As the mergers and acquisitions market went on a record run in South Korea last year, signs of shifting sands are fleshing out in the market, according to top attorneys specialized in the field.
Korea’s M&A deals topped $53.1 billion in 2018, the highest annual figure as per data of Mergermarket recorded since 2001. Cross-border deals were also on the rise, as 86 outbound deals from Korea led to record-high $15.5 billion transactions, while a combined $9.9 billion transactions from 48 inbound deals was the second-highest figure.
But this year, uncertainties in the domestic M&A market are emerging, while the changes in regulatory landscape reflect Korea’s sophisticated approach in measuring market concentration, M&A experts at Korean law firm Bae, Kim & Lee said in a recent interview with The Investor.
Coupled with the slowdown of the Korean economy, escalating instabilities are dampening the M&A market prospects here this year, which are likely to dissuade offshore investors, Kang Han, partner at Bae, Kim & Lee dedicated to cross-border M&As, told The Investor.
Bae, Kim & Lee partners Kang Il (left) and Kang Han
Most of the issues stem from political situations here, with an unprecedented minimum wage hike affecting the real economy and court orders to seize foreign assets based on lawsuits by Korean plaintiffs.
“From a law firm’s perspective, it does not matter whether the rules in the (M&A destination’s) jurisdiction are in favor of foreign buyers or sellers,” Kang said. “As long as the market situation is predictable, foreign buyers will go to great lengths to make cross-border deals despite the unfavorable circumstances.”
“Unfortunately, things are hard to predict in Korea now,” he added.
Kang has advised numerous cross-border deals including GS Engineering & Construction’s 80 percent stake takeover of Inima, a water treatment unit of Spanish builder Obrascon Huarte Lain, for 231 million euros ($259.30 million) in 2012.
As for the outbound deals, more buyers from Korea are tapping Korean law firms as their legal advisers, because they can bridge the gap in understanding overseas investment, he said.
For example, the two largest outbound M&A deals in 2018 involved a Korean law firm. The two transactions -- KCC-led consortium’s Momentive Performance Materials takeover at $3.1 billion and CJ CheilJedang’s $1.8 billion acquisition of 80 percent stake of Schwan’s -- accounted for a third of the entire outbound deals by transaction volume, according to data by Mergermarket.
“Leveraged by Korean law firms, clients here looking for outbound cross-border acquisitions can maximize cost-efficiency when negotiating and drafting deals,” Kang said. “Korean firms are capable of guiding Korean clients about other jurisdictions efficiently.”
He added that upon such advice based on information from foreign countries, clients seeking outbound deals can make optimal choices -- to proceed or scrap the deal.
Bae, Kim & Lee partner Kang Han
On the other hand, the Korean M&A market is anticipating a sophisticated approach in reviewing the threshold of a buyer in a competitive market, in the wake of a new M&A regulations by the Korea’s Fair Trade Commission that came into effect in February.
Until now, firms with innovative technologies were not properly assessed under traditional valuation methods such as revenue and market share.
Korea is one of the first countries in the world that is striving to revise the guidelines for mergers, as there are signs that transactions involving intangible assets such as patents, intellectual properties and customer database will be put under review, according to Kang Il, partner at Bae, Kim & Lee dedicated to competitive laws.
“Korean antitrust authorities are likely to express concerns in the future when reviewing large M&A transactions involving firms with innovative technologies,” he said.
He cited a conditional approval by the FTC in January 2018 for the merger of US chipmaker Qualcomm and Dutch rival NXP which banned the latter’s sales and authorization of patents for near-field communication technology to Qualcomm. Kang said the decision signifies elements of “assessment on intellectual properties” in merger control. The megadeal was effectively canceled the same year by Chinese authorities.
Bae, Kim & Lee partner Kang Il
But the change does not necessarily translate into tougher regulations and instead will lead to more likelihood of FTC’s green light in some cases, considering the economic downturn here, he forecast.
“In the past, the competitive market threshold bar would have existed when a company was acquiring troubled assets, but I guess that the FTC is likely to consider granting an exception if the acquisition is designed for company restructuring,” he said.
By Son Ji-hyoung (firstname.lastname@example.org)