ANALYSIS Korean conglomerates lukewarm on venture M&As

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Lack of promising Korean ventures cited as core factor for top conglomerates inactivity on local M&As

By Anna J. Park

Korea's M&A market has nearly quadrupled during the past two decades, as the average yearly number of such deals exceeded about 430 in 2020, compared to 102 logged in 2000. The market size increased to about 50 trillion won ($43 billion) last year, nearly four times that of 13.1 trillion won in 2000.

However, the market has dwindled during recent years after reaching an all-time high market value of 60 trillion won in 2018.

The squeeze is partly due to a weakened investment sentiment with the global pandemic shock incurred in 2020, when the number of M&As stood at 436. About 60 percent of the M&As completed last year were led by the nation's conglomerates.

According to the latest statistics announced by the Financial Service Commission (FSC), the country's top financial policy regulator, local market conditions seem to have improved this year, as both the number of M&As as well as the market size have jumped during the first half of this year.

Conglomerate-led M&As during the first half increased by over 60 percent compared to the same period last year, exceeding the 30 trillion won mark in terms of market size for the first time since 2017.

It is also encouraging that the increase in conglomerate-led M&A deals has mostly come from their mergers with non-affiliate companies, rather than mergers with their own affiliate subsidiaries, meaning that Korea's big companies are at least trying to diversify their business models by embracing new organizations through M&As.

However, the country's performance in the M&A market lags far behind that of the U.S., where M&A deals are most prevalent, particularly in the coronavirus-led economic transformation period. The global M&A market size reached $1.3 trillion in terms of monetary transactions as the end of the first half this year ― an all-time high ― market researchers said.

In this fast-growing global setting, Korean conglomerates ― the backbone of the nation's economic activities ― have particularly shown a rather defensive attitude towards risky investments in local venture companies.

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According to the figures compiled by the Federation of Korean Industries (FKI) along with a local media outlet, nine out of 10 Korean conglomerates surveyed responded that they have no intention of acquiring local venture companies in the next three years.

Most of the companies cited the lack of promising venture companies in the country as their main reason for having no interest in such acquisitions.

The survey results clearly show the reality of the Korean economy, which seems to have failed in nurturing a healthy venture ecosystem. Market watchers say the core problems could be found on the part of both conglomerates and venture companies.

“Korean conglomerates have traditionally relied on developing key technologies on their own, when faced with the need to develop and explore new markets, rather than striking M&A deals,” said Choi Soon-young, senior researcher at Korea Capital Market Institute (KCMI).

Other market watchers also pointed to some local venture companies' lack of technological expertise, such as the number of international patents, as a key reason for their losing attractiveness in the merger market. Big conglomerates would rather develop their own technologies or turn their eyes to global tech venture firms.

But in this fast-changing global economy where innovations sweep the market daily, local conglomerates cannot just rely on themselves to cope with high demand for new technologies in the global market, said industry officials. “That's why market watchers say the local M&A market led by local conglomerates will grow in the coming years.”

“The sluggish M&A market would lead to weakening of local businesses' global competitiveness, especially in the realm of newly-created markets,” said an official from the FKI, adding local businesses are expected be more active in deals with government support measures.

“While the traditional corporate culture is still not very familiar with taking active risks by aggressively acquiring venture companies to secure their technologies, M&A deals will be in more demand over the next few years, as it is one of the most used and proven business tools to secure growth of a company,” the senior researcher at the KCMI added.