The prime determinants of selecting payment methods in m&a business: The case of vietnam

THE PRIME DETERMINANTS OF SELECTING PAYMENT METHODS IN M&A BUSINESS:

THE CASE OF VIETNAM

**

1

2

Le Ngoc Quynh Anh* - Nguyen Tien Nhat

ABSTRACT: The study aims to explore factors that aﬀect the choice of M & A payment methods (cash,

stock swap or mixed payment) conducted by ﬁnancial institutions in Vietnam. Methodology: To carry out

the analysis, this study focuses the past literature relating to payment methods in M&As and summarizes

the positive and negative eﬀects of diﬀerent payment methods. A group of explanatory variables was

created based on technical knowledge of M&A business in terms of payment methods, including (i) the

group of variables reﬂecting the nature of the deal (M&A_size, M&A_ratio and M&A_option), (ii) the group

of variables reﬂecting characteristics of the buyer (Foreign), and (iii) the group of variables reﬂecting the

characteristics of the seller (Bidding, Revenue, Ebitda and Asset). The result shows that there are ﬁve key

factors, including foreign involvement, M&A size, bidding, M&A ratio and total asset, that place signiﬁcant

inﬂuence on how ﬁnancial institutions in Vietnam choose the payment method as carrying M&A businesses.

Research Implications: The knowledge gained from this study will help managers from both acquirer and

target companies for selection of appropriate payment methods.

Keywords: M&A business; Payment methods; Financial institutions.

1. INTRODUCTION

M&A businesses and factors affecting the choice of M&A payment methods, (by cash or stock swap)

are the main targets of this study. These days, M&A has increasingly become an emerging business in the

Vietnamese market, bringing a variety of beneﬁts to national joint-stock companies. Also, it has been seen

as one of possible solutions for a process of structural reform in banking sector conducted by the State Bank

of Vietnam since 2012 in order to meet new standards of corporate governance. Opinions have varied as to

whether M&A would be a golden opportunity to enable commercial join-stock banks, either Vietnamese

banks or foreign institutions, to conquer larger market shares, and also to enlarge business client networks

with a continued expansion in business operation. Up to now in Vietnamese market, there are several

specialized private companies working in M&A business with a prime target for searching proﬁts, they

either directly or indirectly have built up an irresistible momentum of M&A market, stemming from a wide

range of market-oriented strategies. In addition, Vietnamese government has introduced the most recent

and prominent policy relating to foreign ownership and investor since mid-2015 that can be seen as a move

towards greater internal integration in the M&A wave with the private sector, enhancing more positive

impacts and contributing to faster growth of Vietnamese economy. All these movements would be marked

out the signs of a growing M&A market in Vietnam.

*

Hue College of Economics-Hue University, 99 Ho Dac Di Street, Hue City

Hue College of Economics-Hue University, 99 Ho Dac Di Street, Hue City, Corresponding author.

**

Tel.: +84919490669. E-mail address: [email protected]

HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA

200

However, companies carrying M&A business have to face numerous market risks and they inevitably

encounter environmental challenges in terms of macroeconomics factors, ﬁnancial legislations, and especially

payment methods that might lead to an unsuccessful M&A business. Therefore, it would be necessary to raise

serious doubts over the determinants leading to a success of M&A business, narrowing down to payment

methods used regularly in M&A business in conditions of Vietnam market. Unfortunately, in Vietnam it is

likely to be hard to ﬁnd an in-depth research in public that found a comprehensive solution to this question.

Thus, by conducting this research, the authors attempt to ﬁll in the research gap in the ﬁeld of M&A industry

with a primary aim of identifying determining factors that inﬂuence the choice of payment method in M&A

business in Vietnam context. The research results are expected to be extremely useful and can be act as either

theoretical or practical knowledge to help M&A-related companies conduct successful M&A businesses. In

addition, from the macro perspective, research results can also be used as strong suggestions for Vietnamese

government to formulate policies to expand the M&A market in the future.

2. BACKGROUND AND POLICY DETAIL

2.1. M&A deﬁnition

According to Circular 36/ 2015 introduced by the State bank of Vietnam, mergers and acquisitions are

deﬁned as follows:

Merger of credit institutions means the transfer of all assets, rights, obligations and legitimate interests

to a credit institution (hereinafter referred to as merged credit institution) (hereinafter referred to as the

merging credit institution) and concurrently terminate the existence of the merged credit institution.

