vietnam national university, HANOI
school of business Vu Thi Thu Minh A STUDY ON Merger and acquisition
IN VIETNAM - THE CASE OF ho guom AND
CHIEN THANG garment COMPANIES
master of business administration thesis
1.2.1 Pitfalls of acquisitions 15
1.2.2 Execution of acquisitions 17
1.3 Managing acquired companies 19

viii
1.3.1 Restructuring poorly-run enterprises 21
1.3.2 Transferring competencies 21
1.3.3 Realizing economies of scope 22
1.4 Conceptualization and emerged frame of reference 23
1.4.1 Conceptualization 23
1.4.2 Emerged frame of reference 25
CHAPTER 2: METHODOLOGY 27
2.1 Research purpose 27
2.2 Research approach 28
2.3 Research strategy 29
2.4 Data collection method 30
2.5 Sample selection 32
2.6 Data analysis 33
2.7 Reliability and validity 34
CHAPTER 3: DATA PRESENTATION AND ANALYSIS 36
3.1 Company presentation 36
3.1.1 Ho Guom Garment JSC 36
3.1.2 Chien Thang Garment JSC 39
3.2 The situation leading to the acquisition 41
3.2.1 Post-integration change of Vietnam garment and textile industry 41
3.2.2 HOGARSCO – Expansion for development 43
3.2.3 CHIGAMEX – A poorly-managed and loss-making company 46
3.3 Execution of the acquisition of CHIGAMEX by HOGARSCO 50
3.4 Managing the acquired company - CHIGAMEX 52
3.4.1 Restructuring CHIGAMEX 52

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LIST OF ABBREVIATIONS

M&A
HOGARSCO
CHIGAMEX
VINATEX
JSC
Merger and Acquisition
Ho Guom Garment Joint Stock Company
Chien Thang Garment Joint Stock Company
Vietnam National Textile and Garment Corporation
Joint Stock Company
Introduction 1
INTRODUCTION
This first part is intended to give an introduction to the area of research. First a
brief background discussion regarding merger and acquisition (M&A) will be
provided, followed by the problem discussion, leading to the objectives and aims,
then research questions, scope of work, significance, and the limitations of the study
will be presented and finally the outline of the thesis.
1 Background

underperform their industry peers and fail to earn the expected financial returns
[DePamphilis, D., 2005]. Reasons for acquisition failure can range from
overoptimistic estimates of the target company’s value which result in extensive
overpaying; over slow integration of all operational levels in the post-acquisition
phase; poor, clashing business strategies impossible to merge [DePamphilis, D.,
2005]. Furthermore, the degree of relatedness of businesses, as well as the distance
in business or corporate culture is crucial factors to take into consideration [Child et
al., 2001; Gancel et al., 2002].
Vietnamese enterprises have been integrating into the global trend of rise in M&A
activities, especially when Vietnam is in the context of high economic growth rates,
low interest rates, strong and rapid equitisation and “hot” stock markets. Similarly,
market, cost, competitiveness, government and synergies are often mentioned as
drivers for merger and acquisitions in Vietnam. The presence of conglomerate and
group of companies in Vietnam has indicated a condensed strength and has shown
the willingness for integration into globally competitive economies.
2 Problem discussion
Due to the competitive environment of rapid change and aligned constant need for
growth and development, companies have to exploit organic sources of expansion
as well as external ones in order to compete. The options range according to the
degree of integration that is established among individual enterprises. Mergers and
acquisitions are two common and prevailing means for company growth in today’s
Introduction 3
business world. More precisely they represent options that aim at a very high
degree of integration, as opposed to cooperative agreements and joint ventures.
Generally speaking, acquisitions refer to a shift in the controlling ownership of a
company that is taken over by another company. This can occur both through share
purchases or other forms of the target’s equity as well as asset purchases. The

CHIGAMEX in order to draw some successful lessons for other companies in
Vietnam, therefore, the title of the thesis would be finalized as “A study on merger
and acquisition in Vietnam – The case of Ho Guom and Chien Thang garment
companies”.
Companies such as HOGARSCO have been choosing a strategy of horizontal
acquisition to consolidate their competitive advantage. Vietnam National Textile
and Garment Corporation (VINATEX) arranged the horizontal acquisition of Chien
Thang Garment JSC by Ho Guom Garment JSC in order to help CHIGAMEX
overcome the edge of bankruptcy. By pursuing horizontal acquisition, both
HOGARSCO and CHIGAMEX can obtain economies of scale or secure export
market for their products. After acquisition, the two companies will be able to
improve their competitiveness and market visibility.
3 Objectives and Aims
The objectives of the thesis are as below:
¾ Firstly, to provide a better understanding of M&A, its rationales and
international guidelines for M&A.
¾ Secondly, to review the recent upward trend in M&A activities and the context
of Vietnam garment and textile industry in 2007 to raise the demand of M&A.
¾ Thirdly, to apply theory into case study of Ho Guom and Chien Thang
garment companies to show advantages, disadvantages, successes, limitations
of the acquisition that help these two companies get inside picture of this
acquisition.
¾ Fourthly, to draw out some conclusions and suggestions for M&A activities in
Vietnam.
Introduction 5
Finally, the thesis aims to introduce international standards and practices in making
M&A and apply them into a case study in order to provide a better understanding of

