Navigating new horizons: Vietnam's M&A market gears for strategic growth

Vietnam's M&A market has evolved significantly overall with domestic firms becoming more assertive and sophisticated, while foreign investors increasingly view Vietnam as a key strategic market in Southeast Asia, write KPMG analysts.

2022 marked 15 years since Vietnam joined the World Trade Organization (WTO). As we head to 2024 with fresh challenges, it’s important to put Vietnam’s current M&A market into perspective and reflect on its progress.

In the late 2000s, Vietnam's M&A market was relatively nascent, with deal values and volumes being modest. The average deal size was relatively small with no deal crossing the billion-dollar mark.

As the government implemented reforms to attract foreign investment and integrate with the global economy, the environment for M&A transactions began to flourish. In the early 2010s, Vietnam saw an uptick in M&A activities with increasing deal volumes and values. This growth was spurred by the government's continued efforts to privatize state-owned enterprises (SOEs) and liberalize key sectors of the economy.

Average deal size during this time rose steadily until 2012 when the country faced an economic slowdown as a result of the global 2007 crisis aftermath. Between 2015 and 2020, bolstered by sustained GDP growth and stable fundamentals, Vietnam’s M&A market accelerated toward maturity.

Foreign investors started to move beyond exploratory investments and sought long-term strategic positions. Deal values reached record highs, with mega deals closing across sectors.

Many billion-dollar deals took place during this period, such as Thai-based Central Group’s $1.14 billion acquisition of Big C Supermarket (2016), Thai Beverage’s $4.8 billion acquisition of Sabeco (2017), and South Korea-based SK Group’s $1 billion investment in Vingroup (2019).

As a result, the M&A market reached its peak at over $11 billion total deal value in 2017, with the average deal size also peaking at $57.3 million. Since 2021, Vietnam’s economic resilience in the face of global uncertainties, including trade wars and the Covid-19 pandemic, has kept foreign and domestic investors interested in the market.

Investors have now moved towards consolidation and strategic investments. For instance, Japan-based Sumitomo Mitsui Banking Corporation's (SMBC) continued investments totaling $2.82 billion in two landmark deals in 2021 and 2023 indicate investor confidence and commitment to Vietnam’s current market and prospects.

The average deal size crossing the $50 million mark perhaps most clearly signals investors’ stronger shift towards strategic investments, which often command larger ticket sizes.

Overall, Vietnam's M&A market has evolved significantly with domestic firms becoming more assertive and sophisticated. In addition, foreign investors increasingly view Vietnam as a key strategic market in Southeast Asia. Ongoing resilience and momentum are expected, spurred by worldwide economic changes, supply chain modifications, and Vietnam's development. Continuing regulatory enhancements and free trade agreements will likely sustain Vietnam's M&A activity.

Vietnam's M&A scene reflects global trend despite a stable economy

In 2023, global deal activity halted as dealmakers faced worldwide geopolitical and macroeconomic uncertainties. A tempering of global economic growth alongside rising global inflation rates affecting investor sentiment has contributed to a more cautious investment approach.

The tightening of monetary policy across major economies, leading to higher interest rates, has also reverberated through emerging markets. This has made financing of deals more expensive and adversely impacting deal flow.

Additionally, currency volatility, particularly in emerging market currencies, may have posed challenges in deal valuations and cross-border investment decisions. Vietnam has been no exception to the global slowdown in deal activity. Deal value in the first 10 months of 2023 has fallen behind by 23% year-on-year. The number of deals also came short of the previous two years.

Nonetheless, Vietnam's underlying economic fundamentals remain robust, with FDI still flowing in at a healthy rate and the government's commitment to infrastructure and economic reforms continuing unabated. This temporary dip in M&A activity could be viewed within the broader context of cyclical economic patterns. While 2023 was a year of recalibration, market fundamentals suggest a resilient outlook.

Compared to the last two years, there was a significant uptick in average deal size on disclosed deals, reaching an average of $54.5 million per disclosed transaction in the first 10 months of 2023. This suggests investors remain active in strategic dealmaking.

