Act now on the poison pillThe Fair Trade Commission has withdrawn its opposition to the use of poison pills, a corporate strategy to make shares less attractive to deter takeover bids. Poison pills have been widely deployed in advanced markets as a defense mechanism against unsolicited bidders.
A target company can issue the right to buy new stocks at discounted prices to existing shareholders to fend off a hostile takeover attempt. The antitrust agency has so far been opposed to the plan, believing it is uneconomical for a large shareholder to be overprotective of its management control.
But its logic has been wrong.
Since the Asian financial crisis, we have been compelled to let down our guard and open our doors to mergers and acquisitions. Foreign capital was free, and it encouraged the attack of vulnerable Korean companies with few defensive measures to protect their management control. Many Korean CEOs complain that they never get a good night’s sleep due to fears of hostile takeovers.
Before the global recession set in, blue-chip companies like Samsung Electronics Co. and Pohang Iron and Steel Co. were the most concerned. They shivered at the thought of falling into the hands of foreign forces, given the fact that 60 percent to 70 percent of their stocks are owned by foreign capital.
The commission has made the right decision in giving the green light to the use of poison pills.
The strategy can be adopted once the government draws up a bill for parliamentary approval, and the parliament should waste no time in legalizing the plan. With management rights at risk, there is little time to waste.
Once the global economy regains its health, foreign companies will renew the hunt for their next merger or acquisition. Many have been keeping a close eye on the exceptional performance of Korean companies amid the global economic downturn.
If the Korean authorities move to legalize the defensive mechanism based on signs of hostile corporate predators, it will be too late, and the government may come under fire from the international community for economic nationalism. It is best to start building the walls of protection now, when foreign capital is least interested.
Once they are sure they are protected, companies can use their cash reserves for much-needed capital investment and to fend off corporate buyers. Local companies have been using profits to buy back their shares. If the companies use the funds to increase production, they can also create jobs. We know from past experience the cost of mending fences after the sheep are gone.