In the growing climate of global economic integration, mergers and acquisitions (M&A) have seen a rise in frequency. M&As serve to create new development opportunities for businesses, expand scale, and enhance the competitiveness of enterprises in the market. The potential generated from mergers and acquisitions can be significant, offering improvements in time, human resources, and optimal strategic planning, attracting the participation of businesses when developing new strategies and plans. Although most M&A transactions can bring several advantages to business operations, the process can also generate risk and limitations. As such, businesses will conduct deep evaluations before engaging in M&A activities. Under Vietnam’s current economic hardships, finding cash flow to continue operations is a top priority for businesses. M&As are often turned to by many businesses to supplement capital and restructure efforts.

Overview of Mergers and Acquisitions

M&A activities are not only a business strategy but also a driving force for innovation and sustainable development for businesses. They are one of the optimal methods for business operations in the current phase. The 2020 Law on Enterprise outlines five forms of reorganization in Clause 31, Article 4, including division, separation, consolidation, merger, or conversion of business type. Only the concepts of consolidation and merger are defined in Articles 200 and 201, without a definition for business acquisition. However, through these regulations, merger and acquisition activities can be summarized as follows:

Merger is the consolidation of independent enterprises into a single enterprise. It is the agreement between two or several businesses to share assets, market share, and branding to form a new enterprise with a new name, ending the existence of the old enterprises. Mergers are cooperative and open a trend of development on a larger scale.

Acquisition refers to one enterprise buying part or all of the shares of another enterprise, thereby fully controlling the acquired enterprise. It is the purchase or takeover of another business without forming a new legal entity. Acquisitions occur when the acquiring business gains control of the target business. This can be control of shares, business rights, or the target business’s assets. Acquisitions often happen in competitive and hostile transactions between enterprises and organizations. Business acquisitions are directly performed only for private enterprises. For other types of enterprises such as single-member limited liability companies, two-member limited liability companies, or joint-stock companies, acquisitions are performed indirectly through buying the owner’s capital contribution, member’s capital contribution, or shareholder’s shares.

Legally, business acquisitions and mergers are different, but their goals and outcomes are closely related. The shared goal of acquisitions, mergers, and consolidations is to create a new enterprise with a value much larger than the initial individual business value, while optimizing business operations. Attaining this through M&A has many advantages as it doesn’t require building the business from scratch, but many aspects need to be considered to minimize potential risks.

Mergers and Acquisitions – A Solution to Enhance Enterprise Strength

Practically, M&A has become an effective capital-raising channel, playing an important role in diversifying investment attraction channels, significantly contributing to the innovation of growth models, restructuring, and enhancing enterprise competitiveness in the market.

Opportunistic benefits of scale expansion. Mergers and acquisitions help enterprises penetrate new markets, expanding their distribution ranges, branches, transaction offices, and projects. These help not only in improving business efficiency, but also in building a low-risk investment portfolio. Larger-scale enterprises will have favorable position in negotiations with partners, expanding their marketing channels and distribution systems, and enhancing their position in the community. This all serves to provide a stable income, create more investor trust, and open up new business opportunities, allowing for easier investment redirection.

Improving financial resources. One of the standout benefits of M&A is the significant improvement in the enterprise’s financial strength. The ability to access new capital presents a strong financial base, which strengthens an enterprise’s competitiveness in the market. For businesses experiencing losses, recessions, or reduced competitive advantage, unable to adapt to the new business environment, M&A is a financial solution to avoid continuous losses, promote restructuring, create investment attraction channels, and bring good opportunities.

Enhancing technical technology levels. Investing in technology is the key to business success amid continuous technological renewal requirements. Through M&A, businesses can leverage each other’s technologies and techniques to create competitive advantages. Additionally, abundant capital from restructuring provides favorable conditions for enterprises to invest in and equip modern technologies for business and production activities.

