Against all odds, Korea has begun a rapid economic recovery, registering economic growth of 4.6 percent in the first quarter of this year.  Meanwhile, the government-initiated corporate restructuring drive has entered an irreversible phase after almost 18 months of steady progress.

The Korean government began its intervention in the affairs of the chaebol, or conglomerates, in February last year, subjecting them to a full-scale reform program. The move came amid mounting criticism of the family-owned chaebol system. Critics claimed the system was to blame in large part for the economic crisis, which invited the financial trusteeship of the International Monetary Fund (IMF), because of its lack of managerial efficiency and transparency. Economists at home and abroad at that time asserted that any recovery in the Korean economy largely depended on the success of chaebol reform.

The program was launched after President Kim, Dae-jung succeeded in striking an agreement with the owners of the top five conglomerates on a five-point plan designed to expedite the corporate restructuring of the business sector, in the belief that chaebol reform was essential for the nation to overcome the financial crisis. The five points concern the improvement of business transparency, eradication of mutual debt payment guarantees, drastic improvements in the financial status of the chaebol, focusing on core business sectors and heightening the accountability of major shareholders. In order to promote managerial transparency, the five chaebol agreed to introduce consolidated financial statements in line with international standards from 1999. The cross-debt payment guarantee system among subsidiaries of the same conglomerate, which IMF Asia Pacific director Hubert Neiss has frequently described as a system leading to "Mutual suicide" will be dismantled completely by March 2000. Under the cross-guarantee system, bankruptcy at one subsidiary has led to the collapse of all of a business group's affiliates. Such an eventuality will disappear with the eradication of the system.

Following government guidelines, the chaebol have pursued measures to lower their equity-debt ratio below 200 percent by the end of this year. In order to realize this goal, the chaebol must liquidate marginal subsidiaries or sell assets and stakes in other operations. In addition, if they wish to maintain a certain amount of shares they have to introduce foreign capital. Such measures have resulted in the termination of the so-called "fleet management" system through which the chaebol were able to maintain extensive control of a series of affiliates.

The chaebol have also been urged to concentrate on only three to five core businesses to avoid overlapping investment and develop competitiveness in specific areas.

Due to the revision of related laws and the advancement of the rights of minority shareholders, chaebol owners or their major shareholders have been forced to become more accountable for their managerial actions. Under the agreement, the chaebols are obliged to employ a certain proportion of outside auditors from this year, who will be given authority to monitor the activities of incumbent executives through special committees. Chaebol owners will be regarded as members of the board of directors and held responsible for inappropriate management.

The government judges the efforts regarding three of the five points - improving managerial transparency, eradicating mutual debt payment guarantees and heightening the accountability of major shareholders - as having borne considerable fruit, supported as they are by legal and institutional initiatives plus endeavors by the chaebols themselves. It embarked on a major effort to address the two remaining points - reducing equity-debt ratios and focusing on key business divisions - in the latter half of last year.

For example, the government announced a list of 55 companies that would be subjected to market exit by June 18th 1998, followed by an action program for the work-out of marginal businesses in June 30th 1998. These measures were designed to enable the chaebol achieve equity-debt ratios of 200 percent or less and to concentrate on key business divisions.

Expediting Reform

At a luncheon meeting held July 4th last year attended by major policy makers and business leaders, issues pertinent to the so-called   "Big Deal," or swap of major business divisions among the chaebol, were discussed in detail. Discussions among the same parties regarding the Big Deal as well as the action program took place at a  further meeting July 26th.

On Dec.7th 1998 representatives from the government, business and banking sectors met at the Blue House, the Korean presidential seat of government, where they reached final agreement on measures intended to expedite major business swaps and improve the financial status of the major conglomerates. The agreement featured, among other things, a slimming-down of the five major chaebol to key sub groups and reducing their subsidiaries to almost half through sell-offs, spin-offs and mergers. They also concurred on specific steps to realize the Big Deal in the areas of semiconductors, petrochemicals, rolling stock, aerospace, oil refining, power generation facilities and ship engines.

Under the Big Deal, the petrochemical divisions of Hyundai and Samsung were scheduled to merge into one judiciary corporation and boost the equity of the resultant body by 50 percent through an introduction of foreign capital. In the aerospace sector, the relevant divisions of Samsung, Hyundai and Daewoo were to be separated from their parent groups to emerge as an unitary company, with ownership shared equally by all three chaebol.

In the rolling stock sector, the  relevant business divisions of Hyundai Precision, Daewoo Heavy Industries and Hanjin Heavy Industries were to be separated from the groups to form a single corporate entity. Samsung Heavy Industries was to hand its ship engine division over to Korea Construction and Heavy Industries (Hanjung).

