The Merger Proposal 1
The longest year of my life came to an end, and a new one began.
It had barely been long since the calendar turned when, just as expected, Hanjeong Group disclosed its merger proposal for Hanjeong Mulsan and HJ Logics.
HJ Logics would survive as the continuing entity, while Hanjeong Mulsan would be dissolved; HJ Logics would issue new shares and distribute them to Hanjeong Mulsan shareholders.
The merger ratio was set at 1 to 0.32, based on the average stock prices over the previous three months.
At the press conference, Executive Director Park Un-yong explained the reasons for the merger and laid out the vision for the company afterward.
“The merger between Hanjeong Mulsan and HJ Logics is absolutely necessary for Hanjeong Group to improve management efficiency, reduce investment costs, and reassess its global strategy. Through this merger, we intend to maximize the synergy between the two companies and accelerate our global management initiatives. We earnestly ask for your support.”
The media showered the announcement with praise, and securities firms rushed to raise their target prices for Hanjeong Group affiliates.
From the standpoint of HJ Logics shareholders, there was no reason to oppose it, but the situation was very different for Hanjeong Mulsan shareholders.
As soon as the merger proposal was announced, Hanjeong Mulsan’s stock fell while HJ Logics rose.
Stock forums and portal stock boards turned into public squares of outrage for retail investors.
As I was checking the mood among retail investors, a call came in from David Lockhart.
“Have you seen the announcement?”
Yes. It’s proceeding exactly as you said it would.
“Yes.”
When I told him I was buying Hanjeong Mulsan stock, David had taken a close look at Hanjeong Group’s situation. And, as expected, he had come to the conclusion that Hanjeong Mulsan and HJ Logics would merge.
Is the objective to block the merger?
“Come on. Would that really be enough?”
He understood what I meant immediately.
That won’t be easy.
“Well, if it doesn’t look right, I can always sell and get out.”
There was a reason I was so confident.
I wasn’t the only one who had noticed what was happening.
Other players had picked up on it early and moved into the game as well. Since Hanjeong Group had made the first move, they would start shifting in earnest too.
Hanjeong Mulsan and HJ Logics announced that they would hold an extraordinary shareholders’ meeting in early February to pass the merger proposal and complete the merger by March.
It was a textbook blitz.
Then, at that very moment, two events no one had anticipated happened at once.
First, the American hedge fund Elliott Management disclosed that it held 6.1 percent of Hanjeong Mulsan. Its stated purpose was “management participation.”
Second, KSGI made its opposition to the merger clear.
KSGI was a Korean hedge fund and a major shareholder with 7.7 percent of Hanjeong Mulsan. In an interview with the press, CEO Kim Sung-gwun said:
“KSGI opposes the merger proposal between Hanjeong Mulsan and HJ Logics. The merger ratio is plainly unfavorable to Hanjeong Mulsan and has been set in favor of HJ Logics, which means it will cause significant losses to Hanjeong Mulsan shareholders. Moreover, if two companies with different business areas are merged, rather than creating synergy, it will instead cause confusion and damage future value.”
Elliott Management and KSGI, united in their opposition to the merger, joined hands and formed an alliance.
Before the merger was announced, Hanjeong Mulsan stock had been at 40,500 won. After the announcement, it fell to 36,700 won.
But once it became known that Elliott and KSGI opposed the merger, the stock shot straight to its upper limit. In just three days, it recovered to 60,000 won.
To anyone who trades stocks, the worst person in the world is the one who makes your stock go down.
So who’s the best? Obviously, the one who makes your stock go up.
Unlike the press, which condemned the funds as speculative vultures, Hanjeong Mulsan’s retail shareholders welcomed them with open arms.
Even then, people were still divided over what Elliott and KSGI were really after.
Were they trying to raise the merger ratio? Were they stoking a battle for control in hopes of making short-term gains? Or, if not that, were they actually planning to participate in management down the line?
That question was answered soon enough.
Elliott Management announced that it had purchased the entire 5.3 percent stake in Hanjeong Mulsan held by the Dutch pension fund ABP.
With that transaction, Elliott rose to 11.4 percent, surpassing the National Pension Service and becoming Hanjeong Mulsan’s largest shareholder.
