As Korea seeks to extract itself from the economic crisis gripping all of Asia, the country as a whole is going through several radical changes. During this dynamic time in history, significant changes are occurring at such a rapid rate that Korean society itself is being forced to adapt to the new environment in a hasty manner. After the initial euphoria over the mergers & acquisitions (M&A) "wave" immediately ensuing after the onset of the crisis and the International Monetary Fund (IMF) program, the market has subsided significantly to the concern of both government and investors alike. With news of labor unrest, severely-reduced domestic consumption, devaluation of the yen, less-than expected export results, and contraction in 1st quarter GDP, the stock market has sunk to an 11-year low, barely above the 300-point level. Investor confidence is waning as corporations attempt to grapple with their high levels of debt through several restructuring measures.  Through the inducement of large amounts of foreign investment, it is hoped that Korea will recover its economic strength. However, foreign investors, in general, have taken a wait-and-see attitude towards investing in Korea. With new regulatory changes still uncertain, unclear results of corporate restructuring and an unstable market, and rumors of a second currency crisis about to hit, many foreign investors are waiting until market conditions become clearer. As a result, the planned restructuring drive through the inducement of foreign capital has not taken off as hoped. Both at the corporate and government levels several reform strategies are currently being implemented to restore investor confidence. However, the restructuring process is a long one that may not produce results quick enough for some. 1. The Corporate Restructuring Process The immediate goal of corporate restructuring for Korean firms is to reduce their high levels of debt and ultimately improve efficiency for greater international competitiveness. According to a study by the Fair Trade Commission, the average debt-to-equity ratio of the top 30 conglomerates was 518 percent at the end of 1997. Since the onset of the strictures of the IMF program, restructuring of Korean companies has been undertaken in a 4-stage manner. Starting with the easiest measures to implement such as voluntary retirement, the restructuring process has gradually moved into the more painful phase of implementing mass layoffs and the selling off of profitable divisions. Beginning in the latter months of 1997, Korean corporations or chaebols began asking for voluntary retirements, followed by the cuts in benefits and dividends, and wage freezes and cuts for all employees. As the first stage of restructuring did not significantly reduce corporate debt, the second stage began with the laying-off of "non-essential" personnel, with female workers being the first major casualties of the restructuring drive. Next followed the "forced" early retirement of those at or near retirement age by making them leave early or risk losing pension benefits. In combination with these measures, corporations began sacrificing long-term growth for short-term capital liquidity as R&D investment was reduced. Facility investments have also fallen 31 percent due to shortage of funds and overall recession in the market. The third stage of the restructuring drive began around February with the signing of the Labor Accord. The "soft" laying off of essential personnel for companies began with a small reductions of 5 to 10 percent of the payroll. In April, the number of unemployed surpassed 1.4 million with that number expected to reach over 2 million by the end of the year. In this stage the Korean companies began selling off massive amounts of unprofitable divisions, real estate, and other fixed assets. Things such as idle property, golf courses and office buildings were all placed on the auction block. However, this has created a situation of too many sellers and not enough buyers, thus causing a fall in real estate prices. Furthermore, foreign companies have shown little interest in the purchase of unprofitable companies put on the market. Korea has reached the fourth stage of restructuring in recent weeks with the announcement of "hard" layoffs. With unemployment surpassing 1.4 million in April at a 12-year high of 6.7 percent, corporate restructuring is claiming hundreds of victims daily. There are even indications that Korean corporations are considering selling even their prized divisions in order to reduce their debt-to-equity below the 200 percent level. Scaling down or even abandoning overseas projects by chaebol is a pattern under way. Despite the labor issue, there are signs that the M&A market will improve. In the biggest deal struck for a domestic business to date, Hanwha Energy sold its power generation business to AES of the United States for $874 million. 2. Solving the Labor Problem A key issue in allaying foreign investors' fears over the unstable economy is the resolution of the labor problem. Foreign businessmen have cited labor practices as the major hindrance to their investment in Korea along with the huge amount of debt by domestic businesses. Although the official unemployment number stands at 6.7 percent, hidden unemployment is speculated to be much higher. Major conglomerates have recently announced mass-layoff plans to add to the further reduction of the workforce. With labor unions calling for general strikes in opposition to the introduction of mass layoffs, the government has vowed to deal sternly with all non-government approved strikes. Despite layoffs being a key component of restructuring, labor unions have taken a defiant stance towards a further reduction of their ranks. The labor strikes staged by the Korean Confederation of Trade Unions (KCTU) have come at an inopportune time as Korea tries to solicit foreign investors. Even the mention of a strike puts fears in the minds of foreign investors and hampers any efforts to attract outside capital. The government continues to seek measures that continue the restructuring drive while minimizing the burden on the average citizen. 