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Chaebol add many subsidiaries

Published: 06 Oct. 2013, 22:15

As the financial meltdown of the Tongyang Group brings new attention to how family-oriented Korean conglomerates manage their affiliates, many of the top 30 chaebol companies have expanded their businesses aggressively over the past five years.

According to Chaebul.com, a Web site dedicated to providing information about the families that run Korea’s chaebol companies, the number of affiliates of the nation’s top 30 family-owned conglomerates have surged nearly 50 percent since 2007, with some expanding 80 percent.

Chaebul.com said the total number of affiliates owned by the top 30 chaebol was 1,246 at the end of last year, up 843, or 47.8 percent, from the end of 2007.

This month, three affiliates of Tongyang Group filed for court receivership after they failed to secure funds to keep themselves afloat. They had relied on another company in the group for financing previously.

Before Tongyang, STX and Woongjin Group had similar problems and some analysts blame the liquidity crises on restless expansion.

Over the past five years, local retail giant Lotte Group posted the largest increase in the number of affiliates from 43 at the end of 2007 to 79 at the end of last year.

The steel and construction conglomerate Dongbu Group added 27 affiliates from 2007 to last year, and smart grid and solutions chaebol companies LS Group and LG Group each added 28.

Hyundai Heavy Industries increased the number of its affiliates from 8 at the end of 2007 to 27 as of the end of last year, while Hyundai Group increased from 9 to 21 in the same period.

The only company that reduced the number of affiliates over the past five years is Kumho Asiana. The number of affiliates of Kumho Asiana Group fell from 35 at the end of 2007 to 20 last year.

The main cause for the surge in affiliates is mergers and acquisitions. A large number of insolvent companies have been acquired by conglomerates after they completed restructuring.

Chaebul.com said there are growing concerns that the excessive expansion could bring about a “winner’s curse” by increasing financial and management strains on the conglomerates.

While M&As are a time-honored way for big companies to grow, it can also put on pressure if they borrow too much to acquire the companies.

“Some conglomerates face insolvency after forcibly acquiring other companies to expand,” said a spokesperson for Chaebul.com. “To prevent such crises, companies should establish an effective and transparent restructuring system for insolvent companies, and receive an approval from the general meeting of shareholders when signing a large-scale M&A.”

In the cases of Woongjin, STX and Tongyang, analysts blame excessive expansion in the number of subsidiaries for the liquidity crises.

The total liabilities of the 30 chaebol companies last year was 574.9 trillion won ($535.2 billion), up 83.2 percent from 313.8 trillion won at the end of 2007.

BY KIM JUNG-YOON [[email protected]]