Mergers and Acquisitions of Vietnamese Commercial Banks

d. Purchase on the stock market

This is one of the most commonly used M&A methods in practice, the buyer bank will gradually purchase the target bank's shares on the stock market. The advantage of this method is that the acquisition cost will be limited to the lowest level, but its disadvantage is that it is time-consuming and prone to failure if the target bank detects and takes actions to hinder the acquisition process during the acquisition process. In addition, the laws of countries often control the purchase of large quantities of shares by individuals or organizations on the stock market to prevent monopoly and improve the economy by regulating share control. If an individual or organization holds a certain percentage of shares when trading, it must report to the Commission.

State Securities Commission (SSC) as well as publicly announced on the stock market[ 4 ] (In Vietnam, according to Article 26 of Circular 52/2012/TT-BTC, shareholders holding 5% or more of a public company's shares when trading or investors trading with a buying and selling ratio of 1% of a public company's shares must report to the SSC). Therefore, in order for the acquisition to be carried out,

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If the transaction is conducted secretly and successfully and does not violate the regulations of the State Securities Commission, the buyer bank will divide the ownership ratio to many different investors related to the buyer bank to gradually purchase shares on the stock market. When reaching a ratio sufficient to control the target bank, the buyer bank will represent this group of investors to request a General Meeting of Shareholders to dismiss the board of directors of the target bank and elect a new board of directors of its bank.

Normally, the buying bank in this method is often a large bank acquiring a small bank. However, in reality, there are many cases where a small bank acquires a larger bank. This case is called a reverse takeover (reverse takeover or reverse merger) [ 5 ], we can understand a reverse takeover as

4 Circular 52/2012/TT-BTC on information disclosure on the stock market.

5 According to the definition of reserve takeover on wikipedia.org.

The acquisition of a public company (listed company) by a private company. Reverse takeovers often occur mainly abroad when private companies acquire public companies, these acquired companies are often referred to as "The public shell company". The main purpose of private companies in reverse takeovers is to convert from a private company to a public company with the simplest procedures and fastest time, usually only a few weeks. However, in reality, there are sometimes cases where a smaller company acquires a larger company because the smaller company, through many channels (can borrow or cooperate with many other companies), has accumulated a large amount of working capital and then secretly acquires a target company that is larger than its own company.

e. Purchase of assets

Unlike other M&A methods, in this method, the buyer company will hire a third party specializing in valuation to value the target company and then the buyer company will offer a purchase price higher than the valuation value to the target company in order to convince the target company to resell. Valuation of intangible values such as brand, market share, customers, human resources, organizational culture, etc. is very difficult to accurately value. Therefore, the buyer companies in this method will often focus on target objects that are small companies or companies with tangible assets accounting for a high proportion of total assets. The main targets that the buyer companies aim for are the facilities and distribution systems of the target companies.

f. Measures to counter the acquisition by the target company's management

Faced with the risk of being taken over, the board of directors of the target bank will also try to find ways to retain ownership and management rights. One of the most effective ways is MBO (Management Buy-out) - buying back shares to retain management rights.[ 6 ] "There are many ways to implement this method. One is to find a "white knight" - a relative

6 Definitions of MBO on website saga.vn.

be more friendly to them and can pay a higher price than the buyer to sell, after this good knight has got the shares in hand, the board of directors can negotiate with the knight to buy back a part of these shares and still maintain ownership of the company. Second, they can also restructure their bank's capital by borrowing money (borrowing from the bank or issuing bonds) to buy back shares from other shareholders.

In addition to MBO, another solution is to borrow money and pay high dividends to shareholders to convince them not to sell. However, in reality, it is not easy for the target bank's management to find a "good knight" or borrow money to retain its management rights.