Furthermore, Samsung Heavy Industries and Hyundai Heavy Industries were scheduled to hand their power generation facilities over to Hanjung while Hyundai was to take over Hanhwa's oil refining division. Hyundai was to take over LG's semiconductor division while Daewoo Motor was to assume control of Samsung's automotive division in return for handing over its electronics affiliate to Samsung.

Currently, the major swaps in the areas of semiconductors, oil refining, power generation facilities, ship engines, aerospace and rolling stock  have made steady progress toward completion. Daewoo and Samsung have yet to agree on details of the swap of the automotive division because of the matter of asset valuation and the assumption of Samsung Motor's 4 trillion won debt.

Samsung has recently taken a negative view of the takeover of Daewoo's electronics division, prompting the Daewoo company to seek survival through attracting investment from United States and Japan. Samsung and Daewoo have been in protracted negotiations regarding the swap of the electronics division, pending progress in the automotive sector.

The much-delayed swap negotiations in the petrochemical sector over a dispute over final equity holdings was wrapped up with an agreement between Hyundai and Samsung  May 10th this year for the setup of a      unified joint entity in September.

In the process of putting pressure on the chaebol to restructure corporately, the government has met   fierce resistance. The Big Deal drive  faced a serious setback with the chaebol adopting a stance of passive resistance. Despite earlier pledges to decrease their debt ratios by, for instance, selling off real estate holdings, most conglomerates in fact lowered their debt ratios mostly  in bookkeeping terms through a re-evaluation of assets. Many of them also postponed their corporate restructuring plans scheduled to take place throughout the whole year to just the latter half.

In response, Lee Hun-jai, Chairman of the Financial Supervisory Commission (FSC), opened fire on the chaebol's attempt to "buy time." He made it clear that the commission will not acknowledge equity increases through asset re-evaluation and stock investment by subsidiaries as "self-saving" efforts. Lee's pronouncement caused the greatest disruptions in cash-poor Hyundai and Daewoo, which attempted to re-evaluate their assets by 6 trillion and 6.5 trillion won, respectively, until the FSC chairman's directive made them think otherwise.

Applying Pressure

Daewoo has been particularly insistant on being allowed to re-value its assets as it has been unable to generate sufficient funds through stock increases after the value of most of the stocks of its subsidiaries  fell below their face value. The government, however, rebuffed Daewoo's request.

In the meantime, Samsung, showing a determination to follow the government's lead, substantially wrapped up its negotiations with Daewoo on the swap of its automobile division March 22nd. SK and LG have pursued their own restructuring programs smoothly. Under the circumstances, Hyundai and Daewoo have become the main targets of the government's reform drive.

Exasperated by the protracted negotiations over the swap by LG of its semiconductor division with Hyundai, Mr. Lee successfully  pressured Hyundai to submit an appropriate price for purchase of LG Semicon after Hyundai was    cornered by the exposure of its key executives for stock price manipulation.

President Kim has also been pressuring Hyundai and Daewoo to expedite the process of reform within their own structures. In a Blue House press conference April 14th he said, "The reform drive by five major chaebol has fallen short of expectations. However, the five can now be subjected to work-out programs."

Creditor banks inflicted the decisive blow, rejecting Daewoo and Hyundai's efforts to improve their financial status as insufficient "Self-relief efforts" April 16th. Under the agreement reached between the five chaebol and creditor banks, the latter are to pressure the former to improve their financial status if they are found to have made little progress in this regard. However,  the creditor banks offered a grace period to Hyundai and Daewoo after they failed to meet the terms of the previous agreement.

Meanwhile, Mr. Lee met with LG Group chairman Koo Bon-moo and Hyundai Group chairman Chung Mong-koo to mediate on the price negotiation regarding the semiconductor swap. The government previously pledged not to intervene at least in the negotiations on price but reversed its position, as there was no progress with the two sides remaining poles apart on this very sensitive issue.

After marathon negotiations, the two groups completed the negotiations on the price Hyundai would pay LG for its semicon division April 21st. The Daewoo Group also made a huge contribution to the reform drive by taking the unprecedented step of putting its lucrative shipbuilding division up for sale April 19th. Hyundai responded by announcing additional corporate restructuring measures.

With the top chaebol having announced their own corporate reform measures, it remains to be seen how and to what extent they will follow through.

In order to prevent any backsliding by the large enterprises, the FSC will undertake comprehensive supervision on the chaebol's debt-reduction efforts, and take remedial action against them including the termination of credit lines and the repayment of outstanding bank loans.

The  framework and direction of the national corporate restructuring drive have been established. However, this by no means spells the end of the reform process, which in most of the corporate sector is far from complete.

