Korean firms reeling from aggressive M&As

013-10-08 15:29

Firms reeling from aggressive M&As

Tongyang, Woongin, STX struggle to stay afloat on huge debts
By Kim Rahn
Growth is a priority for every business, but growing too fast can spell disaster for a company. Three Korean firms are currently experiencing this problem, after a series of mergers and acquisitions (M&As) brought them more harm than good.
Woongjin, STX and Tongyang, all went down in the last one year. Through M&As, the three groups grew but the tactics used for growth eventually caused them to collapse.
Samsung Economic Research Institute (SERI) economist Kim Sung-pyo says it is natural for a company to look for new growth opportunities. “But it would have been better if they focused on sectors with which they were familiar and in which they could take advantage of their existing knowhow,” he said.Woongjin Group, which got its start as a study guide maker, expanded into other areas by setting up Woongjin Foods and Woongjin Coway.
Backed by the success of its two new affiliates, Woongjin Chairman Yoon Seok-geum went after solar and construction businesses by establishing Woongjin Energy and Woongjin Polysilicon and acquiring Kukdong Engineering & Construction in the middle of the 2000s.
However, such rapid expansion led to a liquidity shortage at a time when the economy was unstable. Analysts say Woongjin paid 600 billion won for Kukdong, which some believe was overpriced.
Finally, Kukdong and Woongjin Holdings, the group’s holding company, filed for court receivership in September last year.
STX also grew through M&As. Based on Ssangyong Heavy Industries, the group took over a shipping firm and a shipbuilding company in a short space of time to add to the conglomerate’s portfolio.
STX acquired Aker Yards, a French cruise shipbuilder, in 2007 and established a large-scale shipyard in Dalian in 2008, but the shipping and shipbuilding industries collapsed during the financial crisis.
STX Group, which was founded by former chairman Kang Duk-soo, recorded more than 1.4 trillion won in net losses last year. Its key affiliates went under court receivership this year, and the group was virtually disbanded.
Tongyang, which is led by its Chairman Hyun Jae-hyun, started with a cement business and expanded into the finance, food, leisure and home appliance industries. Experts say that the companies were too diverse to be successful.
Analysts say there is always risk involved with M&As, which is why each decision should be carefully made.
“To create a stable cash flow, it is desirable for a group to focus on its key business and merge other firms in the same industry,” Korea Institute of Finance researcher Lee Yoon-suk said.
However, branching out into different industries isn’t always bad, Lee said, because it can diversify a group’s business portfolio.
“When a new strategy does not work, the group needs to make up for losses from its main business components, and it may bring liquidity problems to the whole group,” he said.
Kim of SERI also said in the long-term economic slump, companies will be able to lower risks and raise the possibility of success when they focus on their main business.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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