Passport to Vietnam

Inbound investment trends and tips

H CHIU

The state of M&A:

Vietnam is not an easy place to do business. The rules are always changing, the laws are murky and the government often makes arbitrary decisions. A lot of clients say that Vietnam is 1 percent of their Asia business but 99 percent of their headaches, says Fred Burke, an M&A partner inBaker& McKenzies Ho Chi Minh City ofce. Yet theres no denying that Vietnams growing consumer market, educated workforce, cheap labor costs, high GDP growth rate and booming tourism industry have made the country an attractive destination for foreign investment. In 2011 and 2012, M&A inbound investment in Vietnam rose to nearly US$2 billion each year, up from an average of $400 million in previous years, according to Thomson Reuters. Many deals involve sellers trying to raise capital for their struggling businesses or to pay off debts on investments they can no longer afford following the global economic crisis and the recent crackdown on nonperforming loans (NPLs). Other M&A activity is driven by foreign multinationals trying to break into the Vietnam market or private equity rms taking advantage of bargain prices in sectors like real estate and consumer products. Six months before the global economic crash in 2008, Prime Minister Nguyen Tan Dung started to tighten up Vietnams credit policy, which enabled the countrys banking system to remain capitalized and avoid a situation as dire as the 1997 Asian Financial Crisis. But banks are still working out bad loans and large state-owned companies have suffered major losses. In September 2012, Moodys downgraded Vietnams bond rating one level to B2, ve steps below investment grade. The recent economic trouble has sparked attacks on Prime Minister Dung by President Truong Tan Sang, who claims that Dungs mismanagement of state-owned rms and push for rapid growth is the cause of Vietnams slump. Sparring between the political factions appears to be settling down, but has diverted attention from the governments efforts to move forward with economic reform. Vietnam has been in talks to join the Trans-Pacic Partnership, which would create a free trade zone similar to NAFTA among Vietnam and Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Mexico and Canada. The agreement would not only reduce tariffs on trade, but set binding rules on things like service-sector regulation, patents and copyrights and government procurement, as well as provide foreign investors with recourse in cases of expropriation. The power struggle at the top of the government has left it with little time for working on foreign investment projects, but we hope this will stabilize soon and the economy will get back on a higher growth track, Burke says. We have so many small businesses that are growing and need foreign capital and expertise. Globalization is still in growth mode here.

Biggest investment opportunities:

Population: 91 million GDP growth: 5% (2012) 5.9% (2011) 6.8% (2010) Average deal size: US$20 - 35 million Major players: Foreign multinationals andprivate equity rms Ease of doing business ranking: 99 (out of 185 countries) Corruption ranking: 123 (out of 174 countries)
Sources: World Bank, Transparency International

1. Real estate In the run up to the global economic crisis, many real estate developers took on too much debt and are now selling parts of their portfolios to repay those commitments. The glut of vacant hotel rooms and ofce and retail space has led to a spike in M&A activity as local authorities have become more accommodating to workouts and foreign investors have taken advantage of bargain prices. 2. Seafood Fish and shrimp are some of Vietnams largest exports, particularly to the US and Japan. Vietnams seafood industry is comprised of small family-owned businesses that have recently been struggling nancially, drawing attention from foreign private equity rms eager to streamline their operations and capitalize on Vietnams abundant sea life. 3. Supermarkets Grocery stores didnt exist in Vietnam 15 years ago, when wet markets and Mom-andPop shops dominated the sector. But a recent boom in consumer spending has drawn large foreign-owned supermarkets like Metro (Germany), Big C (France) and Lotte Mart (South Korea) to Vietnams major cities. 4. Financial services Starting in 2007, the Vietnamese government opened the nancial services industry to allow up to 20 percent foreign ownership of local banks, attracting investors from Japan, Australia, Europe and the US. Until recently, nancial services drew more foreign investment than any other sector. Now that most Vietnamese banks already have 20 percent foreign ownership and the global economic crisis has taken its toll, deal making has slowed. But the government is considering increasing the cap, which would open up the sector to a new wave of investment. 5. Others Electronics and medical equipment manufacturing, retail, consumer products (especially food, beerand cosmetics)

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Passport to Vietnam

Greatest challenges for foreign investors:

