South Korea was brimming with billiondollar mergers and acquisitions in 2019, mainly propelled by large business groups in search of new growth opportunities, along with the divestment of their noncore business units.

Throughout 2019, Korean entities announced a record-high volume of M&A transactions worth a combined 37.7 trillion won ($32.6 billion), according to Maeil Business Newspaper’s capital market tracker Radar M.

Experts say this uptrend will continue and will eventually fuel an industrial revamp in 2020.

Korean conglomerates have been the biggest buyers in 2019. Their huge deals sought to reshape the industry at home and abroad. But some cases often left them saddled with financial burdens.

Woongjin Group regained control of water purifier rental company Coway in March, as a consortium comprising its educational arm Woongjin Thinkbig and private equity STIC Investment bought 22.17 percent stake for 1.7 trillion won from MBK Partners, until it put its voting rights up for sale after merely three months due to indebtedness.

The pay TV market in Korea is also expected to undergo a major reshuffle starting 2020, as LG Uplus’ acquisition of LG HelloVision from CJ ENM for 800 billion won was closed after regulatory approval in December. SK Broadband’s merger with T-broad is awaiting a review by authorities next year. The two entities owned by major telecom companies here will narrow the gap with the market leader KT and its affiliate KT Skylife, in their efforts to make inroads into pay TV services.

The financial industry also went through an overhaul through M&As, including Shinhan Financial Group’s acquisition of a 59.15 percent stake in Orange Life Insurance, formerly known as ING Life Insurance’s Korean unit, for 2.3 trillion won in February. Shinhan Financial’s purchase from private equity firm MBK Partners was granted approval in January.

The sale of Lotte Group’s financial units -- Lotte Card and Lotte Non-Life Insurance -- closed in October, after gaining regulatory approval.

Many more domestic megadeals by conglomerates are in the offing.

In December, a consortium composed of Hyundai Development Company and Mirae Asset Daewoo announced a 2 trillion won takeover of 61.5 percent stake -- including existing shares from Kumho and newly issued shares -- of Asiana Airlines, South Korea’s second-largest air carrier. Netmarble also agreed to become the No. 1 shareholder of Coway, in a plan to buy a 25.08 percent stake for 1.7 trillion won.

The merger of Hyundai Heavy Industries Group and Daewoo Shipbuilding & Marine Engineering is awaiting antitrust reviews in overseas markets including Europe.

In 2020, business reorganization through M&As will increasingly become the norm, said an M&A expert.

“Korea will see more M&A activities in 2020, as efforts for corporate reorganization will result in more carve-out deals, while simultaneously, conglomerates seek to strengthen their core capacity for future growth through targeted acquisitions,” Lee Jin-kook, partner at Korean law firm Yulchon told The Korea Herald.

Corporate reorganizations stem from conglomerates’ need to address the shifting sands across the industries with the arrival of digitalization, another expert said.

“In the face of the ‘fourth industrial revolution,’ more selloffs of units devoted to manufacturing, construction and freight transportation are expected,” said Ahn Chan-sik, partner at HMP Law. “In the meantime, there would be growing demand for stake purchase in industries like finance, media and distribution.”

By sectors, insurance firms are fast-emerging targets for M&A deals, in the face of new accounting standards -- International Financial Reporting Standards 17 -- that go into effect in 2021, experts said.

“Insurance firms are likely targets of M&As, especially from foreign investors,” said Roh Mi-eun, partner at law firm Bae, Kim & Lee. “It is crucial for potential buyers to take into account valuation methods specific to the insurance industry.”

Blockbuster cross-border deals also allowed conglomerates to make a foray into foreign markets. In May, a consortium of construction materials maker KCC, ceramic wares maker Wonik QnC and PEF SJL Partners bought a 45.5 percent stake in US silicon maker Momentive Performance Materials for 3.5 trillion won from Apollo Global Management. CJ CheilJedang closed a 1.9 trillion won acquisition of meal-ready frozen food maker Schwan. SK Group also made a 1.2 trillion won investment in a 6.1 percent stake in Vietnam’s Vin Group.

While such deals -- often supported by debt -- sparked concerns about financial instability coupled with the acquired companies’ subpar profitability, experts said they are not cause for concern in the long run.

“The short-term profitability of an acquired firm cannot be a parameter to evaluate whether an M&A deal is successful. What counts instead is the effect the M&As have on the industry,” Lee of Yulchon said.

What to look out for in the M&A activities is the PEFs’ tendency to jump in major deals and their exit from the portfolio firms with high returns on investment, the experts added.

Private equity houses at home and abroad have been popular choices for strategic acquirers in such deals as financial investors, given their track record in maximizing business potential of portfolio companies. They not only joined club deals as financial investors, but also took a lead role in the billion-dollar deals.

These include IMM Private Equity’s 1.3 trillion won acquisition of Linde Korea and 1.4 trillion won fundraising of Shinsegae’s online shopping arm SSG by a consortium led by Hong Kong-based Affinity Equity Partners, in exchange for its newly-issued 23 percent stake.

MBK Partners, Korea’s largest private equity firm by assets, also led a consortium to close a 1.4 trillion won acquisition of Lotte Card, partnering with Woori Financial Group.

Moreover, major PEFs closed new Korea-focused funds in 2019. Hahn & Co., the No. 2 PEF in Korea, closed its flagship Fund III at $3.2 billion in October, while IMM Private Equity collected 2 trillion won to close its Rosegold IV.

“Money is flowing in private equity funds and talents are jumping into such investment firms. These firms are becoming more experienced, which will increase the clout of PEFs in the Korean M&A landscape,” Lee of Yulchon said. “Strategic investors in 2019 had a tendency to go for a club deal with PEFs, and this will continue in the future.”

Meanwhile, there were signs that startups are seeking a quantum jump through sales of their controlling stake.

The biggest deal announced in 2019 was of a Korean unicorn – startups valued at over $1 billion.

Woowa Brothers, a food delivery unicorn that operates a No.1 mobile app called Baedal Minjok, has agreed to sell its entire stake to German company Delivery Hero at a $4 billion valuation.

Medit, another Korean startup that manufactures 3D dental scanners, also chose sales of its controlling shares, instead of earlier plans to go public. Medit CEO Chang Min-ho sold his 50 percent stake plus a share to Unison Capital for 320 billion won.

Experts were mixed as to whether M&A is a go-to option for startups to secure cash.

“For startups, M&As cost less time and money, making highly-valued startups more inclined to for stake deals instead of going through a more rigorous financial standard to be listed on a stock market,” Ahn of HMP Law said.

“For startup entrepreneurs, listing is a more likely option to exit, even when their startups were highly valued through stake selloff deals. Considering the CEOs’ influence on most unicorns in Korea, their exit from the startup through M&A deals at once may carry risks,” said Kim Mok-hong, partner at Bae, Kim & Lee.

By Son Ji-hyoung (consnow@heraldcorp.com)