Korea's Chaebol: So Much For Reform

Why the Hyundai-LG merger isn't likely to be imitated

At 10 p.m. on July 7, Hyundai Electronics Industries Co. finally got its deal. The Korean chipmaker formally acquired rival LG Semicon for $5.4 billion, after more than a year of political intrigue and clan rivalry. The result: the world's biggest maker of memory chips.

It would be nice to imagine that this acquisition is the beginning of a trend. After all, South Korean President Kim Dae Jung has told chaebol chiefs that they must sell off their less competitive divisions and focus operations. Only that way, says Kim, will Korea Inc. regain its health and foster new areas of growth. But far from being the first of its kind, the LG-Hyundai deal may be the only one of its kind. Top chaebol executives are balking at further deals as President Kim's political strength slips. With industrial production up to pre-crisis levels, the biggest chaebol see no need for more mergers.

Of course, overcapacity still plagues the economy, and many chaebol divisions remain in the red. But chaebol executives see the sale of any asset to a rival as a humiliation. And they will fight to avoid that dishonor, as LG's top managers did in the LG-Hyundai deal. Indeed, the merger panned out only because of the enormous pressure the chaebol all felt during the darkest days of the crisis. And the chip industry, plagued by overcapacity and a price collapse, was ripe for a shakeup.

PRESIDENTIAL SUMMONS. So in September, 1998, the Federation of Korean Industries recommended that LG and Hyundai merge their semiconductor operations. It brought in U.S. consulting firm Arthur D. Little Inc. to decide which partner should be the dominant player. But the day before the only scheduled ADL visit to its semiconductor factories, LG canceled the trip, says Taesoo Jung, director-in-charge of Arthur D. Little's Seoul branch. In December, an ADL team found that Hyundai was the stronger player and should buy LG's chip assets. LG executives were furious.

Alarmed, Kim Dae Jung summoned LG Group Chairman Koo Bon Moo and Hyundai Electronics Chairman Chung Mong Hun to the presidential Blue House on Jan. 6. There LG's Koo surprised the President by agreeing to end resistance and give up the chip business. The next day, LG's executive in charge of restructuring, Kang Yu Sig, and Hyundai Electronics President Kim Young Hwan signed an agreement to wrap up the deal by Jan. 31.

Yet when negotiations started in earnest, LG asked for $5.63 a share, more than six times what the stock was selling for when the deal was announced. By asking for such a high price, the company could stall for time and hope that the political pressure would ease enough for LG to walk away from the merger agreement.

So the January deadline came and went with little progress. The next target was Feb. 25, the first anniversary of Kim Dae Jung's inauguration. The government turned to its Corporate Restructuring Coordination Committee to mediate. On Feb. 20, LG's investment bankers argued before the committee that the company was being forced to sell at the bottom of the highly cyclical semiconductor business. But Hyundai's bankers countered that the business would require much higher investments than LG projected. Feb. 25 passed without an agreement, and LG continued to demand more than four times what Hyundai offered.

In stepped the powerful head of the Financial Supervisory Commission, Lee Hun Jai. Lee started investigating reports of stock manipulation by the Chung family, the clan that controls Hyundai. He also said he would cut off bank loans to whichever party was holding up the deal. That did the trick. "The [price] gap narrowed," says an LG Semiconductor board member. On Apr. 20, the two chairmen, Koo and Chung, agreed to a deal. LG executives have declined to comment, but sources say the sale has deeply upset their chairman. "I feel like a loser," an associate says Koo told him.

For Hyundai, the hard work is just beginning. On July 8, Hyundai Electronics President Kim headed for LG's plants to shore up morale. Kim says that he doesn't expect any layoffs among plant or R&D staff. "I assured them that the jobs were theirs to lose," says Kim. Perhaps. But Korea Inc. is already losing something--the momentum for reform.

Before it's here, it's on the Bloomberg Terminal.