Korea's Biggest Foreign Deal Ever Bites Back

Seoul - Doosan is one of the largest chaebol, or conglomerates, in South Korea, with some $20 billion in sales. A maker of construction equipment and builder of industrial plants, Doosan is not nearly as well-known globally as Samsung, LG, or Hyundai Motor. But in Korea it's seen as the chaebol that pulled off the biggest foreign takeover ever. And that, it turns out, has proven to be a problem.

Doosan's $4.9 billion acquisition in 2007 of Bobcat, a North Dakota maker of compact earth movers, was modest by U.S. standards. But it was a seminal moment for Korea Inc., which had largely avoided acquisitions abroad until Doosan outbid others for Bobcat and two related businesses, which all belonged to Ingersoll-Rand.

But today, Doosan Infracore, the unit that controls Bobcat, is reeling. The economic crisis has halved Bobcat's revenues and pushed Doosan Infracore into a loss of $46 million for the first six months of 2009. "The timing [of the takeover] was bad," concedes Lee Sang Hoon, Doosan's vice president in charge of strategic planning. "But no one could have thought the worst recession in 70 years was in store."

Scott R. Nelson, who runs Bobcat and the other acquired businesses for Doosan, will have slashed staff 40%. He says the Koreans will not cut and run. "Our chairman [Doosan's Y.M. Park] has a very long-term view. He doesn't look at this as a one-, two-, or three-year payback," he says.

That's good, because it will take a while to sort out the finances of the deal. The Koreans relied on bank loans and outside investors for 86% of the acquisition cost. To secure good terms from its banks, Doosan agreed to repay loans early if Bobcat's cash flow fell below normal levels. Now that the business has drastically shrunk, Doosan this year has to pay back $600 million of the $2.9 billion Bobcat borrowed to pay for its own acquisition.

Doosan's equity partners in the purchase also got special terms to back the deal. The partners planned eventually to take their share of Bobcat public. If that proved unlikely, they could sell their investment back to the Korean parent with a guaranteed return of 9% compound interest. A public offering of Bobcat seems impossible anytime soon, so Doosan will probably have to pay $1.23 billion by 2012 to its equity investors.

Former executives grumble that the Koreans mishandled the acquisition. One veteran, who declined to be named, says Doosan, spurred on by rival bids and its own ambitions, overpaid. "It was national pride," he says. (An industry consultant figures the Koreans spent $1 billion too much.) The ex-manager also cites differences in management culture: "They wanted everything controlled out of Korea."

Nelson disputes that there has been a culture clash. "There's no question that Asian culture is different from American culture," he says. "But I wouldn't call it a clash at all. It's a learning curve." He adds that Bobcat has gained market share in its key products since the Koreans arrived.

Clash or no, Doosan has no choice but to struggle on. Little growth is expected for the U.S. construction equipment business until 2011. Strategist Lee pledges more cuts if necessary to get Bobcat back in the black.

And the reaction in Korea to Doosan's difficulties? Korean executives don't say publicly that Doosan made a wrong move. But in a recent survey of 37 major companies, all but two said they have no plans to seek acquisitions.

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