M&A to Power Korea’s Future Growth
By Lee Hyo-sik
Corporate takeovers will become one of the main growth engines for the Korean economy over the next 10 years as the nation enters an era of a low growth amid the saturated domestic market and the rapid aging population, according to the head of a local asset management firm.
In an interview with The Korea Times, Allianz Global Investors Korea CEO Lee Won-il said merger and acquisitions (M&A) will become commonplace here, leading the direction of the local stock market and stimulating
``The U.S. stock market and the broader economy there were driven by a series of corporate takeovers in the 1980s and 90s, turning the increasingly maturing country into one of the world's most dynamic economies. Likewise, with the falling growth rate and the aging population, Korea will follow the U.S. over the next decade as more businesses resort to acquiring competitors and promising companies in other sectors to create synergy effects with existing units and emerge as a winner in an increasingly saturated marketplace,'' Lee said.
The CEO then said he wants to become a ``credible threat'' through the asset manager's corporate governance (CG) funds in a competitive marketplace, helping to promote successful M&A. ``I will study more about takeover issues, including what makes M&A successful. Through our corporate governance funds, I will continue to actively participate in the decision-making process of the invested companies to make their governance more transparent and increase corporate value.''
The asset manager, which has nearly 12 trillion won under management, began operating two corporate governance funds since June 2004, capitalized at a combined 600 billion won. It attracted investments mostly from a number of institutional investors, including the National Pension Service. The funds have acquired between 5 to 10 percent stakes in usually medium-sized listed firms to force them to adopt more sound management practices and thus boost shareholder value.
Lee said with more M&As in the making, he would like to enlarge the size of corporate governance funds to play a bigger role. ``I will try to raise more funds from institutional investors, including pension funds and life insurers, as well as from retail investors. Since the governance fund requires a relatively long-term commitment, compared to a typical equity fund, it will be a good investment vehicle for individuals with a long investment horizon.''
The CEO said he became interested in corporate governance issues after lecturing about ethics of financial analysts 10 years ago. ``I am the second Korean national who earned a certified financial analyst (CFA) credential in the United States. After I came home, I was asked to teach MBA students about business ethics by several universities. This is how I got into the governance issue and set up CG funds,'' he said.
Lee then said if his CG funds owned a stake in Kumho Asiana Group, he would have told the group's top management not to acquire Daewoo Engineering & Construction in 2006 because the takeover would seriously weaken the entire group's financial structure.
``The decision to purchase the nation's largest builder turned out to be a critical mistake for Kumho, sending shares of group units into a plunge over the past year, coupled with the global financial crisis. To prevent such a wrong decision by top management, I would like to become a credible threat in Korea's corporate world, ensuring that executives make decisions solely based on the interests of shareholders and employees disregarding political and non-business factors,'' the CFA said, stressing more transparent governance will help companies raise fresh capital and hire more workers, bolstering economic vitality.
Lee then said asset managers holding stakes in troubled companies should act to maximize the interests of their clients, adding it is irresponsible for them to just dispose of the shares and purchase stakes in new companies.
``Such behavior by asset managers is called the 'Wall Street walk.' The practice goes against the interests of those who entrusted money to fund managers because it incurs significant transactions costs for investors when managers sell and buy shares. In the U.S., if the investment funds are caught doing the Wall Street walk, investors take legal action. Asset managers instead should fight with the company management to improve the corporate governance and increase shareholder value,'' the CEO said.
No Steep Market Correction
Touching on the stock market outlook, Lee said there will be a mild correction in the second half of the year after a steep ascent over the past few months. ``Some analysts are raising the possibility that the market may crash hard in the second half on the fears of a double dip as a result of massive corporate bankruptcies. I don't think such a scenario is feasible under the current economic conditions. Deadly lightening has been finished and only thunder remains.''
The fund manager said the main KOSPI may fall back to as low as 1,450 but then it will soon start heading upward because there will be more positive news than negative for the remainder of the year. But the CEO cautioned against blind optimism, saying no stock market will go up forever.
