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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, but this method cannot turn things around quickly. For companies with huge accumulated losses such as MBS, what they want, first and foremost, is to clear their losses. So it is not surprising that they see benefit in merging with another securities company to create a new single entity with a ‘clean’ financial statement.

While admitting that combining two weak companies may not always result in one that is strong, Mr Luu Trung Thai, Chairman of MBS, is still fully behind the merger. More so than anyone else, he understands that a “clean” financial statement at this time has become important to MBS’s ambitions. It has been two years since Mr Thai became chairman and the company has focused most of its efforts on brokerage and investment banking services. Although MBS delivers business restructuring services to others, the company has found itself under pressure from its accumulated losses. “The losses won’t allow MBS to build a reputation among customers and it will be hard for them to attract foreign strategic investors,” said the leader from Bao Viet Securities. “A merger like this is the best way for MBS to achieve a ‘clean’ financial statement, which is the only thing that can convince shareholders and customers.”

The merger announced last month does more than merely that. It is one step towards MBS’s long-term goal of going public. “After the merger MBS’s shares were valued higher and liquidity has improved, paving the way for us to find a foreign strategic investor to go public in the next one or two years,” said Mr Thai.

Wave of M&As expected

The majority of securities companies registered on the Hanoi and Ho Chi Minh City bourses have had problems over recent years. They have reportedly incurred major losses and some have been on the verge of bankruptcy, posing a threat to the system as a whole. The restructuring process, therefore, was enhanced during 2013 with a series of securities companies and fund management companies closing their operations, having their licences revoked, or being placed under special control.

Official figures from SSC show that as the end of 2013 there were 100 securities companies in Vietnam, of which three were about to have their licenses revoked, two had been forced to temporarily cease operations, and around 70 per cent had accumulated losses. It is clear that Vietnam simply has too many smaller brokerages that can’t compete in the market. This is why the first-ever merger of securities companies in Vietnam, which had the backing of the SSC, will be a trigger for much-needed industry consolidation.

Analysts believe that the merger between MBS and VITS may kick-off an M&A wave between securities companies in 2014, paving the way for authorities to push the restructuring process. “If M&A activity does pick up it is likely to involve the kind of loss cutting deals seen in this case,” predicted Mr Vu Bang, Chairman of the SSC. Considering the fact that nearly 70 per cent of securities companies in Vietnam have accumulated losses, restructuring via M&A could be a genuine solution for both companies and regulators. “Getting rid of accumulated losses by mergers between securities companies is a sound method,” said Mr Bang. “It is also in line with the policy of the SCC of restructuring securities companies via M&A activities.”

But Mr Quach Manh Hao, Member of the Board of Directors at MBS, holds a pretty cautious view. He was quoted as saying that “M&A may not be a trend in the market during 2014. What I see this year is that more and more companies will quit the market. Like MBS and VITS, some companies will choose to merge to form new companies with a new financial platform.”

Despite being mentioned a lot in the past, M&A activities between local securities companies are yet to take off. The reluctance and resistance of these companies can be partly explained by the Oriental culture. Typically, securities companies have their own way of doing business, and the ego of some company leaders makes them reluctant to merge with others. But facing the risk of bankruptcy is hardly a great prospect either, so they may have to compromise a little and more deals should be on the way.

Mr Luu Trung Thai, Chairman of MBS, spoke about the company’s operations post-merger and M& A trends in 2014.


What strategies are in place for the new MBS?

It is true that the two companies have a history of development and have certain positions in the market. With merger plan approved, the expectations of the Board of Directors and shareholders is to direct MBS towards sustainable and efficient development. We target becoming a securities company with customer friendly policies, a large network, diverse communication channels and professional consultancy services. This strategy will be thoroughly implemented from now to 2015 with the objective of maintaining and increasing our brokerage market share so that we will be in the Top 3.

The most important thing is that MBS is a new company with a healthier financial structure. We will increase our charter capital to $57 million this year, thanks to the support of MB Bank and shareholders.

What comment would you like to make on the M&A trend between local securities companies in the time to come?

The successful merger of MBS and VITS will open up a new direction for the restructuring process of securities companies, especially for those with similar financial status as MBS. By doing this they can save a lot of time in making their financial situation healthier or improving their scale. Merging is a feasible alternative and is backed by regulators.


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