M&A market plagued by oversupply

2013-12-24 17:13

M&A market plagued by oversupply

By Kim Tae-jong
The nation’s mergers and acquisitions (M&A) market remains in the doldrums because many companies up for sale have failed to find new owners amid the prolonged economic slump. The combined value of firms on the market is estimated at dozens of trillions of won.
Experts say that it is highly likely that only a few deals will be made due to a small number of investors showing interest. “There are many more supplies than demand in the M&A market,” said Kim Dae-hyun, a certified public accountant at M&A team of Ernst & Young. “As a result, there are only a few deals made, with a number of companies failing to find new owners.”
He stressed that investors tend to maintain very “conservative” forecasts about the economy, which was another reason for them to hesitate to even acquire an attractive item on the market in recent years.
In fact, cash-strapped conglomerates are trying to sell off their affiliates to address liquidity shortages, as the government has pushed them to lower their debt ratios and improve their financial health following a series of bankruptcies of big conglomerates.
For example, Hyundai Group has decided to sell all of its financial affiliates and other cashable assets to raise over 3 trillion won in a preemptive measure to avoid a liquidity crisis. Its financial units to be put up for auction include Hyundai Securities and the brokerage’s two affiliates, Hyundai Savings Bank and Hyundai Asset Management, which are worth an estimated 1 trillion won.
Dongbu Group also plans to sell two of its key affiliates Dongbu HiTek and Dongbu Metal, and other core assets to prevent its current cash shortage from developing into a liquidity crisis, aiming to secure up to 3 trillion won by 2015.
Many construction firms, which have long suffered falling profits in recent years, are also seeking new owners, such as Ssangyong Engineering & Construction, LIG Engineering & Construction and Tongyang Engineering & Construction.
Brokerages, which faced a stagnant run on the local stock market and falling profitability, are also for sale. Four out of 10 of the largest securities firms will be soon put up for auction, as well as six smaller ones.
But experts warn that unsold companies stuck in the M&A market can cause burdens on the economy.
“If a lot of companies fail to find new owners, it will be a major obstacle for their restructuring efforts, as they may have to be sold at much lower prices than their actual value,” said Kim Sung-pyo, an economist at the Samsung Economic Research Institute. “This is obviously a big burden not only for individual firms and also the nation’s economy.”
He added that the oversupplied M&A market will show little sign of improvement until uncertainty in the economy is resolved.
To tackle the issue, experts also suggest that the government should ease regulations on private equity funds (PEFs) so that they can actively get involved in more M&A deals.
“With the growing demands for corporate restructuring amid the prolonged downturn, it is necessary to ease regulations on PEFs,” said Professor Kim Sang-jo of Hansung University. “The quality of PEFs here is still low due to too many regulations on them due to concerns over their negative impact on business, but it’s time to support them so that they can play a bigger role in the M&A market.”