SOUTH KOREA: An Introduction to Corporate/M&A
Fuelled by abundant liquidity, soaring stock valuation, and the pent-up deal-making demand from the preceding year, the year 2021 was a blow-out year for the global M&A market. Investors in the South Korean market unsurprisingly took part in this frenzy, with deal volumes hitting an all-time high since relevant data started being collected in 1998. Domestic and global private equity firms - as well as major Korean conglomerates - avidly sought investment opportunities, and while the deals took place in all sectors, assets in technology and digital assets, manufacturing, and environment-related sectors were particularly sought after.
The Korean corporates encountered a number of challenges during the pandemic. Such challenges – exacerbated by the pandemic - include the unprecedented speed by which digital transformation took place and various supply-chain management issues. Many corporates chose M&A as the most effective strategy for overcoming such issues and maintaining future growth. As a result, in 2021, the top 500 companies in Korea spent twice as much money conducting M&A as compared to 2020. SK hynix Inc.'s acquisition of Intel Corp.'s NAND business ranked top, being worth 10.3 trillion won (approximately USD 8.6 billion). 2021 also saw an increase in the number of trillion won deals. These included: top discount retailer E-Mart Inc.'s takeover of eBay Korea (at 3.6 trillion won (approximately USD 3 billion)), game developer Netmarble Corp.'s purchase of Hong-Kong based social casino game company SpinX Games (2.6 trillion won (approximately USD 2.2 billion)), and Hyundai Motor Group’s acquisition of US engineering and robotics design company Boston Dynamics (1.1 trillion won (approximately USD 916.7 million)). Tech behemoth Kakao Corp. in particular accelerated its expansion by logging the largest number of M&A, with 23 deals in 2021, sparking controversies surrounding the need for the Korean government to adopt antitrust regulations over their platform business.
Not to be outdone, private equity players also took a critical role in the record deal boom, sweeping 17 out of 20 biggest Korean M&A deals in 2021. MBK Partners, a Seoul-based private equity firm, scored the highest recorded private equity sale with its sale of Doosan Machine Tools to DTR Automotive for 2.5 trillion won (approximately USD 2.1 billion). American global investment firm KKR came next by purchasing 2.4 trillion won (approximately USD 2 billion) worth of newly issued redeemable convertible shares from Korean energy company SK E&S. SoftBank Investment Advisers and Bain Capital also made the top five by respectively investing 2 trillion won (approximately USD 1.7 billion) in travel startup Yanolja and selling management rights of Korea’s largest botulinum toxin maker Hugel to a GS-led consortium for 1.7 trillion won (approximately USD 1.4 billion).
We note that private equity firms’ share of the Korean M&A market is expected to further grow in 2022. This is due to changes in the Korean capital markets laws which became effective in October 2021. The most notable are the modifications to the regulatory framework which previously regulated private funds based on a fund’s investment objective (“professional investment-type” and “management participation-type”), replacing it with the type of investor involved (“institutional” investors and “general” investors). Another notable amendment pertains to the removal of restrictions on private funds’ management of real estate property. Such amendments mean that now general partners can structure their management of funds in more diverse ways and also expand investment into wider areas, from minor stake acquisition to loans and real estates, and so-called acquisition financing funds as well as mezzanine funds.
An interesting trend that appeared in the Korean M&A market in 2021 was family owners of small and medium sized companies, rather than have their children succeed their businesses, selling their stakes to private equity funds. For example, MBK Partners recently purchased the 100% stake of Dongjin Textile Co., the largest textile supplier in Korea - which has been supplying footwear textiles to Nike and Adidas for more than 30 years - for 780 billion won (approximately USD 653.8 million). Two major reasons behind this trend are, first, difficulties the founders face in finding appropriate successors and second, high rates of inheritance tax which often reach up to 65% for listed shares with voting rights. As private equity funds are continuously searching for undervalued family businesses with a global sales network, this trend is anticipated to continue.
Of course, for every action there is reaction, and the M&A market is no different. Just as decline in the number of M&A deals in 2020 due to the pandemic outbreak led to an explosion of M&A deals in 2021, despite the market remaining generally optimistic about M&A activities in 2022, there are also signs that the number of transactions may decrease somewhat. As central banks in several developed countries, including Korea, begin raising interest rates to respond to inflation, and as investors become more cautious in the face of historically high valuations, we cautiously predict that discrepancy between the sellers’ price tag and the buyers’ willingness to pay such price tag will become more pronounced in 2022, which will inevitably have an impact on volume, as well as successful closing of deals in 2022.