Pandemic crisis puts dealmaking on hold

By Lee Min-hyung

• Published Apr 19, 2020 3:24 PM KST
• Updated Apr 20, 2020 11:22 AM KST

By Lee Min-hyung

The global coronavirus pandemic is freezing the domestic merger and acquisition (M&A) market, with companies prioritizing stability over growth amid widening market uncertainty.

The temporary slowdown of growth in the investment industry was widely expected, as COVID-19 has already started to paralyze economic activities in the United States and major economic powerhouses in Europe. Korea ― whose economic growth relies on exports ― is also reeling from the Western shock in regaining investors' confidence.

The number of cross-border M&A transactions dropped by more than half to 385 in March 2020, compared to a month ago when the figure reached 874, according to data by the United Nations Conference on Trade and Development (UNCTD). The monthly average in 2019 came in at around 1,200.

Market insiders said the Korean M&A market would continue facing turmoil until the spread of the virus comes to a halt in the world's largest economy and in European nations.

“For now, most companies seek to hedge against the potential risk of proceeding with their scheduled deal plans, as virus-induced economic uncertainties remain in place,” an executive in the local investment industry said.

Reflecting on the pessimistic market outlook, domestic and foreign investors are on track to either cancel their planned M&A procedures or reschedule them for the latter half of this year when the coronavirus is expected to subside, according to the source.

Before signing M&A contracts, buyers need to engage in an on-site inspection of the seller's office and major business facilities. But the virus has put a brake on these procedures here and abroad, with government authorities across the globe tightening quarantine measures against foreign visitors.

“If buyers skip the process, chances are financial regulators ― such as the Financial Supervisory Service ― will slap sanctions on them,” the source said. “Under the worst-case scenario, investors of the buying side may file a class suit over such an act, as on-site inspections are crucial before making an investment.”

Against the same backdrop, firms across the world are also reluctant to engage in equity investment for the time being, he said.

Disruption to global supply chain

One of the most concerning parts of the virus-driven economic impact is that COVID-19 is disrupting global supply chains, which has driven some Korean firms into a corner.

Asiana Airlines, the nation's second-largest carrier, is hit hardest by the pandemic shock among domestic companies.

The ailing airliner was put up for sale last year, and Hyundai Development Company (HDC) became the preferred bidder to take over the company at 2.5 trillion won ($2.5 billion) in November 2019. The Hyundai affiliate offered the price in consideration of the stock value Asiana had at that time.

But with the pandemic devastating the aviation industry by slashing most international flights Asiana's stock price has since plunged, falling as low as 2,270 won on March 19 when the virus fear reached its peak here and abroad. This was a threefold decline, compared to Nov. 12 when the airline's stocks were traded at around 6,580 won.

Even though the company's shares recently rose to over 3,700 won as of April 13, its total market capitalization is unlikely to recover to the level recorded last November any time in the foreseeable future, due to lingering uncertainties in the airline industry.

For this reason, HDC is in a growing dilemma over whether to proceed with the planned acquisition of the sagging airliner. If the buyer carries out the deal under the previously-signed contract, it has to take the burden of hundreds of billions of won due to Asiana's recent drop in corporate value.

This sparked rumors that HDC will decide not to finalize the takeover deal with the airliner and be liable to pay 250 billion won for breach of the contract.

Another source from the industry said, “HDC is unlikely to be in a rush to finalize the M&A process even at a time when it has to suffer loss unless the firm revises the previous terms of the contract.”

But if HDC continues to delay making its decision over the acquisition, Asiana will continue being exposed to a worsening financial status. For now, the airline company has to pay 250 billion won each month in fixed costs for airplane leases, even if more than 90 percent of its international flights have been suspended.

GS Engineering & Construction is also facing difficulties in finalizing a contract to take over a modular construction firm based in the U.S.

The Korean construction company announced its plan to sign the contract to acquire the U.S. firm in February, but the global spread of the coronavirus has put a brake on the timeframe.

To finalize the deal, officials there need to visit Korea. But the plan hit a snag amid the global spread of the novel coronavirus. GS has yet to fix a schedule to rearrange the meeting, as it remains unknown when the pandemic will subside.

SK Global Chemical, a petrochemical products manufacturer based in Seoul, also recently delayed its legal procedure to take over Arkema France SA, a French chemical firm, by one month to May 11.