There are a number of other measures that the target bank's management can also take against the buyer but are rarely taken [ 7 ], which are:

 “Poison pill: The most common defense to discourage a potential takeover. There are five types of “poison pills”:

o Preferred stock: Issue preferred stock, which includes a provision allowing conversion to common stock upon completion of the merger.

o Flip-over: Allows shareholders of the old company to buy shares of the new company after the merger at a very cheap price.

o Flip-in: Allows existing shareholders to buy additional shares at a very preferential price when a major shareholder owns more than one percent of the shares.

% certain.

o Back-end: Allows existing shareholders to convert shares into cash at a predetermined price when the takeover occurs.

o Poison Puts: Allow investors holding a company's bonds to receive money before maturity if the company is in the process of being "taken over".

7 Articles on Anti-Acquisition Tactics on Vietstock.vn

 Staggered Board of Directors: Regulations for staggered board elections, in which only a portion of the board is re-elected each year instead of all at once.

 Crown Jewel: The acquired company states its intention to sell its most valuable division or asset if acquired.

 Pac-Man Defense: The acquired company turns around and acquires the company that wants to acquire it.

 Jonestown Defense: This is the most negative defense method, pushing the company to the brink of bankruptcy or leaving long-term bad consequences for the company such as selling its valuable assets at low prices to everyone except the company that wants to take over or taking on large, unnecessary, expensive debts.

2.2.1.4 M&A process [ 8 ]

The M&A process is very diverse and rich, it does not follow any certain standard model, it depends on each form of M&A, there will be different approaches, for example, cross-border M&A is different from domestic M&A, cross-border M&A in the M&A process will have additional steps of research on law, culture, level of integration abroad as well as the issue of access to relevant state agencies in foreign governments or the M&A process in countries with developed financial markets, long history of M&A is also different from the M&A process in poor countries, developing countries, even emerging countries with weak financial markets, differences in management level, legal framework, information imbalance as well as misinformation ... Therefore, the author proposes an M&A process for Vietnamese commercial banks that the author thinks is the most suitable, this process includes 5 stages:

8 Research on bank mergers and acquisitions (Luu Thi Thuy Tram, 2012; Pham Thuy Cam Tu, 2011; Phan Thi Hong Nhung, 2012; Pham Xuan Thi Thanh Quang, 2011; Nguyen Thi Hien, 2012).

Phase 1: Pre-M&A preparation phase

 Develop strategic plans and identify the motivations for M&A deals.

To be successful in work, life or anything, first of all, we must clearly identify the goals we want to achieve when doing that, then we will build a strategic plan from general to detailed around the general direction to achieve that goal. Therefore, determining the motive of the M&A deal and building an overall strategic plan is the most important step that determines the success or failure of a bank M&A deal because if the direction is wrong, the following steps will be meaningless, will lead to further deviation and will cause especially serious negative consequences for the parties participating in the M&A, mainly for the buyer. Therefore, first of all, the acquiring bank must clearly identify its goals and expectations when conducting the M&A deal, that is, to consolidate its position in the existing market or expand the market or diversify products, is this goal consistent with the long-term business strategy of its bank or not. From there, the board of directors of the acquiring bank will propose the most suitable M&A strategy to both achieve the initial goals and be consistent with the bank's long-term business strategy; for example: Bank A has a business strategy with the goal of expanding the market and penetrating new markets, it will have to find an M&A partner such as Bank B, banks with operating areas in markets where Bank A is not present or is present but not significant, to conduct M&A with the aim of penetrating new markets quickly and effectively.

 Prepare adequate resources for the deal.

After determining the direction and building a strategy for the M&A deal, the board of directors needs to prepare resources to be ready to meet the needs arising during the M&A process, especially financial resources (funded by existing working capital and/or loans) and human resources.

 Re-systemize financial books.

The systematization of financial records can be understood as the beautification of the parties involved in the M&A deal before officially negotiating with each other. Beautifying the financial statements or business performance helps the parties involved gain an advantage in the negotiation process and negotiate the purchase price as well as making it easier to find partners to conduct M&A.

