[M&A to Overcome Recession]② Increasing Big Corporations' 'KOSDAQ Shopping'

Active M&A Among KOSDAQ Listed Companies Despite Economic Downturn Outlook
Supply Chain Restructuring Due to US-China Tensions and AI Development Accelerate Changes
Growing Interest in Secondary Battery, Semiconductor Materials, Parts, and Equipment Firms

Editor's NoteThe government and financial authorities are revising regulations to revitalize mergers and acquisitions (M&A) and are also promoting the activation of corporate restructuring. This proactive measure is based on the judgment that if the economic downturn continues, a surge in marginal companies and sluggish technology development and facility investment could dampen economic vitality. As a result, transactions in the M&A market, which was stagnant last year, are becoming active. Assets with lowered valuations due to long-term recession concerns are emerging, and large corporations and private equity funds aiming to seize opportunities for business restructuring amid supply chain realignment caused by US-China conflicts are stepping forward as acquirers despite high interest rates.

At the beginning of this year, interest in M&A in the KOSDAQ market grew as Samsung Electronics and Samsung SDS acquired stakes in KOSDAQ-listed companies. Kakao and HYBE's public tender offer to secure shares in SM Entertainment is also cited as a case different from previous share battles. The COVID-19 pandemic-induced supply chain collapse and 'deglobalization' due to US-China conflicts have significantly impacted the corporate investment environment. With the advancement of artificial intelligence (AI) technology expected to accelerate social changes, M&A activities among KOSDAQ-listed companies and small and medium-sized enterprises (SMEs) are also anticipated to become more active.

According to the Financial Supervisory Service's electronic disclosure system on the 10th, a total of 21 KOSDAQ-listed companies have signed stock transfer contracts involving changes in the largest shareholder this year. Compared to nine companies in 2022 and eight companies in 2021 that disclosed stock transfer contracts during the same period, the number of companies undergoing management rights changes has increased this year.

Samsung Electronics, Samsung SDS Secure Stakes in KOSDAQ-listed Companies from Early This Year

A collaborative robot is exhibited at '2022 RoboWorld' held at Kintex, Goyang, Gyeonggi Province in October last year. Photo by Jin-Hyung Kang aymsdream@

Samsung SDS signed a contract on the 15th of last month to acquire a 33.4% stake in supply chain management solution specialist EMRO for 111.8 billion KRW. EMRO provides core material demand forecasting, inventory management, and optimal quotation automatic analysis using its proprietary AI technology. By acquiring EMRO, Samsung SDS secured specialized solutions in the procurement supply chain management sector. Samsung SDS CEO Hwang Seong-woo said, "We will join forces with EMRO to expand the integrated supply chain platform business targeting global customers."

Earlier, on January 12, Samsung Electronics invested 59 billion KRW to acquire 1.94 million new shares (10.22% stake) of collaborative robot company Rainbow Robotics. Although this is not an M&A securing management rights, Samsung Electronics also secured a call option to increase its stake in Rainbow Robotics up to 60%. On the 16th of last month, Samsung Electronics additionally acquired some shares held by Rainbow Robotics' management off-market, raising its stake to 14.99%. Rainbow Robotics appointed Yoon Jun-oh, Vice President of Samsung Electronics' Planning Team, as a non-executive director. Rainbow Robotics established a corporation in Schaumburg, Illinois, USA, to expand overseas.

Samsung Electronics plans to enter the overseas robot market by collaborating with Rainbow Robotics, which has secured high technological capabilities. Amid ongoing labor shortages in manufacturing sites, demand for collaborative robots is rapidly increasing. The share of collaborative robots in manufacturing rose from 5% in 2018 to 13% last year.

