Q.What attracts “black knights” to Korea?Terms like “black knight,” “white knight,” “attackers” and “defenders” come straight out of medieval tales of jousts and chivalry, but on any given day they are more likely to show up on the business pages of newspapers than in literary reviews.
That’s because these terms are used in stories about hostile mergers and acquisitions that have become a dominant feature of the contemporary landscape of business investment. Because medieval tales grip the imagination, the colorful language and imagery help us to understand modern-day contests for control of companies to enlarge shareholder profits.
What then are hostile mergers and acquisitions?
Any attempt to take control of a company’s management, in the face of opposition from that company, is defined as hostile. The takeover of a company’s management can be accomplished by picking up more stakes than are currently controlled by the management. This process is akin to doing battle, except that money, not swords or bullets, are the weapons employed.
A billionaire known in the United States as a corporate raider has been in headlines recently as a “black knight” whose maneuvers to take over a major Korean company have fired up nationalist opposition. American investor Carl Icahn led a group of foreign shareholders in a much-publicized battle to gain control of the management of KT&G Corporation, Korea’s largest tobacco company. Mr. Icahn and his allies began buying KT&G shares last year. Early this year his group offered a $10 billion buyout, but was rebuffed. The battle for control of one of Korea’s largest corporations is raising concerns that domestic companies are too vulnerable to aggressive foreign investors.
A few years ago, the hedge fund “Tiger Fund” made a bid for control of SK Telecom Company. Sovereign Asset Management from the United States went after SK Corporation’s management. While neither Korean company lost control, the foreign investors walked away with hefty profits. When Tiger Fund left, it was 630 billion won ($630 million) richer. When Sovereign sold its 14.8 percent stake in SK Corporation last summer, it made more than 800 billion won in profits. When there is a battle over management, the stock price of the targeted company usually rises because everyone is fighting to pick up shares.
So why do foreign investors and funds go after domestic companies? The answer is simple ― because they can.
Control of a stock company’s management can be grabbed by acquiring more stakes than other investors or by lining up enough support for the takeover effort from other shareholders who stand to gain windfall profits from the resulting rise in share values. As it turns out the largest shareholders at some of Korea’s major corporations do not own enough stakes to have a majority. Those hoping to take over a company in that situation won’t need to acquire too many shares to accomplish their goal. Hedge funds, which own a significant slice of foreign investments in Korea, target companies whose shares are divided among many shareholders, and whose stock prices are considered undervalued. Sometimes, these investors will keep attacking management to drive up the stock price, and then sell off their stakes for quick and easy profits.
Because KT&G was a state corporation before it was privatized in 2000, it does not have a single shareholder with a majority stake. KT&G’s shares are spread out among many shareholders ― which makes the company more transparent, and thereby more attractive to foreign investors ― at the same time it makes them vulnerable to hostile takeover attempts. More than 60 percent of all KT&G shares are owned by foreigners, and the largest shareholder is a foreign fund. While Mr. Icahn holds only a 6.5 percent stake, in combination with other foreign shareholders he is said to effectively control about a third of KT&G’s shares. This accounts for the election to the board of his candidate last month ― the first time that a foreigner won a seat on the board of a Korean corporation.
But KT&G is not the only Korean company having to fend off hostile takeover bids. The steelmaker Posco and KT Corporation were reported recently as targets of foreign raiders because, as with KT&G, their largest shareholders hold relatively small stakes, while foreign investors own a significant chunk of shares. Even Samsung Electronics, the nation’s largest corporation, has been in the sights of foreign corporate raiders.
With Korean corporations so exposed, many have called for measures to better protect domestic companies, feeling that the doors were left too dangerously open to foreign capital when seeking investments after the late 1990s financial crisis. The government, desperately needing to rebuild foreign exchange reserves, has made it easier for foreign companies to operate in Korea. The general view in Korean financial quarters is that foreign investors, the “attackers,” have too great an advantage over local firms, the “defenders” of domestic companies.
Business groups, such as the Federation of Korean Industries, and activists argue that Korean companies should be able to fend off attempted hostile mergers and acquisitions and would like to see the government step in to help Korean companies preserve their control over management.
But it would be wrong to always see hostile takeovers in a negative light. Indeed, they can help get rid of incompetent and corrupt executives and improve efficiency. We shouldn’t protect companies that are run poorly, although we can’t afford to let flawed regulations keep companies exposed to rapacious foreign raiders.
Shareholdings in Korean companies at the end of 2005
Largest shareholder Foreign shares
Samsung Electronics 27.54 53.83
Korea Electric Power 55.69 29.95
Kookmin Bank 4.79 85.43
Hyundai Motor 30.33 45.10
Posco 14.15 67.93
SK Telecom 33.32 48.95
LG Philips LCD 37.90 53.97
Hynix Semiconductor 9.56 18.78
Woori Financial Group 80.15 11.44
Shinhan Financial Group 6.54 57.06
LG Electronics 36.59 41.24
KT 29.64 46.26
Hana Financial Group 9.36 78.15
Korea Exchange Bank 52.65 74.16
KT&G 15.48 62.66
Source: Korea Exchange
by Lee Hyun-sang