SK innovation, SK E&S plan internal merger to enhance synergy

[Photo by MK DB]

SK innovation Co. and SK E&S Co. are planning an internal merger in the form of company-in-company (CIC), a move that will minimize organizational disruption.

According to sources, the merger will follow a CIC model, in which the merged entity operates independently with specific authority and responsibility. SK Group previously followed this approach in 2021 when SK Inc. merged its semiconductor materials company, SK materials Co.

SK E&S, a key subsidiary of SK Group, posted an operating profit of over 1.3 trillion won ($934 million) last year.

The group believes that the CIC method is in line with the group‘s restructuring strategy, allowing SK innovation to increase its financial capacity while SK E&S focuses on its core business.

This method is considered feasible for the merger, allowing SK E&S to maintain its highly profitable core businesses such as city gas and liquefied natural gas power generation, as well as its renewable and hydrogen energy ventures.

At the same time, SK innovation, which is engaged in oil refining, petrochemicals and electric vehicle batteries through SK on Co. and SK energy Co., will be able to avoid complex restructuring issues and integration challenges, minimizing confusion and delays and creating immediate synergies, according to an SK official.

The CIC method is considered appropriate to address the differences in organizational culture and performance compensation systems after the merger.

[Graphics by Song Ji-yoon and Chang Iou-chung]

In 2023, SK innovation and SK E&S had revenues of 77.3 trillion won and 11.2 trillion won, respectively, with operating profits of 1.9 trillion won and 1.3 trillion won.

Despite the difference in revenue, the narrow operating profit margins have raised concerns about the merger of the highly profitable SK E&S with SK innovation, especially among SK E&S employees regarding performance evaluations and bonuses.

“The CIC method can alleviate concerns about wages, bonuses, and possible job losses and maintain successful business operations,” said an SK official.

This method will also help address support for SK on.

Previously, the group considered merging some of the profitable businesses of SK E&S and SK on, which sparked concerns about undermining existing businesses, especially given the synergy between various units within SK E&S.

SK Group plans to hold board meetings as early as July to approve the merger plan, with the meetings for SK innovation scheduled for July 17 and SK E&S July 24.

The merger is expected to be completed by November 1, after shareholders’ meetings and other necessary procedures.