the parties' commitments to the transaction.

The existence of a market for mergers and acquisitions in the economy is an inevitability of economic development and strong growth.

of the stock market. We cannot deny the existence of this market even though we know that activities in this market can bring many serious risks to businesses and the economy. The role of mergers and acquisitions today for Vietnamese businesses is a tool to help businesses restructure their businesses, in order to improve their competitiveness in an increasingly fierce competitive environment. The negative side of this activity can be overcome if there is close supervision from the State management agency and good preparation and implementation from the business before, during and after the business merger and acquisition transaction has been conducted.

M&A activities are an inevitable activity of the market economy. However, this activity needs to be regulated in the direction of ensuring fair competition and anti-monopoly. Legal adjustment in accordance with the above objectives will ensure the development of M&A activities and contribute to promoting the development of the economy in general.

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