Kumho Asiana has no other choice but to sell its building affiliate, Daewoo Engineering and Construction, in the face of a financial crunch amid the global economic crisis. It is fortunate that the conglomerate has decided to jettison Daewoo before it's too late. The decision came about three years after the group took over Daewoo for 6.4 trillion won. The takeover now proves to be a failure because the business concern bought the building giant in a race to recklessly expand its business operations.
The acquisition is a typical case of a leveraged buyout. And Kumho has learned a painful lesson that such a buyout and overextension do more harm than good. Other family-controlled conglomerates or chaebol should bear in mind that an excessive competition for mergers and acquisitions (M&As) could cripple not only their business but also the whole industry and the Korean economy. It is necessary for them to refrain from creating a vicious cycle of foolhardy expansions, monopolization of economic power, and business failures.
Kumho cannot avoid criticism that it has gambled on a buyout bid over the past few years. After acquiring Daewoo in 2006, it also purchased logistics giant Korea Express for 4.1 trillion won last year. As a result, Kumho became the nation's eighth-biggest business group from its previous ranking of 11th. It has sought to beef up construction and logistics as its core business along with chemical and air transportation. But now, the group has to shed Daewoo in a desperate bid to get out of financial difficulties and push for a restructuring of its operations.
It is hard to exaggerate the dangers of leveraged buyouts. Kumho borrowed 3.5 trillion won from 18 banks and financial companies by offering 39.6 percent of Daewoo shares as collateral in order to finance the acquisition of the builder. The problem is a put-back option under which the group promised that it would compensate the lenders if Daewoo's stock price fails to reach 31,500 won by December this year. Kumho, which is not able to pay the loan, may incur an estimated loss of over 4 trillion won if the creditors exercise the put-back option.
Against this backdrop, the group has been haunted by speculation after speculation about a potential collapse. Thus, its decision to put Daewoo up for sale is seen as an inevitable step to save the conglomerate from a looming catastrophe. But, no one is sure whether Kumho can find a buyer or a group of investors to take over Daewoo at a time when the worldwide economic crisis still persists.
Even if it succeeds in selling off Daewoo, it is still uncertain that the conglomerate will regain its financial health immediately. Therefore, Kumho is under increasing pressure to sell more subsidiaries in all-out efforts to push more radical restructuring. It would be better for the group to avoid the state of being ``too big to save."