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From London to New York to Singapore, South Korea’s financial regulators have spent much of this year traveling the world to generate enthusiasm among global investors for the country’s latest round of capital market reforms.
The changes are Seoul’s latest attempt to address chronic undervaluations of its listed companies, long blamed on corporate governance weaknesses and poor treatment of minority shareholders, often the result of the dominance of the country’s big conglomerates, known as chaebol.
He “corporate appreciation program” It includes a new index to highlight companies that have improved capital efficiency, as well as tax incentives for companies that prioritize shareholder returns. While it is far from the first attempt to address the “Korea discount,” this latest push appears to have new political winds of support.
The rise in the number of local retail investors, the country’s demographic crisis and anxiety about slowing future growth have all helped put capital market reform high on the country’s political agenda. Tokyo’s recent success in extracting more value for shareholders has given Korean policymakers a model to follow, while depriving them of excuses for inaction.
So far, however, the “valorization” campaign has disappointed advocates of local reform who argue that the proposals do not address the root cause of discounting in Korea.
“Most listed Korean companies have majority shareholders who prioritize their own power and interests at the expense of minority shareholders,” said Kim Joo-young, managing partner at Seoul-based Hannuri Law and a board member of the Korea Corporate Governance Forum. “This often happens through mergers, exclusive exchanges, delistings and corporate spin-offs, but authorities are hesitant to regulate these activities due to strong opposition from the business community.”
To illustrate the scale of the challenge, reform advocates point to a current test case: a controversial restructuring proposed by conglomerate Doosan that has sparked strong opposition from minority shareholders.
Under the proposed restructuring, Doosan Bobcat, an industrial equipment producer that generates the majority of its revenue in the U.S., will merge with the group’s subsidiary Doosan Robotics. Korean law stipulates that when two publicly traded entities merge, the enterprise value of the companies used in merger terms (the value of equity plus net debt) must be calculated using the average share price of the previous month. This applies regardless of whether the share price reflects the intrinsic value of either entity.
In this case, however, critics argue that the merger is taking place at a time when Doosan Bobcat, which made an operating profit of more than $1 billion last year, is vastly undervalued by the market and loss-making Doosan Robotics is vastly overvalued. “Based on peer valuations and M&A precedents, we estimate Doosan Bobcat’s intrinsic value to be around $10-14 billion, but Bobcat’s board of directors has just agreed to a merger that values its equity at $3.7 billion,” said Changhwan Lee, chief executive of Seoul-based activist fund Align Partners, which has no investments in any of Doosan’s subsidiaries.
Sean Brown of Texas-based Teton Capital, which owns a stake in Doosan Bobcat, notes that the deal values Robotics at 86 times its trailing 12-month revenue, while valuing Bobcat at 0.4 times revenue on the same basis.
“The result is that Bobcat shareholders will see their stake in the company more than halved, while Doosan’s holding company, controlled by family shareholders, will see its stake in Bobcat tripled from 14 to 42 percent,” Brown argues.
In a statement to the Financial Times, Doosan Bobcat chief financial officer Duckje Cho dismisses the criticism as “misguided and in some cases based on unsubstantiated claims,” and that “the respective prices have been determined in accordance with the Financial Investment Services and Capital Markets Act.”
“We believe that the proposed transaction is not inconsistent with the government’s corporate valuation program,” Cho said. “We believe that the ratio calculated in the manner prescribed by applicable laws and regulations is not unfavorable to the company’s shareholders.”
But Park Yoo-kyung, head of emerging markets equities at APG Asset Management, describes the proposed restructuring as a “slap in the face” to regulators and to Yoon Suk Yeol, the country’s conservative president who has promised voters better returns for shareholders.
But some reform supporters find reason for optimism in the episode, arguing that it will lend weight to calls for the country to amend its commercial code and incorporate a fiduciary duty toward shareholders for the first time. On Tuesday, lawmakers met with reform-friendly academics, investors and lawyers at a seminar at the National Assembly to discuss the change.
“A fiduciary duty to shareholders would not solve all of the Korean market’s problems, but it would help directors of listed companies resist pressure from controlling shareholders to do things that undermine the interests of other shareholders,” says Align Partners’ Lee.