The study has made some certain contributions to the economy in generally and the
enterprises in particularly.
¾ To the economy: the study shows both motives and de-motives behind M&As
and their influences to the overall economy. The successful acquisition in the
case study has contributed to the acceleration of M&A activities in Vietnam
indicating a condensed strength and the willingness for integration into
globally competitive economies.
¾ To the enterprises: the study provides them a better understanding of why they
should take M&As, how M&As occur and how they can effectively manage
acquired enterprises in order to make a successful acquisition. The case study
where experiences of success are shared would help enterprises
9 Limitations
The topic M&A is generally not well documented in Vietnam, especially M&A
activities seem to be rather new in Vietnam so the researcher has not found best
practices concerning M&A in textile and garment industry. This thesis will
concentrate on investigating the case of two garment companies one year after the
acquisition.
The research will not evaluate the correctness of the Vinatex’s decision in favor of
HOGARSCO to take the acquisition of CHIGAMEX, since various specific factors
influence it and these are not the focus of this study.
Introduction 7
It will be necessary to interview more relevant persons, preferably from
CHIGAMEX, to deeply understand the company insight and to display a
representative image of the post-acquisition situation.
The efforts within the empirical as well as the analytical part will be concentrated
on CHIGAMEX. There is no presentation and analysis of HOGARSCO’ post-
acquisition performance in this study.

Chapter 1:
Literature Review
Chapter 2:
Methodology
Chapter 3:
Data Presentation
& Anal
y
sis
Conclusions &
Implications
Literature Review

9
CHAPTER 1: LITERATURE REVIEW
The previous part provided the background and the problem discussion of the area
of this study, leading down to the specific research questions. In this chapter,
literature related to the research questions will be reviewed. Available theories
relevant to the three research questions will be presented in the same sequential
order as stated research questions.
1.1 Rationales of Merger and Acquisition
1.1.1 Definition and classification of M&A
In business or economics, a merger is a combination of two companies into one
larger company. Such actions are commonly voluntary and involve stock swap or
cash payment to the target. Stock swap is often used as it allows the shareholders of
the two companies to share the risk involved in the deal. A merger can resemble a
takeover but result in a new company name (often combining the names of the
original companies) and in new branding; in some cases, terming the combination a
"merger" rather than an acquisition is done purely for political or marketing reasons.
An acquisition, also known as a takeover, is the buying of one company (the

failure, it must increase shareholder value faster than if the companies were
separate, or prevent the deterioration of shareholder value more than if the
companies were separate.
1.1.2 Business valuation
The five most common ways to valuate a business are asset valuation, historical
earnings valuation, future maintainable earnings valuation, earnings before interest
taxes depreciation and amortization valuation and shareholder's discretionary cash
flow valuation. Professionals who valuate businesses generally do not use just one
Literature Review

11
of these methods but a combination of some of them, as well as possibly others that
are not mentioned above, in order to obtain a more accurate value. These values are
determined for the most part by looking at a company's balance sheet and/or income
statement and withdrawing the appropriate information. The information in the
balance sheet or income statement is obtained by one of three accounting measures
such as a notice to reader, a review engagement or an audit.
Accurate business valuation is one of the most important aspects of M&A as
valuations like these will have a major impact on the price that a business will be
sold for. Most often this information is expressed in a Letter of opinion of value
when the business is being valuated for interest's sake. There are other, more
detailed ways of expressing the value of a business. These reports generally get
more detailed and expensive as the size of a company increases; however, this is not
always the case as there are many complicated industries which require more
attention to detail, regardless of size.
1.1.3 Financing M&A
Mergers are generally differentiated from acquisitions partly by the way in which
they are financed and partly by the relative size of the companies. Various methods
of financing an M&A deal exist:
¾ Payment by cash: Such transactions are usually termed acquisitions rather than

important where foreseeable liabilities may include future, unquantified
damage awards such as those that could arise from litigation over defective
products, employee benefits or terminations, or environmental damage. A
disadvantage of this structure is the tax imposed on transfers of the individual
assets, whereas stock transactions can frequently be structured as like-kind
exchanges or other arrangements that are tax-free or tax-neutral, both to the
buyer and to the seller's shareholders.
Literature Review

13
1.1.4 Motives behind M&A
These motives are considered to add shareholder value:
¾ Economies of scale: This refers to the fact that the combined company can
often reduce duplicate departments or operations, lowering the costs of the
company relative to the same revenue stream, thus increasing profit.
¾ Increased revenue/Increased market share: This motive assumes that the
company will be absorbing a major competitor and thus increase its power (by
capturing increased market share) to set prices.
¾ Cross selling: For example, a bank buying a stock broker could then sell its
banking products to the stock broker's customers, while the broker can sign up
the bank's customers for brokerage accounts. Or, a manufacturer can acquire
and sell complementary products.
¾ Synergy: Better use of complementary resources.
¾ Taxes: A profitable company can buy a loss maker to use the target's loss as
their advantage by reducing their tax liability. In some countries, rules are in
place to limit the ability of profitable companies to "shop" for loss making
companies, limiting the tax motive of an acquiring company.
¾ Geographical or other diversification: This is designed to smooth the earnings
results of a company, which over the long term smoothes the stock price of a
company, giving conservative investors more confidence in investing in the

lower revenue. In addition, the supplier may find more difficulty in supplying
to competitors of its acquirer because the competition would not want to
support the new conglomerate.
In summary, a merger can happen when two companies decide to combine into one
entity or when one company buys another while an acquisition always involves the
purchase of one company by another. Synergy is the logic behind mergers and
acquisitions, the functions of synergy allow for the enhanced cost efficiency of a
Literature Review

