Biggest Outbound M&A Deal by Korean Company
by Brendon Carr
Today’s big Korea business news is the announcement that Doosan Infracore is making the largest-ever overseas acquisition by a Korean company, purchasing three units of the Ingersoll-Rand conglomerate for US$4.9 billion in an all-cash deal. Notable among the companies acquired is the Bobcat Company, maker of those cute but powerful construction machines for tight spaces.
Bobcat is one of North Dakota’s largest employers, with 2600 employees manufacturing at several locations in the state. I’m sure there is some anxiety at dinner tables in Fargo today. Will the Koreans close US manufacturing and move things off to “low-wage Korea” (ha, ha) or to China?
FinanceAsia’s report on the transaction (which will probably go away in a few weeks) quotes Citigroup’s Shaheryar Chisty making a good observation about why this was a good move for Doosan:
“Recently, Korean companies have faced a dilemma: should they use their cash flows and debt capacity to acquire companies in Korea but outside their core businesses, or acquire outside Korea but within their core business. Unfortunately, the trend has been more often in the former category, but Doosan has set a healthy example of going outside the comfort zone of Korea to build a strong, global business,” comments Shaheryar Chishty, Citi’s co-head of industrials Asia-Pacific markets and banking.
Bobcat in particular is #1 in its market segment. Buying a dominant player with an established distribution network, in a new market, is a very smart play by Doosan.
Doosan is financing the acquisition by anteing up US$700 million in cash on hand, plus US$4.2 billion in debt finance. Presumably, with the won strengthening considerably, and the US Dollar on the edge of the abyss, taking on dollar-denominated debt (especially as it’s reportedly non-recourse financing) looks like a smart move for Doosan. Not only is the deal cheap now, but it will get cheaper over time.
Meanwhile, over at the ever-bumptious Marmot’s Hole, Doosan’s acquisition is being met with some initial derision (which is, after all, the specialty of the house at the Marmot’s Hole) and thoughtful, well-informed discussion (another house specialty over there), with one Korean-American commenter describing “medieval” chaebol practices as making the integration an “interesting” challenge. What’s life without interesting challenges?
It’s true that Korean companies have had a mixed record on their forays into acquisitions outside Korea: Leading Edge computers (Daewoo), AST Research computers (Samsung), and Zenith televisions (LG) stand out as the most spectacular flops I can think of (however, in these cases they were all turnaround plays by the Koreans). The mighty POSCO has been stymied by Indian bureaucracy and is crawling away from its planned US$12 billion investment in India. But there are counterexamples to be found in Hyundai’s Alabama plants and its investments in the Czech Republic.
And there are also a number of smaller Korean companies which have already begun globalizing as well. One example I can think of is Young An Hat Company, which not only has 40% of the worldwide hat market (if not for the popularity of baseball caps for bald guys, I think that Young An’s market position in hats would be like being the dominant zoot-suit maker), but is also a diversified conglomerate with US$750 million in sales. In 2003, Young An bought Clark Material Handling Company of Kentucky out of bankruptcy, after Clark’s fortunes shifted. In 1998, Clark had been the savior of Samsung Heavy Industries’ forklift division and the company was a darling of KOTRA’s Invest Korea campaign, as Clark closed down its Lexington, Kentucky manufacturing in 2000 to consolidate around the Samsung plant in Changwon and a facility Clark established in Germany in 1977. Clark Asia CEO Kevin M. Reardon was quoted by KOTRA as saying Korean workers were “two and a half times as productive as US workers”.
But here’s a tidbit about Clark for Bobcat folks in Fargo: In 2006, under the new Korean management Young An, Clark re-opened US manufacturing in Lexington. That must be a fascinating story. I wonder what could have overcome that fantastic productivity advantage Mr. Reardon described? At any rate, if the topic is raised to move Bobcat production away from North Dakota to Korea, Bobcat’s managers would be well-served by having first had some discussion with Clark about why that decision was taken.
And we should be watching this space carefully. The Doosan investment looks to be a harbinger of things to come.
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Nice post Brandon, I’ve just come across your blog and after reading your posts, it’s quite a breath of fresh air to see a professionals take on the hidden important issues of the day in comparison to the many other blogs which either offer touristy posts or regurgitate the same old Korean nationalism issues. Hope to continue to see you posting!
Thanks for stopping by, plasmo. I hope to keep this blog relevant and helpful. If there’s some topic you’d like addressed, please feel free to contact me and make a suggestion.
As for the nationalism arguments, I admit to that guilty pleasure. Don’t sell them short!
Agreed, until fervent nationalistic massings are reduced, it will have to rear it’s head in a number of topics. I was simply addressing the mundane ones that are brought up for the sake of nationalism as a general topic and not the effects it is/will have towards a more specific one such as business.