In 2002, mergers and acquisitions (M&A) in Asia registered a sharp drop from the highs of 2001. According to Thomson Financial, up to the end of the third quarter of 2002, announced M&A deals in Asia outside Japan totalled $62 billion, compared with $76 billion for the same period in 2001.
Despite the difficult economic conditions, Korea's improving legal and regulatory conditions have made investment into the country more attractive, and 2002 saw significant deals being done. While FDI fell to $11.87 billion in 2001 from a high of $15.69 billion the year before, these figures are up from $6.9 billion in 1997, according to the Korea Investment Service Centre. Since the Asian financial crisis of 1997, Korea has turned its economy around. The International Monetary Fund was forecasting Korean GDP to grow by almost 6% this year, though the actual results are likely to be lower due to the slowing global economy.
Unemployment stood at 2.6% in October 2002. Korea was ranked fourth last year in terms of GDP growth among OECD members. Much of this success can be attributed to the efforts of the Korean government to tackle corporate debt and to deal with the non-performing loans of Korean banks. In addition, Korea's legal and institutional framework has also been improved to make Korea a more attractive destination for foreign direct investment.
The Foreign Investment and Promotion of Act of 1998 has simplified foreign investment procedures by moving from the previous "positive list" system (showing the types of businesses that were open to foreign investment) to a "negative list" system (showing the types of businesses that are closed to foreign investment).
Foreign individuals and corporations may now purchase real estate in Korea, without any restrictions on usage of the site purchased. Tax incentives have also been increased for foreign corporations operating in Foreign Investment Zones, Free Export Zones and Customs Free Zones, together with foreign corporations using advanced technology or which are involved in service industries that support the manufacturing sector.
Labour laws and practices have also been undergoing change, from the seniority-based remuneration system, where it was difficult to layoff workers. The government has promoted labour market flexibility by legalising redundancies in certain circumstances involving the survival of the company, and the employment of temporary workers assigned from placement agencies. Flexible working hours have also been permitted to allow employers to accommodate fluctuations in demand.
FDI deals of note in 2002 include:
- Wallenius Lines and Wilhelmsen acquired Hyundai Merchant Marine's car carrier division for $1.3 billion
- Hutchison International Ports, a division of Hong Kong's Hutchison Whampoa, acquired certain port facilities of Hyundai Merchant Marine for $215 million
- Goldman Sachs raised its stake in Kookmin Bank from 2.27% to 5.42%, at an estimated cost of $193.58 million, through the purchase of debt convertible into shares of Kookmin Bank
- WPP, the world's largest advertising group purchased 35% of LG Ad, Korea's second largest advertising company, and thereby gaining a controlling stake in LG Ad, for an undisclosed amount
2002 also saw notable M&A deals within Korea, top of the list being FinanceAsia's M&A Deal of the Year 2002: Seoul Bank's acquisition by Hana Bank for $1 billion. This deal created the third largest bank in Korea and vindicated efforts by the Korea government to privatise the local banking sector. Hana Bank was chosen over the foreign private equity firm Lone Star, and sought to emulate the success of the previous year's local merger between Kookmin Bank and Housing & Construction Bank. The Kookmin-H&CB merger created Korea's first 'superbank', and was expected to take on about 40% of the country's consumer banking business.
In December 2002, the Korean government announced that it had selected Shinhan Financial Group as the preferred bidder for the government's 80% stake in Chohung Bank. The competing bid was from US buyout fund Cerberus Partners. Shinhan was reported to have offered $2.4 billion for the stake. If completed, this deal will make the merged Shinhan-Chohung bank the second largest in Korea.
Korea's insurance sector has also received a fair amount of attention recently due to the announcement by ING Group, the Dutch banking group, of its agreement with Kookmin Bank in anticipation of the deregulation of the Korean insurance market later this year. ING has agreed to invest up to $250 million in Kookmin at that time, increasing its stake from approximately 4% at present to about 6%. The agreement with Kookmin is reported to involve Kookmin selling ING's insurance products through its branches when bancassurance business becomes possible in Korea.
It has also recently been reported that the US giant, American International Group (AIG) is in discussions with Korea's Woori Finance about an insurance joint venture along similar lines.
While Korea's legal and regulatory framework has been made more attractive to foreign investors, the enthusiasm of foreign investors has often been tempered with frustration at the slowness with which management of the heavily indebted companies and chaebols have moved to accept foreign investment in reality. None of this frustration was dispelled when it was reported at the beginning of December that the Korean Kumho Group, in debt for about KRW 5.5 trillion ($4.6 billion) as at the end of 2001, had broken off talks with foreign private equity firms on the sale of the tyre manufacturing assets of Kumho. The private equity firms in question were the Carlyle Group and JP Morgan Partners Asia, already significant investors in Korea. Carlyle holds a controlling stake in Koram Bank, which it bought for $300 million in 2000 in a deal that BusinessWeek called "The Korean Bank that Almost Got Away".
This announcement comes not long after the high-profile termination of negotiations between Micron Technology, Inc and Hynix Semiconductor of Korea. Micron is one of the largest manufacturers of computer memory semiconductors. It had offered to buy the memory semiconductor business of Hynix for $3 billion. The board of Hynix rejected this offer in early 2002, and soon thereafter Micron terminated negotiations. At the time, Hynix owed its creditors more than $5 billion, and its creditors and the Korean government were highly supportive of the deal.
It is very likely that, despite the improved regulatory environment, and the interest of foreign investors, many indebted businesses in Korea will seek to hang on for as long as possible, taking hope from the good economic performance of the Korean economy as a whole, and an incipient global economic recovery. However, this prevarication may merely make things worse in the long run. As BusinessWeek reported in October 2000, Carlyle and its consortium partners had originally bid for 35% of Koram, offering $450 million. By the time the regulators had approved the deal, Koram's shares had been sold down by nervous Koreans, and Carlyle and its consortium partners finally secured 40.7% of Koram for the $450 million they had offered.