In general, we see a diverse range of positive and negative external factors that have impacted businesses in 2023. Since there may be little companies can do to influence these larger trends, it’s now more imperative than ever for businesses to focus internally to better navigate the current turbulences. This will enable them to position themselves in the best possible stage to capitalize on opportunities as we emerge out of the storm.

Navigating market challenges: Repairing the balance sheet to return to profitable growth

Amidst the complexities of Vietnam's market in 2023, where sectors such as manufacturing and exports are expected to grow significantly over the next five to 10 years, the economic landscape is a mosaic of opportunities. These medium-term prospects, however, coexist with a prevailing air of uncertainty and even financial distress.

This is driven by global events such as high U.S. interest rates, the ongoing Russia-Ukraine conflict, recent Israel-Hamas tensions, and challenges in Vietnam's real estate and funding market. As a result, many businesses in Vietnam, particularly in sectors such as real estate, consumer manufacturing and hospitality, face liquidity challenges and unsustainable capital structures.

Businesses must now act decisively to recover, creating adaptive strategies that protect operations and forge pathways back to sustainable growth. One such strategy involves adept working capital management, an approach that offers substantial benefits at minimal funding costs.

At its core, optimizing working capital leads to cash release and more streamlined operations. Especially in the current economic downturn, businesses desperately need additional liquidity to fund daily operations, debt repayments and internal reorganizations. Working capital optimization involves improving receivables, payables and inventories management. Standardizing procurement processes, for instance, could lead to cash release in the payables cycle. Similarly, accounts receivable optimization could include minimizing overdue receivables and improving billing processes.

Yet, the key lies not just in the implementation of these strategies but also in their constant vigilance and re-assessment. Regular, detailed monitoring of individual working capital components is paramount. Implementing SKU-level reporting, for instance, facilitates the rapid identification of slow-moving inventory items, enabling timely adjustments and informed procurement plans. Even without a dedicated management system, businesses can harness available office software or deploy reporting platforms through Business Intelligence tools.

These practices, however, necessitate a corporate culture that places liquidity at its core. In tandem with getting a grip on working capital, companies need to carefully reconsider their long-term assets and liabilities, including restructuring debts to ensure the capital structure is supported by expected future cash flows and refocusing investment into core business segments.

In this dynamic landscape, businesses do not merely confront challenges; they encounter opportunities for growth and enhanced resilience. Proactively addressing challenges allows businesses to navigate uncertainties, secure market positions, and foster transformation to thrive in a changing environment.

Vietnam sees M&A pivot: Domestic investment slows, foreign capital flows

The market experienced a frenzy in value and volume led by domestic investors starting in 2020 as many strengthened their market share and vertical integration. However, such unprecedented capital mobilization among domestic investors ended at the end of 2022, with their total share claiming the first spot and peaking at over $1.3 billion in deal value.

In the first 10 months of 2023, as domestic investors turned defensive and reassessed their strategies, their share in M&A value fell to $161.6 million, or around 4% of the total reported deal value.

Unlike the prior three years when domestic investors played a major role in Vietnam's M&A market, foreign investors took up all the top five spots by deal value in the first 10 months. Japan, Singapore, and the U.S. continued to be among the most active foreign investors. Together they accounted for more than 70% of the total reported deal value.

Foreign investors’ dominance in 2023 likely signals the market shift from opportunistic to more strategic long-term investments in strong and selected sectors. Assets that promise scalability and integration into broader regional trends as well as capitalizing on the country’s rising fundamental demands and changing global supply chains will likely continue to attract foreign investors’ interest.

Notable megadeals in 2023

Foreign investors made up the majority of mega deals in 2023. The largest deal of the year thus far was Japan-based SMBC’s $1.45 billion acquisition of a significant minority stake in VPBank after it purchased FE Credit, a consumer finance company, from the same bank in 2021. The VPBank transaction was also the largest-ever deal recorded in Vietnam’s banking industry.

