Failed Hankook takeover a lesson for companies

SEOUL: The attempt by homegrown private equity firm MBK Partners to acquire a stake in Hankook & Co – the holding company behind South Korean tyre giant Hankook Tire & Technology – has failed, but it has served as a wake-up call for South Korean conglomerates with poor corporate governance.

MBK’s move in the last few weeks for a hostile takeover of South Korea’s No. 1 tyre company and its demand for the improvement of Hankook’s governance structure raised some eyebrows, especially at large companies, as such moves have been typically made by foreign hedge funds, not local private equity funds (PEFs).

The proxy fight between the sons of Hankook & Co honorary chairman Cho Yang-rai wrapped up last week after the stock tender offer conducted by the eldest son Cho Hyun-sik and MBK ended in failure, resulting in the younger son, Hankook Tire & Technology chairman Cho Hyun-bum, to retain his seat.

The family feud at the tyre giant over management control has been ongoing for years, but MBK’s involvement added a new twist to the sibling rivalry.

Just like other global activist funds that criticise South Korean conglomerates’ lack of environmental, social and corporate governance (ESG) efforts, MBK has been pointing out that the weak governance of Hankook under the current management hampers its business to achieve further growth.

“ESG management is a global and irreversible trend. Although Hankook & Co is a company with solid fundamentals and the potential for sustainable growth, due to poor governance and judicial risk of major shareholders, its corporate value has declined. So we are seeking corporate control through a tender offer,” MBK said in a statement released on the last day of its tender offering.

Hankook & Co, which owns Hankook Tire & Technology, the No. 1 tyre manufacturer in South Korea and No. 6 in the world, is expected to see a strong growth momentum in the coming years, thanks to the transition from gas-powered cars to electric vehicles (EVs).

The holding company’s operating profit doubled in the third quarter from a year ago, largely due to the strong sales of tires for cars and EVs.

Despite the sanguine outlook for its business, judicial risks involving Hankook Tire & Technology chairman Hyun-bum have remained a concern for investors.

Hyun-bum was released on bail in November, and is currently undergoing trial without detention on charges of embezzlement, breach of trust and violation of the Fair Trade Act.

Securing the independence of board members from management to defend shareholder interest is another task the company has to resolve, as Hyun-bum has come under criticism for exerting excessive influence in the boardroom.

MBK may be the first domestic private equity fund that includes ESG considerations for its takeover target, but such a buyout strategy will be widely used with a growing number of PEFs here.

“Shareholder activism is likely to rise among local private equity firms in the future, given that South Korea has entered a period of low gross domestic product growth since 2010,” said Hwang Sei-woon, a senior research fellow at Korea Capital Market Institute.

Stock prices, which reflect corporate value, are highly bound to this trend of low economic growth, according to Hwang. “The slower the growth of stock prices, the stronger investors’ desire to increase the stock price return by actively improving corporate value.”

South Korean PEFs – which have been lagging far behind global players in terms of institutional arrangements, lack of professional staff and capital – are now growing in number and flush with cash. According to the Financial Supervisory Service, the number of domestic PEFs with management participation has increased significantly, doubling from some 580 in 2018 to over 1,000 in 2021. — The Korea Herald/ANN