The financial investment industry expects that the technological capabilities secured by EMRO and Rainbow Robotics will create synergy effects when combined with Samsung Group's brand and overseas networks. Yang Seung-yoon, a researcher at Eugene Investment & Securities, explained, "The investment decision was made for two reasons: Samsung Group's automation promotion using Rainbow Robotics' collaborative robots and cooperation in future robot technology development. Rainbow Robotics is expected to gain recognition overseas while securing supply performance with Samsung Electronics." He added, "It is also possible to develop future robots through cooperation by combining Rainbow Robotics' robot hardware technology with Samsung Electronics' software and AI technology."

Increase in M&A for Technology Internalization Amid Supply Chain Restructuring Expected

The investment banking (IB) industry believes that the cases of EMRO and Rainbow Robotics indicate changes in large corporations' M&A strategies. While developing proprietary technology remains important, there is an expectation of relatively active moves to secure technological capabilities or new growth engines through M&A.

According to the '2023 Global M&A Trends' report by Samil PwC Management Research Institute, M&A tends to slow down during periods of economic uncertainty but paradoxically presents optimal opportunities for corporate acquisitions due to attractive corporate valuations. M&A is expected to be active in sectors such as secondary batteries, electric vehicles, and materials, parts, and equipment. A PwC survey of global CEOs showed that interest in M&A remains high even during economic slowdowns. Six out of ten CEOs surveyed said they plan to proceed with M&A as planned. Companies with abundant cash and aggressive growth goals are expected to have many M&A opportunities.

Daebo Magnetic, which Hansol Group is pursuing to acquire, fits this trend. Samjong KPMG, the sales agent for Daebo Magnetic, selected four qualified bidders: Skylake Equity Partners, Korea Development Bank & Eugene Private Equity (PE), and Hansol Paper. Daebo Magnetic manufactures electromagnetic separators (EMF) that remove iron contained in raw materials using magnets. Demagnetization is necessary to manufacture secondary batteries. Using EMF, trace amounts of iron (Fe) contained in secondary battery cathode materials can be removed down to the PPB level (one-billionth). As the secondary battery market grows, demand for EMF is expected to increase.

On the 3rd, LS Cable & System acquired 6.29 million shares of KT Submarine for 44.9 billion KRW. Adding to the existing 5.04 million shares, LS Cable secured a 43.68% stake, becoming the largest shareholder of KT Submarine. As the fourth-largest player in the submarine cable market, LS Cable plans to strengthen its construction capabilities by acquiring KT Submarine's shares. The combination of LS Cable's submarine cable manufacturing technology and KT Submarine's construction technology and vessel operation capabilities is expected to increase overseas orders.

The supply chain restructuring issue due to deglobalization is also one of the factors increasing interest in KOSDAQ-listed companies. As time passes and the US-China dispute intensifies, the US is building new supply chains and value chains. The Inflation Reduction Act (IRA) reflects the US government's intention to create supply chains excluding China. Previously, efficiency based on supply and demand laws was the principle of corporate supply chain construction, but geopolitical issues are expected to be unavoidable in the future. In the past, domestic SMEs lost price competitiveness to Chinese companies, but SMEs with technological capabilities and production capacity have gained opportunities to enter new supply chains. M&A attempts targeting materials, parts, and equipment companies in the semiconductor and secondary battery sectors are likely to increase.

An IB industry official said, "Due to rising exchange rates and financial costs, overseas M&A by domestic companies is likely to shrink," adding, "M&A related to essential parts and raw materials for stable supply chain construction will increase."

The government's plan to improve regulations and support strategic M&A to enhance overall economic resilience through corporate M&A is also seen as a positive factor. Kim So-young, Vice Chairman of the Financial Services Commission, explained, "Corporate M&A is a key means for management efficiency," adding, "M&A allows relatively easy acquisition of new technologies and human resources." The Financial Services Commission plans to revise unreasonable regulations in the corporate management rights market, such as tender offers, IB corporate credit extensions, and mergers. Additionally, it aims to revitalize corporate restructuring through M&A by providing liquidity for M&A and expanding corporate restructuring measures.