SK Group Chairman Chey Tae-won listens to explanations at the Icheon factory of Hynix Semiconductor in Gyeonggi Province late last year. SK Group spent more than $3 billion to acquire the world’s second-largest memory chipmaker to mark one of the country’s largest M&A deals of 2011. Such mega-sized contracts are less likely this year due to soured business sentiment among local companies. / Korea Times file

Organic growth emerges as top priority of Korean companies

By Ernst & Young

Despite a more favorable deal-making environment more recently, leading global companies are not yet convinced about engaging in mergers and acquisitions (M&A), according to Ernst & Young’s latest biannual survey where more than 1,500 senior executives in 50 countries around the world shared views on economic outlook and their capital agenda.

Ernst & Young’s sixth Global Capital Confidence Barometer (CCB), released last month, finds that only 31 percent of those surveyed intend to pursue an acquisition in the next 12 months, down 24 percent compared to October 2011 and the lowest figure since the survey began in 2009.

The deterioration in business sentiments rose although the fundamentals for M&A are arguably stronger than they have been for some time ― corporate cash balances are higher than they were; credit constraints are lower than the past; the global economy appears to have recovered its equilibrium in the past few months, following an extended period of macroeconomic instability; and hopes the eurozone crisis may finally be ebbing.

In South Korea, however, executives seem even more cautious on many fronts. Despite being more confident about the global economic outlook than their global peers, Korean respondents are more subdued about credit availability, economic and employment growth, the regulatory environment and short term market volatility.

A mere 4 percent surveyed expressed an expectation to pursue acquisitions in the following 12 months, a sharp decline from 50 percent from a half year ago. It means almost all of the Korean companies surveyed do not expect an M&A in the coming year.

``Korean conglomerates were involved in several transactions in 2011, both acquisitions and divestments, as they sought to optimize their businesses,’’ said Transactions Advisory Services Leader Yoo Hong-yeol at Ernst & Young Korea. ``With most major activities already completed, it’s expected that activity over the next 12 months will decrease.’’

Korean executives feel they have less opportunity to participate in private deals overseas compared with their global peers. They feel that the auction deals they participate in are highly competitive and unattractive, which forces them to either accept a purchase price they feel is over-valued or alternatively walks away from the deal.

While a gap in expectations over valuations was the most important reason for 55 percent of the Korean respondents, 33 percent felt that they lacked the deal execution, integration capabilities and experience to successfully pursue an acquisition, particularly international deals.

However, 64 percent of Korean executives expect M&A asset valuations to decrease over the next 12 months, a much stronger response to six months ago when most felt valuations would remain stable (45 percent) or increase (39 percent).

Focus on organic growth

A majority of Korean companies were focusing on ``growth’’ rather than ``survival’’ or ``stability.’’ Some 65 percent of the Korean executives said they would continue to focus on growth over the next 12 months, above the total global response of 52 percent and also an increase from the country’s 52 percent six months ago.

When asked about which capital management issues the company is placing the greatest attention and resources today, 68 percent of Korean executives said investing capital and primarily focused on ``organic growth.’’

It was a similar response when presented with the option should they have excess cash ― 68 percent of Korean executives selected organic growth, higher than six months ago when 40 percent responded likewise. Investment in fixed assets is expected to reach 3.9 percent in 2012 compared to 0.7 percent in 2011 in Korea.

While reinvesting excess cash is expected to drive Korean companies’ growth strategies, it will be challenging to deliver top-line growth given slow gross domestic product (GDP) growth across the globe.

Organic growth continues to be important for 50 percent of global respondents as well, a result similar to that of October 2011.

``Korean executives have spent the last six months optimizing their balance sheets and capital, reviewing their portfolios and divesting non-core assets,’’ Yoo commented. ``The majority are moving on though as more than two-thirds now seem focused on investing capital to drive organic growth.’’

Out of the 1,500 senior executives that participated in the latest global CCB survey, 51 were from Korean companies, one third of which had annual revenue of more than $5 billion.

Industry sectors ranged from technology, automotive, power and utilities as well as financial services retail and wholesale and so forth.

This article was contributed by Ernst & Young, a leading global professional services firm.