Case study: Crown-Haitai M&A
Cookie makers made painful mistake of downplaying labor issues before merging
By Shin Hyun-han
On January 2004, the management at Crown Confectionary, ranking fourth in market share in the confectionary industry, faced the task of advancing its hold to the next level. One of the myriad plans to attain this goal was to acquire Haitai Industries, which was owned by a consortium led by UBS, a Swiss investment bank, as a consequence of its financial instability in the late 1990s.
The acquisition was deemed an ideal strategy, with expectations for synergies in economies of scale and enhancement of brand value in the midst of an ever-competitive confectionary industry. However, this move would not come without risk. The capital required to acquire a corporation whose assets and revenues were twice its own was beyond something negligible.
The UBS consortium, the seller of Haitai, proposed a price range of 500-600 billion won. Some opposition within management was made considering the difficulty to obtain the capital needed and the possibility that Haiti's labor union along with its disparate corporate culture may pose barriers to the true assimilation of the two companies.
In 2004, Crown Confectionary was fourth in market share and touted a performance of 142 billion won in revenue and 10.4 billion won in operating income. Having undergone the tumult of the financial crisis in the late 1990s, the management at Crown felt the pressure to further expand its presence in the market in order to survive in the long run, and it was faced with the options of either making new investments or delving into an M&A that would diversify its businesses. As the management opted for a strategy that would produce drastic results within a short timeframe, an M&A was preferred over new investment, which generally require more time for its effects to show.
In 2004, Haitai recorded the sixth highest revenue in the entire food industry, and similar to Lotte Confectionary, expanded to businesses that included biscuits, ice cream, frozen foods, chewing gum and chocolate bars. Among this range of products, ice cream and frozen foods required high capital investment with its need for refrigerated transportation along distribution channels and thus had a high entry obstacle. Crown Confectionary, which did not produce these particular products, was naturally attracted to the business with its high cyclical correlation with the summer season, when sales of crackers and biscuits are usually down. Furthermore, as the two companies had few overlapping product lines, Crown Confectionary saw the possibility of a "portfolio effect" within its products as an acquisition would not require a large investment in overheads. Lastly, Haitai was a stand-alone corporation as opposed to chaebol (family-controlled conglomerates) that generally dominated the industry, and this projected ever-more desirable prospects.
Financial structure for acquisition
Assuming a large debt, Crown Confectionary acquired Haitai through an LBO (Leveraged Buyout), from UBS Capital Consortium for 345 billion won. This implied significant financial risk in the event synergy was lower than expected or if growth proceeded slowly.
In 2005, Crown displayed its confidence in the acquisition by stating that it has "projected revenues of 1 trillion won and may have a shot at overtaking Lotte Confectionary," but the much-awaited synergy did not emerge until 2006. According to Crown Confectionary's financial statements, by the end of 2005, Crown and Haitai had a combined market share of 32.7 percent, which was 1.6 percent lower than 34.3 percent in 2004. The chief reason for this was Haitai's market share slumped from 19 percent in 2004 to 15.9 percent in 2005 due to a protracted union strike. This reflects not only the disadvantage of the LBO but also the lack of synergy created through the acquisition.
Lesson: synergy is rare
The most significant factor appears to be the firm-wide labor strike at Haitai, and research shows that during the 170-day strike, Crown incurred losses of approximately 10 billion won. Such losses could be blamed on Crown Confectionary's failure to effectively monitor post-merger integration. As Crown saw the Haitai acquisition as no more than a business strategy, it did not maintain sufficient vigilance required to successfully integrate the two companies.
Shin Hyun-han is a professor of finance at Yonsei University and advisor for CFRC, the school's Corporate Finance Research Club.