Under Pressure for Governance Reform
The first half of 2018 has seen no Korean conglomerate pursuing trillions of won worth of mergers and acquisitions (M&As) to secure new growth engines and launch new businesses. Instead, an increasing number of conglomerates merged their subsidiaries to reorganize the groups under the government’s pressure for governance reform.
According to a report released by the Fair Trade Commission (FTC) on August 22, the total amount of M&As of external companies, which were pursued by conglomerates with an asset of more than 5 trillion won (US$4.47 billion), came to 1.8 trillion won (US$1.61 billion), down 82.7 percent from the 10.4 trillion won (US$9.29 billion) at the same period last year. By contrast, the number of M&A deals increased from 27 to 50.
The M&A deals with external firms are intended to get new growth engines by moving into new areas. Conglomerates hesitated to make a large-scale investment and only had relatively smaller M&A deals. In contrast, Samsung Electronics Co. completed the acquisition of US-based car infotainment and audio company Harman for 9.3 trillion won (US$8 billion) in the first half of last year.
An official from the FTC said, “Conglomerates couldn’t attempt to ink large-scale M&A deals due to growing global economic uncertainties.” Experts also said that conglomerates focused on stable business activities rather than challenges with risks as the government’s policies, including the governance reform drive, amplified uncertainties amid worsening market conditions.
There was a significant increase in the number of intragroup mergers of subsidiaries. This was because business groups turned into a holding company system, removing cross-shareholding ties. The amount of such M&A deals grew by as much as 198 percent, from 4.9 trillion won (US$4.38 billion) last year to 14.6 trillion won (US$13.04 billion) this year. The number of such deals increased from 18 to 57 as well. Accordingly, the total amount of mergers by conglomerates stood at 16.5 trillion won (US$14.74 billion), up from 15.3 trillion won (US$13.67 billion) in the first half of last year.
For domestic companies as a whole, including small and mid-size firms, the amount of enterprise combinations decreased from 41.5 trillion won (US$37.07 billion) to 21.6 trillion won (US$19.29 billion), while the number of the deals increased from 215 to 266. When including foreign companies, the figures amounted to 175.4 trillion won (US$156.68 billion) and 336. The amount went down by 72.2 trillion won (US$64.49 billion), while the number went up by 41.
CJ O Shopping Co. was the domestic company that completed the biggest M&A deal in the first half of the year. It merged with CJ E&M Corp. and the amount of the merger was 3.2 trillion won (US$2.86 billion).