Koreans don't think much of foreigners who want to take over their companies. Until a decade ago, it was virtually impossible for outside investors to lay their hands on a Korean enterprise without the backing of the local Establishment. Sure, the 1997-98 Asian Crisis opened up the economy a bit, and in recent years foreigners have bought a few banks, auto makers, and telecom companies. But a hostile takeover? Forget it. No foreign investor in Korea has ever succeeded.
So what are Carl Icahn and his partner Warren Lichtenstein up to? The U.S. financiers on Feb. 23 dropped a bomb by making an unsolicited bid for KT&G, Korea's former tobacco monopoly. Funds they control bid $62 a share, representing a 17% premium over the previous close and valuing KT&G at some $10 billion. On Feb. 24 the company's stock jumped 11.3% to $59, its biggest one-day gain in four years.
HIGHER TENSION. So far, it's not clear what the U.S. investors want. Icahn, who last week ended his battle for control of New York-based Time Warner (TWX), has yet to make a formal takeover bid, which requires filing paper with the regulators (see BW, 6/3/06, "Carl Icahn: Still An Improbable Robin Hood"). His partner, Lichtenstein, head of investment partnerhip Steel Partners II, suggested they want a friendly acquisition, asking KT&G's management to respond to their proposal by Feb. 28.
But the offer increases the tension in an ongoing battle between the U.S. investors and KT&G. Icahn and Lichtenstein, who control 7.3% of the company, have demanded changes they believe will increase the stock's value. Their demands include selling off old factory sites, unloading noncore assets, and a public offering of shares in a fast-growing subsidiary that sells beverages and other products made from ginseng, a traditional herbal tonic. But KT&G Chief Executive Kwak Young Kyoon and his team have spurned the request (see BW, 2/27/06, "South Korea: An Unruly Guest From The West").
The battle promises to be tough for the U.S. team. Korea Inc. often rallies behind takeover targets to fend off intruders. "The Korean business community just hates hostile takeovers, particularly when interests of the Establishment are challenged," says Kim Sun Woong, head of the Center for Good Corporate Governance (CGCG), an independent watchdog group.
SEIZE CONTROL. Take the case of Dainong Group. In 1997 powerful Korean industrial conglomerates, or chaebol, such as Samsung and Hyundai, bought bonds with warrants issued by embattled Dainong to help it fend off an attack by Shindongbang Group. That Korean company had teamed up with Hong Kong-based Peregrine Investments Holdings to seize control of a department store chain owned by Dainong.
Any takeover of KT&G may be complicated by the fact that the company has been hailed as a model of successful privatization. Many watchdog groups have praised the company for its corporate governance. Since its 2002 privatization, the company's share price has tripled, and it pays out almost half of net profits in dividends.
A report by the Korea Center for International Finance, a state-financed research group, expects about 30% of shares -- mostly held by Korean institutional investors -- to back management. The state-run Industrial Bank of Korea, KT&G's biggest domestic shareholder, has already said it will support management.
SHOWING SUPPORT. Working in Icahn and Lichtenstein's favor is the fact that foreigners own more than 60% of KT&G. But the bulk of foreign investors are mutual funds or pension funds, which might be reluctant to stir up trouble for fear of triggering a decline in the Seoul market. "I bet most foreign fund managers will stay on the sidelines as they don't want to burn their good business relations in Korea," says Ahn Young Hoe, chief investment officer at KTB Asset Management in Seoul.
Indeed, other foreign shareholder activists have failed to garner broad support among foreign fund managers. Consider the efforts of Dubai-based Sovereign Asset Management to oust Chey Tae Won, chairman of oil refiner SK.
Despite a conviction for accounting fraud, Chey still heads the company. Many foreign investors -- who together controlled more than half the outstanding shares -- supported him in a shareholder meeting last year because SK's stock has soared under his leadership.
SOARING STOCK. Some market watchers suspect that in the end, Icahn might not press ahead with a takeover bid for KT&G. "His real intention may be to keep the tension with management high as a way of driving up the stock's price," says Kim at CGCG. Since mid-January, when Icahn's campaign was first reported, KT&G shares have jumped some 20%.
Icahn and Lichtenstein might simply follow in the footsteps of Sovereign, which last July walked away with $800 million in capital gains from its investment in SK despite the failure of its two-year drive to improve governance there. After all, what investors really want is profits -- regardless of whether they get them through victory or defeat.
Moon is a correspondent in BusinessWeek's Seoul bureau
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