Merger trends with subsidiaries flourishing

After racing to establish subsidiaries with a series of legitimate reasons, many companies now are giving compelling reasons to merge subsidiaries into parent companies.

PVD Invest (PVDI), a joint venture company, established in 2007 with 51 percent stake held by PetroVietnam Drilling and Well Services Corp (PVD), specialises in investing and leasing drilling rig and technical equipments. By the end of 2009, PVD merged with PVDI.

Similarly, at the start of 2007, Hoa Sen Construction Materials Joint Stock Co and Hoa Sen Construction and Mechanics Joint Stock Co were established and then merged into its parent company namely Hoa Sen Group Joint Stock Co (HSG) by the end of 2007.

While offshoots of Kinh Do Joint Stock Co (KDC) were preparing to merge in 2003, Kido Co was established in HCM City to produce and trade foodstuff and drinks, of which KDC holds 28.33 percent stake. In 1999, North Kinh Do Co (NKD), 100 percent stake held by KDC, was also set up in the northern province of Hung Yen to develop the market in the north.

According to Tran Cong Thanh and Vu Anh Dung (Hanoi National University), the success ratio of Mergers and Acquisitions (M&A) is still low. Many deals have not reached resonant value as expected and have not brought value for shareholders.

A survey made by KPMG in 2003 showed that 70 percent of M&A deals failed.
Currently, all companies said that M&A is necessary to increase competitive capacity and market share and reduce costs such as production, marketing, finance costs and investment costs for information system.

Nguyen Van Thuan, head of the HCM City Open University’s Finance-Accounting-Banking Department, said previously many companies raced to open subsidiaries and joint venture to enjoy tax incentives like corporate income tax (CIT) and other preferences on renting land. Till now, when the time for tax reduction and exemption and other expenditures is over, it seems that the role of subsidiaries also ends.

Additionally, the competitive pressure on expanding production capacity and restructuring administration mechanism to reduce spending leads to the M&A tendency with subsidiaries.

Besides, M&A deals also cause impacts on share price in the stock market.

After hearing information about the merger between Kinh Bac Urban Development Corp (KBC) and Saigon Telecommunication and Technologies Joint Stock Co (SGT), the price of SGT-coded shares increased continuously for one week with a rise of 27 percent (from 23,100 dong per share on April 26 to 29,500 dong per share on May 6) although the conversion ratio between these two shares have not been revealed yet.

A stock specialist from HCM City said that enterprises want to merge subsidiaries into parent companies for trade name reason of parent companies whereby the share price of offshoots will also increase.

As for unlisted firms, merging into parent companies will help them increase their share value when going public.

In addition, shareholders of subsidiaries will also earn higher benefits.
Trinh Viet Cuong, Asiavantage Global Co’s investment director, said that M&A between subsidiaries with parent companies will be good if these subsidiaries are operating with profits otherwise if these offshoots are facing losses in business, it’s necessary to reconsider and be cautious when taking M&A.

Thanhnien

Tags: Vietnam M&A