Hedge Funds Eying Korean Companies

Goldman Sachs said in the seminar recently held in New York, “Global M&A’s New Trend, Shareholder Activism” hosted by KT&G, “The number of global hedge funds rapidly increased to over 9,000 in September this year with an investment amount of about 1.2 trillion dollars, up from over 530 with 39 billion dollars in 1990.”

Hedge funds are currently moving their target market from the U.S. and Europe to Asia, including China and Korea.

Mark Shaffer, representative of global M&A in Lehman Brothers, said, “Profits for the top five hedge funds through investing into Asia over the recent five years amount to 12 billion dollars.”

As major countries in Asia went through foreign exchange crisis in the late 1990’s, they have made their domestic companies more transparent and more open to foreign investment. In addition, with high standard for corporate governance, they are more open to shareholder activism.

In particular, Korean companies place too much emphasis on “financial soundness,” including non-borrowing business management, after foreign exchange crisis, a situation which makes them vulnerable to hedge funds.

Companies with low debt ratio and many cash assets need low acquisition costs and can be high-profit opportunities in a short period of time through high dividend, buy-back, asset disposal, etc.

A fund manager who asked for anonymity pointed out, “Korean companies are financially stable, but their right of management became harder to protect than during foreign exchange crisis.”

The U.S. has also seen capital flow into hedge funds due to low interest rates and the low earning rate of the stock market for many years, so hedge funds’ investment strategies changed.

Bill Anderson, head of M&A in Goldman Sachs, said, “Initially, hedge funds operated only for a small number of investors. But, getting larger, the funds put pressure on the management through corporate governance restructuring and efficient asset sharing.”

According to Lehman Brothers, the rate of M&A by hedge funds out of all M&A transactions sharply increased to 16 percent (404 billion dollars) during January to September of 2006, from four percent (103 billion dollars) in 2000.

Companies Need To Be Prepared For New Trends-

Goldman Sachs advised, “Capital would keep flowing into hedge funds, because successful track records of hedge funds are increasingly reported. Companies should devise strategies to protect their right of management.”

This means that companies need to identify shareholders as well as manage undervalued shares, and to make sure that their management strategies will improve the corporate value from long-term perspective.

Lee Min-seob, senior director of Lehman Brothers Korea, said, “Global hedge funds are taking the list of Korean companies as “a menu.” Some Korean companies whose stock price does not reflect intrinsic values should be prepared as soon as possible.”

larosa@donga.com