Acquisitions: a back-door market entry?

Acquiring an existing company is an increasingly attractive investment option for both foreign and domestic investors seeking to increase market share quickly.

ANCO Joint Stock Co, a domestic food and beverage maker, acquired a Nestle milk plant in the town of Ba Vi in Ha Tay Province. The acquisition includes a license to use the Nestle brand name for one year on fresh milk and yogurt products produced by the plant.

Asia Pacific Breweries Ltd, a Singapore-invested firm that owns Viet Nam Brewery Ltd (VBL), similarly expanded its capacity recently by acquiring an 80-per-cent interest in Quang Nam VBL Ltd, while Viettel bypassed the need to develop an outlet network by acquiring Nettra's.

There are a variety of factors that push one company to purchase another. Some takeovers are opportunistic and encouraged by the target company's reasonable price. Or the acquiring company expects to increase its bottom line with the acquisition of the target company.

Other takeovers are considered strategic for the acquiring company to enter into a new market without undue risk or the time and expenses needed to start a new business. The acquiring company may also aim to eliminate or reduce competition.

For the time being, acquisitions also may be the only practical means of doing business in a number of sectors. For example, the Law on Real Estate Transactions, enacted on June 29, 2006, places condition on legal capital with regard to entities wishing to operate in this sector, but the level of legal capital has not been specified. In the meantime, the registration of all real estate businesses are being held up, pending the issuance of a guiding regulation.

A few clever investors, however, have found a way to jump over this obstacle by acquiring an existing company already registered to conduct business in this sector.

Procedures for acquiring a company are specified in the Law on Competition of 2004, Decree No 116/2005/ND-CP of September 15, 2005, and Article 56 of Decree No 108/2006/ND-CP of September 22, 2006, which details and guides implementation of the Law on Investment.

The availability of acquisitions as a doorway into some markets or lines of business has, in turn, spurred the growth of business consulting and auditing services, as well as specialised transaction floors in which companies can offer themselves up for sale via professional brokers.

Established mergers and acquisitions (M&A) law in other countries classifies acquisitions into two types: share purchases, under which the target company itself is acquired, and asset purchases, under which assets of the target company are acquired but not the target company itself.

The laws of Vietnam on M&A, however, are not yet perfected, and even the definition of an acquisition is vague. Article 17.3 of the Law on Competition comes closest, stating: "Acquisition of enterprises refers to an act whereby an enterprise acquires the whole or part of property of another enterprise sufficient to control or dominate all or one of the trades of the acquired enterprise."

Decree No 116/2005/ND-CP defines control or domination to mean that the acquiring company holds more than 50% of voting rights at the general shareholders meeting or on the board of management or otherwise per the charter of the acquired company can control or dominate the financial policies and operations of the acquired company. The law, in other words, has heretofore been silent on the issue of acquisition by means of asset purchase.

Decree No 108/2006/ND-CP sets out some procedures for a foreign investor to obtain official approval of an acquisition. However, the' relationship of this approval process to procedures for obtaining an investment licence are ambiguous.

Whether it can be understood that the procedures to be followed will be those for amending an investment licence isn't entirely clear, however, so some foreign investors may run into a wall when authorised State or local authorities delay approvals of acquisitions while they await guidelines.

Acquisition deals may also be examined with respect to competition rules regarding monopolies or economic concentrations, a process that may be hampered or delayed due to the lack of official data on the market and the market share of enterprises.