Let there be light

The latest merger announcement from H&CB and Kookmin leaves major issues unresolved
Has anyone ever heard of a straightforward Korean merger? Does such a thing exist? The ongoing merger of Korea’s two top banks, H&CB and Kookmin, added another notch to this track record last night (Wednesday). After the close of trading, it was announced that the two banks – which announced their intention to merge at the end of last year – had finally settled on a merger ratio.

The new ratio will see Kookmin shareholders get 63.1% of the new entity. However, no-one is particularly happy because the main issue – who will be the new CEO – has not been settled. In any normal merger situation, this would be decided fairly early on. Yet, almost five months into the process, there is still no clarity on the issue.

International investors tend to favour H&CB’s straight-talking Kim Jung-Tae. He is widely regarded as Korea’s most formidable banker. He has reassured international investors with his sound management of H&CB and his clear focus on profits as well as an avoidance of any chaebol lending.

Kookmin’s CEO is less well known – but that doesn’t make him any less keen to get the top role. In theory, his candidacy is also backed by Goldman Sachs which owns 14% of Kookmin.

There appears to be very little love lost between the two Korean bankers. The newly announced merger ratio also looks like the latest bout of horsetrading in their ongoing battle.

For Kookmin, it appears a minor victory. It represents a merger ratio of 1.6883, an improvement on the original ratio of 1.88. However, if you factor in a H&CB one-for-10 bonus issue, the ratio is tightened in from a less staggering 1.73. According to anonymous sources, this represents a concession to Kookmin.

And the name of the new bank? Again this is complicated. If Kookmin is the surviving legal entity, i.e. it takes over H&CB, then the name will paradoxically be changed to H&CB. If a new legal entity is created – into which both banks are injected – the bank will be called Kookmin.

Confused? You should be. The latter course represents an accounting nightmare, and is not popular with savvy foreign fund managers who would prefer Kookmin to take over H&CB.

That aside, who will win the CEO battle? Under the original plan, the merger committee – which contains six members – would decide simultaneously on the merger ratio and the new CEO. The fact that the merger committee has ducked the CEO issue sends out a very negative signal. It is now up to Goldman, the Korean government and ING (a shareholder in H&CB) to pick the CEO.

All sorts of theories are now doing the rounds. The merger will now not be finalized until October 31. One conspiracy theory says that because H&CB’s Kim will see his term of office end, then this will make it impossible for him to claim the role.

Conspiratorial though this sounds, it reflects more on prevailing sentiment than anything else. Sources close to the deal say they are concerned that a high degree of execution risk is developing. Given the animosity between the two senior managements, the danger with this merger is that two good banks could become bad because of management tensions at a senior level.

There is a genuine fear among all parties that the new Kookmin could dash any gains for shareholders via infighting. It would make everyone a lot happier if one side was seen to be totally in the driving seat. And thus while the announcement of the merger ratio may have been designed to quell rumours that the deal had stalled, it has not resolved the fundamental issues. The sooner there is clarity on who will be the new CEO, the more comfortable everyone will be.

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