Korean companies acquired by private equity firms see value double over 5 yrs

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The corporate value of business units and affiliates of large companies in South Korea acquired by private equity firms in recent years has more than doubled on average, an analysis showed Sunday.

According to an analysis by Maeil Business Newspaper and consulting company Bain & Co., the corporate value of 8 companies that PEs acquired from large companies and resold in the last five years soared by an average of 147 percent. The analysis involves companies whose equity value is over 100 billion won ($75,837) and is based on management acquisition transactions.

The corporate value of the copper foil and thin film business unit of LS Mtron Co., a Korean heavy machinery and electronic components manufacturer, rose 300 percent after it was purchased by a PE and the flexible copper clad laminate (FCCL) business unit of SK innovation Co. 430 percent.

The corporate values of Doosan Machine Tools Co. and HSD Engine Co. have also increased by 85 percent and 55 percent, respectively, after being sold to PEs under Doosan Group restructuring. The value of Twosome Place, a coffeehouse chain, has also more than doubled.

Twosome Place logo [Courtesy of Twosome Place]

“Once a PE acquires a non-core business unit of a conglomerate, it channels all resources into the business unit to focus on improving management efficiency and corporate structure with a goal to resell it within five years,” said Ahn Ji-soo, a partner at Bain & Co. “From the perspective of large companies, business restructuring enables them to inject resources into core businesses. It is a ‘win-win’ in terms of overall industrial competitiveness.”

In the past, there were many negative views on the restructuring led by PEs due to the excessive restructuring of manpower and investment by foreign capital and controversy over “eat and run,” a term coined to describe a person taking the money they have won in a game and runs away, leaving the other players to complain.

However, as the number of deals led by local PEs has increased in recent years and their socially responsible management has become a trend, the industry has a more positive view on PEs.

“The key to value creation is to have an efficient governance structure and match interests among shareholders, management, and employees,” said Kim Soo-min, a partner at Unison Capital Korea. “It is a misunderstanding from some cases in the past that PEs are obsessed with short-term results by excessively reducing manpower and investment.”

A large amount of funds, in the meantime, is pouring into PEs as they are generating results. For investors, they mean “high returns.” The amount of domestic PE contracts doubled in five years to 125.8 trillion won at the end of last year.

“In the past, corporate restructuring relied on public funds, but now PEs are playing an important role in the domestic M&A market,” said an official from the financial investment industry. “Their role and influence will grow as the market size expands every year.”