Kingmaker (9)
GL Chemical’s main business was petrochemicals, and batteries were only a sideline.
But by now, batteries had grown so large that when people heard GL Chemical, they thought of batteries before anything else.
That was why GL Chemical had moved to split itself apart, in the name of specialization, greater efficiency, and attracting investment.
“Would you take a look at this?”
I handed Namgung Seok the materials on GL Chemical. They were something my senior, Dongho, had put together with careful graphs and all.
“There are two ways to split a company: a shareholder spin-off and a subsidiary spin-off.”
It was a slightly complicated subject, but if you were investing in stocks now—or planned to in the future—it was something you absolutely had to understand.
That was because Korean companies were constantly being broken apart and put back together again at the whim of the chaebols.
A shareholder spin-off is exactly what it sounds like: a division in which the shareholder structure carries over intact.
The existing company’s shareholders receive new shares in the newly created company in proportion to the stake they already hold. In other words, the ownership ratio in the new company is 100 percent identical to the old one.
Suppose I owned 10 percent of a company called A, and A carried out a shareholder spin-off to create a new company called B.
Then, after the split, it would look like this:
A (existing company)
Shareholders: me 10%, others 90%
B (new company)
Shareholders: me 10%, others 90%
Of course, since one company had simply been split into two, the value of the stake remained the same.
Ten percent of a company worth 10 billion won, or ten percent of two companies worth 3 billion won and 7 billion won respectively—it was still ten percent worth 1 billion won.
A subsidiary spin-off, on the other hand, was a structure in which A split off B and then kept it as a subsidiary.
A (existing company)
Shareholders: me 10%, others 90%
B (new company)
Shareholders: A company 100%
I would still own 10 percent of company A, but I would not own a single share of the newly created company B.
Instead, I would own B indirectly through company A.
Namgung Seok took out a cigarette.
“Do you mind if I smoke?”
“Ah! Please, go ahead.”
“Excuse me for a moment.”
He smoked as he scanned the materials.
“A subsidiary spin-off isn’t inherently a problem, is it? I understand foreign companies do it quite often.”
“That’s right. A subsidiary spin-off itself isn’t the problem.”
The only difference was whether the company kept doing the same business itself or put it under a separate subsidiary. Whether it did a subsidiary spin-off or not, the company’s value did not change in the slightest.
But...
“The real problem comes when the newly spun-off company gets listed.”
The KOSPI’s total market capitalization was about 2,400 trillion won.
So what would happen if an 80-trillion-won company suddenly entered that market?
Would the KOSPI surge by more than 3 percent and make everyone happy?
Unfortunately, nothing like that happened.
When a new stock debuted on the exchange, the opening price was treated as zero. In other words, whether you listed a company worth 100 trillion won or 1,000 trillion won, the index itself did not move.
Then did a new listing have absolutely no effect on the market?
“The listing of GL Entech will drag down the entire market and end up hurting other investors.”
“Why?”
“At the offering price, GL Entech is expected to be worth 80 trillion won. This isn’t some KOSDAQ junk stock worth a few hundred billion won. It’s an 80-trillion-won company entering the market. On the KOSPI, that would rank third in market cap, behind Yu-seong Electronics and LK Nix. Since it’s one of the companies that represents the market—and the industry—it will naturally be included in the KOSPI 200 as well. Institutional money and pension funds track the index. So whether they like it or not, they have to buy GL Entech in proportion to its weight.”
Most of the funds invested in the stock market had the character of index funds. They were also called passive funds, and their defining trait was that they tracked an index.
To do that, they had to buy large-cap stocks in proportion to their weight in the index.
So what if they were already holding a full basket of stocks?
Then they had to sell other large-cap names and buy GL Entech to rebalance the ratio.
“Other large-cap stocks will take a hit too, but the biggest victims will be GL Chemical shareholders, of course.”
When institutions or pension funds invested, they usually did so by sector. Construction names were traded against other construction names, semiconductors against semiconductors, and so on.
In other words, if they needed to buy A Construction, they would sell C Construction—not B Semiconductors.
“Right now, GL Chemical is the world’s second-largest battery company. So in funds like a ‘global battery ETF’ or an ‘Asia EV ETF,’ there’s already a substantial amount of GL Chemical stock. While GL Entech remains a 100 percent subsidiary of GL Chemical, GL Chemical is undeniably a battery company. But what happens once GL Entech is listed? Can we still call GL Chemical a battery company then?”
Up until now, the only way to invest in GL Entech had been to buy GL Chemical stock. But now there would be a separate route to invest in GL Entech directly.
Naturally, those funds would dump GL Chemical and buy GL Entech instead. In that case, GL Chemical would fall while GL Entech would rise.
Namgung Seok stubbed out his cigarette in the ashtray.
“But isn’t GL Chemical a different case? They’re saying that once GL Entech lists, it’ll finally be valued properly, and that GL Chemical will actually rise.”
GL Entech planned to float 20 percent of its shares through a mix of new issuance and secondary sales. GL Chemical would retain the remaining 80 percent after the IPO.
On the face of it, the higher GL Entech climbed, the more GL Chemical should rise as well.
But...
“It’s nonsense. Once a subsidiary is listed, the Double Counting problem appears.”
Let’s look at the magic trick the Korean market performed.
Suppose there was a company called A worth 10 billion won.
A carried out a subsidiary spin-off and created a subsidiary called B, which was worth 8 billion won.
