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| gettyimagesbank |
By Jeon Yong-bae
Recently, Kakao Entertainment (Kakao) and HYBE engaged in a fierce money game to acquire SM Entertainment (SM), the leading entertainment company in Korea, after which Kakao has emerged victorious.
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| Jeon Yong-bae |
However, SM's current management brought in Kakao, another competitor, to engage in a stake battle, emphasizing maximizing shareholder value. Kakao considered it would be an opportunity to make an entry into a market that SM has a strong hold on, acquiring the company through its solid financial backing.
The start of this takeover battle was driven by a local activist fund called Align Partners. Align purchased SM shares and engaged in shareholder activism to increase shareholder value, demanding various improvements in governance structures for SM.
When a stake competition begins, demand for stocks increases, and individuals seeking short-term profits join in, causing the stock price to rise sharply in a short period of time. In the case of SM, the stock price has risen more than 70 percent from the 70,000 won ($53) range at the beginning of the year to the 120,000 won range recently. Align and individual investors that have joined the battle are gaining significant profits through this investment.
Recently, activist fund attacks have been detected in various cases. Osstem Implant, the No. 1 dental implant company in Korea, saw a significant decrease in its corporate value due to an embezzlement scandal of over 200 billion won in 2021.
However, this year, a private equity consortium of MBK Partners and Unison Capital successfully acquired the company through a public tender offer of Osstem's shares. The consortium plans to restructure the company, increase its corporate value and resell it in the future. If the funds sell the company successfully, they will be able to maximize their investment returns.
KT&G has for a long time been receiving demands for corporate restructuring from activist funds both domestically and internationally. These funds are demanding various shareholder proposals such as increasing dividends, repurchasing and retiring treasury stocks, and particularly separating and listing Korea Ginseng Corp. (KGC), a subsidiary that generates a lot of profits. Although the management is not accepting these demands, explaining that they do not help improve corporate and shareholders' value, the issue must be resolved someday.
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Activist funds have been active mainly in the U.S. and Europe. Recently, even large corporations have become targets of these funds. Entertainment company Disney, global oil company Shell and customer relationship management software company Salesforce are negotiating with these funds after receiving demands such as selling subsidiaries, repurchasing treasury stocks and changing board members or management.
Currently, there are dozens of funds active in the Korean stock market, and they generally target companies with low stock prices but excellent long-term prospects, low ownership ratios of major shareholders, holdings of real estate or cash assets and highly profitable subsidiaries.
Initially, they acquire about 5 percent of the shares to secure voting rights and then actively demand maximization of shareholder value, such as sale of unnecessary assets, improvement of the ownership structure, dividend expansion, treasury stock repurchase and even replacement of owner management, by collaborating with institutional investors.
March is the season of annual shareholder meetings. Activist funds actively engage in various claims against their target companies. To avoid these attacks from activist funds, companies need to keep enhancing their transparency and pursue shareholder-friendly policies to increase shareholder value. Companies should pay a certain level of dividends to shareholders every year and defend against excessive stock price declines through stock buybacks or active corporate promotion. Transactions between subsidiaries or affiliates should be conducted transparently.
When management and shareholders cooperate to create a healthy corporate environment, a company can grow and its stock prices can also rise steadily, which will be a win-win for all stakeholders.
The writer is a senior consultant and auditor of Franklin Templeton Investments Korea, where he previously worked as CEO, and is professor of University of Maryland Global Campus' MBA program.
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