1. Bureaucracy In Vietnam, decisions are made by consensus. Getting a business license requires multiple approvals by ministry ofcials who must be convinced that the enterprise will benet the local economy before putting their chops (stamp) on the papers. If you want an export manufacturing license so you can make industry staples like footwear, clothing or furniture for export, you can get it in a few days, Burke says. But if youre trying to compete with local companies to sell cosmetics, it can take up to 15 months because it has to be approved by a lot of ministries and its all done by snail mail. 2. Restricted markets After Vietnam joined the WTO in 2007, it opened much of the market to foreign investment. But some industries, such as the service sector, remain highly regulated and in some cases, closed. Foreign retailers, for example, are subject to an economic needs test, which gives authorities the power to reject their applications to expand beyond one store. Its a rule that has made large foreign retailers wary of entering Vietnam. Pharmaceuticals is an even harder industry to break into. Foreign drug companies cant sell their products directly to the market, but must go through local distributors. If youre trying to compete in an industry like health care where most of the local players are government owned, theres bound to be barriers, Burke says. 3. Non-compliance with nancial reporting requirements and anti-bribery laws Some Vietnamese companies fail to keep proper nancial records and try to dodge corporate taxes. Others have cozy relationships with government customers or suppliers. Both scenarios create risks for foreign investors who must comply with strict nancial reporting requirements and anti-corruption laws like Sarbanes-Oxley and the FCPA. 4. Unchartered legal territory Following enactment of the Enterprise Law in 2007, Vietnamese companies with more than 100 shareholders became public companies, subjecting them to strict disclosure requirements and corporate governance rules. Many smaller companies that didnt have the means to comply with these requirements became public without planning to. In what would otherwise have been simple private transactions, several smaller companies found themselves among the rst to try to manage a tender offer to take themselves private before they could accept much needed foreign capital from private equity rms. There was no guidance on how to do a tender offer because nobody had ever done one before, Burke says. We had to collaborate with the government towork out the details. 5. Language barriers All M&A documents must be translated into Vietnamese, a requirement that many foreign investors overlook in the heat of negotiations. Failing to account for this step in the process can delay closing a deal for one to two months while waiting for the translation and then renegotiating terms that the local party may not have clearly understood the rst time around.

Its amazing to see how much Vietnam has changed in 10 years, how quickly its become part of the world community.
Fred Burke M&A partner Ho Chi Minh City

Tips for increasing chances of M&A success:

1. Resist the temptation to operate under the wrong license Because its more difcult to get some types of business licenses than others, foreign investors can let local consultants convince them to operate under an incorrect license because, Its how we do things in Vietnam. But problems arise when, for example, foreign companies operate a retail business with a wholesale license, running the risk of the government shutting them down until they get the proper license. It may not seem likeaproblem if the business issmall, but as it grows, it is at greater risk of detection. Acompetitor that has the proper license could report the violation to put you out of business. Andtheres no guarantee that the government will be open to working out a compromise. 2. Become familiar with Vietnams WTO commitments Because the government restricts access to certain markets, the rst thing you need to do before establishing a commercial presence in Vietnam is cross reference its WTO commitments with the relevant central product classication (CPC) codes to make sure its a sector theyve opened. You will also need to understand how Vietnams administrators interpret and implement these commitments to limit surprises as you operate your business. 3. Be strict about compliance Many foreign companies have learned the hard way that avoiding taxes and paying kickbacks is still part of Vietnams business culture. When taking over a Vietnamese workforce, youre more than likely to have employees who are engaged in these activities as a routine part of doing business. To avoid violating anti-bribery laws, its important to conduct thorough due diligence and make sober assessments about whether the business is even viable if the bad practices are cleaned up. Also, its not a given under Vietnams Labor Code that staff can be terminated for engaging in these practices. 4. Appeal to the ministries The courts in Vietnam are overwhelmed and under-resourced and judgments are hard to enforce. The best way to resolve business disputes is to appeal to the relevant ministry to pressure the parties to resolve the problem. Arbitration options are improving, but its still typically slower than supportive government intervention.

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Passport to Vietnam

Current trends
VIETNAM INBOUND DEALS
No. of deals
80 70 60 50 40 30 20 10 $0.5 $0.0 63 67 51 $1.5 $1.0 58 72

TARGET INDUSTRIES (BY DEAL VALUE 2008-2012)

Billions
$2.5 $2.0

Telecom Consumer Products 1% 3% Healthcare Industrials 1% 5% Real Estate 7% Materials 9% Media and Entertainment 11% Consumer Staples 13% Financials 27%

2008

2009

2010

2011

2012

Number of deals Total deal value US$

Energy and Power 23%

WHOS INVESTING IN VIETNAM (BY DEAL VALUE 2008-2012)

China 2% India 1% Russia 1%

WHOS INVESTING IN VIETNAM (BY DEAL VOLUME 2008-2012)

Indonesia 3% Other 29%

France 23%

Other 33%

Unknown 18%

Japan 15% United Kingdom 5% South Korea 6% Japan 18% Singapore 9% United States 10% United Kingdom 4% South Korea Singapore 4% Malaysia United States 14% 5% 7%

Source: Thomson Reuters

The road ahead

If Vietnams political situation stabilizes and the government can provide greater exibility and certainty for foreign investors, M&A activity will continue to rise.
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Passport to Vietnam