``Market fundamentals have been distorted to some extent because of ample liquidity at home and abroad. Central banks around the world have injected combined $4 trillion into the financial sector, the largest amount ever, which has boosted corporate performance and share prices across the globe. Many investors still remain cautious because nobody knows yet what the true market fundamentals are,'' Lee said.
The most difficult task facing governments around the world is when and how to retrieve the oversupplied liquidity from the financial market in order to prevent a possible real estate bubble and other adverse effects on the economy, the CEO said.
``Nobody has ever dealt with such a task before. If governments successfully implement ``exit strategies'' from their expansionary fiscal and monetary policies, we will experience modest inflation. But if they fail, we will suffer from hyperinflation. I think Korean policymakers are now in a dilemma over the timing of the policy shift. They have no choice at the moment but to vow for the continuation of the current expansionary policy mode, while testing several liquidity tightening steps behind closed doors to decide the timing and the method of exit strategies,'' he said.
The government and the Bank of Korea (BOK) have pledged to stick to the current expansionary fiscal and monetary policies for at least the remainder of the year to facilitate the slowly rebounding economy. But they are increasingly concerned about the potential side effects of the excessive money supply if the Korean economy recovers faster than expected, fueling inflation and an asset price bubble.
The state-run Korea Development Institute (KDI) and other research institutes here suggested that the government tighten lending rules on mortgages to curb rises in property prices and BOK raise its base interest rate from the current 2 percent to ease inflationary pressure created by ample liquidity and the record low interest rate.
Stock Most Attractive Investment
Stocks are the most attractive investment vehicle for retail investors, outperforming real estate and other assets in the long term, Lee said. But he cautioned that equity investors should lower their expected returns to between 8 and 10 percent.
``In the 1980s and 90s when the Korean economy was growing rapidly, it was possible to realize over 30 percent annual returns through equity investments. But as Asia's fourth largest economy has entered a low growth phase and its population is aging rapidly, it has become extremely difficult to do so. If investors go for over 30 percent returns, they must take extremely high risks and may lose all their money,'' the CEO cautioned.
He said now is a difficult time to make investment decisions on greater market uncertainties, adding it was much easier during the global financial crisis late last year and early this year because the market had to go up, suggesting individual investors hold 30 percent of their portfolio in cash.
``Investors should put 30 percent each in real estate and stocks and with the remaining 10 percent, they buy commodities for inflation hedging. When investing in foreign stocks, investors should not hedge against foreign exchange risks because uncertainties associated with equity investment are already far greater than currency risks,'' Lee said, adding some local banks blindly encouraged overseas equity fund buyers to hedge in order to earn commissions on currency transactions.
In particular, those who hedged against foreign exchange risks suffered from both the market crash and the Korean won's weakness against the dollar, the CEO said, saying equity investors who did not hedge realized huge currency gains.
``The nation is an outward-oriented economy and will likely become more dependent on exports for growth. With growing external exposure, it makes more sense for individuals to hold dollars, euro, the yen and other major international currencies, rather than stick to the local currency only,'' Lee said.
He then said the current market rallies here will spread to second-and third-tier companies, saying ample liquidity and strong corporate performance are behind surging prices of information technology (IT) and auto shares. ``Samsung Electronics, LG Electronics and other global companies here have outperformed their rivals overseas, posting better-than-expected performances and fueling the current market rally. The trend has spread to financial shares and soon, shipbuilding, construction and steel shares will likely take a center stage.''
Financial Hub Plan Unlikely
The CEO is pessimistic about Korea's goal to transform itself into a financial and business hub for Northeast Asia, citing its low English proficiency, heavy taxes and poor residential and educational environment.
``I was once a member of the financial hub promotion committee but resigned from the post soon after. I do not think Korea is capable of becoming a regional financial center. Compared to Hong Kong and Singapore, Korea has highly skilled and educated manpower. But they do not speak English well, which is the greatest handicap for the nation to become an international financial and business center,'' he said.
Korea should also lower salaried and corporate income taxes to attract foreign investors and financial firms, as well as drastically improve educational and residential infrastructures. ``The nation should offer exceptionally good incentives to give a shot at becoming a financial center, such as designating either Incheon or Jeju as a tax heaven or naming English as Korea's second official language. But of course, it will create an array of side effects.''