The Deal

Korea's conundrum

Korea's conundrum

Seoul's business leaders have been riveted by news of the ongoing case against Lone Star Advisors...

  • min read


Korea's conundrum

Seoul's business leaders have been riveted by news of the ongoing case against Lone Star Advisors Korea, the Texas-based private equity firm accused of taking unfair advantage in its Korea Exchange Bank deal. But even before Lone Star, South Korea's business leaders were building some skepticism against global private equity funds for being short-term-focused, greedy and not socially minded.

That's too bad, because Korean companies may be overlooking the positive lessons they can learn from private equity in everything from advanced governance models to overseas expansion to honing operations at home with the discipline and focus that private equity firms can bring. The rise of private equity could be an especially welcome development for many of Korea's chaebol, which are experiencing the organizational stalemates that typically plague companies entering their third generation of family ownership. Such firms inevitably find themselves juggling the wealth management concerns of owners with the challenges of managing publicly listed companies for investors. While some of the largest chaebol, such as Samsung Group and LG Group, are now considered among the best-run businesses in the world—investing heavily to attract and retain world-class management and developing best-in-class operating practices—it's no secret that many chaebol are struggling and could learn from the best of the private equity funds as their scale, presence and influence rapidly spread across the region and globally.

Probably the biggest challenge facing chaebol is the need to turn around their own operations. Newbridge Capital Group and Blum Capital Partners LP became the first outsiders to own a Korean bank when they bought a 51% stake in Korea First Bank in 2000. Under its new leadership, the foundering Korea First was transformed from a sleepy corporate bank into a leading retail bank. Lax financial controls were replaced with stringent financial discipline. Korea First's new outside management re-engineered its branch network, created a cross-selling culture, designed and outsourced a centralized back office and launched an Internet banking strategy. In early 2005, Standard Chartered plc bought Korea First for $3.25 billion. To lead such turnarounds themselves, many chaebol need to recruit and create incentives for top-notch outside management the way former Samsung CEO and former Minister of Information and Communications Jin Dae-jaewas hired from IBM Corp.—and they need to build boards that can bring an outsider's perspective. Also, chaebol are at a point where they need to invent a leapfrogging governance model to maintain their competitive edge—balancing the quick-decision family control advantage with stronger transparency disciplines and management skills. These are areas where chaebol can learn from private equity funds. Recently, governance activists like Jang Ha-sung, the high-profile dean of Korea University Business School, have joined hands with firms such as Lazard to target those chaebol that are seen as lacking in governance discipline. Growth abroad is another area where chaebol could gain advantages through the right partnerships with private equity. Cross-border dealmaking, for instance, is an area where Chinese companies have combined forces with private equity players to learn the game and sprint ahead. PC maker Lenovo Group, for example, bought IBM's PC division but turned to minority investor Texas Pacific Group to help put the right management team in place. TPG knew how the system worked in the U.S. Lenovo, by its own admission, didn't. And integration problems can be the downfall of any merger, cross-border or not. Our recent survey of 250 global executives involved in M&A found 67% traced disappointing results to "ignoring integration challenges," while 66% said they "overestimated synergies." Sometimes the smartest move is to walk away from a proposed merger. Here, too, private equity can help by steering chaebol away from a potentially sour deal. When the assets of Jinro Ltd., a leading producer of Korean alcoholic drink soju, went on the market in 2005, Taihan Electric Wire Co. Ltd. was one of 10 bidders. Taihan hired ex-private equity professionals as acquisition advisers and, in the end, ceded the deal to Hite Brewery Co. Ltd., which outbid the cable manufacturer by 30%. After due diligence uncovered Jinro's worth, Taihan was happy to exit the deal. It's too soon to tell whether Hite will achieve the value it is banking on from the Jinro acquisition. Whether or not Korea's prosecutor proves its stock manipulation charges against Lone Star, the case is likely to cause Korea's business leaders to further distance themselves from global private equity. That's unfortunate. The fact is, if chaebol want a second wind, they need to look up and out, stop spurning private equity and start learning from it.


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