[Viewpoint] Greed behind Kumho’s troublesWith the new year under way, it’s a good time to examine the situation at Kumho Asiana Group.
One question stands out more than others: Who in fact bears more of the responsibility for the company’s current problems, Kumho or the banks?
It is a tough question to answer.
I have no intention of defending Kumho, but I do take issue with the actions of the banks.
They certainly played a role in the current mess, and they are showing no signs of remorse. And we all know that when you don’t take time to reflect, it is easy to repeat the same mistakes.
We are all aware of what Kumho did wrong. The most serious crime that it committed involved greed. It took over Daewoo Engineering and Construction with excessive loans, which ended up choking the company nearly to death.
The deal ended up being a curse, and Kumho is now paying the price.
At the end of last year, the business group began a restructuring process, meaning that the company’s creditor banks began meddling in Kumho’s management. The group’s chairman now has to inject a substantial amount of his private assets into the firm, an unavoidable move that’s necessary to save the business.
The changes afoot were apparent when the group held a kickoff meeting for this year, and all of the company’s executives turned in resignations, waiting for their fates to be decided by others.
The banks, though, are also guilty of greed. They were, in fact, greedier than Kumho.
Let’s go back to what had happened in 2006.
In November of that year, Kumho took over Daewoo Construction for 6.4 trillion won ($5.6 billion). Of that total, Kumho only paid 2.9 trillion won, which amounted to less than half of the purchase price. The rest was funded by financial investors including Shinhan Bank, the Industrial Bank of Korea and Daewoo Securities, a subsidiary of the Korea Development Bank.
Industry insiders said the total price tag of the deal should have been about 4 trillion won, but the final amount rose by more than 50 percent because of two reasons. The first was competition, as six companies made bids to take over Daewoo Construction, raising the price.
The second reason is tied to the financiers.
When there is enough money, it’s always easy to up the ante in a gamble. As the scope of the deal grew, financiers became fearful of possible consequences. So they created safeguards in the form of tight repayment conditions and 9 percent annual compound interest for three years.
If everything fell apart, they could recover their money through put-back options.
This is no different from the practices of a loan shark, who gives out a high-interest loan with no questions asked and then harasses the individual’s families and friends for repayment when the borrower fails to pay back the money.
Many experts say it is meaningless to consider the “what ifs” when it comes to economic and business matters. But let’s do it this one time. What if the banks had not financed Kumho three years ago when it looked to take over Daewoo Construction? Kumho would not have been able to buy the company. Even if it had, the price would have been much lower. Of course, Kumho could have found other investors, but it is hard to find financiers when banks are not joining the deal. One financial investor involved said, “I participated because banks did,” adding that “even if something went wrong, I believed that the banks would be able to resolve the situation first.”
When risks are too big, investors - and particularly banks - must take a step back and reassess. If they don’t, public funds will later have to be used. That’s a valuable lesson we learned from the foreign exchange crisis. That’s why we are allowing banks to be extremely strict and rigid with individual customers and small companies.
Let’s think about home-backed loans. They probably have the lowest amount of risk, but a bank only provides up to 60 percent of the home price to prevent real estate speculation. And yet, the banks even consider the borrower’s debt-to-income ratio.
Such fastidiousness, however, disappeared when banks loaned money to Kumho three years ago because of greed. And real people are suffering from the consequences now.
The banks and Kumho were greedy because they had so much money back then. Large banks had huge reserves, and companies had hundreds of trillions of won in assets. Companies had no place to spend the money, and banks had no opportunities to lend.
The only opportunities, they felt, were in the merger and acquisition market.
After Kumho’s takeover of Daewoo Construction and Korea Express, more deals followed, such as Hanwha’s attempted takeover of Daewoo Shipbuilding and Marine Engineering. The price tags of these deals skyrocketed as well.
This year, more companies will be placed on the market. Banks still have no place to invest, and companies again have money. But today I believe that no bank or company would take such risks. If they repeat these practices once again, however, the people will throw rocks at the banks first.
*The writer is the business news editor of the JoongAng Sunday.
Translation by the JoongAng Daily staff.
by Yi Jung-jae