3. Government Response Regulatory Changes Recognizing the slowdown in investment activity, the Korean government has issued a wide range of economic reform policies in a short period of time in an attempt to woo foreign capital. Korea, long being considered as a closed nation, is quickly opening its doors to the outside world. The liberalization process has speeded up with the complete lifting of the foreign ownership limit from the 55 percent level to 100 percent for all listed local firms, except state enterprises. The limit on government-run companies has been expanded from 25 percent to 30 percent. The limit for telecommunication companies will rise from 33 percent to 49 percent in January. 1999, while the limit for oil companies will rise on Aug. 1, 1998 from 50 percent to 100 percent. Once hotly disputed, even hostile M&As by foreign corporations of domestic firms (except defense-related) are now allowed. As of July 1,1998 the real estate market will be liberalized to foreigners. While the limit of 200 pyong (about 661 square meters) for residential property will still exist, foreign companies will find it easier to acquire land. The foreign exchange system will also be completely liberalized in a two-stage process by the year 2001. Effective immediately, all foreign exchange transactions related to foreign direct investment, equity investment, or mergers and acquisitions of Korean companies will be liberalized by July 1, 1998. Furthermore, there will be a lifting of restrictions pertaining to residents' foreign borrowings. From April 1, 1999 corporations will be free to invest in foreign countries, keep the foreign currency earned abroad, and hedge their forex risk in the forward market. Foreigners will also be allowed to raise capital domestically. All financial institutions will be allowed to engage in the foreign exchange business. By June 2001, all restrictions involving domestic individuals will be lifted. In terms of financial reform, the government is expected to intervene directly in restructuring the commercial banking sector. In a program announced by the Ministry of Finance & Economy (MOFE), most troubled banks will be merged with relatively healthy banks or will be obliged to transfer their assets and liabilities to the viable banks. Furthermore, the government will issue public bonds worth 50 trillion won this year and next to finance the restructuring process. Of the total, 41 trillion won will be allocated for the fiscal support of viable financial institutions engaged in the disposal of nonperforming loans and recapitalization, while the remaining 9 trillion won will be set aside for meeting possible deposit withdrawals in the course of liquidating financial institutions.  4. Future of Restructuring and the M&A Market Possibly disheartening to foreign confidence is the decision by banks to continue supporting ailing firms. Evidenced by the creditor banks' decision to bail out Dong ah Construction with a large emergency loan, it is apparent that, despite requests to liquidate insolvent firms, minimizing of domestic turmoil is still first in the minds of decision makers. Market analysts state that banks are forced to extend rescue loans to the financially troubled companies for fear that immediate bankruptcies will bring about massive bad loans, thus making it more difficult to maintain the minimum 8 percent capital adequacy requirement. To properly implement the reforms as stated in the IMF agreements, such unsound financial practices should be eliminated. A bright spot for the future of the M&A market is that the previously negative attitude by the general Korean populace towards foreign companies' M&A activity domestically appears to be changing. A survey recently conducted by a Korean opinion research firm showed that 68.5 percent of the pollees replied that they supported M&As of domestic firms by foreign companies. Furthermore, on the issue of labor strikes protesting layoffs as part of corporate restructuring, 62.2 percent said they would oppose such strikes. Restoring foreign confidence in Korea is the key to attracting investment. Delegations such as President Kim Dae-Jung's investment mission to the United States in June conveyed the message to the foreign community that Korea was taking strong measures to improve its position and would recover from this economic crisis. Recent government regulatory changes regarding M&As should also help stimulate investment activity in the near future when market conditions begin to stabilize. As Korean corporations begin to undertake bold restructuring moves and reduce their high debt-to-equity ratios, improvements in their financial health will appear. Domestic firms will continue to welcome an inflow of foreign capital through the M&A process by spinning off their assets and looking for equity investment partners. Consulting or intermediary companies with an expert knowledge in the local market and M&A field will play an ever-larger role in the facilitation of the restructuring drive in the upcoming months. Frontier M&A,
|
