[Editorial] Daewoo M&A Deal

Middle Eastern sovereign wealth fund Jabez Partners and the TR America Consortium yesterday were selected as preferred bidders for Daewoo Engineering and Construction. Daewoo E&C’s largest stakeholder, Kumho Asiana Group, will select the final bidder this year after additional consultations. Taking over Daewoo E&C in 2006, the Korean conglomerate is expected to suffer a loss of 1.4 trillion (1.21 billion dollars) to two trillion won (1.73 billion dollars), but the sale will help it get out of financial difficulty.

Over the past few years, an M&A boom in Korea has encouraged many companies to acquire or merge with companies, resulting in a “winner’s curse.” Along with Kumho, which faced a liquidity crisis after taking over Daewoo E&C and Korean Express, the Doosan, Hanwha and Eugene groups suffered after buying companies that they could not afford. The industry needs to learn a lesson from the failure of the Daewoo E&C sale and make a rational judgment without being swayed by the trend.

Probably for this reason, the three bidders were a foreign fund or consortium. No Korean company took part in the bidding. Kumho said Jabez and TR America are proven investors with funding capabilities, but many issues linger like whether the process will go smoothly to the final negotiation on price or if a technology leak is possible after the company is handed over to the foreign fund. Another factor is the Daewoo union, which blasts Kumho for hurriedly announcing preferred bidders without considering the deal seriously. Kumho and the preferred bidders need a smooth negotiation process to prevent complaints.

The Daewoo deal is considered a litmus test for corporate restructuring in the industry. Methods arising from the aftermath of the global economic crisis to deal with failing companies in construction, shipbuilding, and the shipping industry have made little progress. The Dongbu Metal deal is also showing no progress over differences on price in the negotiation process. Hopefully, the selection of the preferred bidders for Daewoo E&C can signal the beginning of corporate restructuring.

Slap-dash restrictions hastened by a tight schedule without a meticulous review should be prevented. Yet delay of corporate restructuring for one reason or another could bring bigger consequences. Businesses must cut off failing subsidiaries as soon as possible. Financial authorities and creditors must use tough measures on companies refusing to restructure despite a bleak future. This can be done by rejecting their request to postpone the deadline for credit repayment or denial of new loans.