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Cruising for bargains in South Korea

Published March 1998 © MSNBC

By Kari Huus

NEW YORK -- Ssang Bang Wool, a textile company that had careened into real estate, was barely scraping by. Like so many South Korean companies, its substantial foreign debt was coming due, and it didn't have the cash. The company was busy doing accounting gymnastics when Michael Jackson moon-walked onto the scene.

THE GLOVED ONE last week agreed to invest at least $100 million in Ssang Bang's Muji Ski Resort, according to the South Korean company. The resort would be turned into an amusement park - Neverland Asia. That would help Ssang Bang out of hot water. And Jackson -- once considered too decadent to perform in South Korea -- could seal his friendship with the newly elected President Kim Dae Jung.

Just a decade ago, South Korea shunned most foreign investment - both through law and the attitude of its conservative and suspicious public. And even in the last few years, each new reform has been a struggle. In the late 1980s, protesters regularly marched on and sometimes firebombed a bank part owned by the Bank of America.

NEW LANDSCAPE

But 1998 may change South Korea's investment landscape dramatically, making way for a flood of foreign capital. Under pressure from the International Monetary Fund, which came up with a $57 billion bailout fund for South Korea in December, the country has committed to greater deregulation in investment and market access.

'At this point almost everything is on the table,' MICHAEL MEYERAND Assistant Director, International Communications, GM

Investment laws are changing week by week. Through at least three regulatory changes, the limit on a single foreign investor's equity holdings in a company has been raised to 33.3 percent from 10 percent a few months ago. Foreign companies are allowed to hold a majority of shares, and take part in company decision-making for the first time. The government is now close to allowing hostile takeovers.

At least as important, South Korean companies are desperate for the cash. Most of the conglomerates have debts that exceed their assets four to one. And the cash crunch is expected to hit crisis proportions again this month as another wave of Korean debt comes due. "If I were advising foreign investors looking at Korea, I'd say they should hold off a little more," says a former Central Intelligence Agency officer who specializes in Korea. "March is going to be a terrible month."

Expect a wave of new deals in everything from telecoms and seed businesses to biotech in three to four months, says Kook-Hyun Chang, executive director of the Federation of Korean Industries in New York. "Deregulation is very important, but more important is that government officials attitudes are changing very rapidly."

THE SPOILS South Korea gets high marks from investors for moving quickly, after some initial waffling, to implement the stabilization program mandated by the IMF. It also has one of the best-developed industrial bases in the region. So with the South Korean currency, the won, at about half the value it was last July, investors armed with U.S. dollars are on a mad shopping spree for assets.

The early results are in the bag -- deals wrought between some of the world's biggest names in industry. Proctor & Gamble Co. has bought paper-making facilities from troubled Ssangyong, and Coca-Cola bought bottling facilities from a South Korean beer maker. Germany's BASF bought a chemicals company from Hanhwa Group.

Last week, South Korea's semiconductor giants started spinning off assets, marking a new era for the country's industrial giants, which have been extremely reluctant to put core assets on the block. Hyundai Industries announced it would sell a U.S. subsidiary to American computer firm Adaptec for $775 million. Just one day earlier, Samsung Electronics said it was working out a "new business alliance" with Intel Corp.

Another major landmark will come when South Korea puts two of its major banks up for sale, which is expected later this year. The government bailed out Seoul and Cheil banks from insolvency, and will put them on the block later this year. Among those said to be courting are Chase Manhattan and Citibank.

What may turn out to be one of the biggest deals remains under wraps. In January, General Motors entered into talks with Daewoo Motors to explore renewing a business relationship that soured in 1992. The only concrete deal is for a string of service centers for GM cars in South Korea. Aside from that, "we're trying to figure out what this business arrangement might look like," says Michael Meyerand, assistant director of international communications for GM. "At this point, almost everything is on the table."

Things have certainly changed since 1992, when the two companies severed a joint venture arrangement to produce Pontiac LeMans for the U.S.market. There were managerial disputes, and South Korea's own market -- the second largest in the region -- remained firmly closed to imports from abroad. Meyerand says just 1 percent of the total 1.6 million cars sold last year were imported, about 1,000 of them from GM.

A new tie-up, under the circumstances, may finally make it possible to crack South Korea's market. And this time, GM comes back to old partners with more bargaining power -- Daewoo is just one of the South Korean companies that approached the U.S. automaker in recent months. "In any situation, if somebody is coming to you, you're in a better position," says Meyerand. The talks will be wide ranging, which may mean buying Daewoo plants in Eastern Europe, new joint ventures or parts deals. But Meyerand insists, it's about long-term strategy. "We're not looking to get into a fire-sale mentality."

VULTURES BEWARE

But the new environment is at a fragile stage, say some observers. After all, the old system was created after a four decades of Japanese colonialism (1905-1945) which marginalized Koreans in their own country. By the end of World War II, Japan owned 90 percent of all major and modern enterprises. The only large South Korean companies succeeded because they were willing to collaborate with the Japanese.

"There was a consensus after 1945 that it should never happen again," says Clark Sorenson, an associate professor at Jackson School of International Studies at University of Washington. Foreigners were basically shut out of the economy, except in areas where South Korea needed the technology.

'Those who will go to Korea and try to be very aggressive in terms of deal-making may get the deal, but it may lead to some social backlash,' KEITH RABIN, KWR International

The government established a practice of borrowing large amounts of money abroad, and lending it to local companies that produced according to industrial policies and goals. The method resulted in an impressive industrial base, and few questioned it until reforms of the 1980s. "Everything is up in the air now," says Sorenson. "There is still fairly widespread fear of foreign domination."

This kind of thinking doesn't change overnight. And some South Korea hands fear that the new investors populating Seoul's hotels in 1998 might be too brash for their own good. "One thing people are worried about is the vulture investor mentality," says Keith Rabin of KWR International, a public relations firm for major Korean companies. "Those who will go to Korea and try to be very aggressive in terms of deal-making S may get the deal, but it may lead to some social backlash."

LINGERING RESISTANCE

Even though Seoul is now actively courting foreign investment, and investors have arrived, some deals are still getting hung up in red tape. South Korea lost out on a $2.8 billion investment by Dow Chemical to build a silicon plant because of confusion among South Korean ministries that led to delays and disruptions in negotiations. In late February, Dow announced it had chosen Malaysia as a site for the plant.

"It was a very unfortunate mistake," Kook-hyun Chang says, but he adds, "it was a good lesson, and we are speeding up to open our market. You will see a rapidly changing business environment." From now on, he says, each company involved in negotiation will be assigned a government official to ease them through the process. In general, Kook-hyun Chang says, South Korea needs to take a more outgoing approach to problems -- working on marketing opportunities, rather than taking a bunker mentality.

And South Korea's conglomerates need to get used to the tough, new environment, or suffer the consequences. "They don't know how to hire the accountants, lawyers and consultants to help them negotiate," says Kook-Hyun Chang. "They think the fees are too expensive, but they don't know how much they lose by doing it themselves."