When high-flying Hong Kong investment bank Peregrine decided to set up a joint venture in South Korea six years ago, its partner must have seemed an excellent choice. A medium-sized conglomerate, the Dongbang group was a reasonably well focused business, the leading maker of cooking oil, a producer of food materials and owner of a restaurant chain. Inexperienced in investment banking, it was not likely to interfere in the day-to-day running of the business.
It was also very well connected, always helpful in a country like Korea. The daughter of the Dongbang chairman was married to the son of South Korea’s then president, former-general Roh Tae Woo. Under the carefully structured joint-venture agreement, Peregrine held a 44% stake but gained effective management control as it was the largest single shareholder. It hired the staff and did the deals.
The company was profitable from year one. As one of the few foreign houses with a seat on the Korea Stock Exchange, Dongbang Peregrine attracted considerable business. It won awards for its equity research and was voted best investment bank in Korea in a 1995 Euromoney poll.
Not that the house did a lot of investment banking. Like Japan, Korea has an industrial structure dominated by family-owned business groups, known locally as chaebol. These groups pay little attention to shareholders, and shy away from the deals which are the bread-and-butter work of investment banking mergers, acquisitions and flotations.
Until very recently, strict government rules backed up this cultural rejection of market transfers of ownership. But the Korean government has now been converted to the idea of financial reform, sparked by a wave of corporate bankruptcies and a distressed banking system. Last year the rules started to change.
Meanwhile Peregrine’s partner Dongbang had been eyeing opportunities for expansion through acquisition. Top of its shopping list was the Midopa department store, a high-end fashion retailer owned by the Dainong group, an industrial fossil left over from the days when Korea was a major textile producer. Dainong, like most of Korea’s sprawling business groups, had borrowed and diversified, not very successfully, into unrelated areas such as newspapers and restaurants.
Last year, with the backing of Peregrine and its Asian funds which can invest in Korea, Dongbang mounted a hostile takeover bid for Midopa, buying up its shares in the market. Dainong, initially caught unawares, watched the stock price rise in wonder before realizing the danger. Pledging its newspapers, including the English language Korea Herald, as collateral it raised W44 billion ($48 million) and went into the market to defend its stake. Amid cries that such hostile takeovers were un-Korean, it rallied some big names to its side and, with a bit of help from the bureaucrats, successfully fended off the bid.
But when the dust settled Dainong was bankrupt. Midopa’s stock price had tumbled after market players saw that the takeover would fail, and Dainong lost much of its borrowed funds. Forced to consult a government panel set up to reorganize bankrupt companies, Dainong got the new hard line, straight out of the western management textbook but so shocking to Korean companies. The government told it to sell assets, divest non-core businesses, fire staff, change management and repay debts.
Management complied, holding on to the textile company and the fashion store that had caused all the trouble, but selling off the newspapers and the restaurants to the Sungwon group, another second-tier chaebol whose main claim to fame is its poor performing merchant bank, Daehan Investment.
Within weeks of the dispersal of Dainong’s assets they were sold again, as Sungwon and Dongbang engaged in a little private investment banking, between themselves. It was a swap.
Dongbang got the newspapers and the food and restaurant businesses, a neat fit with its existing specialities, while Sungwon took over Dongbang’s stake in Dongbang Peregrine, a rather more profitable financial services company than Sungwon’s merchant bank.
The trouble was, nobody told Peregrine. “We don’t object to Dongbang wanting a divorce,” spluttered Alan Mercer, director and legal counsel to Peregrine. “But when you divorce someone, you can’t force them to marry someone else of your choice.”
According to Peregrine, Sungwon’s merchant bank has at least $300 million of loans outstanding to the bankrupt Kia group, has a negative net worth and is wholly unqualified to act as its joint-venture partner.
Seoul general manager Warren Allderidge has fended off threats to his staff from the merchant bank, which is demanding that employees sign a petition welcoming its entry as a shareholder.
Peregrine is not the only foreign financial institution experiencing problems in Korea. JP Morgan has recently wound up an asset-management joint venture with the giant Samsung group, and Salomon Brothers’ joint venture with Hannuri is also under threat of closure. “This country is still parochial,” says a senior banker. “It’s hard to do business in a modern way here; the old guard is still in power and it all needs to be restructured.”
Korea’s financial leadership agrees, and is unlikely to be too unhappy about the outcome of the Midopa saga. In place of three indebted diversified business groups, there are now three focused companies, one in food and restaurants, one in textiles and fashion retailing and one in financial services.
At least if the new joint-venture partnership goes ahead Sungwon will be going into the banking business with its eyes open. “Peregrine probably made a turn on the Midopa deal; they were selling as the price went up,” says one insider. “But it could be that Dongbang lost money.” In 1997 Dongbang lost face as well, as former president Roh went to jail for corruption. As Korea takes its first steps into the risky global financial arena, the comparative attractions of selling cooking oil and fast food may have taken on a new allure. James Sinclair
