Chaebol’s expansion: Three major conglomerates ― Woongjin, STX and Tongyang ― went belly-up this year because of their headlong expansion into diverse fields of business.

2013-10-07 17:22

Chaebol’s expansion

Three major conglomerates ― Woongjin, STX and Tongyang ― went belly-up this year. There are several reasons for this, but one is most certainly because of their headlong expansion into diverse fields of business. A recent report on chaebol subsidiaries once again illustrates the seriousness of this deep-seated problem in our corporate world, raising the need for the government to act resolutely in order to prevent the recurrence of another currency crisis.According to a report released by Chaebul.com which keeps track of the family-run conglomerates, the number of affiliates owned by the nation’s top 30 chaebol reached 1,246 at the end of last year, up 843 or 47.8 percent from the end of 2007. This figure has continued to rise sharply since surpassing 1,000 in 2008 despite negative public opinion against rash expansion by the chaebol.
Retail giant Lotte Group posted the largest increase in the number of affiliates from 43 to 79 in the five-year period. Dongbu, the steel and construction conglomerate said to be experiencing financial problems, came in second by increasing its subsidiaries by 33.
The surge in the number of conglomerate affiliates is attributed largely to mergers and acquisitions that have gained momentum since the 2008 global financial crisis. The fact is, a number of insolvent companies have been acquired by chaebol after being normalized through restructuring.
Corporate takeovers are not always bad. It’s possible to create a synergy effect if a conglomerate can succeed in diversifying its business. M&A deals also can be a prime engine for spectacular growth.
But an excessive business expansion could prompt a “winner’s curse’’ by putting severe financial strain on the conglomerates themselves that often rely on outside borrowings to acquire companies. Kumho-Asiana Group, which took over Daewoo E&C beyond its means, and Woongjin Group that plunged into trouble after acquiring Kukdong E&C are good examples of this “winner’s curse’’ mantra.
We can’t overemphasize the danger of pursuing M&A deals recklessly through funds secured by offering payment guarantees among subsidiaries, given that business expansion is possible only when corporate finances are in a good state. Indeed the court receivership applications by STX and Tongyang Groups have been caused by their overblown expansion of business and weak financial structures.
Against this background, the government needs to be in a hurry to introduce restrictions on the circular investment practice, which is favored by many conglomerates as a means to increase affiliates but could provoke a cascade of bankruptcies. The matter is now pending at the National Assembly, but it’s necessary to hasten the debate so that the chaebol’s excessive expansion might not undermine our economy down the road.