Important things to know about the merger and acquisition

 

Mergers and acquisitions (M&A) drive business growth, enhance competitiveness, and unlock new resources. However, legal, financial, and governance risks demand careful navigation. This guide explains M&A, its processes, benefits, risks, and critical considerations

 Article content

• 1. What is Mergers and Acquisitions (M&A)? - The Big Picture for Sellers

• 2. Mergers and Acquisitions (M&A) Process

• 3. Legal and Preparatory Aspects of Mergers and Acquisitions (M&A) in Vietnam

• 4. Dossier & Data to Prepare Before Finding an Investor

• 5. M&A: The Attractive Benefits and Hidden Risks

• 6. The Role of an M&A Advisor: Is It Really Necessary?

• 7. FAQs

• Conclusion

1. What is Mergers and Acquisitions (M&A)? - The Big Picture for Sellers

M&A involves combining or transferring company ownership to achieve strategic goals.

• Merger: Two firms unite into one entity, sharing resources and control.

• Acquisition: One company buys a majority stake or assets of another, gaining control.

Goals include market expansion, cost optimization, or competitive advantage.

1.1 Common Forms of M&A - More Than Just "Acquisition" or "Merger"

M&A comes in various forms, classified based on the relationship between the companies or their strategic objectives. The main types include:

Horizontal Merger:

• Occurs between two companies in the same industry, typically competitors.

• Objective: To increase scale, reduce competition, and optimize costs.

Vertical Merger:

• Occurs between companies at different stages of the supply chain.

• Objective: To control the supply chain and reduce intermediate costs.

Conglomerate Merger:

• Occurs between companies in unrelated industries.

• Objective: To diversify the investment portfolio and mitigate risk.

Acquisition:

• One company purchases a majority of the shares or assets of another.

• Can be friendly (with mutual consent) or hostile (without the target company's agreement).

Reverse Merger:

• A private company merges into a publicly-traded company to go public without an IPO.

• Objective: To save time and listing costs.

1.2 Business Valuation Methods - What Does the Sale Price Depend On?

• Discounted Cash Flow (DCF): Forecasts future cash flows, discounted to present value.

• Net Asset Value (NAV): Assets minus liabilities, based on market or liquidation value.

• Market Comparison: Benchmarks similar deals for competitive pricing.

Additionally, when conducting a valuation, businesses also need to consider influencing factors such as:

• Value Boosters: Strong brands, loyal customers, stable growth.

• Value Reducers: High debt, legal disputes, founder dependency.

1.3 Common Mistakes That Lead to a Lower-Than-Expected Sale Price - Do Businesses Know This Yet?

Businesses often make several mistakes that lead to a valuation that is not as high as they had hoped, including:

• Undervaluing Intangibles: Overlooking brand, technology, or talent.

• Opaque Finances: Unclear reports or unaudited revenue erode buyer trust.

• Poor Documentation: Incomplete data rooms weaken growth potential perception.

• Weak Negotiation: Failing to highlight unique advantages lowers offers.

• Market Misjudgment: Ignoring industry trends or demand undercuts positioning.

2. Mergers and Acquisitions (M&A) Process

PHASE 1: Pre-M&A Preparation

Objective: To prepare a comprehensive strategy, documentation, team, and data before negotiations.

Step 1: Define Strategic Objectives & Market Research

• Determine the reason for M&A: market expansion, technology access, divestment, etc.

• Analyze the industry, competitors, and market to find a suitable target.

• Assess the potential for strategic and cultural integration between the parties.

Step 2: Internal Preparation

• Legal review: ownership, licenses, major contracts.

• Financial review: cash flow, tax reports, accounts payable.

• Operational & HR review: systems, key personnel, operational capacity.

Step 3: Build a Consulting Team & Financial Plan

• Establish an M&A team: including lawyers, financial advisors, and strategic experts.

• Determine capital sources (self-funded, loans, fundraising).

• Estimate M&A transaction costs: audit, legal, advisory fees, etc.

Step 4: Prepare the Business Introduction Dossier (Teaser & CIM)

• Draft the Teaser (summary introduction) and CIM (Confidential Information Memorandum).

• Clearly present the business model, financials, team, and growth opportunities.

• Note: Only share after the investor signs an NDA.

PHASE 2: M&A Execution

Objective: To approach, negotiate, conduct due diligence, sign, and transfer systematically.

Step 5: Approach and Screen Investors

• Search for suitable partners (strategic, financial, domestic/foreign).

• Sign an NDA before providing detailed information.

• Evaluate suitability through initial contact.

Step 6: Negotiate Preliminary Terms (LOI – Letter of Intent)

• Issue a preliminary investment intent (not fully legally binding).

• Includes: expected price, control rights, timeline, conditions.

• Establishes the framework for entering the due diligence phase.