Healthcare also had its largest-ever deal take place in 2023 as Thomson Medical Group, one of Singapore’s largest medical private healthcare providers, spent over $380 million to buy a controlling stake in FV Hospital. This also marked Thomson Medical Group’s entry into Vietnam, which has a promising healthcare market full of growth opportunities with aging demographics and rising incomes.

Even as the overall consumer sector’s M&A activity slowed due to adverse macroeconomic conditions, Consumer Discretionary still saw a significant deal reported at $200 million. In this deal, the prominent US-based Bain Capital invested in Masan Group as its first move in Vietnam. This marked a major milestone for the country’s consumer industry and showcased its promising prospects.

Legal prudence paves the way for successful real estate deals

Despite a challenging regulatory environment with increased scrutiny of projects’ legal requirements in 2023, strategic investors remain active in pursuing high-quality and legally sound real estate assets. As a result, the sector saw several mega deals during the year with deal value on track to surpass last year's billion-dollar level.

The largest deal in this sector was a returning Singapore-based investor’s $450 million acquisition of a strategic equity stake in BW Industrial, one of Vietnam’s largest and fastest-growing logistics and industrial developers. BW Industrial plans to use the fresh funding to further their leading position in critical infrastructure development for the new economy.

In addition, they will benefit from the manufacturing shift to Vietnam. On the non-industrial front, Malaysia-based Gamuda Land acquired a 100% stake at $316 million in Tam Luc Real Estate Corporation to expand its land bank in Vietnam. The investor is planning a $1.1-billion premium mixed-use project on the acquired land located in Thu Duc city center, HCMC.

Sector breakdown and 2024 M&A outlook

Healthcare, financial services, real estate dominate deal value

Deal activity remained robust in financial services (47%), real estate (23%), and health care (10%), which together accounted for 80% of deal value in the first 10 months of 2023 and claimed four out of five largest transactions.

Compared to last year, financial services and healthcare replaced consumer discretionary/staples and industrial in terms of deal value. In spite of the current challenging economic environment, such activity in the most sought-aftersectors demonstrates the opportunities Vietnam's M&A market can offer strategic investors. Meanwhile, major developments during the year in consumer discretionary/staples, information technology, and energy & utilities sectors could signal potential future growth and opportunities.

Prudent growth ahead, driven by strategic sector investments in 2024

Looking ahead, Vietnam’s M&A market is poised for growth in 2024, supported by economic gains and reforms aimed at attracting FDI, with rising deals in key sectors like green energy, tech, real estate, and healthcare, which are set to expand due to policy support and rising demand.

Investment trends may shift towards these industries, with particular growth in renewable infrastructure and tech driven by digitalization. Healthcare is expected to grow, propelled by demographic changes. Real estate will remain active, driven by demand for high quality assets.

Drivers for 2024 include robust FDI inflows, thanks to a stable political environment and key trade agreements. Moreover, with inflation controlled under the 4% target, the IMF’s projected GDP growth bouncing back to 5.8% in 2024 and 6.9% in 2025, and public debt remaining within the legislative ceiling of 60% of GDP, the fundamentals indicate a favorable year for investors targeting strategic opportunities in Vietnam’s dynamic market.

Vietnam’s GDP grew 5.05% year-on-year to $430 billion in 2023, according to the General Statistics Office (GSO).The figure is higher than 2.91% in 2020 and 2.58% in 2021, the two peak years of the Covid-19 pandemic; but lower than 8.02% in 2022, the post-pandemic period, and 7.02% in 2019, the pre-pandemic period. The growth missed the target of 6.5%, set by the National Assembly, Vietnam's highest legislative body.

The average consumer price index (CPI) increased 3.25% year-on-year in 2023, below the mandated 4.5% limit. Inflation has been driven by price increases in: education (7.44%), housing and construction materials (6.58%), food (6.85%); and retail electricity (4.86%). Core inflation, excluding food and perishable foodstuff, energy and centrally-administered services such as healthcare and education, increased 4.16% over 2022.