Recently, critics of corporare reform have expressed skepticism over the possible stalling of the conglomerates in this regard, amid concerns that the rapid economic recovery may retard their restructuring. In a clear demonstration of the incumbent government's unswerving commitment to restructuring the chaebol, reform-minded figures were appointed to major portfolios in the May 24th cabinet reshuffle.

However, what is more important in this respect is the fact that the enterprises themselves now agree on the dire need for reform to ensure their survival. Given these circumstances, all indications are the chaebol will continue to restructure themselves without cessation and comply with their reform plans.

 

Chaebol Checklist

The FSC monitored the progress of the chaebol regarding their restructuring efforts and made its findings public along with the conglomerate's plans to improve their financial status. Hyundai and Daewoo subsequently made revisions to their rehabilitation plans involving drastic restructuring and downsizing measures. The following is a summary of the FSC's findings and the cheabol's new restructuring game plans.

 Daewoo

Selling its lucrative shipbuilding division, an unprecedented move by  a chaebol to reduce debt

Daewoo's debt increased by 17 trillion won last year over 1997's total. Its effort to boost its equity capital also fell short of expectations, as seen in the increase of its equity-debt ratio from 474 percent to 527 percent. Although it set a goal of 6.5 trillion won in debt reduction from last year through the first quarter of this year, Daewoo achieved only 1.2 trillion won in this respect, achieving only 19 percent of its debt-reduction target. Even worse, the group has succeeded only in reducing its debt load by 0.7 percent this year.

However, the group's financial situation is expected to improve enormously on the implementation of an initiative announced April 19th by Daewoo Group chairman Kim Woo-choong. The initiative features, among other things, the reduction of the number of Daewoo subsidiaries from the current 34 to 8, which would include Daewoo Motor and Daewoo Corporation. In the process the chaebol's equity-debt ratio, which stood at 527 percent at the end of last year, should be pared down to  below 200 percent.

Even so, should Daewoo's plan be implemented in full, its total assets will decrease by around 20 trillion won from 78 trillion won to 58 trillion won according to data released by the Fair Trade Commission on the financial situation of top 30 conglomerates. This will put Daewoo below Samsung's projected final asset base of 61 trillion won but significantly above LG's 48 trillion won. Thus Daewoo will be able to maintain its position as the third largest business group behind Hyundai in first place and Samsung in second. The total turnover of Daewoo subsidiaries is expected to fall to 50 trillion won from 62 trillion won.

Daewoo drew special attention for deciding to sell-off its moneymaking shipbuilding division operated by Daewoo Heavy Industries. Regarded as Daewoo's most lucrative division, it yielded more than 300 billion won   in profits last year alone and  has two years of work on   its books. Daewoo estimates the value of the division at around 5 trillion won. The division contributed enormously to Daewoo Heavy Industries registering the seventh largest net profits among the listed companies on the Seoul bourse last year.

Daewoo has yet to surmount a number of perceived barriers, though. Critics cite possible resistance from employees, the feasibility of selling so massive a business division, and the planned disclosure of purchaser's name, a rare occurence in the international merger and acquisition market. Accordingly, industry observers are skeptical as to whether Daewoo will be able to sell its shipbuilding division as well as other giant and lucrative   subsidiaries at an appropriate price.

 Hyundai

Slimming down to five core activities

The Hyundai Group's debt reached to 61 trillion won at the end of last year, registering little change on the year previous due to a lack of serious efforts to raise equity capital. Even though it decreased its debt ratio from 572 percent in 1997 to 449 percent last year, it received a warning from the FSC for failing to meet its target level.

The chaebol subsequently achieved 105 percent of its self-relief effort target from 1998 to through first quarter 1999 through assets sales and stock increases, but its performance in this respect was made  mainly by through capitalization increases on the domestic market. In terms of sales of business divisions and the inducement of foreign investment, the   chaebol achieved only 34 percent and 21 percent of its original aims, respectively. Despite the steady progress in terms of abolition of cross debt repayment among subsidiaries and improvement its corporate governance, the group has failed to show tangible results with respect to spinning-off subsidiaries.

However, Hyundai is expected to undergo a remarkable improvement in its debt structure should its initiative of April 23rd be executed as planned, and which contains more intensive financial restructuring plans than had     earlier been submitted to its creditor banks.

The initiative is characterized by, among other things, liquidating marginal non-key business divisions and advancing the dissembling of its group system by two years, effectively, to 2003 from 2005. It also aims to propel its five major divisions - automobiles, electronics, construction, heavy industries and financial services - to among the world's top ten enterprises in their respective fields.

Hyundai plans to liquidate 35 subsidiaries including healthy firms with more than one trillion won in assets from the current 61 to 26 within the end of this year. In its original plan, Hyundai intended to reduce the number to 36.