At that point, A’s operating business value dropped to 2 billion won, but since it owned a company called B worth 8 billion won, its corporate value still remained 10 billion won.
Then B raised 2 billion won from outside investors and listed on the exchange.
B now had 8 billion won of existing value plus 2 billion won in fresh investment, for a total of 10 billion won.
Because of the outside investment, A’s stake in B fell to 80 percent, but since B’s value had risen to 10 billion won, the value of A’s stake in B was still 8 billion won.
Therefore A was worth 10 billion won, and B was worth 10 billion won as well.
By this point, you could probably sense that something was off.
All that had happened was that a 10-billion-won company had been split off and listed, and 2 billion won of additional investment had come in during the process.
And yet the exchange had somehow created the miracle of two companies worth 10 billion won each.
That happened because A owned 8 billion won worth of B. In other words, 8 billion won of B’s value had been counted twice.
That was what Double Counting meant.
“When a subsidiary is listed, the value of the subsidiary stock held by the parent gets discounted. Usually by 50 percent, and in bad cases by more than 70 percent.”
In other words, even if a holding company owned 10 billion won worth of subsidiary stock, its own market cap might only be 3 to 5 billion won.
It might be hard to understand at first glance, but almost every holding company was subject to that kind of discount.
“If the existing company gets hurt because the new company is listed, why did GL Chemical choose a subsidiary spin-off at all?”
GL Entech planned to double both sales and production within three years.
To do that, it needed massive investment, and massive investment meant it needed a lot more money.
In truth, there were plenty of ways to raise capital.
GL Chemical could have done a rights offering or issued bonds with warrants, or GL Entech could have raised money after a shareholder spin-off.
Since the outlook for the battery industry was so bright, if the company had announced a rights offering to expand its factories, shareholders likely wouldn’t have opposed it, and investors would have been willing to put in the money.
And yet they had chosen this method because...
“Because it’s the easiest way to attract massive investment while still keeping control.”
Under the Commercial Act, a company division is basically assumed to be a shareholder spin-off, and a subsidiary spin-off is only allowed as an exception.
And yet Korean chaebols strangely prefer subsidiary spin-offs.
Because it is the most favorable structure for the controlling shareholders.
The founding family’s stake in GL Chemical was currently 34 percent.
If they had raised capital without splitting the company, the family’s stake would have been diluted.
If they had done a shareholder spin-off and then GL Entech had raised capital, the family’s stake in GL Chemical would have stayed the same, but they would have had to accept dilution in GL Entech.
But if they carried out a subsidiary spin-off and then raised capital, every problem was solved neatly.
GL Chemical’s ownership would still stand at 34 percent, and even after the listing, GL Chemical would still hold 80 percent of GL Entech.
So by holding control of GL Chemical alone, they could dominate GL Entech as well.
“In other words, they’re sacrificing ordinary shareholders just to protect the control rights of the largest shareholder.”
Namgung Seok looked as if he still couldn’t quite understand it.
“If GL Chemical’s share price falls, Chairman Go Jae-ik will lose money too.”
That was exactly where the interests of chaebols and retail shareholders diverged.
If he were a professional manager, he would have been obsessed with pushing the stock price higher for the sake of a bigger salary, bigger bonuses, and more stock options. But a Korean chaebol didn’t need to do that.
“From a controlling shareholder’s perspective, it doesn’t matter whether the stock goes up or down. It’s not as if they can sell the shares they already own just because the price rises. If anything, a lower price makes it easier to buy more shares, and it’s also better for inheritance and gifting.”
On the Korean market, it was nothing unusual to see dozens of chaebol affiliates listed one after another under the same name—holding companies, subsidiaries, parent companies, daughter companies, all of them.
The Yu-seong Group alone had dozens of listed affiliates: Yu-seong Trading, Yu-seong Electronics, Yu-seong Power, Yu-seong ES, Yu-seong Heavy Industries, Yu-seong Engineering, Yu-seong Life, Yu-seong Securities, Yu-seong Card, and more.
So let’s turn the whole thing around and think about it in terms of foreign companies.
The world’s largest company right now was Enple.
If Enple had been a Korean company, then not only the parent company itself but also the Enphone manufacturer, the NOS software company, the App Store company, the retail company, the marketing company, and the distribution company would all have been listed one after another.
But that didn’t happen in the U.S. market.
Only a single company called Enple was listed.
Enple had thousands of subsidiaries beneath it, but not a single one of them was planned for listing.
That was why all the enormous profits Enple earned from hardware and software went entirely to Enple shareholders.
That was why Enple’s stock price had soared like crazy.
The same was true of Guble, NS, AMZ, and every other big tech company.
ATube was a wholly owned subsidiary of Guble. But Guble did not list ATube.
So every penny ATube earned became Guble shareholders’ profit, and anyone who wanted to invest in ATube had to buy Guble stock.
AMZ was the world’s largest e-commerce company, something everyone knew.
But 70 percent of its real profit came not from e-commerce but from ZWS, its cloud service. Even so, AMZ had never once considered spinning off ZWS.
If a Korean chaebol had run AMZ, what would have happened?
I could say with certainty that it would have carved out ZWS as a subsidiary from the start and then relisted it.
“In foreign markets, it’s usually just the holding company that’s listed. Even when they acquire another listed company, they either merge it into the parent and convert it into parent-company shares, or they buy it out through a tender offer and delist it, leaving only one company behind. But in Korea, they even split up perfectly healthy listed companies and relist them. Does that make any sense?”