Phase 2: Select target bank

After having the orientation and overall strategy, the board of directors will proceed to phase 2, which is to choose a suitable target bank. For developed economies, this is the most important step, success or failure is mostly due to the participants not choosing the right partner or rather not accurately assessing the synergies and potential risks that the partner brings in the M&A deal and thereby making the wrong choice (many M&A processes abroad have omitted the step of determining the orientation or motive of the M&A deal above because the market in those countries is too developed and they consider step 1 as an obvious thing, a must when doing any business activity). Therefore, choosing a suitable bank is very important but not simple at all, usually, this phase 2 will be divided into the following small steps:

 Step 1: Select the first list of target banks.

 Step 2: Prepare complete documents about target banks.

 Step 3: Preliminary analysis and assessment of target banks.

 Step 4: Select the second list of target banks.

 Step 5: Propose to conduct preliminary contact with target banks.

Specifically, after determining the direction and building a strategy for the M&A deal, the next step is for the board of directors to conduct a survey of all banks to select a list of target banks that are suitable for their M&A strategy, for example: Bank A is in the US and wants to

To develop the market in Vietnam, we will select potential banks in Vietnam as our target.

After having a list of target banks that meet the initial requirements, the next step for the board of directors is to collect preliminary data on the target banks such as business performance, balance sheet, position in the industry... From the collected information, the board of directors will conduct preliminary analysis and assessment of these target banks and select suitable target banks (2nd list of target banks).

After that, the management board will conduct preliminary contact with the target banks in the second target bank list to make an initial offer as well as to probe the attitude and reaction of the target bank's management board, from which the acquiring bank's management board will be able to propose the most suitable M&A method. This is a very sensitive step in the M&A process and has a great impact on the level of convenience or difficulty in the M&A process (for M&A methods such as attracting dissatisfied shareholders or acquiring on the stock market, there will be no preliminary contact with the management board). Therefore, the management board of participating banks must send representatives who have good communication skills as well as extensive relationships to carry out this step (Here, the party that proactively contacts or requests a meeting first is not necessarily the acquiring bank but can be the selling bank. If the selling bank is in a state of loss-making business, operating poorly and needs to carry out M&A for restructuring, the party that makes the request for first contact will be the selling bank).

Phase 3: M&A Deal Execution

 Evaluation of target bank.

After receiving the target bank's agreement to cooperate, the acquiring bank's management board will collect the most detailed information possible about the target bank. Then, the management board will analyze and make its own assessments of the business situation, advantages and disadvantages, opportunities, development potential as well as risks from the target bank in the future.

(especially difficult to recognize the potential risks) and the suitability of the target bank with your bank. From there, you can come up with the most reasonable purchase (sale) price for the deal.

 Target bank valuation.

Valuing a business is very difficult and complicated, especially for intangible assets such as brand issues, reputation, customer network, traditional products, patents and especially human resources (one of the main goals in modern M&A deals today to replace traditional recruitment to save time but bring higher efficiency). If the acquiring bank values too high, it will cause serious damage to the future business development of the acquiring bank, and if the valuation is low, the target bank will not accept it. Therefore, to be objective, the parties involved in the M&A deal will usually invite a third party specializing in business valuation to act as an intermediary to conduct the valuation. Then, the parties will rely on the third party's valuation as the basis for their final price (usually the buyer will pay a higher price than the valuation to make it easier to convince the seller to sell back to them).

Enterprise valuation is a very difficult problem and is another research topic. Therefore, within the scope of this research topic, the author will only introduce the basic 3 methods of enterprise valuation according to the review documents of the Ministry of Finance, but will not delve into the research on enterprise valuation, which are: asset method, income method and market comparison method[ 9 ].

“Approach from total assets of the enterprise at the time of valuation - Asset-based method

 Is a method of estimating the value of a business based on the market value of the total assets of the business.

 This method provides a “floor price” for determining the value of the enterprise.

9 Short-term training documents on valuation skills of the Ministry of Finance.