Offloading of flagships a watershed for Doosan

In 1996, one year prior to the 1997-1998 Asian currency crisis, Doosan Group celebrated the 100th anniversary of its founding. Until then, the group was a retail-focused company with a lion’s share in the local liquor and beverage market.

However, Doosan did not pop champagne. Instead, the group carried out radical restructuring to reorganize its business portfolio in order to survive in the rapidly-changing market environment, which was the integral factor that helped the nation’s oldest Chaebol head off the 1997-1998 crisis.

Park Yong-maan, chairman and CEO of Doosan Corp., was at the forefront of the restructuring and has since been the vanguard for the group’s rebirth into an infrastructure support business (ISB) power house from a retail-oriented domestic company. The Korea Times had an interview with Park to listen to his business philosophy and strategies.

Drastic restructuring

“We can change even our brand for survival.”

This remark by chairman Park during the interview well illustrates the business philosophy of Doosan, ultimately behind the radical restructuring that was implemented in the late 1990s. The core of the revamping tackled selling off all the unprofitable business units. It even unloaded OB (Oriental Brewery) Beer, its flagship firm, to Interbrew, a large Belgium-based brewing company.

Doosan also sold other key affiliates in beverage, milk-processing, vending machines and Cable TV businesses. Instead, Doosan entered the ISB industry by taking over Korea Heavy Industries & Construction. Then many blamed the group for giving up its family business, saying that it was simply taking a shortcut to bankruptcy.

More than a decade after the group’s dramatic transformation, the group has advanced as a totally-different enterprise becoming a global ISB powerhouse. It purchased and nurtured a number of global heavy industry firms and machinery companies with the profits from the sale of its key businesses.

Many firms are talking about new growth engines but it is difficult to find a company that gave up a flagship company. Doosan’s case will be remembered as the most dramatic example of business portfolio remodeling in Korean business history.

“I sold 18 firms and bought 15 companies. At the time when we started the restructuring, we had a dominance in the domestic liquor market with a nearly 70 percent market share,” he said.

“Despite the dominant strength, our annual revenue stood only at around 3 trillion won due to the integrated (business) portfolio and the limited size of the domestic market. Business modifications through M&A were a must for us to secure growth potential to go abroad,” he said.

The overhaul was painful but it gave the group some direction to where it should be heading.

“We reflected on ourselves following the massive changes and took away three crucial lessons for our future. First, we have to establish a global platform beyond the domestic market. Second, we have to operate a large-scale business valued at over trillion won. Finally, we need to engage in a manufacturing-based, stable business with a long life cycle that requires strategic management,” Park said.

Strategic approach in M&A

To become a global player, Doosan decided to pursue inorganic growth through merger and acquisitions (M&A). It engaged aggressively in international mergers by purchasing a number of foreign players.

Fortunately, the group did not suffer in the aftermath of aggressive cross-border acquisitions. The secret was its strategic approach in M&As and post-merger integration (PMI). The approach can be summarized in four steps _ balance sheet (profit and loss) restructuring, avoiding M&A traps, no layoffs in target companies and no M&As simply for size expansion.

“We learned a fundamental lesson from our restructuring process. We made our balance sheet ‘lean’ and created profits to lower the debt ratio. As a result, our operating profit ratio jumped to 11.2 percent in 1999 from 4.5 percent in 1998,” he said.

“When taking over Korea Heavy, currently Doosan Heavy Industries & Construction, in 2001, we took a similar approach and it worked well,” he added.

Fortified with a new cash flow from the acquisition of Korea Heavy, Doosan took over Daewoo Heavy Industries and Machineries in 2005 and UK-based Babcock in 2006. After the takeover of Babcock, its sales and operating profit jumped 4-fold and 10-fold, respectively. In 2007, it acquired Bobcat, to emerge as the world’s seventh-largest construction equipment company.

However, Park warned that companies pursuing growth through M&As should be wary of the cash drainage trap. “Typically, many firms buy a new company and generate new cash by turning it around. Then it seeks to purchase another firm with the cash, and repeat the process. The problem is that new cash flow should be able to cover more than the financing cost for the purchase of a new firm but (in many cases,) cash is drained during the process,” he said.

Another aspect that sets Doosan apart from other Korean companies in M&A is their “no lay-off policy.”

“Only 18 executives and employees left when taking over Korea Heavy, while 10 walked away after purchasing Daewoo Heavy. In other words, we had no head-on collision with the target companies,” he said.

“Companies we are targeting already have intrinsic value and potential to further increase their values. People working there are part of that value. If we replace them, the synergy benefits can decline due to their exit costs and additional education costs,” he said.

Lastly, the group is not pursuing M&As just to get bigger in size. “We have never signed an M&A deal just for size expansion. In every case, we took over something that we really needed in technology, products or network. For instance, Korea Heavy was then the only company meeting three requirements ― a global platform, a large-scale business, a manufacturing-based business with a long life cycle,” Park said.

‘Fair price paid for Bobcat’

Regarding the criticism that Doosan paid too much for Bobcat, Park said that he doesn’t agree. “In the case of Bobcat, there was a market crisis. How could you expect me to predict it? I believe that I paid a fair price for Bobcat at the time.”

“When buying Doosan Heavy and Doosan Infracore, we also paid twice or one-and-half-fold premium the price our rivals had bid. But the deals proved successful with stock prices rising afterwards. My point is that the public cannot criticize whether or not we paid too much because we took over and made money as a result,” he said.

He also pointed out that Bobcat contributed a lot to the acceleration of the group’s globalization.

“It took eight years to globalize our group to this level since we started our personnel system reform in 2003. Without Bobcat, it would have been more challenging. What’s behind the speedy globalization was the M&A. It would be fair to say that the price we paid for the U.S. company includes this element,” he said.