Bank Merger Leaves Investors in Dilemma

Kookmin Bank’s likely takeover of Korea Exchange Bank (KEB) is leaving minority shareholders wondering what they should do.

Experts say that minority shareholders of Kookmin Bank would be better off if they hold on to their stocks, because merger talks usually push stock prices up. But the situation is different for KEB minority shareholders.

Four Possibilities-

Minority shareholders of Kookmin Bank will be largely unaffected by the merger. The number of stocks Kookmin shareholders own will not change, and they are free to either sell or buy stocks after the merger.

On the other hand, KEB minority shareholders have four choices: make a tender offer, exchange KEB stock for Kookmin stock at market exchange rates, exercise their appraisal rights, or sell before the merger takes place.

Although a tender offer is not obligatory, it is often exercised. Kookmin Bank is expected to buy some KEB shares to protect minority shareholders of KEB, because KEB stocks will be delisted after the merger.

Kookmin will set a tender offer price, based on stock prices and the value of KEB’s assets. Leftover shares from the tender offer will be exchanged with Kookmin shares at a fixed exchange rate. The rates are set according to the stock price average of a month, week, or a day before the merger decision is made. For instance, if the rate is three to one, three KEB shares will be exchanged for one Kookmin share.

If the shareholder opposes to the merger, the person can exercise his appraisal rights. The bidding price is set based on the stock price average of two months, one month, or a week before the decision to merge is made. It is usually lower than tender offer prices.

Which Decision is Most Beneficial?

Shareholders should respond differently according to the outcome.

They should sell stocks now if they think the price of KEB stocks at 12,700 won per share on March 24 is high enough, or if they do not prefer fluctuations in price due to the merger.

If Kookmin is to join hands with another investor and raise six trillion won for acquisition costs, it would be better to wait until the merger takes place.

“Integral processes are likely to end in a short period of time, and tender offer prices could be set at the advantage of minority shareholders,” projected researcher Hong Jin-pyo at Hyundai Securities.

When Citi Bank took over Hanmi Bank in February 2004, acquisition and the merger took place simultaneously. At the time, the tender offer price was 15,500 won per share.

If Kookmin attempts to raise money on its own, the merger could be a prolonged process. In this case, the tender offer price would fall as shareholders sell stocks before the merger takes place. A case in point is when Shinhan Bank took over Chohung Bank in July 2003.

Shinhan purchased Chohung stocks at 6,200 won per share, but the merger was delayed until April 2004. As a result, the tender offer price remained low (at 3,500 won).

“All possibilities are open. Minority shareholders should stay current with Kookmin’s decisions and make their decisions carefully,” advised Koo Kyeong-hoe, a researcher of Hanwha Securities.

Im-Sook Ha TK Sohn artemes@donga.com sohn@donga.com