By Mike Newlands
Surprised, but pleasantly so, appears to be the initial reaction in Korea to the LG Group’s sudden capitulation to government pressure in agreeing to let Hyundai take over its prized chip making subsidiary, LG Semicon. Following a meeting late Wednesday between President Kim Dae Jung and the head of the family-run LG conglomerate, the presidential office released a statement which perhaps unintentionally came close to the truth of the matter. Chairman Koo Bon Moo was tormented before making the decision, said Kim’s spokesperson Park Jie Won. But while huge pressure from the government, culminating in last week’s refusal by government-controlled banks to provide new credit to LG and their threat to call in existing loans, undoubtedly played a part in focusing Koo’s mind. Analysts’ initial impressions are that LG will come out of the deal very well. In the first place Hyundai will have to pay a huge price for LG Semicon, while also taking over the company’s substantial debts which are estimated at $3.9bn. But the government will also have had to produce some very juicy carrots of its own. Several different sources in Korea believe that LG has been promised a major role in the country’s telecommunications sector, and in particular control of the country’s second telecoms provider Dacom. At present, because it operates its own sizable cellphone network, LG Telecom, it is prohibited from increasing its estimated 30% holding in Dacom. With the restructuring and consolidation of the telecoms sector close to the top of the government priority list for the year, LG could also end up becoming the dominant player in the rapidly-growing PCS cellphone sector, analysts say.
Initial euphoria
But just how much Hyundai must pay LG, and more importantly what form the payment takes, have still to be worked out at the negotiating table and there are signs that even after the apparent capitulation by LG, and the initial euphoria over the deal, it could all still come unstuck. The Hyundai Group, like LG, is heavily in debt and also has a large amount of capital tied up in financing its takeover of bankrupt Kia Motors and its heavy investments in North Korea. LG is insisting it should be paid in cash, and is asking for not just the value of its shares – which alone are worth in the region of $1bn and which shot up in value when the news of the deal broke – but for half of the profits from the so-called synergy effect. When it was named in December by independent US consultants Arthur D Little as the company that should get management control and a major stake in the merged chip venture, Hyundai Electronics Industries put a value on the synergy effect of $6.2bn over the next five years, a value which it will probably now have to live with. We will have to put our R&D and marketing in monetary terms but we also feel that it is only fair that we receive $3.1bn, half of the anticipated synergy effect,” said Kang Yoo-shik, LG’s top restructuring officer. While Kang insisted that this will be a simple deal based on a cash transaction, and that LG is not interested in receiving Hyundai’s business interests, Hyundai will certainly offer other options. A Korean press report said Hyundai is considering is giving LG its TFT-LCD (thin film transistor-liquid crystal display) business, which would merge with LG’s own similar unit, as well as its IT and communications business divisions. This scenario was given further credibility when a government Financial Supervision Commission told HEI to pull out of its non-memory chip businesses, including cellphone manufacturing, to concentrate on semiconductors. If the deal does go through, Hyundai plans on rapidly turning the merged venture into the world’s largest chipmaker ahead of another Korean conglomerate, Samsung, and Japan’s NEC. HEI president Kim Young-Hwan said the combined unit could produce 280,000 eight-inch wafers a month, far higher than the capacity of Samsung which cornered 18.8% of the world’s memory chip market last year.
