[M&A to Overcome Recession] ① Liquidity Secured as Corporate Listings Surge... "Companies with Cash Have an Opportunity"

Concerns Over Prolonged Recession Lead to Successive Listings of Major Assets Since Early Year
Large Corporations and Private Equity Funds Aim for Business Restructuring Despite High Interest Rates
Government Moves to Revise Regulations on M&A Including Tender Offers

Editor's NoteThe government and financial authorities are revising regulations to revitalize mergers and acquisitions (M&A) and are also promoting restructuring activation. 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 are becoming active again in the M&A market, which was stagnant last year. Assets with lowered valuations due to long-term recession concerns are emerging, and large corporations and private equity funds (PEFs) aiming for business restructuring opportunities amid supply chain realignments caused by US-China tensions are stepping forward as acquirers despite the high-interest-rate environment.

According to the Financial Services Commission, the domestic corporate M&A market size rapidly grew from KRW 49.1 trillion in 2013 to KRW 134.1 trillion in 2021, largely thanks to abundant liquidity due to low interest rates. Last year was different. The M&A market shrank to KRW 78.7 trillion, a decrease of about 41% compared to the previous year. The reason was the exact opposite of when the market was expanding. The sharp reduction in liquidity was mainly due to the high interest rates triggered by the US Federal Reserve (Fed). An investment banking (IB) industry insider analyzed, "Sellers held out (to get higher prices as they could still endure the recession), while buyers hesitated due to deteriorated financing conditions."

M&A Market Shrinks Sharply Last Year... Stirring Again Despite Economic Deterioration

The atmosphere has changed again this year. According to the IB industry, the announced deal value of stock purchase agreements (SPA) in the first quarter reached about KRW 5.7 trillion, up approximately 67% from KRW 3.4 trillion in the first quarter of last year. Significant companies across various industries have flooded the market as assets for sale. HMM, LG Chem’s Diagnostics Division, SK Shipping’s Tanker Business Unit, SK Ecoprime, SK Shieldus, SM Entertainment, Ssangyong Remicon, Jeonju Paper, Boryung Biopharma, Daekyung ONT, Taewoong Medical, Daebo Magnetic, Seorin Company, Shoe, MRO, Iljin Materials, Ostem Implant, and Nexflex have all been listed as assets for sale.

This is due to growing concerns over economic recession caused by high interest rates and the prolonged Russia-Ukraine war. As even the so-called 'cash cow' business units were shaken by the downturn, companies facing financial difficulties have entered restructuring as a matter of selection and concentration. Private equity funds (PEFs), for whom liquidity is critical, have also started portfolio adjustments. Companies and PEFs with relatively strong financial capacity or those aiming for business restructuring are poised to use this as a new growth opportunity. During economic recessions or downturns, M&A serves as an important means for improving management efficiency and business restructuring of industries and companies. Smooth M&A transactions can enhance overall economic productivity and act as a catalyst for economic recovery.

LG Chem is currently selling its non-core Diagnostics Division. Although the price is in the low KRW 100 billion range and the scale is not large, it is attracting attention as it coincides with the restructuring of LG Chem’s Life Sciences business structure. LG Chem’s Diagnostics Division has a long history, starting in 1986 with research on in vitro diagnostic reagents. However, it failed to achieve significant results during the COVID-19 pandemic.

LG Chem is redrawing the blueprint for its pharmaceutical and bio business in the Life Sciences sector. In January, LG Chem acquired US cancer drug developer Aveo Therapeutics for USD 571 million (approximately KRW 700 billion). Following the announcement of the Aveo acquisition and the visible push to sell the Diagnostics Division, there is an analysis that Koo Kwang-mo’s new drug business is now in full swing.

SK Shieldus also attracted attention as a major asset. It is the first case of SK Square, which positions itself as an investment specialist company, recovering investment funds. Last month, SK Square, along with Macquarie Asset Management, sold the management rights of its subsidiary SK Shieldus to EQT Partners, a private equity firm affiliated with the Swedish Wallenberg family. Through this process, SK Square secured a total of KRW 864.6 billion. SK Square Vice Chairman Park Jung-ho announced that when about KRW 400 billion is received in the first phase around August to September, it will be used for treasury stock cancellation.

Some analysts say that although SK Shieldus has competitiveness in physical and information security businesses, SK Group had no choice but to sell to secure cash amid uncertain macroeconomic conditions. SK Hynix, SK Group’s flagship affiliate, is likely to record a loss exceeding KRW 10 trillion this year. SK On, a secondary battery company, needs to make aggressive investments, but its investment capacity is limited under the high-interest-rate environment as it is an unlisted company. A senior IB industry official hinted, "SK Group, which positions itself as an investment specialist company, made many large-scale domestic and overseas project investments when the market was good. Some projects had the company entering as a subordinated investor and institutions as senior investors, but as market conditions worsened and losses occurred, the burden increased."

