It was South Korea's most contentious proxy fight ever, a corporate drama so huge that Koreans liken it to Hewlett-Packard Co.'s assault on Compaq Computer Corp. If anything, the outcome of the fight for Hanaro Telecom Inc. was even more astounding than the end of the HP-Compaq brawl. The surprise? The foreign guys won. Says Kim Joo Young, the lawyer for Hanaro's employees, who campaigned to stop Korea's LG conglomerate from taking boardroom control at Hanaro: "This is a landmark decision for shareholder value in Korea." And a landmark decision for foreigners interested in Korean companies.
Here are the bare-knuckled facts: On Oct. 21 shareholders of Hanaro Telecom voted overwhelmingly to sell a controlling 40% stake to a U.S. group led by private equity firm Newbridge Capital Inc. and insurance giant American International Group Inc. The loser was LG group, one of the mightiest chaebol. LG wanted to fold Hanaro into its own telecom operations -- a seemingly easy goal, since LG was, until the vote, Hanaro's largest single investor, with an 18% stake. Most shareholders, however, preferred the terms offered by Newbridge and AIG.
Sounds straightforward, until you consider the context. For Americans, who have watched everyone from Germans to South Africans buy U.S. assets, the idea of foreigners landing a choice corporate property isn't novel. But in Korea, investors are still getting used to the notion of outsiders controlling a major company. Sure, there are exceptions: Foreigners have acquired a few banks, and floundering Daewoo Motor Co. was handed over to General Motors Corp. But Hanaro is a prize. With an expected $1 billion in sales this year and operating profit margins of 18%, Hanaro controls 27% of the high-speed Internet market in South Korea, which has one of the densest broadband networks on the planet. Whoever runs Hanaro, then, controls a big piece of Korea's digital future.
No wonder AIG and Newbridge -- which has already successfully invested in a Korean bank -- wanted it. But so did LG. Jung Hong Shik, head of LG's telecom business, described Hanaro as the core of his strategy. LG's fixed-line unit, Dacom Corp., the Net leader before high-speed networks were introduced, lost $43.4 million, on sales of $419.5 million, in the first half and can go nowhere without Hanaro's broadband expertise. Besides, LG has invested more than $4 billion in its telecom ventures, with little to show for it.
If LG is such a name to contend with in Korea, how did the foreigners prevail? For one thing, Newbridge and AIG offered $2.72 a share in cash and pledged to arrange a $600 million loan to relieve Hanaro's short-term credit crunch. LG offered a $700 million loan plus $2.89 a share. But a chunk of that was in the form of stock in struggling Dacom. Another big factor: LG rivals Samsung Electronics and SK Telecom Co. owned a combined 14% of Hanaro. Six days before the vote, LG recruited Washington buyout firm Carlyle Group to its side, to no avail. At the shareholders meeting, company union members staged a sit-in wearing headbands reading "Down with LG." Says Hanaro President Yoon Chang Bun: "Foreign investors or not, we needed a proposal enhancing the value of our company for shareholders."
Now, Hanaro has big plans. The capital injection will not only end its liquidity crunch but also enable Hanaro to acquire other broadband companies, says Park Byung Moo, managing director of Newbridge Capital Korea. The biggest opportunity, though, came for Korean investors. They got to vote -- and win.
By Moon Ihlwan in Seoul