Lg Group: From Master Stroke To Debacle

It's failed telecom plan has investors fleeing

Ever since the mid-1990s, LG Group Chairman Koo Bon Moo had coveted Dacom Corp., a South Korean operator of fixed-line telephone service. LG had aspirations to become a major player in telecom hardware and mobile-phone service, and Koo figured that by adding Dacom's subscriber base of Internet users--then the country's largest--LG could emerge as a global telecom power. So when the government lifted ownership restrictions on Dacom in 1999, Koo bested other Korean chaebol in a feverish takeover war and bought a 56% stake for $1.5 billion.

But far from being a master stroke, the Dacom acquisition is proving to be a debacle that has left not only Koo's telecom strategy but his entire $52 billion group in a shambles. Since falling under LG's umbrella, Dacom has lost its market leadership, while its stock has plummeted by more than 90%, to $35. Even though Korea is one of the world's heaviest users of mobile phones, three-year-old wireless operator LG Telecom continues to pile up hefty losses and also has seen its stock price vaporize. Worse, investor panic now afflicts other affiliates of Korea's third-largest chaebol. LG Electronics Inc. and LG Chemical Ltd.--the group's flagships--have lost three-quarters of their market capitalization. In all, the group's 11 listed companies have shed $17 billion in value this year.

LG's tumbling fortunes are one of the big surprises for Korean business in a year that already has witnessed the bankruptcy of Daewoo Group and near-collapse of key subsidiaries of giant Hyundai Group. To be sure, LG's financial problems aren't remotely as big as those that felled the other two conglomerates. Even though LG Group profits are expected to drop by 42% this year, to $1.75 billion, that's mainly because 1999 earnings were bloated by the sales of such assets as its semiconductor business, under a chaebol-restructuring deal with the government, and half of its liquid-crystal display unit. And LG doesn't appear to be having trouble servicing its rising groupwide debt, which has reached $23 billion.

To the markets, however, the botched telecom plan has fueled a broad disenchantment with LG management, which is dominated by the founding Koo family and seems unaccountable to investors. Among the chaebol, LG not long ago was regarded as doing a relatively good job of cleaning up its finances and honing its business focus following Korea's 1997 debt crisis. Koo, 55, also promised greater power for outside directors and management transparency. But he didn't follow through, and shareholders have sued several LG companies that they allege have shifted wealth to family-controlled affiliates. Now there is fear that bankers will lose faith, as well. "If they start pulling back their loans, LG will face dangers of default," warns Lee Jeong Ja, Seoul branch manager at HSBC Securities Inc.

Koo's main failure, analysts say, was that he didn't adapt to the rapid pace of change in the telecom industry. The loss of market leadership by Dacom is a good example. Earlier this year, it was in good shape because it delivered, over its conventional copper phone lines, a strong Web portal that boasted some of the smartest content in Korea. But when rival companies started offering faster service and more attractive content over broadband, Dacom didn't keep up. More than a quarter of Korea's 12 million households now access the Net through broadband. Also, many Koreans now make long-distance phone calls free over the Internet, cutting into Dacom's once-lucrative long-distance phone business. After a $14 million net profit in 1999, Dacom expects to lose around $17 million this year. "LG has shown no ability to stay ahead of the pack," observes one government economist. "And in telecom, laggards are bound to lose out."

POOR PERFORMANCE. LG's weak showing in wireless is another case in point. Even though the group pumped $1.6 billion into LG Telecom, the unit has been able to sign up only 3.9 million subscribers--about one-quarter as many as market leader SK Telecom--to secure a 14.5% market share. LG's wireless business has lost some $500 million since it was set up in October, 1997, while SK Telecom expects to earn $800 million this year alone.

Even moves that seem to make sound business sense have landed LG in trouble. In September, for example, mobile-phone manufacturing unit LG Information & Communications Ltd. was merged into electronics flagship LG Electronics. The takeover forced LG Electronics to take on $2.4 billion in new debt, boosting its total to $7.3 billion. Now, its debt-to-equity ratio of 284% exceeds a government-mandated ceiling of 200%. To raise cash, the company has agreed to sell a 50% stake in its profitable television and computer monitor tube businesses to Philips Electronics. The companies will merge their production. While LG Electronics will get $1.1 billion, the merger will dilute its share of earnings from tubes.

Now, at the same time it is struggling to slash debt, LG is planning to make its costliest telecom investment yet. The group has bid $1.1 billion for a license to offer next-generation wireless service, known as 3G. LG Glocomm, of which the group owns 60%, plans to spend another $1.6 billion over three years to set up a national 3G network. To reduce risk, LG says it wants to sell half of its equity to a foreign partner. Still, analysts are not enthusiastic about LG's chances of making money in 3G, which also will be offered by two other companies. "It's a no-win situation," says Seoul National University economist Min Sang Kee. "It will be a humiliating blow to LG's image if it doesn't get the license. But if it wins, that will spell financial disaster."

A lack of focus has been part of the problem. The telecom push became serious after LG sold its computer-memory-chip business to Hyundai Group under pressure from the government in 1998. But as it had done in other industries prior to the crisis, LG went overboard. "From satellites to cables, we wanted to cover everything," admits an LG executive who asked not to be identified. And many of these investments didn't fit together. Since 1997, for example, the group has spent $224 million for a 13.8% stake in Hanaro Telecom, a broadband service company. But Hanaro doesn't collaborate with the rest of the group. In fact, it also is competing for a 3G license.

Indeed, market observers are hard-pressed to explain what LG's telecom game plan ever was. "LG only had ambitions," says Samsung Securities Co. telecom analyst Chang Sung Min. "But it hasn't had a grip on the telecom business." Management hasn't even done a good job of selling its vision to employees. In November, some 1,800 unionized Dacom workers--60% of its staff--went on strike to oppose LG's plan to merge Dacom's Internet businesses with those of LG, which they feared would lead to layoffs. On Dec. 7, Dacom locked out the striking workers.

LOSER. Many analysts believe LG should give up on telecom services altogether. "The past year has shown LG is a loser in the telecom game," says Hangaram Investment Management Co. CEO Park Kyung Min. Instead, he says, the group should concentrate on what it knows best--chemicals and electronics.

LG Group: From Master Stroke to Debacle (int'l edition)

These industries also could require heavy investments as the markets move on to new technologies. LG Chemical, for instance, says it hopes that its greater focus on research and development will enable it to catch up with Japanese competitors in materials for next-generation computer batteries and display screens. "We know we don't have financial resources to compete in all the new areas," says LG Chemical CEO Sung Jae Kap. "You need to choose and concentrate." Because Koo is in ultimate control of LG Chemical, though, its stock is being hit as well.

Discipline has never been a strength of Korean chaebol. But as the bad news mounts, it may be time for Koo to abandon his telecom dream--as well as his hold on management--before the problems careen too far out of control.

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