Like David Trying to Gobble up Goliath?
KCC chairman Chung Mong-jin has officially announced his intent to acquire U.S. silicone maker Momentive Performance Materials Inc.
Chung issued a personal statement on Sept. 4 to make it clear that KCC Corp., South Korea's largest maker of building materials, will push to take over Momentive as planned.
According to investment banking (IB) industry sources, Chung has decided to come to the front as concerns are growing in the market about KCC’s takeover plan. Skeptics note that the company lacks experience in merger and acquisition (M&A) and may not be able to raise funds required to purchase the U.S. company.
Chung issued a press release after the stock market closed, saying, “KCC is very serious about acquiring Momentive. KCC will carefully review all related issues and thoroughly prepare for the M&A.”
Considering the fact that a company usually don’t show its hand until the last minute of completing an M&A procedure, Chung’s remarks are truly exceptional, according to industry analysts. A source who is well-informed with the internal matters of KCC, said, “Chung has led the M&A plan and made his bid for victory.”
However, the IB industry’s negative view of this acquisition is one thing Chung has to overcome. Momentive, formerly General Electric Silicone, was created from the sale of General Electric (GE) Advanced Materials and its former joint ventures GE Bayer Silicones and GE Toshiba Silicones to Apollo Management, L.P. in December 2006. The company has been running business for 75 years and posted 2.6 trillion won (US$2.33 billion) in sales as of the end of last year. Momentive is the world’s second or third largest producer of silicones and silicone derivatives with a great number of original technology patents.
In contrast, KCC’s silicone business is in its infancy compared to the company’s businesses related to building materials and paints, which post trillions of won in sales. An official from the IB industry said, “It is impossible to know how large KCC’s silicone business is, as it is categorized as ‘other’ business in its financial statements. But the securities industry estimates its sales at about 200 billion won to 300 billion won (US$178.97 million to US$268.46 million). The latest takeover battle is like David trying to gobble up Goliath.” In addition, the fact that KCC has no notable track record in the M&A market under Chung’s leadership strengthens the negative outlook for the latest acquisition .
However, KCC says that there is no problem with the acquisition since it has sufficient cash assets. In regard to concerns over the company’s financing capabilities, Chung said, “There is a risk of specifying the whole process of the M&A because we are participating in a takeover battle in the form of a consortium consisting of KCC, SJL Partners and Wonik and are dealing with one of the top firms in the global market. KCC is now trying to find the best means to riase more than 1 trillion won (US$894.85 million) of payment guarantee while closely discussing it with SJL Partners and financial institutions such as banks and investment firms. The company has very sound financial status and is planning to secure funds for the acquisition in various ways, including cashable assets.”
When KCC succeeds in taking over Momentive, its annual consolidated sales are expected to nearly double to 6 trillion (US$5.37 billion) from 3.4 trillion won (US$3.04 billion) as of 2017. Particularly, KCC, which has been developing and producing silicone manufacturing technologies on its own for the first time in the domestic industry, will be able to consolidate its position in the global market, beyond the simple expansion of the silicone business. An official from KCC said, “With the acquisition of Momentive, we can complete the business portfolio ranging from advanced materials to paints, glasses, flooring materials and doors and windows, based on the main silicone business. So we will expand our business not only to the domestic market but also the global market.”