Foreign CEOs Shun ‘Poison Pill’
By Jane Han
Staff Reporter
Foreign business leaders here are speaking out against the possible introduction of ``poison pills'' that would fend off hostile takeover attempts, but critics say their intentions are questionable as the traditional defense mechanism is common practice worldwide.
``There's no reason why South Korea shouldn't make this system legal,'' said Shin Seok-hoon, a senior research fellow at the Korea Economic Research Institute (KERI), a leading economic think tank. ``Advanced economies implemented this concept decades ago.''
The strategy, colloquially called ``poison pill,'' is also known as a shareholder rights plan. There are many different ways the pill can be executed, but it is fundamentally designed to minimize the likelihood of an unwanted takeover by allowing shareholders to purchase or receive new shares in a company when an outsider attempts acquisition.
When more shares suddenly float in the market, the hostile acquirer is forced to either give up on the buy or negotiate with its target.
``This is considered the most cost-effective way to protect a company,'' said Shin, adding that companies like POSCO and Samsung Electronics, which have often been rumored to be bought out, ``can relax'' with the scheme.
However, regardless of its effect, foreign businesses seem to shun the practice, citing that it works against free flow of capital.
``The pill would not do the South Korean market well,'' said Hans Bernhard Merforth, the vice president of the European Union Chamber of Commerce in Korea (EUCCK). ``It will back up chaebol (family-owned conglomerates) to have even more power than they do now.''
He said the problem with the system is that it can lead to lazy management and encourage giant corporations to hoard too much capital unproductively.
``If the system is implemented, it will be a clear sign that the government is not investor-friendly, but extremely chaebol-friendly,'' said Merforth. ``I hope the government isn't hiking back to the old days.''
Minister of Justice Kim Kyung-han suggested last week to President Lee Myung-bak that the anti-merger and acquisition (M&A) plan be introduced.
It immediately stirred up mixed reactions in which major business groups like the Federation of Korean Industries (FKI) hailed the move, while the Ministry of Strategy and Finance dismissed the pill, citing its backwardness in the global market.
A local representative of a U.S.-based company, who asked for anonymity, sided with the latter, stressing that the number of companies using the poison pill is falling in the U.S. and Europe.
A 2006 U.S. survey shows that 46 percent of S&P 500 companies used the defense in 2005, down from 53.8 percent in 2004. It stated that the number has been on a steady decline since 2002.
``Conscious investor-groups are making sure their voice is heard in advanced economies,'' he said.
Merforth added, ``It tends to be depressing for the stock price because, sometimes, stock prices go up on the fantasy that a company might be taken over.''
Park Young-koo, a research fellow at the Samsung Economic Research Institute (SERI), agreed, but stressed, ``The system should be introduced here, regardless.''
He said the U.S. took about 20-30 years to stabilize the mechanism in its market and Japan has been experiencing years of trial and error until now, so South Korea will need a generous amount of time to settle the scheme.