Acquisition of credit institutions means the transfer of all assets, rights, obligations and legitimate

interests to form a group (hereinafter referred to as consolidated credit institutions). (hereinafter referred

to as the consolidated credit institution) and concurrently terminate the existence of the merged credit

institutions.

2.2. Methods of payment in M&A business

Since the main research question of this thesis focusses on the method of payment, it is important to be aware

of the different possible methods of payment. On the one hand, acquiring companies might choose to ﬁnance the

deal with cash. This is the most straightforward method, which seems to come without any ambiguity. There is a

price for the desired company to take over or to merge with, which has to be paid in the correct currency. On the

other hand, there is the option of paying for the deal with equity. In this case the acquiring company pays with

their own shares, which all represent a certain value. The difﬁculty here however, lies in the fact that nobody can

assure themselves of knowing the exact value of the equity, and therefore the exact price the acquirer is willing

to pay. Of course, as a third option, also a mixture between these methods is possible and frequently used. In this

case a part of the deal is ﬁnanced with cash and the other part is ﬁnanced with equity. Finally, in rare cases, the

payment is done by exchanging other ﬁnancial assets, like bonds or convertibles. However, in the majority of the

cases the payment is done by one of the ﬁrst three options.

- Method of payment in cash

Cash is the most common and simplest way to buy shares and assets of another company. Cash used

in M & A transactions may be acquired by the Company from internal sources or through additional debt.

The main advantage of cash payment is that corporate identity and ownership structure remain unchanged.

However, the disadvantage of this approach is that tax should be paid to the target shareholders.

INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION

201

- Method of payment in stock swap

The method of stock payment is a non-cash payment method in which the acquirer issues its own

equity to the target company as consideration of the purchase of the deal. In this method, both acquirers

and target companies share the M & A results. The most important part of this method is to determine the

appropriate exchange rate. The rate of exchange and price-earnings ratio of companies are two important

factors that signiﬁcantly inﬂuence the practical beneﬁts for shareholders of companies who buy stock

options for payment. Typically, it is an ideal way to ﬁnance an M & A deal in which the company’s share

price-earnings ratio is relatively higher than that of the target companies

- Method of mixed payment

The mixed payment method is a combination of both cash and non-cash payment methods. In this

payment method, the purchase consideration is made through a combination of cash, stock, and debt.

2.3. Legal framework for M & A activities in Vietnam

- Enterprise Law: M & A regulation as a form of corporate reorganization, including mergers and

mergers. It also regulates the procedures and procedures for acquiring shares, purchasing shares, acquiring

private enterprises, merging and consolidating enterprises.

- Competition law: M & A is viewed as an act of economic concentration, including mergers,

acquisitions, mergers and acquisitions. Introduce restrictions on M & A transactions based on the combined

market share of the parties to the transaction

- Investment Law: Considering M & A is a form of direct investment that includes mergers and

acquisitions, equity or equity investments to participate in investment management. Introduce regulations on

capital contribution ratio, share purchase of foreign investors in some sectors of industry and power mergers,

acquisitions of companies and branches. For credit institutions, M & A activities include consolidation,

merger and acquisition activities and are speciﬁcally regulated in Circular 04/2010 / TT-NHNN. This is a

special ﬁeld and has a great impact on the national economy, so the conditions and procedures for M & A

implementation are more detailed and strict than in other ﬁelds.

- Commercial Law and Civil Code: mainly regulate M &Ain terms of contracts between parties. These

types of contracts may include share purchase contracts, transfer contracts, property purchase contracts,

joint venture contracts, etc.

- Tax Law: M & A will generally change in terms of ﬁnance, corporate income tax, personal income

tax, value added tax, etc., so the participants must complete Tax obligations for the Vietnamese state.

- Accounting Law: regulations on consolidation of ﬁnancial statements. In addition, the Circular No.

21/2006 / TT-BTC, Circular No. 161/2007 / TT-BTC,Accounting Standard No. 11 - Business Combinations,

Accounting Standard No. 25 - Consolidated Financial Statements and Accounting for Investments in

Subsidiaries.

