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Much to gain

Released at: 13:46, 21/03/2014

Much to gain

The merger between Military Bank Securities and VIT Securities should spawn a healthier and stronger entity

by Hai Bang & Minh Tien

It was the first-ever merger of securities companies in Vietnam. The deal, which the State Securities Commission of Vietnam (SSC) said was wrapped up on December 9, united two companies, one big - Military Bank Securities (MBS), and one small - VIT Securities (VITS). The newly consolidated company has charter capital of VND621 billion ($29.5 million) and retains the name MBS. Leaders say both companies and their shareholders stand to benefit, and regulators have applauded the move.

Merger the only relief

It has been a bumpy two years for one half of the deal, MBS, who found itself in major trouble clearing significant losses incurred mostly in 2011. Its financial report released at the end of June last year showed that its charter capital stood at VND1,200 billion ($57 million) but accumulated losses were VND534 billion ($25.4 million), accounting for 44.5 per cent of charter capital. MBS believed it would probably take about five years for the company to clear the losses. It would also mean that all profits generated over the next five years would have to be used to cover the loss and shareholders shouldn’t expect a dividend during that time.

In previous years and, indeed, after 2011, MBS operated profitably. Though it’s still to post figures for all of 2013, its turnover in the first nine months reached VND197 billion ($9.3 million) with profits at VND16 billion ($761,904). What MBS failed to fully anticipate, analysts believe, was the market situation and the company’s prudent business approach may make its target of cutting losses harder to achieve. What’s also worth mentioning is that MBS’s aim of going public in the future is now under threat, given the requirement that a company can only offer initial shares to the public via an IPO if it doesn’t hold accumulated losses.

Several reasons have been put forward for the accumulated losses in its balance sheet. Market difficulties are often mentioned first. Given the market’s gloomy situation over the last few years, MBS as well as other securities companies have incurred major losses from investment and financial activities. Still, there is a belief among insiders that MBS must shoulder part of the blame for its failure. “MBS was overambitious in targeting top place in the brokerage market when its risk management wasn’t good enough. It had to pay a price for its ambition,” said Ms Cao Thuy Nga, Deputy General Director of Military Bank, the biggest shareholder in MBS, with a 65 per cent stake.

Meanwhile, VITS, a member of the VIT Group, whose activities include property, financial investment, and communications, faced a similar problem as MBS, with accumulated losses as at June last year reported at VND34.6 billion ($1.6 billion), or 53 per cent of its charter capital. Without a capital injection it would have undoubtedly been difficult for it to turn things around.

There is a lot to be asked about the merger. From a financial perspective, the first question is whether a merger with an inferior company, with chartered capital of just VND46 billion ($2.1 million), is beneficial to MBS, whose charter capital stands at $57 million. Leaders at large securities companies normally hold the view that mergers with a weaker partner fail to add much in the way of value. There can only be one reason MBS agreed to the merger: it represents an opportunity to write off the losses incurred in previous years and thus receive a “clean” financial report.

If this is the case, it seems that MBS scored an important goal by getting VITS to complete the merger. Many analysts have said that the deal gives the former a critical advantage considering the low financial risk of VITS, not to mention the latter’s small operational scale making the merger easier. “It won’t take a lot of time for MBS to sort things out after the merger,” commented one leader at Bao Viet Securities who preferred to remain anonymous.

The merger process went smoothly. First, MBS and VITS gathered together to review their total assets and decided to reduce the charter capital to write off accumulated losses. The charter capital of the new MBS is just $29.5 million, but its losses have also vanished in the financial statement. “Now, as MBS gets rid off all of its accumulated losses, it will be easier for the company to generate profits and pay dividends to shareholders in the near future,” said Ms Nga.

Since 2012 a lot of securities companies have restructured their activities, focusing on narrowing their operational scale. Capital restructuring has also been applied by companies to ease the borrowing burden,