Bout of M&A Indigestion Hits Kumho
Medium-Sized Eugene Takes a Major Drubbing on Stock After Merger
By Jane Han
Staff Reporter
Last year many people got familiar with the once little-known Eugene Group. Striking merger and acquisition (M&A) deals one after another, the small-sized industrial conglomerate got frequent media coverage as a star and symbol of success in the domestic corporate consolidation market.
But one year later, the glory is gone and what Eugene is left with is a liquidity crisis, overwhelming debt, tumbling share price and a downgraded credit rating. What caused this hiccup?
``Gulping down too many companies in a short period of time without adequate financial backing can lead to serious management risks,'' said Kim Jong-nyun, a senior research fellow specializing in M&As at the Samsung Economic Research Institute (SERI).
The company's trek into its rapid M&A route began in 2004 with its acquisition of a local cement firm. A few years later in 2007, Eugene bought parcel delivery service Logen in February; Seoul Securities in March; and Korea G.W. Logistics in August, all of which beefed up and diversified its corporate portfolio.
During this expansion, shares of Eugene Corp. ― the group's flagship unit ― climbed to reach an all time high of nearly 19,000 won by mid-year, and its CEO Yu Kyung-sun was celebrated as a Midas in M&As.
But things quickly turned around when Eugene in December ate up Hi-Mart, a local electronics retail giant, with a price tag of 1.95 trillion won. Unable to shoulder the cost, Eugene ended up drawing hefty short-term bank loans, totaling almost 500 billion won. This hiked the company's total borrowings five-fold compared to 2006.
Consequently, Korea Ratings downgraded Eugene's credit, which contributed to its rapid decline in share prices that now barely top 8,000 won.
``Eugene is an example of a business suffering from the so-called winner's curse,'' said Kim. The term describes the economic burden of paying an outstanding price for a firm.
Buyers usually pay 10 to 15 percent of the purchase price, with the remaining 85 to 90 percent funded via loans. This is the common leveraged buyout (LBO) transaction used by most companies in takeovers. Money is typically paid off through solid business operations. However, problems occur when external economic circumstances hit sales, ultimately making it difficult to pay back the loan.
Tracking along a similar path is a larger scale M&A giant, Kumho-Asiana Group, which picked up major companies, including Daewoo Engineering & Construction, the nation's top builder, and Korea Express, the country's No. 1 logistics company. The first cost 6.4 trillion won and the second, 4.1 trillion won.
The two deals bumped up Kumho-Asiana's corporate ranking, and handed Chairman Park Sam-koo the reputation of being an M&A whiz.
But skepticism started growing, as its new unit, Daewoo construction, took a downturn in business. Among the nation's top five builders, only Daewoo saw a drop in revenue and operating profit in the first quarter of this year.
The share price of Kumho Industrial, which led the Daewoo acquisition, plummeted from over 90,000 won last November to the current 20,000-won range, and citing the large net debt, Korea Rating cut its credit rating.
``A drop in both credit rating and stock price is a double blow for companies because these two are essential barometers to their health,'' said Park Seung-rok, an M&A specialist at the Korea Economic Research Institute (KERI).
Experts highlight other deal making firms, including E.Land, Doosan and STX, as going through their share of growing pains after a significant merger.
``Some companies will manage and overcome the turbulence, while others will think of secondary measures, such as spinning off select business units,'' said Kim.
A few are already opting for this ― Eugene Group said in May it will sell off idle factories to secure cash, while E.Land has sold the hypermarket chain Homever to lessen its financial burden after it bought the discounter from French retailer Carrefour in 2006.
``Korean companies aren't used to M&As yet, so they tend to push themselves too far,'' said Park, adding even companies experienced with M&As often regret consolidation because of the heavy duty work and risks lingering afterward.
A 2002 Boston Consulting Group study showed that 61 percent of 302 firms involved in M&As saw a decline in share price. A report released by A.T. Kearney indicated similar negative results.