[Editorial] Defense Measures Against Takeovers Aren't Everything

The situation with KT&G has renewed the debate about hostile takeovers. The Federation of Korean Industries (FKI) and other big business interests are all calling for measures that would help them fight takeovers. They say that if something isn't done even Korea's conglomerates are going to be targeted by foreign funds. Also, it looks like the government putting together a taskforce of experts on mergers and acquisitions to consider the issue.

The assertions made by big business leaders do seem exaggerated, but it also does look like there needs to be a review of current laws. The door to Korea's capital market since the foreign currency crisis of 1997 has been too loose. Even the Bank of Korea's Institute for Monetary and Economic Research notes that there are not enough measures in place to regulate against speculative foreign capital, and that Korea's laws on foreign capital have been liberalized to levels more than in the advanced nations of the world. Much of the problem is that the current framework was put together in a desperate situation when Korea needed to attract foreign investment and lacked the strength to refuse demands by entities like the United States and the International Monetary Fund.

However, two things must be remembered.

First there is the influence it will have on corporate governing structures. The biggest dilemma is that if the country places greater importance on protecting companies from hostile takeovers, that could hurt progress in jaebeol reform by strengthening their ownership structures. The view commonly shared by the experts is that, in fact, hostile takeovers are not a big problem if companies have efficient and transparent operations. The reason SK and Samsung each found themselves targeted by foreign capital concerns at one point was because of a lack of transparent management. If companies find managerial stability threatened and are spending too much defending themselves then that is something that cannot be ignored, but raising the defense walls higher should not be the automatic way to go about it. The question of how to harmonize the two conflicting goals is what needs to be at the center of the discussion.

Secondly, the country needs to foster the growth of institutional investors. In the United States and other advanced nations domestic institutional investors keep watch on corporate management while being a friendly force that fights off hostile takeovers by foreign funds. In Korea, however, institutional investors have no strength. Foreigners hold 40 percent of the aggregate value of listed stock, while domestic institutional investors have less than 20 percent. It needs to be remembered that there will be limits to how companies can defend themselves with simple legal and structural measures if measures to help the growth of institutional investors are not implemented simultaneously.

The Hankyoreh, 29 February 2006.

[Translations by Seoul Selection]