M&As to Gather Speed on Securities Market

Deregulation to Boost Capital Market, Empower Brokerage Houses

By Park Hyong-ki

Staff Reporter

Mergers and acquisitions (M&A) are starting to gather speed on the securities market as hoped for by the government and regulators promoting deregulation through the Capital Market Consolidation Act.

Hyundai Automotive Group's recent announcement of taking over Shinheung Securities has ignited a fresh round of M&As in line with the implementation of the act in 2009.

With the capital market to undergo a major overhaul for greater competition and efficiency, financial firms and corporations are rushing to either set up a new brokerage house under their wings or acquire existing ones on the market.

Given the limited timeframe of the capital market integration bill, analysts expect a growing number of companies will opt to seek M&A opportunities rather than build securities firms as seen in the case of Hyundai.

Hyundai Automotive currently operates two non-banking units ― Hyundai Capital and Hyundai Card. Doosan Group also acquired a small brokerage, BNG Securities. Other conglomerates such as Aju and Woongjin are reportedly shopping for a small brokerage, and SC First Bank is doing the same. Financial firms such as Kookmin Bank and Solomon Mutual Savings Bank took over small securities firms last year.

Daewoo Securities projects M&As of small- and medium-sized brokerages to increase ahead of a re-licensing process by financial regulators. The Financial Supervisory Commission has urged companies seeking to establish a brokerage unit to apply for a securities license by the end of the first half of this year so that it can process and renew licenses in accordance with the act beginning in the second half. ``With interests growing in establishing a securities business by non-financial firms, we expect M&As to pick up steam,'' it said in a report.

Brokerage houses such as Hanyang, Kyobo and Yuhwa are on the speculative list for possible M&As. Analysts say such small securities firms are more likely to grab the opportunity to merge with big corporations as it will help build their edge and prepare for the increased competition expected after deregulation takes place on the capital market.

Big Bang

The act, which was passed by the National Assembly last year, aims to break business barriers between futures, asset management and securities firms.

The country's financial market has been developing with the primary focus on fostering the indirect financial system, or the banking sector. This, in return, has weakened the capital market with firms reluctant to raise capital through issuances of stocks and bonds amid low investments.

According to the Bank of Korea, the banking industry accounts for over 60 percent of the financial market, while the securities sector accounts for less than 4 percent.

Also, the regulatory structure that guaranteed a protective and safe business environment for securities companies has made them less competitive compared with global investment banks. Analysts say banks and securities firms have played safe under such a framework.

Profitability measured by return on equity for top five Korean securities companies stood at 12 percent, while that for five U.S. investment banks was 24 percent as of 2006. Korean companies' equity capital averaged 1.8 trillion won, while that of U.S. investment banks was at 28.5 trillion won.

``To edge up as competitive investment bankers in Asia, top securities companies in Korea need to boost their capacity by three-fold at least,'' said the Korea Securities Research Institute.

Due to the protective atmosphere, Korean securities firms mainly provided brokerage services, accounting for over half of their total income, meaning that their business diversification lags far behind global investment banks.

With the urgency to develop a new growth engine besides exports and spur the competitiveness of the capital market amid a rapidly ageing society, the government sought to create a reform bill to ignite a big bang to the likes of the Financial Services and Markets Act in Britain and the Financial Services Reform Act in Australia.

This is part of efforts not only to develop the country into a financial center of Northeast Asia, but also make global investment banks out of securities companies through M&As and global advancement.

In a meeting with CEOs of financial firms early this month, President-elect Lee Myung-bak emphasized the importance of developing the financial market for economic growth, vowing to further deregulate and support the industry.

``The new government will back the industry through deregulation,'' said President-elect Lee.

Fierce Competition Ahead

Analysts say such deregulation in the financial market will increase competition, and Korea companies will seriously need to brace for a tough road ahead as they are behind in service diversification and human capital.

``There is a high chance for foreign companies to edge out domestic companies after deregulation as they are already leading in providing investment banking services in the market, and have solid networks worldwide,'' said Jeung Shin-dong of the Financial Supervisory Service (FSS).

He added that deregulation is likely to spur M&As between securities and futures units of financial holding companies or bank groups, and non-financial firms will further engage in M&As of brokerages to expand into the capital market.

However, Jeung was doubtful that M&As will take place between top brokerages as they are already affiliated with big holding companies with their own growth strategies.

Even so, he noted investment banks will be born with the top three firms' market share reaching over 50 percent after restructuring.

The FSS said the act marks the first step of advancing the financial market to join the world's top 10 financial centers, including London, New York, Singapore and Hong Kong.

Currently, the financial industry accounts for about 7 percent of GDP growth, and it aims to push it to 9 percent by 2016, and raise its international status measured by the Trans-nationality Index to 20 percent by 2016 from 4 percent in 2006.

The Global Financial Centers Index by the City of London ranks Seoul at 42nd as a financial city, and categorizes it as volatile. It said that Singapore and Hong Kong are ``clear leaders'' in Asia.

phk@koreatimes.co.kr