- Law on Auditing: Examining ﬁnancial activities of enterprises to determine the value of assets of enterprises.

- Intellectual Property Law: regulates the transfer of copyright and business secrets between the parties.

- Labor Law: requires M & A parties to fulﬁll their obligations to employees, employment options

when the deal is successful.

Other regulations also regulate this activity such as valuation of assets, customs, real estate.

HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA

202

3. EMPIRICAL FRAMEWORK

3.1. Research model

From the previous studies (Boateng, A., & Bi, X. (2014). Acquiring characteristics and method of

payment: Evidence from Chinese mergers and acquisitions; DeYoung, R., Evanoff, D.D. & Molyneux.

(2009). Mergers andAcquisitions of Financial Institutions:AReview of the Post-2000 Literature and Faccio,

M., & Masulis, R. W. (2005, 6). The choice of payment method in European mergers and acquisitions),

the research has selected six independent variables that are relevant to the characteristics of Vietnamese

enterprises as well as the data collection. In addition, through interviewing experts, the study added two

independent variables to the research model including eight variables. There are some variables considered

as dummy variables so the application of the Probit model for the study is appropriate.

To investigate prime factors that inﬂuence the choice of M&A payment method, this study created a

model in association with Probit regression as follows:

(1)

where:

M&A_payment = 1 if M&A payment made by cash;

M&A_payment = 0 if M&A payment made by stocks or a combination of cash and stocks;

Agroup of explanatory variables was created based on technical knowledge of M&Abusiness in terms

of payment methods, including (i) the group of variables reﬂecting the nature of the deal, (ii) the group of

variables reﬂecting characteristics of the buyer, and (iii) the group of variables reﬂecting the characteristics

of the seller. The detailed descriptions of these independent variables are presented as follows:

(1)Foreign is a dummy variable, where Foreign = 1 if buyer is a foreign company. This dummy

variable is included in the model to determine an impact of the regulation on the limits of share ownership

applied to foreign sides in a certain domestic company. These constraints can be act as an incentive for

foreign buyer to decide to pay in cash as conducting M&A deals in Vietnam. [1]

(2)M&A_size is a variable that reveals the actual value of the M&A deal measured in million US

dollars. It would be expected that the larger the scale of payment is, the less likely it is to pay in cash and

vice versa. [1]

(3)Bidding is another dummy variable, where Bidding = 1 if the buyer is selected through a competitive

INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION

203

bidding section. The biding practice offers a number of advantages, with the greatest advantage of being

able to explore the market to ﬁnd potential buyers. In addition, a large number of buyers will help a certain

auction become completely fair, and the seller is able to achieve the best deal. It is expected that the more

competitive a certain bidding is, the higher a probability of choosing the payment in cash will be. [2] [3]

(4)M&A_ratio variable represents the percentage of equity in the target company of the buyer after

conducting the M&A business. [1]

(5)Revenue: is the indicator to assess the current status of enterprises operating effectively or not

(empirical variation)

(6)Ebitda: Proﬁt before tax, interest and depreciation of the seller. This is an indicator of the company’s

rate of return and is a good indicator to assess the ﬁrm’s viability (empirical variation).

(7)Asset is a variable that reﬂects total assets of the seller. [1]

(8)M&A option is a dummy variable which gain a value of one if a business is a merge, and zero if it

is an acquisition. [2] [3]

Based on the theory of choice of payment method in M&A business, some independent variables are

predicted in the research model. The expected signs for the relationship between independent variables and

dependent variable showed in the equation (1) are summarized in Table 1.

Table 1.Description of independent variable

Variable

Foreign

Value/ Unit

1 = foreign company; 0 = domestic company

Million US dollars

1 = biding; 0 = selecting

Percentage

Expected sign

+

M&A_size

Bidding

M&A_ratio

Revenue/Turnover_ratio

Ebitda

+/-

+

+/-

+

Ratio

Million US dollars

1 = M, 0 = A

Asset

M&A_option

3.2. Research data

This research runs a Probit regression with a set of data including detailed information of 364 M&A

deals that were successfully made from 2014 to 2017 in Vietnam. They were collected from the M&A

business reporting system of the State bank of Vietnam and following databases: Stoxplus; Zephyr;

Datastream, the Securities and Exchange Commission’s database, and the Ministry of Industry and Trade

of Vietnam.