15
new entity made from two smaller ones. Acquiring companies use various methods
to value their targets. An M&A deal can be executed by means of a cash
transaction, stock-for-stock transaction or a combination of both. Mergers can fail
for many reasons including a lack of management foresight, the inability to
overcome practical challenges and loss of revenue momentum from a neglect of
day-to-day operations.
1.2 Guidelines for successful acquisitions
Acquisitions have long been a popular vehicle for expanding scope of the
organization. However, despite this popularity, there is ample evidence that many
acquisitions fail to add value for the acquiring and acquired companies and, indeed,
often end up dissipating value. The below figure is drawn from a Mercer
Management Consulting’ study of 150 acquisitions worth more than USD 550
million (1990 - 1995) [J.Warner, J.Templeman and R.Horn, 1995].
Why do so many acquisitions apparently fail to create value? There appear to be
four major reasons: (i) companies often experience difficulties when trying to
integrate divergent corporate culture, (ii) companies overestimate the potential
economic benefits from an acquisition, (iii) acquisitions tend to be very expensive,
and (iv) companies often do not adequately screen their acquisition targets.
1.2.1 Pitfalls of acquisitions
1.2.1.1 Difficulties with post-acquisition integration

The debt taken on to finance such expensive acquisitions can later become a noose
around the acquiring company’s neck, particularly if interest rates rise. Moreover,
if the market value of the target company prior to an acquisition was a true
reflection of that company’s worth under its management at that time, a premium of
50% over this value means that the acquiring company has to improve the
Literature Review

17
performance of the acquired unit by just as much if it is to reap a positive return on
its investment. Such performance gains, however, can be very difficult to achieve.
1.2.1.4 Inadequate pre-acquisition screening
One reason for the failure of acquisitions is management’s inadequate attention to
pre-acquisition screening [P.Haspeslagh and D.Jemison, 1991]. They found that
many companies decide to acquire other firms without thoroughly analyzing the
potential benefits and costs. After the acquisition has been completed, many
acquiring companies discover that instead of buying a well-run business, they have
purchased a troubled organization.
1.2.2 Execution of acquisitions
To avoid pitfalls and make successful acquisitions, companies need to take a
structured approach with three main components: (i) target identification and pre-
acquisition screening; (ii) bidding strategy; and (iii) integration [L.L.Fray,
D.H.Gaylin, and J.W.Down, 1984; C.W.L.Hill, 1984; D.R.Willen, 1985;
Haspeslagh and Jemison, 1996; P.l.Angslinger and T.E.Copeland, 1996].
1.2.2.1 Pre-acquisition screening
Thorough pre-acquisition screening increases a company’s knowledge about
potential takeover targets; leads to a more realistic assessment of the problem
involved in executing an acquisition and integrating the acquired company into
acquiring company’s organizational structure, and lessen the risk of purchasing a
potential problem company. The screening should begin with a detailed assessment
of the strategic rationale for making the acquisition and identification of the kind of

facilities or functions. In addition, any unwanted activities of the acquired company
should be sold. Finally, if the business activities are closely related, they will
Literature Review

19
require a high degree of integration. In the case of a company, whose strategy is one
of unrelated diversification, the level of integration can be minimal. However, a
company requires greater integration if its strategy is concentration on a single
business and expansion.
1.3 Managing acquired companies
It has been noted, in previous parts, that acquisition, as merger, is the principal
vehicles by which companies enter new product markets and expand the size of
their operations [M.S.Salter and W.A.Weinhold, 1979]. Earlier, strategic
advantages and disadvantages of merger and acquisition have been discussed
together with guidelines for successful acquisition to avoid its pitfalls. Now it is
time to consider how to design structure and control systems to manage new
acquisitions. This issue is important because many acquisitions are unsuccessful,
and one of the main reasons is that many companies do a very poor job of
integrating new company into their corporate structure [F.T.Paine and D.J.Power,
1984].
The first factor that makes managing new acquisitions difficult is the nature of the
businesses a company acquires. If a company acquires businesses closely related to
its existing businesses, it should find it fairly easy to integrate them into its
corporate structure. The controls already being used in the acquiring company can
be adapted to the acquired company. To achieve gains from synergies, the
companies can expand its task forces or increase the number of integrating roles, so
that acquired companies are drawn into the existing structure.
If managers do not understand how to develop connection among companies to
permit gains from economies of scope, the newly-acquired company will perform
poorly. It has been argued that this is why the quality of management is so