Failed Hankook takeover a lesson for conglomerates

Big firms with lax ESG could face buyout threats from cash-rich local private equity funds, experts warn

The logo of Hankook Tire & Technology (Hankook Tire & Technology)

The attempt by homegrown private equity firm MBK Partners to acquire a stake in Hankook & Co. -- the holding company behind South Korean tire giant Hankook Tire & Technology -- has failed, but it has served as a wake-up call for Korean conglomerates with poor corporate governance.

MBK’s move in the last few weeks for a hostile takeover of Korea's No. 1 tire company and its demand for the improvement of Hankook’s governance structure raised some eyebrows, especially at large Korean companies, as such moves have been typically made by foreign hedge funds, not local private equity funds.

The proxy fight between the sons of Hankook & Co. honorary Chairman Cho Yang-rai wrapped up last week after the stock tender offer conducted by the eldest son Cho Hyun-sik and MBK ended in failure, resulting in the younger son, Hankook Tire & Technology Chairman Cho Hyun-bum, to retain his seat.

The family feud at the tire giant over management control has been ongoing for years, but MBK’s involvement added a new twist to the sibling rivalry.

Just like other global activist funds that criticize Korean conglomerates' lack of environmental, social and corporate governance efforts, MBK has been pointing out that the weak governance of Hankook under the current management hampers its business to achieve further growth.

“ESG management is a global and irreversible trend… Although Hankook & Co. is a company with solid fundamentals and the potential for sustainable growth, due to poor governance and judicial risk of major shareholders, its corporate value has declined, so we are seeking corporate control through a tender offer.” MBK said in a statement released on the last day of its tender offering.

Hankook & Co., which owns Hankook Tire & Technology, the No. 1 tire manufacturer in Korea and No. 6 in the world, is expected to see a strong growth momentum in the coming years thanks to the transition from gas-powered cars to electric vehicles. The holding company’s operating profit doubled in the third quarter from a year ago, largely due to the strong sales of tires for cars and EVs.

Despite the sanguine outlook for its business, judicial risks involving Hankook Tire & Technology Chairman Cho Hyun-bum have remained a concern for investors.

Cho was released on bail in November, and is currently undergoing trial without detention on charges of embezzlement, breach of trust and violation of the Fair Trade Act.

Securing the independence of board members from management to defend shareholder interests is another task the company has to resolve, as Cho has come under criticism for exerting excessive influence in the boardroom.

MBK may be the first domestic private equity fund that includes ESG considerations for its takeover target, but such a buyout strategy will be widely used with a growing number of PEFs here.

“Shareholder activism is likely to rise among local private equity firms in the future, given that Korea has entered a period of low gross domestic product growth since 2010," said Hwang Sei-woon, a senior research fellow at Korea Capital Market Institute.

Stock prices, which reflect corporate value, are highly bound to this trend of low economic growth, according to Hwang. “The slower the growth of stock prices, the stronger investors' desire to increase the stock price return by actively improving corporate value."

Korean private equity funds -- which have been lagging far behind global players in terms of institutional arrangements, lack of professional staff and capital -- are now growing in number and flush with cash.

According to the Financial Supervisory Service, the number of domestic private equity funds with management participation has increased significantly, doubling from some 580 in 2018 to over 1,000 in 2021. As of the third quarter of 2022, the number of private equity funds reached 1,094, and their assets under management reached 124.3 trillion won ($95.8 billion).

By Park Han-na(hnpark@heraldcorp.com)