The dependent variable, based on the results obtained for the four years from 2014-2017 in 364

observations, was 337 cash transactions, 27 share swaps and 0 forms of mixed payment. Table 2 present

statistics summary of all independent variables used in this study’s research model.

Table 2. Statistics summary

Variable

Foreign

M&A_size

Bidding

Revenue

Ebitda

Value/Unit

{0,1}

million US dollars

{0,1}

Million US dollars

million US dollars

Min

0

0.004

0

0.06

0.02

Max

1

299

Mean

0.604

7.794

0.379

7.895

28.663

1

1084.94

1725.69

HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA

204

M&A_ratio

Asset

%

0

1

291

0.235

131.34

million US dollars

4. RESULTS

Initial results show no statistically signiﬁcant effect on the initial model (1). After eliminating the

variables from the initial model, the research has established equation (2) with high reliability with 6

independent variables.

(2)

The research result is illustrated in Table 4. It shows that the coefﬁcients of all independent variables

are statistically signiﬁcant with p-values are smaller than 0.05. In addition, it can be seen that some variables

affect signiﬁcantly and are consistent with the expectations stated in the background section, especially

two variables with highest level of inﬂuence are foreign and M&A_ratio, at 0.062 and 0.088 respectively.

Furthermore, although the effect of biding variable is smaller than these two mentioned variables, it also

gains a strong signiﬁcance at 0.045. The impact on the change of dependent variable of remaining factors,

M&A_size and asset are at 0.00002 and 0.00001 respectively.

Table 4. Result

Variables

Constant

Foreign

M&A_size

Bidding

M&A_ratio

Asset

Coefﬁcient

-13.0008***

4.4458*

dy/dx

-0.1818

0.0622

0.00002

0.045

z-value

-3.525

2.417

1.718

2.886

3.315

2.039

0.0147*

3.2192**

6.2890***

0.0088*

0.088

0.00001

Observations: 364

Chi-square: 138.84

R²: 0,5706

*** p < 0.01

** p <0.05

* p <0.1

To check that the data used in this study is unlikely to encounter a problem of autocorrelation between

independent variables, it is necessary to make an autocorrelation test before running the Probit regression.

The result of autocorrelation test is presented in Table 3, showing that all the correlation coefﬁcients are

smaller than 0.6, meaning that the multi-links between independent variables are deﬁnitely weak.

Table 3. Correlation matrix of independent variables

Foreign

1

M&A_size

Bidding

M&A_ratio

Asset

Foreign

M&A_size

Bidding

-0,139

-0,258

-0,080

0,069

1

0,032

0,208

0,057

1

0,012

0,046

1

M&A_ratio

Asset

-0,317

1

INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION

205

6. CONCLUSION

According to the research outcome some implications about how the buyer and the seller chose an

appropriate payment method as carrying a certain M&A deal in context of Vietnamese market can be drawn

out as follows:

Firstly, there are there prime determinants that place the greatest inﬂuences on how the buyer and the

seller reach a formal agreement on payment method (by cash or stocks) in the conditions of Vietnamese

market, relating to the involvement of foreign company, M&A ratio and the approach of selecting the buyer.

This study ﬁnds that if the buyer is a foreign ﬁrm that won the M&A deal through the competitive bidding

and ended up having high level of share ownership of the target company, the probability of paying in cash

will be signiﬁcantly increased.

Secondly, the two relatively minor factors affecting the choice of M &Apayment methods by ﬁnancial

institutions in Vietnam are the size of the deal and the total assets of the seller. This study ﬁnds that if the

larger the business size or the total value of the seller’s assets are, the higher the probability of using method

of payment in cash is.

REFERENCE

Journals:

Boateng, A., & Bi, X. (2014). Acquiring characteristics and method of payment: Evidence from Chinese mergers and

acquisitions. Managerial and decision economics.

DeYoung, R., Evanoff, D.D. & Molyneux. (2009). Mergers and Acquisitions of Financial Institutions: A Review of the

Post-2000 Literature. Journal of Financial Services Research.

Faccio, M., & Masulis, R. W. (2005, 6). The choice of payment method in European mergers and acquisitions. The

journal of ﬁnance.