[Letters] Tendency to overpay in M&As

Whenever a listed Korean company is announced to be in an acquisitive mode I worry it is about to overpay for mergers and acquisitions in ways that could hurt the entire firm afterwards. Why is it that so many Korean companies tend to target the wrong companies for M&As and overpay for them so consistently? Even Chin Dong-soo, the FSS chairman, voiced similar concerns regarding the potential sale of Woori Financial in recent Wall Street Journal article.

In Korea, dilutive mergers are common and an enigma for most logical-thinking investors. Why is it that so many large companies with so many bright employees make the same mistake of overpaying over and over again? Just look at recent publicized examples over the last few years: Kumho-Daewoo Construction, Eugene-Seoul Securities, Eugene-Himart, and the most recent likely-to-fail Hyundai Group attempts. These are intelligent firms overpaying to a point where the acquisition must be regurgitated due to inability to service debt levels.

The reasons may not be so obvious, especially to foreigners, but are based on mostly local cultural factors as well as a lack of basic sophistication in the financial field.

First off, Confucian culture discourages juniors from advising seniors on the correct path - namely, if the chairman or CEO wants the target company no matter what price, no one will seriously object within the firm out of fear of being chastised, demoted or fired.

They make emotional purchases. Phrases like, “I want to be a top ranking jaebeol, with size to prove it” or “We want to be a cool firm with lots of product offerings,” are childish, but often used as logic behind acquisitions. These emotional “purchases” are often in great competition with other buyers, resulting in high prices that don’t make business sense.

Second, other people’s money - when a listed firm overpays for targets, it is not the chairman or CEO paying the bill (at most a small minority, if any). It is ultimately the money of the wide investor base that suffers from the bad decision to overpay.

Last, but not least, most professionals advising on these horrible M&A deals come solely from sell-side investment banking backgrounds. Savvy firms should hire less from advisory investment banks and spend the money to bring in professionals who have worked in the buy-side of things (such as hedge funds and value mutual funds). These buy-side people are far more used to spending the least amount of money for the highest accretive targets for M&A.

I expect the future financial landscape in Korea to become very sophisticated rather quickly. But the culture of the past must be evolved to allow for progress. The financial field is a game of the mind, unlike the manufacturing field, which is largely a physical endeavor. Because Koreans are creative and intelligent people with the will to live better every day, I expect a day will come when I write about extreme levels of sophistication in finance, driving many locals to enter foreign markets in their pursuit of accretive M&A.

Joonho Um, Wharton School, University of Pennsylvania