"Fear of Korean companies being sold off at bargain prices"... The uncomfortable flip side of the 'K-Bear Hug' [fn Market Watch]

[Financial News] Concerns are being raised that the "Korean-style Bear Hug," being promoted to boost the corporate value of undervalued listed companies, could inadvertently turn domestic firms into easy targets for mergers and acquisitions (M&A) by foreign capital. This is because while offensive measures to pressure boards of directors by publicly disclosing acquisition proposals are being strengthened, defense mechanisms to protect management rights are insufficient.
According to the investment banking (IB) industry on the 7th, Oh Gi-hyoung, a lawmaker from the Democratic Party of Korea, introduced a bill on the 3rd to amend the Financial Investment Services and Capital Markets Act to strengthen information provision to shareholders and board accountability during M&A processes. The bill mandates that the target company's board of directors disclose its opinion regarding tender offers that have a significant impact on shareholders, and establishes grounds for making important acquisition proposals known to shareholders.
The problem lies in the 'asymmetry' of the system. A bear hug is an M&A strategy in which an acquirer offers a premium that the board of directors finds difficult to refuse, then discloses it to allow shareholders to directly pressure management. While this is effective in pressuring low-PBR companies to increase their value, the possibility cannot be ruled out that, conversely, foreign private equity funds or competitors could use it as a means to undermine the management control of domestic companies that are temporarily undervalued.
In fact, this phenomenon is becoming a reality in the United Kingdom this year. Of the 12 bear hugs made against United Kingdom-listed companies over the past year, eight were initiated by foreign firms. In the second quarter of this year alone, the volume of open and unfriendly takeover offers that were more than 20% higher than the market price reached 44 billion pounds.
As foreign private equity funds and strategic investors (SIs) successively acquire undervalued British companies, concerns about the hollowing out of listed companies are actually growing in the domestic capital market. The volume of M&A deals targeting United Kingdom-listed companies this year has already reached $182 billion, surpassing last year's total of $129 billion.
Overseas, 'control defense mechanisms' are also employed alongside bear hugs. In The United States, the poison pill is a prime example.
In 2011, Airgas in The United States defended itself with a poison pill, arguing that competitor Air Products and Chemicals, Inc. had offered an acquisition price 61% higher than its stock value, and the Delaware Court upheld this. The United Kingdom restricts long-term control of management through a "bear hug" by implementing a "put up or shut up" system, which requires bidders to make a formal offer or withdraw within 28 days of disclosing their intent to acquire.
The consensus in the investment banking industry is that if bear hugs are institutionalized, companies with low PBRs and relatively weak controlling stakes in Korea are likely to emerge as potential M&A targets.
The business community also pointed out that, separate from the purpose of enhancing corporate value, a balance between offensive and defensive measures is necessary.
Even during the actual discussions on introducing bear hugs, voices from the business community are calling for the supplementation of management control defense measures, such as poison pills or differential voting rights.
"While I understand the intent that market discipline is necessary for companies that have been left undervalued, it is difficult to conclude that all premium acquisition offers contribute to long-term shareholder value," said a senior official in the investment banking industry. "We also need to discuss defensive measures, similar to those overseas, where the board of directors can respond by assessing the company's long-term value and strategic importance."
He added, "If we only open the right to attack while leaving the means of defense intact, we must also consider the possibility that bear hugs could degenerate into M&A tools targeting undervalued Korean companies rather than a means of value creation."


[email protected] Kim Kyung-ah, Kim Hyun-jung Reporter