Poison pills: one more reason to avoid Korea

By Cris Sholto Heaton Nov 12, 2009

Cris Sholto Heaton

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Korea is already famous as one of the least shareholder-friendly markets. Now investors' rights look set to take another blow, as the government mulls a daft plan to allow firms to set up 'poison pill' defences.

The 'poison pill' tactic allows a company to fight off hostile takeovers by giving existing shareholders the right to buy large numbers of new shares cheaply. The effect is to dilute hugely any stake that a bidder may try to build up.

The proposal is explicitly aimed at stopping foreign takeovers - the Korean authorities generally dislike the idea of foreigners controlling local firms.

Take US private equity firm Lone Star, which picked up a controlling stake in Korea Exchange Bank in the aftermath of the 1997-1998 Asian financial crisis. Last year, Lone Star attempted to sell the stake to HSBC. The deal would never happen, I heard at the time. Sure enough, HSBC eventually gave up after regulators kept delaying approval. Only a Korean buyer - probably Kookmin Bank - is ever likely to get clearance.

But aside from this clumsy attempt to lock out foreigners, there are other reasons for not investing in Korea. One major reason is the contempt that Korea's chaebols have for the interests of their shareholders.

Chaebols are sprawling conglomerates with multiple-listed subsidiaries and cross-shareholdings. To illustrate how large they can be, Korea has several ETFs devoted to investing in individual chaebols (including Samsung, which accounts for 20% of the Kospi benchmark index).

The complex structure of chaebols has let them shrug off any pressure to deliver better returns for shareholders, such as dividends visible to the naked eye. Promises of reform have always rung hollow, and poison pills would just confirm that.

Add in the country's other negatives, such as high debt and the risks from North Korea, and the infamous 'Korean discount' between local share valuations and the rest of Asia is fully justified.

Korea remains a market to avoid.

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Published in Stock markets | More articles by Cris Sholto Heaton

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  • 1. carlos

    (12 November 2009, 11:31PM)  Complain about this comment

    Weak argument. US and Japan already allows 'posion pill'.

  • 2. Don

    (13 November 2009, 01:51AM)  Complain about this comment

    I totally Agree with Carlos. Obviously, feeding on the whole SK-NK naval propaganda. Pls.. every investor knows NK is not a threat.. Unless your voyuer looking from the outside...

  • 3. Cris Sholto Heaton

    (13 November 2009, 02:27PM)  Complain about this comment

    Thanks for the counterpoints.

    Yes, I had mentioned US and Japan poison pills, but I think that was removed to save space. It's not helpful there either. The difference is that the US doesn’t have value-destroying conglomerates anymore, although it has plenty of areas where treatment of shareholders could improve. Japan has the keiretsu, but they don't dominate the large-cap space and thus most funds like the chaebol do in Korea.

    The issue is not the poison pill law as such, it's the way it illustrates again how little large Korean firms care for shareholders and suggests talk of reforms will remain just that. If I were investing in Korea (and I’m not), I'd favour small-cap funds.

    I don’t think we can overlook the North Korean issue. I’m not just referring to the military threat; when the regime falls, the reunification process will be a drag on the south for years. Think how East Germany affected West Germany and bear in mind that the gulf between the Koreas is far greater.

  • 4. Donald

    (17 December 2009, 08:28AM)  Complain about this comment

    Agree on all counts. The notorious images and the related problems associated with the Chaebols have been prevailing for years in Korea. But, you haven’t mentioned the fundamental problem. The difference between the US and Korean system is that, even if the US firms employed poison pills, they have a relatively sound external mechanism to prevent managers and directors from entrenching themselves. US companies are now either terminating or lifting the provisions or, at least, changing them into more shareholder-friendly provisions. Also, they have these various folks around to look after the corporate actions, i.e. shareholder activists, active mutual funds, rating companies(ER), and so on. They also have a legal system to fight against tyranny. But you can’t simply expect the same things to happen in Korea.

  • 5. Donald

    (17 December 2009, 08:29AM)  Complain about this comment

    Most of the equity research companies are ANOTHER arm of the Chaebol, the legal decisions vary upon which administration holds the power, there are virtually no shareholder activists, and the list goes on. The whole corporate governance system in Korea is by far and large a joke. There are just too much power imbalances toward the Chaebols. I wonder how the whole economy will turn out, once these Chaebols get placed into a vulnerable position.
    By the way, just to correct a minor fact, Korean firms on average don’t hold as much of debt as they used to. Probably less than US firms.

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