 Screening personnel and reducing costs. Alongside capital, inadequate human resources in management knowledge and technology use are significant challenges. When businesses merge, actual job demands decrease, especially for indirect jobs. Therefore, it’s an opportunity to screen out ineffective positions, and the business will have the chance to acquire skilled, experienced, and more suitable labor. Improved human resources enhance and complete the business. For investors, M&A is an effective way to enter the market quickly without spending time searching for a project or handling administrative procedures. Moreover, M&A helps businesses save costs related to establishing a new business, creating a new market, and other arising expenses.

Popular Forms of Mergers and Acquisitions

 An M&A deal can be executed in many forms depending on the business sector and the needs of the buyer and seller. Generally, in Vietnam, there are two common M&A models, which can be combined in a single transaction: Purchasing part of the enterprise’s assets and purchasing shares or capital contributions of the target enterprise. The M&A forms are as follows:

Horizontal M&A. This is the acquisition and merger between businesses providing similar or identical products and services to end consumers. The companies, in this case, are usually direct competitors in the same industry and production stage. The benefit is the elimination of competition, helping increase market share, revenue, and profits.

Vertical M&A: This form is carried out to combine two companies within the same value chain, providing the same service but differing only in the production stages they operate. This type of M&A is typically performed to ensure the steady supply of essential goods, avoiding any supply chain disruptions. Additionally, it aims to reduce the supply available to competitors, thereby helping the business increase revenue and minimize unnecessary intermediary costs. Enterprises often tend to choose to proceed with this form of M&A.

Conglomerate M&A: This type of merger and acquisition aims to form conglomerates. Conglomerate mergers occur between companies serving the same industry but offering different products and services. Their products can complement and support each other, but technically, they are not the same. These products supplement each other, making it more convenient for customers as the two products or services are related and often used together. The goal of this type of M&A is to help businesses diversify their products and services. Additionally, it helps increase market share and profits because selling one service or product makes it easier to sell other related products. For example, the combination of a design company and a construction business: after customers seek design services, they will also look for construction companies. If the same entity provides both design and construction services, customers are more likely to choose the same company. This provides convenience for customers and offers the business opportunities to enter previously unavailable fields.

Barriers to Mergers and Acquisitions

Each form of M&A has its legal regulations. Businesses often conduct thorough research before proceeding with M&A transactions; however, there are still certain barriers that may arise.

Legal Barriers. Applicable laws for mergers and acquisition transactions vary depending on the industry. However, most M&As are governed by the Law on Enterprise, Law on Investment, Law on Competition, and Law on Security, including the relevant decrees and circulars. The process of completing these procedures can be very time-consuming and complex. Legal barriers can also include risks arising from business operations such as suspension, bankruptcy, tax obligations, debts, and non-compliance with legal regulations. Additionally, there are risks from legal actions by partners, such as labor disputes or civil contract disputes. Risks also stem from intentional or unintentional actions or negligence by the company’s managers and employees, leading to litigation or other legal issues.

 Financial Barriers. These barriers are of particular concern to the buyer. Financial barriers include serious risks related to capital contribution. Enterprises that have not contributed enough capital or have unclear business funds pose risks to assets, such as incorrect asset valuation and outstanding debts to state agencies and partners. These barriers are typically addressed by having the acquiring company hire an independent audit unit to review and assess financial-related content to identify financial risks. For asset-related issues, a valuation firm is hired to revalue the enterprise. Therefore, before engaging in any M&A activity, investors must thoroughly understand legal regulations to determine if the investment purpose is achievable and how to ensure the best legal protection for their rights and interests.

 Cultural Barriers. Each company has its unique company culture which has been built over time. Combining these distinct characteristics can create difficulties and barriers for businesses, causing fatigue for employees. Staff may feel confused working in a mixed cultural environment and must adapt to new changes, altering their trust in leadership. They must maintain the old corporate culture while integrating the new one. If the company’s leadership cannot find an optimal method to harmonize the cultures, it will take a long time to blend the new cultures into a unified and stable entity. Otherwise, employees will feel disconnected, and the new corporate culture will become chaotic and fragile.

 Barriers to mergers and acquisitions are an inevitable part of the M&A process. To ensure the highest efficiency in mergers, businesses need to understand these barriers and find appropriate solutions.

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