Hyundai also seeks to lower its equity-debt ratio to 199.1 percent by the end of this year, reducing its debt from 79 trillion to 45 trillion won for its all subsidiaries including LG Semicon, Kia and its subsidiaries.  In addition, it is Hyundai's intention to introduce $4.5 billion worth of foreign capital within this year, although the chaebol had attracted only $1.76 billion by the end of the first quarter.

 Samsung

A leader in Korea's corporate restructuring stakes

The Samsung Group has been undergoing an intensive process of corporate restructuring, centered around key business sectors - electronics, financing and trade and services. Its goal was to reduce its equity-debt ratio, which stood at 366 percent in 1997, to 276 percent by   the end of 1998. It realized 96 percent of its financial restructuring program target via asset sales, capital increases and foreign investment introduction from last year through the first quarter of this year.

Samsung plans to cut down the number of its subsidiaries to 40 by the end of this year. Specifically, it aims to sell 22 of  its companies in non-key business sectors. Its equity-debt ratio is targeted to decline to 193.5 percent as of the end of this year and to 100 percent   by 2001. Corporate observers opine that Samsung has the potential to match leading Western corporations in terms of the stability of its financial situation.

To that end, Samsung conducted stock increases worth 2.7 trillion won last year, and plans to raise another 3 trillion won in capital through the same means this year. It is also seeking to attract $1.4 billion this year through sales of its overseas assets and overseas capital increases.

Samsung has stated it is committed to a program of relentless corporate restructuring plus an improvement its financial situation and its organizational management system with the aim of raising its competitiveness by 30 percent. It also seeks to significantly increase its investment in the emerging electronic commerce sector.

 LG

Focusing on information and communications after semicon unit sale

The LG Group, which agreed to sell its semiconductor division to the Hyundai Group, realized an equity-debt ratio of 341 percent as of the end of last year, down  significantly from 508 percent in 1997. The group plans to further lower its ratio to 199.8 percent and 186.6 percent by the end of this year and 2000, respectively.
For that purpose, the group plans to raise 2.6 trillion won this year through the sale of assets and stock increases through domestic and overseas equity sales.  LG aims to attract $3.5 billion from abroad within this year into all its business divisions including lucrative key areas like chemicals, communications, electrical home appliances and industrial  electronics. LG already agreed to sell its metal refining division to Nikko Metal of Japan in March this year. It has also expedited its corporate restructuring program, agreeing in May to sell its 50  percent stake in its LCD operation, worth $1.7 billion, to Philips.

LG plans to completely put an end to the practice of cross-debt payment guarantees among its subsidiaries by the end of this year. It plans to curtail the number of its subsidiaries, which stood at 53 as of November 1998, to 38 within this year and 32 by 2000. Of the nine subsidiaries set to be sold off this year, four - LG Allied Signal, LG Honeywell and LG Semicon - were liquidated by April this year.

With this, LG's businesses will be realigned into key four areas - chemicals and energy, electronics and  communications, services and financing. After giving up its semiconductor division, LG has emerged as a major   information and communication player, buoyed by securing a controlling interest in wireless and satellite communication equipment manufacturer Dacom.

 SK

Needed no prompting to begin what became a successful corporate restructuring program

The SK Group launched its corporate restructuring drive in December 1997 in immediate response to the economic crisis. Since then it has demonstrated steady progress mainly in its key business areas of energy and chemicals, information and communication, finance,  construction and distribution through sell-offs and  merger and acquisition of marginal businesses.

The ultimate goal of the SK Group is to reduce the number of its subsidiaries, which stood at 49 as November last year, to 22 in the aforementioned key areas by the  end of 2002. To this end, the group has already liquidated 11 subsidiaries and is in process of liquidating five others including Dongryung Chemical and Kyongjin Shipping, through liquidation and merger and acquisition.

The group has also been prompt in addressing its equity-debt ratio, the very barometer of progress in the area of corporate restructuring. By means of real estate hive-offs and stock increases, SK lowered the rate from 466 percent in late 1997 to 355 percent as of the end of last year. Meanwhile it has set a goal of realizing a debt ratio of 199.7 percent by the end of this year, satisfying the government-recommended guideline of 200 percent. In order to achieve this goal, SK has focused on effecting stock increases and attracting foreign capital. Last year, it raised 674 billion won through stock increases and is seeking to raise a further two trillion won by the same means this year. SK also plans to attract $1.4 billion in foreign investment this year, although the group succeeded in attracting only $100 million and $10 million, in this regard, in 1997 and 1998, respectively.

During the first quarter of this year, the chaebol introduced $250 million in investment through establishment of the SK Enron joint venture company and the sale of its SKC processing unit. It has performed outstandingly in terms of dismantling cross-debt payment guarantees among its subsidiaries and is expected to successfully complete its corporate reform program on schedule by the end of this year

 

 

by Kwan Seok Lee