Too Many Big Fish to Buy

AT the beginning of 2009, there were high expectations that M&A’s would be actively accelerated throughout the year. The local M&A market was overflowing with major companies such as Daewoo E&C, Hynix, Daewoo Shipbuilding & Marine Engineering (DSME), and Daewoo International up for sale. However, not only weren’t there any big deals sealed, but there is no sign of any integration happening for quite a while.

Although Kumho Asiana, Daewoo E&C’s largest shareholder, chose Jabez Partners, a Middle East-based private equity fund (PEF), and U.S based TR America Consortium, as the preferred bidders for Daewoo E&C on November 23, neither had made any movement, not even submitting a letter of intention, by December 4. Currently, it is being reported that the two preferred bidders are seeking strategic investors (SI).

However, it should be noted that the bidding price for Daewoo E&C suggested by some bidders was KRW 20,000 per share, while as of December 10, the closing price was KRW 12,600 per share. Accordingly, it seems that no potential SI will pay Daewoo E&C a favorable amount, or even KRW20,000, raising doubt among market players that the two bidders will be able to find adequate SIs. As a result, the sake of Daewoo E&C is likely to be unsettled for quite a while.

Selling Hynix is almost impossible in the short term. After the withdrawal of Hyosung’s plan to acquire Hynix, creditor banks have resolved to sell their shares through a block sale if they fail to sell the semiconductor company to a local corporation or investor by the end of next January.

However, creditor banks will be unable to sell to foreign investors whose stakes are already at 23%, as the Korean government will not allow a foreign investor to become the largest shareholder of Hynix. The Korean government, worrying about any possible technology leaks, has already declared that it would prevent a foreign investor or company from acquiring Hynix. As of now, the people’s share program in which creditor banks sell their shares to the Korean public is regarded as the best alternative. With these two options, the M&A of Hynix is not expected to be either quick or easy.

The sale of DSME is also proving to be problematic. Despite KDB’s RFPs (request for proposal) to approximately 20 securities companies and investment banks regarding the sale of DSME on November 8, the market has shown little enthusiasm. Even POSCO, the strongest candidate, is being timid. In an abortive M&A last year, Hanhwa group suggested KRW 60,000 per share for DSME, much higher than the current price of KRW 16,000-17,000 per share. As of now, therefore, there is no reason for KDB to speed up the selling process until they get an appropriate bid.

Daewoo International seems to be the best among the worst. POSCO, the leading bidder for the company, rushed into the bid by selecting an M&A advisory company, while Hanwha, POSCOS’ strongest competitor, is reported to have abandoned its bid. The problem is that there are too many big fish to buy, and when it comes down to it, the key factor for a smooth and successful M&A is capital. Consus Asset Management, the preferred bidder for Kumho Life Insurance (KLI), is known to be struggling to raise funds .

Recently, the Korean government decided to abolish or ease various regulations on PEFs and hedge funds to encourage the promotion of corporate restructuring and M&As. However, with concern being raised over the risks caused by easing these regulations, it is still uncertain whether the government’s deregulation measures will take effect.