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Holding Sway through Cross Investment
Owners of Conglomerates
Holding Sway through Cross Investment
  • By matthew
  • July 19, 2013, 09:08
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It has been found that the owners of big businesses in Korea and their family members are continuing to exert significant influence on their companies. Such inside ownership is currently over 50% on average, while all of the top 10 corporate groups have recorded an increase in inside ownership and affiliated ownership since the beginning of this year. At the same time, cross shareholding is still commonplace, most of which is designed to further solidify control over companies. 

On May 30, the Fair Trade Commission (FTC) released data on the shareholding and circular equity investment of 62 conglomerates subject to a ban on cross investment. These 62 are divided into 43 chaired by the owners, eight by non-owners and 11 in the public sector. 

Low Shareholding Ratio but Tight Control over Entire Subsidiaries

According to data, the 43 business group’s average inside ownership fell from 56.11% to 54.79% between 2012 and 2013. However, the percentage rose from 4.17% to 4.36% when the relatives of the heads were factored. Affiliated ownership declined by 1.40 percentage
points from 49.55% during the same period. 

“The decline in inside ownership is because some new conglomerates, whose inside ownership is lower than the average such as Hansol and Amore Pacific, have been newly included in the analysis. However, Woongjin Holdings went through stock retirement in Kukdong Engineering & Construction, one of its subsidiaries where it had large shares,”said Shin Yeong-seon, director of the Competition Policy Bureau of the FTC, adding, “The merger between S-LCD and Samsung Mobile Display also played a part.”

The inside ownership of the 43 business groups dropped for the first time in three years. Nevertheless, the figure has remained higher than 50% for the last five years -- 52.86% in 2009, 50.50% in 2010, 54.20% in 2011, 56.11% in 2012 and 54.79% in 2013. 

Family ownership is especially high in Hankook Tire (34.84%), Booyoung (34.81%) and Amore Pacific (23.81%), but low in SK (0.69%), Hyundai Heavy Industries (1.17%) and Samsung Group (1.27). Of the 1,519 subsidiaries in the first category, 57 firms of 21 conglomerates are completely owned by the heads and their family members. 

The inside ownership of the 10 largest business groups was below 50% on average from 1994 to 2010, with the only exception occurring 1999. However, it totaled 53.5%, 55.73% and 52.92% in 2011, 2012 and 2013, respectively. 

The owners’ and their families’ shareholding ratio fell in all groups, but affiliated ownership increased among those in the top 10 list. “There has been some improvement in ownership structure when compared to the previous year, but the heads and their families of leading business groups have been found to be still maintaining tight control over all affiliates through mutual investment,” added the director.

Samsung and Lotte Group Engaged in Complex Form of Cross Shareholding 

Such cross investment is characterized by structural complexity. Specifically, they have gone through an average of 4.51 steps in 35.33 affiliates. This is especially conspicuous for Samsung Group and Lotte Group. In contrast, groups without a head tend to have a more vertical mutual investment structure, with the number of steps as small as 1.52. 

The number of the steps with a shareholding ratio of at least 1% reached 124 in 14 groups, 69 of them in 9 groups being formed in or after 2008. “It seems that there are some cases in which cross investment has been used to further control, support insolvent subsidiaries and avoid regulations,” the director added. 

Circular equity investment is particularly prevalent in financial companies and insurers, e.g. Samsung Group’s Samsung Card and Samsung Life Insurance, Dongbu Group’s Dongbu Capital and Dongbu Life Insurance, Hyundai’s Hyundai Securities, and Tong Yang’s Tong Yang Securities and Tong Yang Life Insurance. Hyundai Motor Group, in the meantime, is engaged in cross shareholding in three major subsidiaries -- Hyundai Motor Company, Kia Motors and Hyundai Mobis. 

The Hyundai Heavy Industries, Daelim and Halla Groups are involved in the practice in only three subsidiaries, while Lotte’s cross investment revolves around Lotte Shopping, Lotteria and Lotte Confectionary. Hanjin Group, Hyundai Department Store and Hyundai Development Company are making mutual contributions in just one main subsidiary; Korean Air, Hyundai Department Store and Hyundai Development Company, respectively. This is similar for Young Poong (Young Poong) and Hansol (Hansol Paper). 

Hansol Newly Added to Business Groups Involved in Cross Equity Investment 

The number of conglomerates whose subsidiaries are engaged in mutual contribution with a shareholding ratio of 1% or higher has increased to 14, with Hansol added to the list. Compared to last year, Lotte, Hyundai, Hyundai Department Store, Tong Yang and Hyundai Development Company recorded increases in the shareholding percentage between subsidiaries involved in cross investment or made new mutual investments. 

Hyundai Motor Group, Hanjin and Dongbu moved in the opposite direction, while Daelim, Hyundai Heavy Industries and Halla maintained the same shareholding percentage year-on-year. In regards to Samsung and Young Poong, an increase and decrease in shareholding percentage has been observed, respectively. 

Mando Corporation of the Halla Group provided assistance for Halla Engineering & Construction by means of cross investment. Specifically, it participated in a paid-in capital increase by Meister totaling 378.6 billion won, with Meister then offering 345.3 billion won for the paid-in capital increase by Halla Engineering & Construction. 

“Laws need to be made immediately to ban new cross shareholding in order to prevent such cases of support for insolvent subsidiaries and corporate succession,” the director explained, stressing, “Information and data must be disclosed on a wider scale to ensure better monitoring.”