Step 7: Due Diligence

The buyer performs a comprehensive review of:

• Legal: licenses, ownership, contracts

• Financial: revenue, costs, tax debts

• Operational: capacity, systems

• Human Resources: labor, compensation, turnover risks

• Customers & Potential Risks

This is conducted by a team of lawyers and independent auditors.

Step 8: Business Valuation

• Apply methods: DCF, NAV, market comparables.

• Account for tangible and intangible assets (brand, customers, IP...).

• The result helps in negotiating an accurate, reasonable price.

Step 9: Negotiate the Detailed Agreement (SPA)

Draft the Sale and Purchase Agreement (SPA):

• Price, payment method

• Debt obligations, legal liabilities

• Post-merger support commitments

• Non-compete, confidentiality, and transfer KPIs

A legal team must carefully review each clause.

Step 10: Sign the Contract & Execute the Transfer

• Obtain approval from the Board of Members (LLC) or General Meeting of Shareholders (JSC).

• Execute procedures: money transfer, asset handover, operational updates.

• Finalize the SPA and legally transfer ownership.

PHASE 3: Post-M&A Integration

Objective: To integrate and stabilize the business post-transaction.

Step 11: Register Legal Information Changes

• Update information with the Department of Planning and Investment: shareholders, members, capital, business lines, etc.

• Capital transfers must be notarized or legalized according to regulations.

• Adjust related licenses as needed (fire safety, environment, etc.).

Step 12: Post-M&A Management and Restructuring

Address cultural, HR, and internal policy conflicts.

• Retain talent, communicate internally, and stabilize employee morale.

• Restructure operating systems, KPIs, products, and management.

Implement the strategic integration and post-M&A growth plan.

Clarify the seller's role: continue operations, transfer, or gradually divest.

3. Legal and Preparatory Aspects of Mergers and Acquisitions (M&A) in Vietnam

3.1 Authority to Sell

• Owner: Sole authority in private enterprises or single-member LLCs.

• Major Shareholders: Holders of over 51% shares in joint-stock companies.

• Board of Directors: Authorized if permitted by company charter.

3.2 Legal Due Diligence:

• Disputes: Review labor, contract, or tax-related litigation.

• Intellectual Property: Verify legal ownership, ensure no disputes.

• Long-term Contracts: Check for transfer or control change restrictions.

3.3 Key Clauses to Note:

• Mandatory Divestment: Investors may demand share repurchase if targets are unmet.

• Non-compete Clauses: Restrict owners from starting similar businesses in specified timeframes or regions.

• Management Transfer: May require changes in leadership or control.

3.4 M&A Regulations in Vietnam Businesses Need to Know

M&A is governed by the Enterprise Law 2020 and Competition Law 2018, varying by entity type: private, LLC, or joint-stock.

• Private Enterprises: Owners can fully transfer (sell) assets, debts, and obligations (Article 192).

• Process: Negotiate contract, register ownership change within 10 days, complete transfer.

• Note: No legal entity status, straightforward process.

• Limited Liability Companies (LLCs): M&A via capital contribution transfer (Article 52).

• Process: Sign contract (notarized if required), notify members (15 days), hold Member Council meeting, register within 10 days.

• Note: Respect members’ priority purchase rights.

• Joint-Stock Companies: M&A via share transfer (Article 127).

• Process: Sign contract, draft transfer minutes, hold shareholder meeting, register within 10 days.

• Note: Deals exceeding 35% market share require National Competition Commission approval.

4. Dossier & Data to Prepare Before Finding an Investor

To attract investors, businesses need to prepare a professional data room:

• Financial Statements (past 3 years): Transparent profit, cash flow, and financial health. Audited reports enhance credibility.

• Contracts (labor, sales, leases): Clarify legal commitments with employees, partners, and lessors.

• Business Licenses and IP: Prove legal compliance and intellectual property ownership (patents, trademarks).

• Tax and Debt Reports: Disclose tax obligations and liabilities for risk assessment.

• Business Model Overview: Detail products, services, target market, growth strategy, and competitive edge.

Key Considerations

• NDA (Non-Disclosure Agreement): Require investors to sign before sharing sensitive data to protect business information.

• Standardized Documentation: Present clear, concise, and consistent materials to impress investors.

5. M&A: The Attractive Benefits and Hidden Risks

5.1 Key Benefits

Mergers and acquisitions (M&A) drive strategic growth and competitive advantage.

• Market Expansion: Access new markets, customers, or regions swiftly, saving time and costs.

• Economies of Scale: Consolidate operations, optimize supply chains, and boost supplier negotiations.

• Portfolio Diversification: Acquire technologies, patents, or services to mitigate risk.

• Financial Strength: Enhance cash flow, secure loans, and share financial risks.

• Talent Acquisition: Gain expertise, innovative technologies, or valuable brands.

• Shareholder Value: Increase revenue, profits, and stock value, strengthening global presence.

