M&A is emerging as a viable option for the globalization of the local securities industry. The revision to the Financial Investment Services and Capital Markets Act, which takes effect on August 29 for the revitalization of investment banking, is expected to be a boon to the financial investment business, too. The financial industry is predicted to be led by the two pillars of banking and financial investment once the local securities market expands its size by means of M&A.
Still, experts are pointing out that market segmentation led by enterprises and investors rather than artificial restructuring will result in more successful M&As. They are also saying that there should be some incentives for the participation of industrial capital, because financial capital alone has limitations.
According to the Korea Institute of Finance, there have been 17 M&As in the local securities market since 1983 and only six of them have been M&As between stock firms. The number is much less than that in the United States, where 22 M&As are made on annual average between securities companies.
Market participants are claiming that such M&A activities are boosted by making use of the disposal of Woori Investment & Securities. No matter who takes it over, the company is likely to cause the landscape of the industry to be reshaped. At present, KB Financial Holdings, NH Nonghyup, Hyundai Motor Group, and Mirae Asset Financial Group are riveting their eyes on it in a bid to enter the investment banking market.
Once the revision becomes effective, major securities companies with an equity capital of at least three trillion won (two point six billion dollars) are allowed to expand their business into investment banking. Including Woori Investment & Securities, the five biggest stock firms in Korea can start the enterprise banking business ranging from corporate lending and credit guarantees to bill discounting.
However, the invigoration of the investment banking market cannot but fail unless M&As set the stage for the growth of the securities industry. If Korean stock firms are to be able to rank with global investment banks such as Goldman Sachs, the local financial industry needs to reshape itself without delay. Most foreign IBs like Goldman Sachs, Morgan Stanley, and Nomura Securities have an equity capital of 10 trillion won (US$8.9 billion) or more along with well-organized overseas business networks.
“The years of 2013 and 2014 make a very good chance for M&As, given the low interest rate trend as of late and the size of the liquidity on the part of companies,” said Kim Hyung-tae, president of the Korea Capital Market Institute, adding, “The M&A market needs to get a boost for the development of the creative economy as well, because the growth of the financial industry will lead to that of the other sectors at large.”
Nevertheless, few entities seem to be willing to take over a stock firm. Apple Investment & Securities, which had held out for a while by means of several capital increases, finally surrendered to continuous deficits and opted for liquidation. Around 10 securities companies are for sale, including eTrade Securities, IM Investment & Securities, Leading Investment & Securities, and Golden Bridge Investment & Securities, but the disposal of all of them with the only exception of IM Investment & Securities has been postponed for now.
Under the circumstances, many people are stressing that the financial authorities have to further facilitate access to the market so as to attract more financial and industrial capital. The Korean government lifted the regulations on stock ownership and the establishment of private equity funds for M&A purposes back in 2007, and enacted the Financial Investment Services and Capital Markets Act to take effect in 2017 in order to spur M&As, but the outcome has not been satisfactory.
“Not only have M&As in the local securities industry been puzzling and yielded no positive results in many cases, but also the government’s stimulus measures have failed to result in inter-company deals,” Korea Institute of Finance researcher Kim Ja-bong explained.
Jang Wook, business administration professor at Duksung Women’s University, echoed the sentiment by saying, “The M&As between local financial institutions have been driven by special factors such as restructuring in most cases, but it is market segmentation by investors and companies that can lead to the emergence of large entities.” He continued, “The Financial Investment Services and Capital Markets Act, increase in the assets of investors, and diversification of financial investment products are showing that the paradigm is shifting in the M&A market.”
An anonymous industry source added, “If the stock firms that have failed to meet the minimum capital adequacy ratio but are willing to become prime brokers take an aggressive stance, the atmosphere in the industry is likely to change significantly.”