beyondbrics

Has Hyundai forgotten the lessons of the 1997/8 Asian financial crisis?

The crisis exposed how the conglomerate mentality put size before profitability (and transparency). For years the chaebols pursued highly-leveraged, reckless expansion into unrelated businesses. To prevent a repeat scenario, Hyundai – like other groups – was split into separate, if linked, companies. But now it looks like Hyundai could be going back to old habits.

A number of different Hyundai companies are bidding for one of their former affiliates, Hyundai Engineering and Construction (HEC). But beware – some investors already feel haunted by the ghost of crony capitalism.

HEC, South Korea’s biggest building company and formerly the flagship company of the old Hyundai group, was driven into the arms of creditors by the Asian financial crisis. Those creditors, which include Korea Exchange Bank, now wish to sell a 38.5 per cent stake in the company, and plan to choose a preferred bidder by the end of the year.

Enter Hyundai Group, which has eight affiliated companies including Hyundai Elevator, Hyundai Asan and Hyundai Merchant Marine. It said that its companies will bid for the $2.4bn stake in HEC, either together or separately. On August 11, Hyundai Elevator said it would bid. The following day, Hyundai Merchant Marine, the Hyundai Group’s shipping unit and de-facto holding company, confirmed its own interest. Hyundai Securities followed suit on August 19.

That underlines Hyundai Group’s reluctance to let go of units – regardless of profitability or synergy. Just like other chaebols, it hates to see beloved former brethren fall into competitors’ hands.

But investors don’t like the idea of conglomerates expanding into non-core businesses.

Shares in listed Hyundai companies have been under pressure in reaction to a possible HEC purchase. On August 12, Hyundai Merchant Marine’s shares fell 4.1 per cent, although they have subsequently recovered. Carmaker Hyundai Motor is also expected to bid for HEC, and its shares have underperformed the wider Kospi index over the last month.

The reaction might be worse still, were HEC not in decent shape. It has constructed large infrastructure projects like the pier (pictured) at Kuwait’s Al-Ahmady refinery, and has won several important contracts of late. Overseas orders helped net profit rise 22 per cent to Won456.6bn ($383m) last year.

Acquisition interest has also helped pushed HEC’s shares up: they have risen over 5 per cent since August 12, and are now 52 per cent above a May low.

But investors may prove to have longer memories than Hyundai bigwigs.

Related reading:
European property: a second home for S Korean cash, beyondbrics
The chaebol conundrum, The Economist