By Nam Hyun-woo
With a batch of companies seeking to become holding firms next year, expectations are rising that they will become new investment destinations in the stagnant domestic capital market.
So far, Hyundai Heavy Industries, Maeil Dairies, Orion Confectionery, Crown Confectionery and several other large firms heralded their plan for turning themselves into holding firms. Samsung Electronics is also reviewing the possibility of such a transformation.
Companies have been making such announcements since November, sparking expectations that this will likely take place in the first half of next year.
Market watchers say they are accelerating efforts because now is the “golden time” to transform. From July next year, the minimum assets for a holding firm will be raised from 100 billion won to 500 billion won.
Also, a series of bills regulating companies becoming holding firms have been tabled by opposition lawmakers. Experienced observers expect the bills to be “highly passable,” as the opposition could win next year’s presidential election.
Another factor for the companies to expedite their efforts is the so-called One-Shot Act. The act is aimed at helping corporate restructuring and mergers and acquisitions (M&As) of businesses by streamlining the processes of stock-swaps. Since the law is effective for only three years from Aug. 13, 2016, now is a favorable timeframe for companies to enjoy the benefits of the act.
Generally, a company transforming itself into a holding firm allows the owners to have stronger control and to pass on their ownership without any extra tax burden. In the process, treasury stocks contribute a lot in enhancing owners’ control because those stocks gain voting rights during the transformation. This helps a holding firm better control its subsidiaries.
At the same time, it is a way to win more investor confidence by improving its valuation and increase the transparency of the current ownership structure.
According to Oh Jin-hwan, an analyst at Hana Financial Investment, 48.1 percent of 27 companies that announced spin offs to create holding firms since 2007 have seen an average 1.83 percent increase in their market caps within a month.
When the period is extended to nine months, 96.3 percent of those companies have experienced an average 90.86 percent of increase in their market cap.
“The cases of holding companies in the past 10 years show that there were significant increases in the market cap for those companies, even though their corporate value stayed the same,” Oh said.
For example, Samsung Electronics shares shot up to record high after it said it was mulling creating a holding company.
Oh said that companies which have high treasury stock ratio will see increases in not only their market cap but also their net assets. “Investors should pay more attention to companies with high treasury stock ratios while the largest shareholders’ stake is relatively low.”