Negotiations between Korean conglomerates LG Group and Hyundai have entered a new phase with the group chairmen getting together on January 4 to negotiate personally for the first time since a merger of their semiconductor operations was suggested in the middle of last year. The Federation of Korean Industries (FKI) organized the meeting to discuss yet another new initiative aimed at breaking a deadlock which has endured since negotiations started, and which has seen government-and creditor-bank-imposed deadlines come and go time after time. What LG chairman Ok Bon-moo and Hyundai chairman Chung Mong-hun and other top officials discussed with FKI deputy chairman Sohn Byung-doo was not revealed. But a proposal by the FKI that the merger be pursued step-by-step over a period of about three years, with the first step involving the immediate creation of a joint research and development company, was certainly on the table. The FKI proposal acknowledges at least some of the concerns of LG Semicon, which independent consultants Arthur D Little handed the short end of the stick to in a report released on Christmas Eve. The US firm recommended that Hyundai Electronics be given management control and a 70% shareholding in the new venture, which would be the world’s second largest chipmaker behind Japan’s NEC Corp. We are seeking to accelerate the pace of negotiations between the two companies. We are looking at a number of options and we are hoping that a compromise can be hammered out by January 14, the FKI’s Sohn was quoted as saying in the Korean press. However the gradual merger is likely to form a core part of any agreement because it allows both LG Semicon and Hyundai Electronics to recoup the massive investment each has separately made in developing, and putting in new production lines for, the current generation 256K DRAM chips, which are replacing 64K DRAM. After three years of struggling and red ink, both firms see good profits ahead – particularly as the international semiconductor market is expected to stage a strong recovery this year. What the proposed new joint R&D unit would be working on is 1Gb chips which are expected to replace 256K chips in two to three years time, and which only a handful of very large firms worldwide will have the capacity to develop and mass produce – thus lending weight to the importance of a new merged giant company which can compete effectively. But this still does not overcome either LG’s feeling that it has been given a raw deal by the consultants or its refusal to let Hyundai walk away with 70% of a merged company under any circumstances. Although South Korean President Kim Dae Jung slapped sanctions on the whole LG Group when it refused to accept the Arthur Little report, making creditor banks cut credit lines and look at calling in loans, it insists it will not give in. It has however taken a backward step and made a counterproposal which could appeal to the government, which has debt-to-equity swaps as a major part of its overall shake-up of the country’s top five conglomerates. This involves creditors of the two semiconductor companies taking a 30% stake in the new merged company in return for writing off debts, with LG and Hyundai splitting the remaining 70%. Hyundai, having apparently already won, says it won’t countenance anything except strict compliance with the consultant’s recommendations. Analysts maintain that as it has already received a major sweetener in the form of being allowed to absorb Kia Motors, the government may well push for the compromise solution. LG, in the meantime, is going ahead with filing a lawsuit in Massachusetts where Arthur Little has its headquarters. LG is seeking not only the nullification of the evaluations but also demanding compensation for material and psychological damages.
