By Mike Newlands
No sooner had the deal between Hyundai Group and LG Group for the transfer of LG Semicon to rival chip maker Hyundai Electronics Industries been finally agreed after months of wrangling, than more complications arose.
LG Semicon’s militant workers, who had threatened to scupper the deal in the first place, rejected the job security accord agreed between negotiators of the two chaebols and threatened to go on strike. However, their soon-to-be new bosses at Hyundai were not in the mood to compromise further and an official said: The accord was far better than LG’s earlier suggestions. We will not make concessions any longer.
But the strike threat and Hyundai’s response to it highlighted the difference in corporate culture between the two conglomerates, which many analysts predict will make the merger extremely difficult and costly for Hyundai.
As well as an unruly labor force, Hyundai is faced with a brain drain. According to Korea’s Ministry of Finance and Economy, around 30 highly-skilled research engineers have already left LG Semicon for rival foreign companies since the deal started to appear likely in January this year. While some employees have moved for fear of losing their jobs, most have gone simply because they do not want to work for Hyundai, officials said.
On the face of it the deal seems to favor LG, which gets more out of it than seemed likely as recently as a few months ago. The 2.56 trillion won package ($2.15bn) is more than double the amount Hyundai was originally offering, and it transpires this buys only the 59.98 of the shares in LG Semicon which are held directly by LG Group companies. How much of the rest is indirectly owned by LG is a matter of speculation but Korean brokers are convinced it is a substantial amount.
Although the chaebol and government have been playing out a charade to the effect that the permissions and exemptions LG needs to become a telecoms major were not part of the package, it seems evident they were.
As part of the deal, LG will inherit Hyundai’s 5.25% holding in Dacom, the country’s second fixed-line operator, to add to its own official 4.21% stake. However, as with the shareholding in LG Semicon, it is not as straightforward as it appears on the surface as LG is widely believed to unofficially hold another approximately 30% in Dacom. It is supposedly banned from having a stake larger than 5% under an agreement with the government under which it was awarded a mobile license for its LG Telecom subsidiary.
Although there are still formalities to conclude, and various wrenches which could be thrown in the works by other chaebols such as Samsung and Tongyang, which between them have accumulated a 32% holding in Dacom, at the end of the day LG will be a formidable opponent for Korea Telecom and the smaller, newer operators – particularly as it also has its own telecoms equipment manufacturing arm, LG Information and Communications.
Also standing to benefit is LG Electronics which holds a 41.23% stake in LG Semicon representing the majority of the shares being transferred. It expects to get a cash payment of 1.7 trillion won which will allow it to both reduce its considerably liabilities and expand the development of digital products including digital TVs, PDPs (plasma display panels) and TV picture tubes.
Hyundai, which is already thinly stretched with the acquisition of Kia Motors, major ventures in North Korea and a host of debts, will have to sell off quite a bit of the silverware to finance the buy-out.
It plans to launch the new combined operation on October 1, and hopes to have some foreign shareholders on board by then. It is also planning to raise some money through rights issues. But all of the non-semiconductor and non-memory device divisions of Hyundai Electronics, including the information and telecommunications products manufacturing units, are to be disposed of or become joint ventures with foreign partners.
