The Merger Proposal (3)
Neither the chairman’s family nor the joint front had yet secured the stake they needed.
That made the votes of minority shareholders crucial.
The Hanjeong Group side had asked every securities firm for cooperation, and DA Securities was no exception.
Branch employees called customers who held Hanjeong Mulsan stock and asked whether they would grant proxy voting rights, while analysts drafted reports on the issue.
Here, the divide between domestic securities firms and foreign ones was painfully clear.
Foreign firms published reports pointing out the merger ratio, while domestic firms spewed out nothing but endorsements, as if they were praising some glorious decision from above.
Lee Dong-ho said, almost accusatory, “This merger proposal is clearly disadvantageous to Hanjeong Mulsan shareholders. It’s basically a breach of fiduciary duty. And you want me to support it?”
“Why are you so worked up?”
Lee Dong-ho answered with conviction. “I’m one of Hanjeong Mulsan’s minority shareholders.”
Manager Woo Baek-hyeon stared at him for a moment with widened eyes.
“Well, well. Sounds like you’ve made quite a bit.”
“The ones I bought a while ago are only just back to breakeven.”
The hundred million won he’d bought recently had doubled, though.
“If you didn’t lose money in stocks, that means you did well.”
That was annoyingly true.
“Anyway, I can’t in good conscience vote for this myself, so how does it make sense to ask me to write a report supporting it?”
The current rise in the stock price was only a temporary effect of the dispute. If the merger proposal passed, the price would collapse again. Telling minority shareholders to approve it was no different from handing them bullets and telling them to load the gun pointed at their own heads.
“You’ve been writing those kinds of reports just fine up to now. If you put it that way, how many of the buy recommendations you’ve written actually went up?”
“...About half, maybe?”
Many domestic securities firms were affiliated with chaebol groups. Even when they weren’t, they still maintained close ties with them.
If a report contained even a sliver of bad news, the company in question would immediately lodge a complaint.
That was why domestic firms were quick to issue buy reports, but almost never sell recommendations.
“So what are you suggesting?”
Lee Dong-ho answered firmly. “As an analyst and as a minority shareholder, I’ll write what I believe.”
* * *
(Strategic excerpt) Even though the merger ratio was obviously unfavorable to Hanjeong Mulsan, the Hanjeong Group side continued to deny it.
The group’s claim that the share price would rise through post-merger efficiency gains amounted to little more than an admission that they had deliberately pushed the price down in order to force the merger through.
Hanjeong Mulsan cited cost reduction, synergy, and global management as the reasons for the merger, but the real reason for pushing a merger with HJ Logistics, whose largest shareholder was Vice Chairman Ju Cheol-jin and not some unrelated affiliate, was obvious to everyone: succession control.
Whether this proposal would benefit the Hanjeong Group as a whole was unclear, but for Hanjeong Mulsan alone it was unquestionably a loss.
Therefore, if Hanjeong Mulsan’s management supported the proposal, it would amount to a grave breach of fiduciary duty and a gangster-like act of robbing the pockets of minority shareholders.
Shareholders should be aware of this and exercise the utmost caution when filling out their proxy forms.
In a situation where most analysts were busy promoting the merger, this report, written by one analyst according to his own convictions, was more than enough to draw attention.
After reading the report in full, I looked at the analyst who had written it and said, “You wrote that really well.”
Senior Dong-ho shrugged.
“Pretty much the crowning work of my life.”
Apparently, he had handed in his resignation right after writing it.
Dong-ho let out a sigh. “Right now, the media and the securities firms are all on the chaebol’s side. Hedge funds are the villains.”
“In Korea, people tend to see corporations and their founding families as the same thing.”
In the United States, where shareholder capitalism was more developed, it was common for founders to be pushed out of the companies they had built themselves.
But in Korea, corporate control disputes were treated like little more than theft, as if outsiders were trying to steal a family business someone else had worked hard to build.
If people hated that, then they shouldn’t have gone public in the first place. They should have stayed private.
“So what exactly is the plan going forward?”
“Hold on a second. One more person is coming, so I’ll explain it then.”
“Hm? Who?”
The moment he finished speaking, a beautiful woman with an unmistakably exotic air opened the door and stepped inside.
Tall, slim, with striking features and large eyes, and brown hair that fell to her shoulders.
Dong-ho, startled by the foreign beauty who had suddenly appeared, looked at me and said, “Looks like the foreigner came to the wrong place.”
“No, she’s in the right place.”
Sarah looked at me and said, “I had my suspicions, but it really did turn out exactly as Miru predicted.”
Dong-ho looked back and forth between us.
“What’s this? You know each other?”
“Yes. This is the princess’s cousin from Saudi Arabia. She’s currently working as CFO of A-Oil.”
“...Huh?”
After a moment of thought, Dong-ho lowered his voice and asked, “Which part is the joke—the Saudi princess’s cousin part, or the part where she’s working as CFO of A-Oil?”
“Both are true.”
“......”
“First, let’s introduce ourselves.”
Sarah extended her hand first.
“I’m Sarah Avery. Nice to meet you.”
“Hello.”
“Pleased to meet you.”
The three of us exchanged greetings and took our seats in the meeting room.
“Now that we’re all here, I’ll explain the plan going forward.”
I spoke as if giving a lecture, writing on the whiteboard as I explained.
“To understand what’s happening now, we first need to know what Elliott Management and KSGI are.”
Dong-ho raised a hand.
“I kind of know already.”
Sarah nodded as well.
“So do I.”
Kim Beom-seok also subtly lifted a hand.
“I know as well.”
As expected of experts, they all already knew.
Still, it felt wasteful to ignore the material I’d prepared, so I said, “Even if you know, listen again.”
