The Korean Bank That Almost Got Away

A cautionary tale of how Carlyle Group fought long and hard with Korean regulators to snare KorAm

For months, Michael Kim and his team of financiers worked day and night, shuttling between Seoul, Washington, and other cities in pursuit of a seemingly quixotic goal: They wanted to be the first foreign investors to control a healthy Korean bank. The process was agonizing. By last July, Kim, a managing director at Carlyle Group, one of the world's largest private equity funds, had hit a wall. Rigid bank regulators, suspicious of the U.S. fund's intentions, blocked his every proposal to take over KorAm Bank, a small institution that he saw as a great bet on Korea's recovery.

Finally, one evening in Seoul he took his dispirited crew out to see Gladiator, the hit Hollywood action film in which the hero, Maximus, triumphs over a legion of foes. "The staff was wiped out emotionally and physically," says Kim. "I wanted something to pep them up and restore their flagging morale."

That must have been the ticket. Pumped up, the Carlyle team dubbed their dogged 37-year old boss "Maximus Kim" and redoubled their efforts. Finally, on Sept. 8, they triumphed. Seoul's powerful Financial Supervisory Commission said that it would let a Carlyle-led consortium buy a controlling 40.7% stake for $450 million. Carlyle, the lead investor with a $300 million share, will directly and indirectly control 7 of 13 board seats. According to David Rubenstein, Carlyle's founding partner, it's the largest equity investment deal the group has assembled.

The deal, which is expected to close by mid-November, is a tour de force for Kim. It's also a cautionary tale for any foreign company eyeing a Korean asset. For Carlyle almost didn't land KorAm--despite having some of the best yonjool, or connections, any Western firm can boast. Although those connections ultimately helped win the day, regulators viewed Carlyle--almost to the end--as a vulture investor that only wanted a quick profit. Says Rubenstein: "The toughest thing was convincing regulators that we would be a good investor."

BAILED OUT. Such fears are understandable. But if the Koreans don't make it easier for foreigners to join the insiders' club, they may never get the outside capital they need to restructure a financial system that still suffers from the 1998 Asian economic crisis.

Given the problems of Korea's banking system, Kim, a native son (now a U.S. citizen) with a Harvard MBA, might have expected a warmer welcome. He'd been named a Salomon Smith Barney managing director at 34 before coming to Carlyle. The country has too many small banks, and they need the expertise of sophisticated firms such as Washington (D.C.)-based Carlyle and its junior partner, J.P. Morgan Corsair Inc., a Morgan unit that invests in financial institutions. (Other investors included the government of Singapore and Prudential Asia.) The government had spent $98 billion bailing out and recapitalizing financial entities over three years. Carlyle figured Seoul would be happy to secure the future of KorAm, one of only five banks that the government certified as "healthy."

Formed 17 years ago as a joint venture between some Korean chaebol, or conglomerates, and Bank of America, KorAm was unusual. It specialized in small and midsize businesses--not the free-spending chaebol--and based its loans on risk, not borrowers' prestige.

Eventually, BofA cut its 49.9% stake to 16.8%. But as BofA's influence waned, KorAm lent more to Daewoo Group, a shareholder. When Daewoo collapsed last year, KorAm held $1 billion of the chaebol's loans.

Enter Michael Kim, whom Carlyle hired in April, 1999, to run its Korean business and co-head its Asia buyout fund. In 1998, with the region reeling under the most severe economic crisis in decades, Carlyle had raised $750 million just for Asia. This was to be its second Asian buyout. Its high-profile partners, including former U.S. President George Bush, his Secretary of State James A. Baker III, and former Defense Secretary Frank C. Carlucci, knew how to use political connections.

Carlyle also had connections within the Korean Establishment. A political heavyweight, Park Tae Joon, joined Carlyle's board of international advisers in 1998, leaving a few months before he became Prime Minister in January, 2000. Park, among other things, had founded steel giant Pohang Iron & Steel Co. He also happened to be Michael Kim's father-in-law.

WINDING ITS WAY. When Kim approached KorAm's board about buying control of the bank, he got a quick hearing. In January, 2000, KorAm agreed to sell 35% to Carlyle and Deutsche Bank, which would take a third of the stake. Carlyle needed Deutsche Bank because nonfinancial groups require special permission to own more than 4% of a viable Korean bank. The Financial Supervisory Commission had waived the rule when U.S. private equity firm Newbridge Capital took over failed Korea First Bank. But regulators deemed KorAm healthy and would grant no exception.

While the proposed deal wound its way through the Seoul bureaucracy, Carlyle began due diligence--bringing in an army of auditors to review all of KorAm's 70,000 loans. By the time they finished, Carlyle had spent $14 million and concluded that KorAm needed a $450 million infusion to clean up its balance sheet.

But by late winter of 2000, negotiations between Carlyle and the government had bogged down. Politicians and the press had excoriated bank regulators for the Newbridge/Korea First deal, calling it a fire sale. To keep Carlyle's deal going, Park lobbied top government officials on its behalf. According to a knowledgeable source, Park "used Deng Xiaoping's saying, `It doesn't matter if the cat is black or white, as long as it catches mice,"' to argue for foreign investment in the bank. Still, the regulators resisted.

Meanwhile, Deutsche Bank surprised Carlyle by pulling out just as the Washington-based fund began its due diligence process. Sources say its board was jittery because of losses in other emerging markets. Carlyle asked regulators to let it buy the stake alone, to no avail. Undeterred, Kim, Carlyle, and company teamed up with Corsair.

Finally, the Korean commission said it would approve the deal--but only if Corsair became a 50% investor with Carlyle. Corsair seemed unready to take such a large stake, Carlyle officials say, though Corsair execs now say they never wanted to back out. Another blow followed: In May, Park Tae Joon quit his post because of an unrelated scandal. In late June, Corsair declined to take part in a stopgap, $40 million financing. Kim even offered KorAm several million dollars of his own money as a bridge loan, which proved unnecessary. It was at that point that Kim and his crew hit the movies.

In the end, Korea's broader banking woes helped Carlyle. Investors, frustrated at the slow pace of debt restructuring, dumped bank shares in general. From late January to late July, KorAm's share price fell 50%. In late August, the government let Corsair be a junior partner with a $100 million interest.

Carlyle had won KorAm. Ironically, the government's foot-dragging handed the foreigners more of the bank. By the time approval came, KorAm's $450 million bought 40.7%, not the 35% the consortium originally bid for.

Closing the deal was just the beginning. Carlyle now has to make some profits for its investors. First it will seek to provision nearly $1 billion in bad loans. Next step: Western-style banking practices such as tighter risk-screening. These are big challenges. But after getting this far, Maximus Kim is convinced that he can vanquish them.