Mr. Stephen Gaskill, Deputy General Director, and Mr. Nguyen Luong Hien, Associate Director, Deals - Strategy, at PwC Vietnam take a closer look at M&A activities between Vietnam and Japan.
Vietnam has been an attractive destination for foreign investors since the country began opening up its economy in the late 1980s. Japan is currently the second-largest contributor of foreign direct investment (FDI) to Vietnam, ahead of other significant investors such as Singapore, Taiwan, Malaysia, and the US, with $37.7 billion in total registered investment capital as at June 2015 and has also been highly active in the field of merger and acquisitions (M&As).
Vietnam has been a strategic market for Japanese companies investing overseas for some time due to its close geographic proximity, low labor costs, abundant workforce, its openness to investment by Japanese companies, and the positive government-to-government relationship that exists between the two countries.
Vietnam has been an investor-friendly country since the mid-1990s and has remained open to foreign investment, particularly from Japan, which is seen by the Vietnamese Government and domestic companies as a high quality, long-term investor. This combination of factors has led to high ongoing levels of Japanese FDI and M&A, the latter becoming an increasingly common route by which Japanese companies have entered the Vietnamese market, especially since 2007.
Attractive segments for M&A
From 2011 to 2015 Japanese investors conducted nearly 70 M&A deals in a wide range of industries in Vietnam. Although Japanese M&A experienced a slow down following a peak in 2012, the first half of 2015 has seen strong signs of recovery, already reaching 75 per cent of the total volume of deals announced in all of 2014 and is indicative of Japanese investors’ long-term confidence and commitment to doing business in Vietnam at the current time.
One of the reasons for the high levels of Japanese M&A is that many Japanese companies, particularly large trading houses and other conglomerates with subsidiaries involved in a diverse range of businesses, will invest in almost any sector of the Vietnamese economy, including power, oil & gas, manufacturing, retail, financial services, and agriculture. There are several factors driving this diverse range of sectors chosen for acquisitions.
Some investors want to tap into Vietnam’s low-cost manufacturing base (especially where there are investment incentives to do so), while others are looking to move manufacturing away from China, where labor is becoming more expensive and where there are geopolitical risks. Some Japanese investors want to tap into Vietnam’s large, growing population as a market and to benefit from consumer trends that are still developing at a rapid pace as the economy matures and becomes more open. This is especially enticing for Japanese companies facing a domestic consumer market that is mature and a population that is shrinking and rapidly ageing. Many Japanese corporates are also sitting on significant cash piles and have little option but to invest overseas if they are to get a return on these funds given the extremely low interest rates and limited economic growth in Japan.
One factor that differentiates Japanese investors entering into Vietnam via M&A is that they are very flexible on deal terms. Many are willing to take minority stakes because they are very long-term investors who intend to take incremental steps as they form strategic partnerships with Vietnamese companies. Having minority stakes also allows investors to develop their understanding of the market over time without taking as big of a risk in the short term.
Japanese investors have been focusing on Vietnam’s rapidly-growing financial services sector for some time, encouraged by Vietnamese institutions that are looking for strategic foreign investors to support them in improving the performance of their businesses and providing much-needed injections of capital to strengthen their balance sheets. One such example of a successful transaction was Tokyo Mitsubishi UFJ’s purchase of 20 per cent of Vietinbank’s shares in December 2012 in a deal worth $743 million. Another successful deal occurred in 2011, when Mizuho made a $560 million investment in Vietcombank, acquiring 15 per cent of the bank’s shares. These deals not only increased the charter capital of these financial institutions but also gave them access to expertise in banking from a highly-developed economy. Vietnam still has a lot of room to grow in terms of its banking sector as it currently has a large unbanked population compared to neighboring countries like Thailand and Malaysia, making it an extremely attractive ongoing investment destination for J