VN companies master mergers, acquisitions
Experts at the merger and acquisition forum held recently in HCM City discussed reasons behind the failure as well as success of M&A (Merger and Acquisitions) deals. Two of those experts speak about the situation.
Christopher Kummer, president of Institute of Mergers, Acquisitions and Alliances (Austria)
Why do M&A transactions fail so often? The reasons are manifold; the proposed critical success factors for M&As are as numerous as the consultants, managers and academics in the field. The fact that change is happening all the time, in addition to the interdependency of factors, can add complexity to the mix and cause significant problems. This is far from being well understood; otherwise, the success rate of M&As would have improved drastically as a result of defining these success factors. In addition, the reasons for M&A failures are not clear. We see that the impediments of unrealistic expectations, over-confidence, promoters and external advice, distrust and group dynamics all play vital roles.
The main reason for M&A failure is unrealistic expectations. First, making M&A deals work is a difficult task and many managers underestimate this fact. Second, the goals of M&A deals are often unrealistic. If the goals are unrealistic to start with, failure cannot be avoided.
Hopes in M&A deals can also exceed what is feasible. Often as a consequence, the amount spent for a target is too high or one of the merging partners is overvalued. Premiums paid can hardly ever be recaptured. Synergies are also frequently overestimated; they look good on paper but are not realised as calculated. Erroneous evaluations can also be produced by the prospective buyer: the acquiring company judges the target with its own (and always different) perspective.
Confidence, hope and optimism are necessary to some degree and useful for M&A success but when managers strive for the impossible or the unlikely, they are simply being overconfident. Some things are simply impossible to execute, especially when expectations are unrealistic and cannot be realised no matter how hard one tries. Optimistic beliefs, however, that turn out to be wrong can be costly.
Managers rely heavily on "promoters" to initiate, structure and carry out the M&A transaction. Promoters for M&As are investment banks and top management consultancies. There is no relationship between higher investment bank fees and acquisition performance.
Distrust, the attitudes and moods of the employees are often quite the opposite of overconfidence, namely distrust. This might contribute to failure because, as previously mentioned, an appropriate amount of confidence is a crucial ingredient for success. Why do so many employees feel a lack of confidence about M&A success? First of all, there is uncertainty about what will happen in the future.
Is there the danger of losing their jobs? If not, how will their jobs and tasks be changed? How will the restructuring affect them personally? Second, companies are often restructured at least every two years. So M&A projects will produce "just another change programme" that will not bring the desired outcome.
An M&A transaction is a situation where a lot of people and teams are involved in decisions. Also, the decision for an M&A transaction is made by the board of directors and the management team, with all of the consequences that are inherent to group situations.
Nguyen Ngoc Su, PetroVietnam deputy general director.
We (Viet Nam National Oil and Gas Group – PetroVietnam) need to expand into various fields, which will support each other while our core businesses remains oil and gas exploitation, fertiliser and power production, to ensure the group's strong growth. M&A deals help this expansion. A successful M&A deal depends largely on the selection of a strategic partner, the most important work. The selection criteria, however, depends on the industry and the M&A's goals.
M&A activities were busy at PetroVietnam, resulting from the fact that many of our affiliate companies operated in the same fields, thus M&A would help create larger and stronger businesses. Further, PetroVietnam is destined to become a multi-business group. The fact that it will set up new companies as well as acquire others is understandable.
We have been carrying out our deals between our affiliates, and buying outside enterprises.We also provide M&A consultancy to others.
To ensure success, a business must have a long-term strategy. PetroVietnam has set a target to develop to the level of the Malaysian corporation Petronas in several business operations and will become Viet Nam's strongest group by 2015. Based on this goal, we will work out restructuring plans for our affiliates via M&A deals, including deals with outside companies to create stronger businesses.
After mapping out sound strategies, sound solutions will be required, which include human resource management and technology solutions.
In our case, we have a knowledgeable staff who are well trained in and outside Viet Nam and we also have had experience from the mergers between affiliates from our early reform. And recent deals were done quickly. Still, the biggest headache is the post-M&A personnel issue. Others include financial management, especially if it's the merger of two companies, one with good financial health while the other has a poor one.
For M&A deals with an outside firm, corporate evaluation is quite a challenge due to the inexperience of most evaluation service providers. Also, the existing standards are not quite clear. In some cases the two involved companies had to negotiate the issue themselves.
Mergers have helped PetroVietnam create several corporations including the PetroVietnam Exploration and Production (PVEP), PVOil and PetroGas. It has allowed us to acquire 20 per cent of the joint-stock Ocean Bank and sell 10 per cent of our financial corporation to Morgan Stanley. — VNS