Why Hyundai Wants Daewoo
By Kim Yoo-chul
Staff Reporter
Questions have been raised over the ulterior motive for Hyundai Heavy Industries' (HHI) late bid to acquire Daewoo Shipbuilding & Marine Engineering (DSME).
"If Hyundai's rival Samsung Heavy bought DSME, then the combined yearly revenue would exceed that of Hyundai, reaching 15.62 trillion won and I can say that would be synergy. But for Hyundai, I don't see any clear reason for its acquisition attempt," said an executive from DSME, requesting anonymity.
Hyundai Heavy, based in Ulsan, South Gyeongsang Province, is constructing shipyards in Gunsan, North Jeolla Province, while the main facilities of Samsung and DSME are located on Geoje Island, South Gyeongsang Province.
"Worries were running that Hyundai's acquisition might hurt its financial long-term soundness as the shipbuilding industry is subject to severe cyclical ups and downs," an industry source told The Korea Times, Monday.
Experts are even more pessimistic, saying the heyday of the shipbuilding industry across the world is fading and a downturn will come early next year.
"Severe international competition, supply and demand contradiction, the updating of shipbuilding standards on the international market, and the high-cost of labor and macro-economic policies such as the rise of interest rates are posing a threat to the global shipping industry," the Economic Research Center of the China Shipbuilding Industry Corporation wrote in a research note.
"The global shipbuilding market will undergo a steady correction over the next few years," it said.
Last week, Hyundai Heavy made an independent bid together with its two affiliates for a controlling stake in DSME. With internal cash reserves amounting to 8.5 trillion won, Hyundai said it won't drop its bid until the race is over.
Other bidders include POSCO, Hanwha and GS Group.
The government plans to sell its 50.4 percent stake in DSME by the end of this year.
Industry watchers say the main benefit that Hyundai will enjoy is that it will grab strengthened pricing strategies for more shipping orders. But this point is not such an appealing factor.
"Considering Hyundai's recent order sheets, there is no reason to significantly boost its production capacity. Currently, it's good," said a local analyst.
As the stake for DSME is too large for a single company to handle, Hyundai's independent move is also under fire as the decision means the company might lose a hedging measure for a possible risk after the global shipping industry enters a demand and supply imbalance.
The value of the DSME will be a maximum of 10 trillion won including the management premium. For that reason, other bidders are unexpectedly busy finding strategic partners.
"We will not tie up with partners who want us to bring a sizable profit in return for their participation," Hyundai said, last week.
The National Pension Service, which manages funds worth $230 billion, is pursuing joint investment opportunities in turnaround companies such as Daewoo to improve on its stalled 6.1 percent average yield by making more high-risk investments. Sealing a partnership with the service is likely to bring much merit to the bidding war.
"We will not allow Hyundai Heavy to conduct due diligence as possibilities are high that Hyundai might conduct huge layoffs and their intention and recent moves are dubious," a union member at DSME said.