South Korean companies are regaining their appetite for European acquisitions, encouraged by the drop in asset prices caused by the continent’s debt crisis and the strength of the won.
But the trend is raising concerns that Korean companies may repeat the mistakes of the past when they often struggled to integrate their overseas purchases.
“As a long-term investor, we look for interesting opportunities coming out of this ongoing turmoil in Europe,” says Jun Kwang-woo, chairman of the National Pension Service, the world’s fourth-largest pension fund. “We do expect opportunities to come out of privatisation programmes, or deleveraging programmes by financial institutions.”
Big Korean companies emerged relatively unscathed from the 2008 global financial crisis and have benefited from a boom in exports in recent years on the back of a cheaper won, leaving them with vast gross cash reserves.
In 2012, the South Korean won gained nearly 7 per cent against the US dollar and 5 per cent against the euro. That has helped to trigger a near doubling in the value of Korean companies’ acquisitions of European businesses, to $1.34 billion in 2012 from $756 million in 2011, according to Mergermarket. South Korea’s total outbound deals increased to $8.1 billion in 2012 from $7.8 billion in 2011.
“It is the perfect time to buy European assets,” says Kim Deuk-gap, at Samsung Economic Research Institute. “The stronger won makes a favourable environment for cash-rich Korean companies to buy overseas firms, while abundant global liquidity makes M&A financing relatively easier.”
Samsung Electronics has led the pack, acquiring CSR’s handset operations in the UK for $310 million last July; buying a 3 per cent stake in ASML, a Dutch semiconductor maker, for $629 million last August; and taking over Swedish semiconductor company Nanoradio for $34 million.
Its affiliate Samsung Medison bought a German medical company while Samsung’s rival SK Hynix took over Italian semiconductor maker Ideaflash. Hanwha Group, another of the country’s chaebol conglomerates, took control of Germany’s Q-Cells, once the world’s top solar-cell maker, for $339 million in August 2012, while Doosan Heavy Industries & Construction, a power equipment maker, acquired a British water treatment company in November to boost its desalination business.
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South Korea’s $1.34 billion of outbound deals to Europe in 2012 is still dwarfed by Japan’s $23.7 billion and China’s $9.6 billion.
Big Korean companies have in the past preferred to expand overseas via greenfield developments after some foreign investments backfired in the 1980s and 1990s. But they are now becoming more open to cross-border acquisitions as a way of quickly acquiring core technology.
Bankers caution against rushing into deals, given the challenges some Korean companies have faced in integrating their overseas acquisitions because of cultural differences and their limited experience in running foreign businesses.
“Many companies are looking at opportunities in Europe to secure core technology and garner premium brands, but they are still cautious,” says David Han, head of Korea investment banking at Barclays. They fear they could face difficulties recouping their investment if the European economy deteriorates further, he notes.
Until recently, most of South Korea’s overseas investment was focused on natural resources and property, with state-run companies and public pension funds spearheading high-profile deals. Korea National Oil Corp surprised investors with its $2.88 billion hostile takeover of the UK’s Dana Petroleum in 2010, but that was an unusually large deal for a Korean company as it was funded by the state.
The National Pension Service has also snapped up landmark buildings and infrastructure deals in Europe, including a 12 per cent stake in the UK’s Gatwick airport in 2010.
Meanwhile, private Korean companies have poured into the European luxury sector, taking advantage of the region’s economic woes. Cosmetics maker Amore Pacific bought French perfume brand Annick Goutal, while Samsung’s fashion unit Cheil Industries took over Italian luxury fashion brand Colombo Via Della Spiga. Retailer E-land has bought Italy’s Mandarina Duck.
Jeffrey Chung, managing director at Deutsche Bank in Seoul, says Korean companies have tended to have the most success with foreign purchases in the resources sphere, because hard assets such as mines and property are easier to manage than manufacturing companies.
“If you are a manufacturing firm, it’s like vertical integration. It has to be in line or has to have some connection with your current business,” Chung says, warning against the chaebols’ reckless expansion into non-core businesses in the past, which brought about the country’s financial crisis in the late 1990s.
“The safer bet is to stick to your core competencies, stick to your core area of knowledge and expertise,” he adds. That would help Korean companies create synergies with their acquisitions, minimising the difficulties that they face in the integration process.