Korea's `big deals' a recipe for pain - South Korea's mergers

Business Asia, Sept 21, 1998

Business Asia introduces a new column, Asia Watch, which will highlight topical issues in Asia, In this edition we consider South Korea's so-called "big deals", which involve takeovers within the nation's once-sacred conglomerates,

THE AGENDA

* South Korean President Kim Dae-jung has been pushing for months to get the top five business conglomerates, or chaebol, to tie up the "big deals". Mergers and takeovers among the top business groups are designed to cut chronic overcapacity, slash debt and lift foreign confidence.

THE REAL DEALS

* A merger between LG Semicon and Hyundai Electronics's semiconductor division, and Hyundai Oil's takeover of Hanwha Energy, have taken the spotlight. Other possible deals include Hyundai Petrochemical merging with Samsung General Chemical.

AN OPINION

* Mr Stephen Marvin, head of research at Jardine Fleming Securities: "So two second-rate companies with too much debt and too much capacity are merged, and we get a bigger second-rate company with too much debt and too much capacity. What's been solved? "Why go through a tremendously complicated problem of trying to merge two distinct management cultures? Why not take one behind the house and shoot it in the back of the head?"

THE ADVANTAGES

* The Federation of Korean Industries claims the deals will cut off 20 trillion won (US$15 billion) in overlapping investments over the next five years, attract up to US$10 billion in foreign investment by 1999 and maintain employment at current levels, or even create jobs.

THE CONSEQUENCES

* The first problem is likely fighting among chaebol as to who gets management control of a merged firm.

* Layoffs are inevitable. Given the lack of a welfare safety net in Korea, the implications for family breakdown and a reduction of consumption are serious.

* The deals are also certain to cause more militant union action.