Hyundai Lg Semicon: This Forced Marriage May Never Come Off

Seoul pushed the deal, but it's in trouble

Kim Young Hwan, president of Hyundai Electronics Industries Co., was dining with reporters in January when an aide brought the news. LG Semicon Co., Hyundai's archrival in the chipmaking business, had decided to sell out completely to Hyundai instead of becoming a minority partner in a government-proposed tie-up. The decision stunned Kim. "He was surprised at this sudden move because LG had fiercely resisted the merger," says an executive who was present at the dinner. Suddenly, Kim had a deal that would create one of the world's biggest memory-chip producers.

Hyundai's celebrations, however, may be premature. LG Group, the chaebol that owns 60% of LG Semicon, is fighting tooth and nail to extract the highest possible price from Hyundai for its chipmaking business. Tough bargaining is standard behavior in American dealmaking but no one expected it in this matchup, which is a government-mandated move to make the top chaebol focus on core businesses. If the deal does not get consummated, its failure would be a serious setback for President Kim Dae Jung's regime, which has staked its reputation on its ability to tame South Korea's free-spending and heavily leveraged conglomerates.

Talks between the companies have given LG the chance to inflict the maximum amount of pain on Hyundai. Sources say Hyundai is offering $1.1 billion for LG Group's stake in LG Semicon. That's about $12 per share, close to LG Semicon's depressed stock price. LG Semicon executives want at least $4.2 billion, arguing this is a fair premium for handing over control and is a good reflection of the productivity gains the merger will create. It may be that LG Semicon is playing for time. The South Korean chipmakers are seeing a pickup in orders, so the longer LG Semicon holds out, the higher its value.

Hyundai is fiercely resisting LG's terms, which include a demand for an all-cash transaction. Paying cash would add serious stress to Hyundai Electronics' overburdened balance sheet. Instead, Hyundai may offer a mix of cash and stock it holds in other companies, such as DACOM, South Korea's second-biggest international phone operator.

The government is getting alarmed at this protracted haggling over price. Regulators also worry that labor strife, which flared briefly over demands by LG workers for long-term job guarantees, will resurface if those guarantees are watered down by either company. Demonstrations and strikes at LG Semicon only stopped in early February when the company offered a bonus of 10 months' salary to 8,400 employees.

The Finance Ministry may have to push the deal along. When LG Semicon first resisted a tie-up with Hyundai Electronics, the government-controlled banks stopped lending to LG. This time, Seoul may encourage Hyundai's banks to accept a debt-for-equity swap that will lighten Hyundai's debt load. The pressure is on to reach an agreement by Feb. 25, the first anniversary of Kim's inauguration. The government wants a deal signed, sealed, and delivered to mark the occasion and strengthen Kim's hand in negotiations with the chaebol.

ODD COUPLE. Even if the deal goes through, it could prove a poisoned chalice. Depending on how much of Hyundai's debt gets forgiven, the combined company could have $8.5 billion in obligations--more than twice the expected revenue for 1999. The companies also are incompatible in many ways. LG and Hyundai make their chips using different technologies that will be difficult to meld. Integrating workforces is always a tough job in Korea, where loyalty to the employer is of paramount importance. "The merger of the two will result in gross inefficiencies," says Stephen Marvin, head of research at Jardine Fleming Securities Ltd. in Seoul. "It's not a prescription for survival." Cho counters that the merged company will prosper, as it is expected to invest $1 billion in new technology annually.

President Kim wants the merger to boost the cause of free markets in Korea. It certainly is true that the country does not need three chipmakers--Samsung, Hyundai, and LG. But the economy doesn't need too many government-brokered deals, either.

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