Will merger king make it stick this time?

By Kim Yoo-chul

STX Group Chairman Kang Duk-soo is a legend among salaried workers here.

Along with Samsung Group Chairman Lee Kun-hee, Kang is one of the most talked-about businessmen in Korea after STX became the nation’s 14th-biggest conglomerate within a decade through continuous mergers and acquisitions (M&A).

The shipbuilding-centered group bought STX Offshore in 2001 and STX Pan Ocean, the nation’s top commodities shipping company in November 2004. It bought Europe’s biggest shipyard Aker Yards in 2007, investing 1.4 trillion won.

Now Kang is preparing to strike another mega deal and this time his target is a semiconductor business.

Acquiring Hynix Semiconductor would be the group’s biggest-ever acquisition because the combined 15.1 percent stake owned by Hynix’s major shareholders could cost some 3 trillion won.

STX claims it wants to diversify its business portfolio by shying away from its heavy dependence on shipbuilding.

And the plan seems to make sense, as it is in the early stages of a financing plan with an unnamed Middle Eastern sovereign fund.

Also, the group’s five listed units had cash-equivalent assets of about 2.9 trillion won in the first quarter of this year, according to STX’s financial statements.

But there are negative views on the plan because officials and analysts say buying a logistics unit could be more strategic considering STX’s current corporate portfolio.

The company has no history of managing a cash- and tech-intensive semiconductor business.

Seemingly, STX is showing more interest in expanding its construction and raw materials-related businesses in Africa and the Middle East.

``In return for bringing in funds from the Middle East, the group is seeking more business opportunities in fields such as oil-related businesses while encouraging the Middle East to have stronger interests in semiconductors,’’ said one credit analyst, who sought STX to put more focus on improving the financial structures of its shipyards in Europe and China amid the sluggish market.

STX Vice Chairman Lee Jong-chul admits no synergy is expected with its existing businesses from buying the Hynix stake but it will help Hynix maintain its current position in the global market, justifying assumptions that STX wants ``something more.’’

The credit analyst insisted that STX is considering the possibility of selling its unprofitable businesses, probably in Europe or China, and said the interest in Hynix could be a good reason for such intentions.

Hidden deal

STX's plan to form an alliance with a fund from the Middle East comes after the Advanced Technology Investment Company (ATIC), an Abu Dhabi fund that owns GlobalFoundries, has been investing heavily in chip-making facilities.

With abundant cash, such big oil majors in the Middle East are diversifying their business portfolios to better prepare for the ``post-oil’’ era.

``For them, Hynix could be the right target because Hynix is one of only two companies in the world, along with Samsung, to fully integrate the 30-nanometer processing chip-making technology. Also, Hynix is offering a display-operating chip to LG Display with the design by LG, another sign proving Hynix’s capability for foundries,’’ said Kim Hong-kyun, an analyst at Dongbu Securities.

A foundry is a manufacturing house that produces chips with original designs from clients and the business is quite new for Hynix as foundries require extremely fine-tuned chip-making technology.

``It’s known that the fund from the Middle East has asked STX to find out more about Hynix’s key facts and figures in return for providing favors to STX for their construction business in the Middle East,’’ said a local fund manager in downtown Seoul.

Last year, ATIC of Abu Dhabi was said to have taken an interest in acquiring Hynix but that failed to materialize because Korea prohibits super-fine chip-making outside the country for fear of a technology leak.

STX said Kang made the Hynix decision after he flew to the Middle East for strategic meetings.

``STX will learn more about Hynix’s key information during intensive inspections and it will help STX justify its case to its investors,’’ the analyst added.

``Debate will be heated over technology leaks if STX is chosen as the preferred bidder. Chances are low that the shipbuilding conglomerate will win. STX is being asked to soothe investors’ concern over its affiliates in Europe and China,’’ said Lee Jae-won, an analyst at TongYang Securities.

STX’s shipyard in Dalian, China, has failed to turnaround to profit over the last few years. Its shipyards in Europe are also experiencing difficulties amid a slower economic recovery in Europe, according to stock analysts.

STX spokesman Lee Sung-hee said the group has already acknowledged negative responses following its decision and is reportedly planning to communicate more with markets.

Chairman's boldness

Despite this, Kang has consistently been saying that the conglomerate will rise further through more M&As.

Kang was an ordinary salaried worker at Ssangyong Group, once a big Korean conglomerate before the Asian financial crisis took it to the brink of collapse.

The investment fund Hannuri, which bought Ssangyong Heavy in 2000, promoted Kang up to chief financial officer and chief executive.

Such M&As have helped him transform STX into the world’s fourth-largest shipbuilder in the space of just 10 years.

The group currently has 11 units with a combined revenue of $21 billion, compared with only $220 million in 2001.

It has 18 shipyards in eight countries with more than 90 percent of its sales generated abroad and nearly 60 percent of the group’s 57,000 employees working outside Korea, STX said.

``The chairman’s main word for M&As is clear ― synergy. When targets are in his sight, he looks at them closely and then makes decisions. But he knows how to effectively work deals,’’ the spokesman said.

STX had been interested in buying companies that overlap with its existing businesses for external expansion.

The world’s No. 2 shipbuilder Daewoo Shipbuilding, another top-tier builder Daewoo E&C and a trading company of Hyundai Corporation are former targets.

``While the chairman’s meteoric expansion has made STX a role model for many South Korean firms, buying Hynix isn’t an easy task. Hynix seems too big for STX,’’ said Song Jae-hak, a research head at Woori Investment.

``With two birds ― shipbuilding and shipping _ already in hand, it could be better for STX to put more focus on its key businesses,’’ said the analyst, adding that stocks of listed STX affiliates will feel downward pressure until late August when Hynix shareholders decide on the preferred bidder.