Now, when the two sides’ stakes were combined, they reached a staggering 19.1 percent.
Once again stepping in front of the press, KSGI’s Kim Sung-gwun sharply criticized the Hanjeong family.
“The reason such an irrational merger proposal has emerged is that management has been serving the interests of the controlling family rather than those of the shareholders. For years, Hanjeong Group has deliberately suppressed Hanjeong Mulsan’s value in order to push through an unreasonable merger, thereby infringing on shareholders’ property rights. Accordingly, KSGI demands the immediate withdrawal of the merger. In addition, to restore shareholder value, we demand the listing of some affiliates, a ban on internal trading favoring companies with high controlling-family stakes, the sale of non-core and underperforming business divisions, and the disposal of all Hanjeong Mulsan land not slated for development. The proceeds should be used to increase treasury share buybacks and dividends, and returned to shareholders.”
Hanjeong Group was thrown into chaos.
When they announced the merger proposal, they had expected some resistance, but they believed they could still pass it comfortably by securing 70 percent of the shares represented at the shareholders’ meeting.
That confidence had been the entire basis for pushing the merger in the first place.
Most institutional investors held both Hanjeong Mulsan and HJ Logics, along with shares in several other affiliates.
Vice Chairman Ju Cheol-jin had promised them that after the merger, the entire group would move to support share prices through treasury share buybacks and larger dividends.
If Hanjeong Mulsan suffered but gains in other affiliate stocks could offset the loss, there was no reason for them to vote yes.
But once Elliott appeared and KSGI took up the flag, the situation began to change dramatically. Before anyone realized it, one-fifth of the shares had fallen into hostile hands.
An executive meeting was summoned at Hanjeong Group’s headquarters in Yangjae-dong. The group’s core executives gathered in the conference room with tight, wary expressions.
Ju Hyeon-jin, who had been drinking until dawn and then sleeping at home, arrived late. His older brother, Ju Cheol-jin, and his sister, Ju Hye-jin, were already there.
Ju Cheol-jin glared at Ju Hyeon-jin and said, “What took you so long? What were you doing that made you this late?”
“I’m sorry.”
A little later, an elderly man with difficulty moving was helped into the room.
Chairman Ju Min-jae had stepped back halfway from the front lines of management for health reasons. It had been a year since he last personally presided over a meeting.
To his right sat the three siblings in a row: Vice Chairman Ju Cheol-jin, who was set to inherit the group, along with Ju Hye-jin and Ju Hyeon-jin.
Given the situation, no one looked particularly cheerful.
Once the meeting began, Vice Chairman Ju Cheol-jin said irritably, “What the hell is going on? Why did the Dutch pension fund sell its stake to Elliott?”
Until now, the Dutch pension fund had supported the controlling family’s management, and they had assumed it would continue to do so. But with the sale completed, a friendly stake had instantly turned hostile.
Park Un-yong from the planning and coordination office said, “I checked with Vice President Park Yu-gyeong, and on paper they say it’s part of a global rebalancing.”
Rebalancing means readjusting the proportions of assets you hold.
Large pension funds invest across the world and follow principles that determine their allocation by market size.
Say you invested 10 units of assets in China, Japan, and Korea at a ratio of 2:5:3.
A few years later, that ratio would shift according to performance. It might become 2:4:4, or 1.5:4.5:4. That is why they periodically sell assets that have risen too much and buy undervalued ones, adjusting the balance.
“And they chose to exit at this exact moment? You expect me to believe that?”
The Dutch pension fund had invested in Hanjeong Group right after the IMF crisis. Considering the stock’s rise and dividends over the years, they must have made gains exceeding thirty times their original investment.
After all the money we’ve made for them, this is how they leave?
And yet they had sold and walked away without even a word of consultation. I ground my teeth from the betrayal alone.
Unlike the highly agitated Vice Chairman Ju Cheol-jin, Park Un-yong remained calm.
“There’s no way a transaction like this was completed in a day or two.”
“Then what?”
“They must have signed the agreement long before the announcement was made.”
“That means Elliott knew about the merger in advance. How on earth did they find out?”
As he spoke, Vice Chairman Ju Cheol-jin swept his gaze across the people seated there. With eyes that seemed to be rooting out a traitor, the older president and executives lowered their heads slightly.