The many tastes of M&A: Game of the giants

Sweet success

KIDO Corporation (HoSE: KDC) has just completed the sale of 11.2 million stocks—approximately 20% of the chartered capital of its subsidiary Kido Frozen Food JSC (KDF)—at the price of US$2.3 per share. 

The ordered quantity is reported to be 3.5 times as much as the offered one. Right after the IPO (March 31), KDF stocks were bought and sold on the free market at the price of US$2.65 per stock.

KDC’s investment in KDF is emblematic of a successful M&A for both involved parties. In 2003, KDC acquired the entire ice cream production facility and brand of the producer and seller of Wall’s ice cream, Unilever Bestfood Vietnam (currently Unilever Vietnam), which later became KDF, for a total of US$20 million.

After 14 years in operation, KDC has achieved impressive progress with KDF’s ice cream brands. 

As of the end of 2016, KDF accounted for one third of the Vietnamese ice cream market. In 2016, it earned US$61.7 million in revenue, US$6.3 million in profit after tax (respectively 85% and 31% higher than in 2015). In 2017, KDF expects to increase revenue by 30%.

With the price of US$2.3 per stock, KDF’s value by market capitalisation is estimated to be US$130 million.

Experts predict that KDC would rake in a considerable profit from the sale of its 20% stake in KDF. On the stock market, KDC’s price has increased by 30% compared to the end of 2016.

In the last few years, KDC has been greatly active in M&A transactions in the food industry, especially after earning big from selling its confectionery factory in Binh Duong Province. For instance, in 2014, KDC bought a 24% stake of Vietnam Vegetable Oils Industry Corporation (Vocarimex – UpCOM: VOC).

At the end of 2016, KDC publicly bid for stocks of Vegetable Oils Tuong An JSC (HoSE: TAC), raising its stake in the company to 65%. On January 20, 2017, after securing approval from VOC’s annual general shareholders’ meeting, KDC raised its stakes in VOC to 51% without a takeover bid. Through its intensive M&A transactions, KDC now has the entire domestic oil market in its grasp.

The cases of KDC-KDF, KDC-TAC, and KDC-VOC are not rare examples of effective M&A which helped the acquired company improve its finances, expand market share, and contribute to the development of the parent company. Both parties have benefited from the M&A and complemented each other for success.

Masan Group has also been intensively pursuing M&A transactions. On March 31, 2016, Masan possessed, both directly and indirectly, 45 subsidiaries and 6 associated companies. Masan’s total investment in its associated companies was about US$538.7 million.

Some of Masan’s featured M&A in recent years include Vinh Hao Mineral Water (April 2013), VinaCafe Bien Hoa (October 2011), International Agriculture Nutrition JSC (Anco) (May 2015), Vietnam-French Cattle Feed JSC (Proconco) (May 2015), Cholimex (November 2014), and Vissan JSC (June 2016).

As a seller, Masan holds a record of the most valuable M&A with the sale of its stakes in Masan Consumer to Thai giant Singha Beer at the price of US$1.1 billion in 2015. Recently, Masan also received a substantial investment of US$250 million from KKR Foundation to accelerate the completion of its meat supply chain (3F: Feed-Farm-Food).

Its knack for M&A strategy has maintained Masan’s high development rate for many years. In 2016, the parent company’s after-tax profit reached US$123.6 million, 89% higher than that of 2015 and six times as much as that of 2013.

The above examples show that M&A is clearly a golden key for enterprises to seek for rapid and effective development, especially when their existing business lines no longer have much growth momentum, as M&A expands enterprises’ market share and network and help companies join a new segment quickly.

Bitter failure

Not every M&A results in sweet success like KDC’s or Masan’s. Several transactions have left investors with the bitterness of loss. Tan Lien Phat Construction Investment Corporation’s acquisition of Truong Thanh Furniture Corporation (TTF) is a typical example of an M&A gone sour.

After a successful negotiation of its debt restructuring in 2013, TTF’s financial results started improving in 2014 with continuously rising stock prices. 

In mid-May 2016, Tan Lien Phat spent US$79.5 million on 72 million TTF shares, approximately 49.9% of TTF’s chartered capital. Also, with agreement from TTF’s annual general shareholders’ meeting, Tan Lien Phat provided TTF with a US$53.1-million loan under the condition that its holding in TTF would increase to 70%.

While investors expected that the active involvement of the strategic shareholder Tan Lien Phat would push TTF’s finances to soar, just 2 months afterwards, Tan Lien Phat suddenly brought public inaccuracies worth up to millions of dollars in TTF’s receivables and inventories. 

From that point on, TTF suffered from dozens of financial problems, leading to a loss of US$56.1 million in 2016, which resulted in an accumulated loss of 98% of the chartered capital—and pushing the company to the edge of delisting. On the stock market, TTF’s stock dove into a free fall.

After several incidents and arguments, Tan Lien Phat has divested almost the entirety of its capital in TTF.

Another defective M&A was Saisan Stock Company’s acquisition of 48.2% of An Pha Petrol JSC (ASP) in 2014. For the year of acquisition, ASP’ net profit was only US$44,000; in 2015, it lost US$441,000. In 2016, ASP’s profit turned positive but it came mostly from its sale of assets. ASP’s stock price on the market was 50% lower than at the time Saisan bought in.

ASP’s 2016 annual general shareholders’ meeting agreed on expanding the maximum rate of ownership for foreign investors to 100%, yet the company has showed no signs of putting the agreement into action. Saisan also failed to move forward with the initial plan to increase its holding to control ASP.

According to experts, there are several reasons for failure after M&A, including misunderstandings between both parties, disagreements in management and differences in corporate culture

For stock investors, an enterprise being acquired or merged is going drive up stock prices, mainly due to the expectations that the acquirer is trying to gather the stocks. Many investors found the winning ticket in the M&A lottery, but no fewer of them came away with losses.

In the end of 2014, Global Emerging Markets (GEM), a US$3.4 billion alternative investment group that manages a diverse set of investment vehicles focused on emerging markets, signed agreements to invest in several enterprises in Vietnam like FLC, HHS, DLG, HAG, HQC, among others. 

This event had led to a streak of increase in the VN-Index and many big transactions of these stocks. However, soon afterwards, most of GEM’s commitments sank into oblivion, forcing investors to sell these stocks to cut down on their losses. Up to now, this case remains a key lesson for investors wishing to surf the M&A waves.

M&A is a long-term game for affluent investors. Many M&A deals have been “advertised” conspicuously, yet failed eventually for many reasons.