First, Elliott Management was an American activist hedge fund founded in 1978 by Paul Elliott Ayns, and its assets under management were now reportedly over 30 billion dollars.
KSGI, meanwhile, was a Korean hedge fund.
Its founder, Kim Sung-gwun, had also come from DA Securities, just like me. Originally a bond analyst, he became well known after publishing reports analyzing the governance problems of chaebol groups.
He argued that the biggest causes of the Korea Discount were controlling shareholders’ breaches of duty, embezzlement, abuse of power, illegal gift transfers, and funneling work to affiliated companies.
His position was that even improving the emperor-style management of chairman families and fixing corporate governance would greatly increase corporate value.
But as the saying went, “the crab sides with the crab basket.” In Korea, no securities firm could directly touch those issues, and his warnings were nothing more than empty words.
Feeling the limits of the domestic market, he moved to a private equity fund under HSBC, and from that point on, he began to show what he could really do.
He acquired 48 percent of Yongjin Development, streamlined its affiliates, improved its governance, tripled the stock price, and sold it. He did the same with SR Logistics and made a profit there too.
After proving his ability several times, he raised outside capital and founded a company under his own name. That was KSGI, or Kim Sung Gwun Investment.
Activist hedge funds were not especially rare overseas, but in Korea he was effectively the first.
These funds usually moved with the goal of squeezing out as much profit as possible in the shortest time.
The typical strategy went like this.
First, they bought a stake above a certain threshold, or acquired the company outright. Then they sold off non-core assets unrelated to operations, along with shareholdings in affiliates, converted them into cash, and used that money for share buybacks and dividends.
Since those benefits went directly to shareholders, the stock price tended to rise as a result.
Along the way, they would not only take part in management directly, but also dig up executive wrongdoing and file lawsuits or criminal complaints.
They pumped up the stock, raised the company’s value, collected dividends and capital gains, and then sold out.
This kind of behavior had positive aspects as well, such as making management more transparent and protecting the rights of minority shareholders. On the other hand, it also had negative consequences, like draining the company’s ability to invest and damaging its future value.
Whether one liked it or not, whether one thought it right or wrong, hedge funds swallowing companies with capital was a common event in the financial markets.
“Here’s the current ownership split for Hanjeong Mulsan.”
Chairman Ju Min-jae held 4.3 percent, Vice Chairman Ju Cheol-jin 3.3 percent. Even if you added up all the shares held by relatives and in-laws, it barely came to a little over 10 percent.
By contrast, the joint front currently held 19.1 percent.
On paper alone, the joint front looked like it had the advantage.
Dong-ho said, “The chairman’s family has a lot of friendly shares, though.”
“That’s true.”
Birds of a feather flock together; chaebols back chaebols. Even if the relationships were poor, in a situation like this they would help one another the way neighbors might share labor during harvest.
The shares classified as friendly holdings came to about 15 percent.
“What about the National Pension Service’s 9.9 percent?”
The National Pension Service managed around 500 trillion won.
That placed it among the largest funds in the world. Naturally, it was the biggest whale in the Korean stock market, and it held about 10 percent of most large companies listed on the exchange. By policy, it did not usually hold more than 10 percent of a single stock unless there was some special circumstance.
I nodded.
“This time, it’s very likely to side with them.”
“Then once the treasury shares are sold, if the National Pension Service sides with them too, they’ll have secured almost 40 percent.”
“On the other hand, overseas institutions will probably back the joint front. I’d put the joint front’s friendly holdings at around 5 percent.”
“Then that side’s only about 25 percent. In the end, it comes down to how much more they can buy before the shareholders’ meeting, and how many votes they can pull from the minority shareholders.”
Sarah asked me, “So which side do you think will win?”
“At this point, the Hanjeong Group side has the advantage.”
In truth, I already knew how this game ended. At the time the incident happened, I had been working at DA Securities.
I still remembered the situation vividly.
And the result?
A defeat for Elliott and KSGI.
With the backing of the chaebol groups and the addition of the National Pension Service, the Hanjeong Group secured 69 percent of the shares participating in the general meeting, while the joint front managed only 31 percent.
It was a narrow victory.
After losing at the shareholders’ meeting, the Hanjeong Mulsan shares they had accumulated were swapped for HJ Logistics shares, and their ownership stake fell.
After that, Elliott and KSGI sold all their shares and pulled out. Their losses were estimated at somewhere between one trillion and two trillion won.
Of course, Elliott wasn’t a firm that succeeded in every investment, and it had suffered losses before. But this was the first time it had taken a loss on the scale of trillions.
The biggest reason for the failure was that they had underestimated the difference between the Korean market and the American one.
In the United States, where financial markets were more developed, shareholder interests came first, and value-destroying behavior was not tolerated.
Korea was different.
The media sided with the chaebols, the government sided with the chaebols, and the courts sided with the chaebols.
The press unanimously ran stories promoting the merger, the National Pension Service sided with the chairman’s family, and the courts rejected every injunction KSGI filed.
On top of that, the public’s resentment toward foreign speculative capital was even stronger than its resentment toward the chaebols themselves.
Elliott had probably believed that if it teamed up with KSGI, the rest of the shareholders would rally with them too.
It probably never imagined everyone would close ranks for the sake of the chairman’s family.
In other words, they had underestimated the Korean market and gotten taught a harsh lesson for it.
Afterward, Elliott filed an ISD, an investor-state dispute, against the Korean government, claiming it had suffered losses due to the National Pension Service’s unfair decision-making.
Under ordinary circumstances, that would have been the end of it. But...
“Now then, what happens if a third force steps in here?”
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