LG Group's Success: Making Compromise Work
DOW JONES NEWSWIRES
While markets seem to be enthusiastic about the increased autonomy of the operating units, they are lukewarm about the holding company itself. LG Corp. currently trades at a deep discount of about 70% to the net asset value of its holdings, says J.D. Song, Seoul-based research analyst at Samsung Securities. Investors appear to be taking a wait-and-see approach to LG Corp.
"It takes time, but the holding company may become a good proxy for the companies they own," says Henry M. Seggerman, president of International Investment Advisers, a Korea-focused investment-management company in New York.
Still, some investors and ...view middle of the document...
What remains to be seen is whether in fact both models can work in Korea.
"The chaebol structure itself is not the critical problem," says Lee of Merrill Lynch, provided that the conglomerate produces reliable financial reports and makes proper disclosure of transactions conducted between affiliates. The combined forces of increased foreign shareholdings in Korean companies, more vigilant shareholder activism and government monitoring could help to keep the former abuses of big business in South Korea in check.
Nevertheless, some investors are asking if Samsung Group will follow LG's lead. A simple and transparent ownership structure could enhance Samsung's market valuation, not to mention investor confidence in the conglomerate.
"We have considered the holding-company model," says S.J. Choi, senior manager at Samsung group information headquarters. "But it is not possible for us under the current laws, where we should have more than 30% of shares in listed companies."
Indeed, for Samsung Electronics alone, the Lee family, which directly and indirectly controls about 22% of the company's shares, would have to purchase 8% more from the market. This could cost as much as 5.38 trillion won.
"All chaebols are not the same," says Lee of LG Corp. "Each has its own history and character."
LG Group is showing its talent for making compromise work. Some shareholder activists want to see the chaebol system dismantled and affiliates established as independent companies. The Korea Fair Trade Commission calls the holding company structure a "middle stage" of corporate reform in Korea. For LG, making it successfully to this "middle stage" may be just enough to secure it a place on the global stage.
Lex: Korean insurance
When Goldman Sachs acquired a stake in Kookmin bank in 1999, some observers scoffed. Few foreigners had invested in South Korea's opaque banking world, and the country was still reeling from the Asian financial crisis. But these days Goldman Sachs is looking smug. It recently sold a third of its original $500m stake for $600m. With the rest valued at about $900m, this implies a threefold return - a profit that has since left competitors scrambling to invest in Korean banks too. Can Goldman Sachs repeat this trick? It wants to try; Daewoo International is trying to sell it its stake in Kyobo, potentially making Goldman Sachs the first large-scale foreign investor in insurance.
From some perspectives this second play looks a tougher gamble. Korea is in recession, exacerbated by labour unrest. Moreover, any exit strategy for Kyobo will be vulnerable to the regulators' whims. Korean insurance companies are not currently allowed to list on the stock market. Although the government is promising to change this, no date has been set.
But the price looks sweet; Goldman Sachs is likely to pay Won200bn for a 24 per cent stake in Kyobo, which has Won900bn of equity...