It isn’t like the big wigs haven’t tried their hand at South Korea before. Paul Singer’s Elliott Management Corp. is all too familiar with some of the country’s tightly held giants, including the groups behind Samsung Electronics Co. and Hyundai Motor Co. Those campaigns to unlock value for shareholders resulted in slight improvements, but some suggestions were rejected outright and capital increases shunned. It got legal, too.
Let’s be clear, companies aren’t suddenly feeling generous or looking for buddies and board members in activists. Korea Inc. has typically allocated more of its returns into research and development and capital expenditures — almost 85% of the total — than regional peers, according to Goldman Sachs Group Inc. That comes at the expense of shareholders’ returns. But with policymakers putting the heat on, they are under pressure to play nice to an increasingly empowered investor base.
South Korea’s firms are canny when it comes to the way business empires build their holdings and maintain control. Companies frequently engage in tunneling, or wealth transfers to controlling families, at the expense of ordinary stakeholders. Others have undertaken spinoffs of entities to maximize value from subsidiaries, but, again, this leaves behind minority investors.
Last year, when chemicals behemoth, LG Chem Ltd., spun off its battery subsidiary, LG Energy Solution Ltd., it was criticized for diluting value for investors in the parent firm. The company didn’t swap shares or compensate them. This route to raising capital ultimately gave precedence to the needs of controlling shareholders.
That happened despite a stewardship code unveiled in 2016 aimed at improving corporate governance. To avoid LG-like situations, regulators are now sharpening the existing playbook. Last year, the Financial Services Commission announced protections for general investors in public offerings of subsidiaries, or spinoffs. In addition, it revised guidelines to require companies to “actively explain” details and reasons behind boards’ decisions on internal transactions and self-dealing. Meanwhile, in 2021, the Korea Commercial Code was amended to shield minority shareholders. No doubt, disclosure practices need to be improved, but refining and executing current rules will go a long way.
With policy tailwinds getting stronger, timing is key. It may seem imprudent to hand out cash and add pressure on companies when economic uncertainty prevails and buffers need to be preserved. South Korean firms may hesitate to open themselves up to scrutiny and treasure-hunting, especially as rhetoric around strong industrial technology and self-reliance ramps up. However, they could use a strong nudge to be more capital efficient. Despite putting in large sums, returns on investment have remained low.
Enter hedge funds. When done right, activism tends to put businesses on alert, forcing them to think about how and where to deploy money. A study that looked at more than 1,000 campaigns from 2008 to 2020 found that activists can help make big improvements to companies’ operating performance when they focus on cost-cutting and asset divestitures. Some were even able to boost profitability without slashing research and development budgets. That sounds like what parts of Korea Inc. need.
The country’s industrials and consumer sectors look ripe for the picking. Relative to their global peers, companies in these areas trade at the steepest of discounts — almost 70% or greater on a forward price-to-book basis, according to Goldman Sachs. These firms tend to be a mish-mash of business segments that make anything from yarn and spandex to audio equipment, real estate and other machinery — and activists love pulling them apart.
All told, South Korean firms have the makings of perfect investor targets.
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Anjani Trivedi is a Bloomberg Opinion columnist. She covers industrials including policies and firms in the machinery, automobile, electric vehicle and battery sectors across Asia Pacific. Previously, she was a columnist for the Wall Street Journal’s Heard on the Street and a finance & markets reporter for the paper. Prior to that, she was an investment banker in New York and London
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