HMM is also considered a big fish in the M&A market. It came onto the market as the shipping industry, which had been booming, began to decline. The Korea Development Bank and the Korea Ocean Business Corporation recently selected Samsung Securities, Samil PWC, and Gwangjang as advisory firms to sell a 40.7% stake in HMM. The shipping industry enjoyed a boom during the COVID-19 pandemic but has recently deteriorated. Both cargo volume and freight rates have fallen due to the economic downturn, and the outlook is that freight rates will decline further in the second quarter. Companies mentioned as potential HMM acquirers include Hyundai Glovis (Hyundai Motor Group), CJ Logistics (CJ Group), LX International (LX Group), SM Line (SM Group), and Hyundai Heavy Industries.

Private Equity Funds Actively Adjust Portfolios

Private equity funds are also putting out a large number of buyout assets. This is interpreted as a preemptive portfolio adjustment in industries expected to face long-term recession. Hahn & Company has listed SK Shipping’s Tanker Business Unit, SK Ecoprime, and Ssangyong Remicon as assets for sale. The shipping industry’s boom has passed, and the construction industry’s downturn is prolonged.

There are also swift moves to seize appropriate sale timing in reopening sectors. IMM Private Equity is pushing to sell a minority stake in semiconductor industrial gas company Airfirst and Able C&C, which operates Missha, a first-generation cosmetics brand shop. As the previously sluggish cosmetics industry shows signs of recovery with China’s reopening, they are trying to turn this into a sales opportunity. Morgan Stanley PE is pursuing a resale of Jeonju Paper, and Stick Investment is proceeding with the sale of Daekyung ONT.

MBK Partners, which has a war chest of about KRW 10 trillion, is steadily acquiring companies with high future value. Following last year’s acquisition of oral scanner company Medit for KRW 2.46 trillion, this year it acquired Ostem Implant in partnership with UCK. It also purchased Nexflex, the leading domestic smartphone film manufacturer. An IB industry insider predicted, "Despite the ongoing economic downturn and increased market anxiety due to the global ‘bankdemic’ (bank + pandemic), companies with capital are seizing this as an opportunity, and restructuring centered on marginal companies will be active."

Government Prepares M&A Revitalization Measures... Falls Short of Industry Expectations

Since a flood of marginal companies entering the market at once due to high interest rates and recession would burden the national economy, the government is taking institutional support measures to revitalize M&A. Various plans are being considered to improve corporate M&A regulations and expand means to secure liquidity.

For example, from the 1st of this month, the scope of proof of funds recognition for tender offerors has been expanded. Tender offerors must prove their financing capability, and previously only certificates of deposits or short-term financial products (such as MMFs) were accepted. Following growing demands to allow various means, financial authorities have decided to recognize loan commitments from financial companies and capital commitment agreements from institutional investors such as pension funds and mutual aid associations as proof of funds starting this month.

The industry also expects additional policy changes. They agree that preemptive institutional improvements are needed to minimize the negative impact of the mandatory tender offer system that the financial authorities plan to introduce. An IB industry official said, "There needs to be discussion on allowing government approval of corporate mergers as a condition or withdrawal reason for tender offers." This is to prevent situations where an M&A fails after a successful tender offer due to lack of government approval. However, since this is a matter with significant market impact, cautious review is also advised.

Requests have also been made to relax the requirements for the Squeeze-Out system. The Squeeze-Out system allows controlling shareholders who own more than 95% of a company’s issued shares to forcibly purchase minority shareholders’ shares and exclude them from company management. Currently, only controlling shareholders holding over 95% can exercise this right, but the industry hopes to lower the threshold to the 90% range. They want easier delisting or full subsidiary conversion. There are also demands to revise the leveraged buyout (LBO) guidelines. LBO refers to acquiring companies using funds raised through external borrowing. The current legal scope of LBO allowance is unclear, causing related disputes to be a risk factor.

Measures to ease financial burdens on KOSDAQ and KONEX listed companies when exercising appraisal rights, and expanding refinancing loan capacity for comprehensive financial investment business operators (CIFs) are also mentioned as ways to revitalize M&A. There are calls for more flexible methods of calculating merger prices as well.

Ultimately, all these demands aim for one goal: to enable companies competing fiercely in the global market to timely and flexibly adjust business units and secure necessary funding through appropriate connections between industry and finance. Lee Su-won, head of the Corporate Policy Team at the Korea Chamber of Commerce and Industry, said, "Corporate survival depends on winning the race to secure future strategic industries. Especially, cooperation between industry and finance is crucial to activate overseas M&A for technology acquisition."