M&A empowers small firms to scale quickly and large firms to innovate.

5.2 Risks of M&A

M&A involves challenges requiring careful management:

• Cultural Clashes: Differing corporate cultures or management styles may disrupt teamwork.

• Financial Risks: Overvaluation, hidden debts, or unmet synergies cause losses.

• Due Diligence Gaps: Overlooked legal, financial, or operational issues, like disputes or tax liabilities.

• Talent Loss: Key employees may leave, disrupting operations.

• Legal Hurdles: Antitrust regulations or disputes can delay or derail deals.

• Integration Challenges: Merging IT systems, processes, or supply chains is costly and complex.

6. The Role of an M&A Advisor: Is It Really Necessary?

Advisors are critical for strategic, legal, and negotiation success in M&A.

Strategic Advisory

• Planning: Identify targets, align with business goals, and strategize market or product expansion.

• Valuation: Use DCF or comparable multiples to ensure fair pricing.

• Post-M&A Integration: Guide operational, cultural, and resource alignment for seamless synergy.

Legal Advisory

• Due Diligence: Review contracts, IP, and compliance to uncover risks.

• Transaction Structure: Design deals (e.g., share or asset purchases) and draft compliant contracts.

• Regulatory Approvals: Expedite filings and negotiations with authorities.

Negotiation Support

• Effective Bargaining: Mediate balanced terms for price, payment, and control.

• Conflict Resolution: Address disputes using data-driven insights.

• Deal Closure: Oversee signing and transfer to ensure commitments are met.

Negotiation Tips

• Focus beyond price—negotiate payment terms, control, and timelines.

• Beware earn-out models to avoid KPI pressures.

• Leverage core strengths for confident negotiations.

Inmergers offers end-to-end M&A support, from strategy to execution, minimizing risks and maximizing value.

7. FAQs

7.1 Why do many M&A deals in Vietnam fail despite seeming mutually beneficial?

Many M&A deals collapse due to overemphasis on financial terms, neglecting human factors and long-term strategy. Cultural clashes, lack of leadership alignment, and unclear restructuring plans undermine initial goals. Misvaluation or unaddressed legal and financial risks also contribute to failures, despite promising contracts.

7.2 How is M&A different from a joint venture?

A joint venture involves collaboration on a shared project, retaining independent entities, offering flexibility but slower growth. M&A (merger/acquisition) entails full control or consolidation, enabling rapid scale-up but risking cultural, legal, and operational conflicts. Joint ventures suit temporary partnerships; M&A targets long-term strategic goals.

7.3 Do small businesses need professional M&A consultants?

Small firms often lack expertise in valuation, negotiation, legal compliance, and tax optimization. Professional consultants, like Inmergers, streamline M&A, minimizing risks. If budgets are tight, a transaction lawyer is essential for drafting contracts and ensuring legal accuracy to prevent disputes.

7.4 Which M&A types suit different business stages?

For startups/scale-ups, acqui-hire or technology-focused M&A secures talent and intellectual property. During growth, horizontal (same industry) or vertical (supply chain) M&A boosts market share and efficiency. For diversification, conglomerate M&A expands offerings but risks operational and cultural misalignment. Choices depend on strategic goals and resources.

7.5 What KPIs should measure M&A success in 6–24 months?

Success hinges on synergy (revenue growth, cost savings), ROIC, key employee retention, customer churn rate, internal NPS, and post-merger integration (PMI) progress. These metrics gauge financial, operational, and organizational stability, reflecting deal success.

7.6 What are the differences between M&A in private enterprises vs state-owned enterprises after equitization?

Private firms enjoy flexible, transparent M&A but rely on owner decisions. Post-privatized state enterprises face complex regulations, approval processes, and obligations (labor, land, public assets). Private M&A is negotiable; state-backed deals risk delays and disputes due to political and shareholder interests.

7.7 Which risks cause early M&A failure: legal, financial, operational, or cultural?

Risks include legal (contracts, compliance), financial (misvaluation, debt), operational (unsynced processes), and cultural (staff/leadership conflicts). Cultural and operational issues trigger early failures, causing internal disputes, talent loss, and disruptions, leading to financial setbacks. Legal risks emerge later but can be costly if unresolved.

Conclusion

M&A is a strategic tool that helps businesses grow rapidly, but it also presents numerous challenges when there is a lack of preparation regarding legal, valuation, and post-merger management.

For this process to be effective, businesses should seek support from professional mergers and acquisitions (M&A) advisors. As a reliable bridge, Inmergers provides comprehensive advisory solutions, helping businesses build strategies, control risks, and enhance value in every M&A deal. This is the key for businesses to not only succeed in the transaction but also to break through strongly after the merger.

Link: https://inmergers.com/en/things-you-need-to-know-about-mergers-and-acquisitions

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