The amount of growing economic markets and the need for new investment possibilities constantly increased over the past years. Financial investors all over the world are seeking for new markets that provide good investment opportunities. Hence former third world countries as for example the BRICs or the Next Eleven are on the rise to become or already represent influencing world economies.
In order to accomplish that the economic markets and especially the merger and acquisitions markets work efficiently, the structure of them is supposed to be well organised and afeguarded in order to attract more investors and allow a further growth. Very interesting regarding this theme is the economic development of South Korea which was able to establish an exemplary business environment within Just a few decades in comparison to other countries which had the same starting position years ago. This term paper will depict how the Republic of South Korea managed and is managing its strong economic performance.
The focus will be on the economic development of Korea until now and it will be examined how they achieved their current economic status. In order to estimate the Korean merger and acquisition ossibilities the market will be investigated from different perspectives. 1. 2 Way of investigation In order to understand the current situation and the changes in the economic world performance of emerging markets, chapter 2 will provide a description of the “Next Eleven” concept. It will also focus on the case of South Korea and give an insight of the Korean economic development and its current performance.
Secondly, a definition of merger and acquisition and different transaction types are introduced in Chapter 3. In the subchapters special attention will be drawn to the Korean merger and acquisition market. A review will be provided and major incentives and obstacles in the market will be shown. The last chapter will summarize how the economy and especially the merger and acquisition market of South Korea managed to become a strong player and an attractive objective for investors. Finally, an outlook, based on the current tendencies, will be provided. 2 “Next Eleven” 2. The Concept of”N-11″ The concept ot tne? ext N Eleven” or “N 11” was developed by the Goldman-Sachs’ chief economist Jim O’Neill in year 2005. It includes eleven countries which are considered to experience a comparable economic growth as the BRIC states (Brazil, Russia, India and China) from 2001. The listing includes mainly emerging markets which are mostly characterised by high population fgures and a huge economic growth. The named countries are Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, South Korea, Pakistan, the Philippines, Turkey and Vietnaml .
The concept of ?Next Eleven” was developed since there was a need for new growing markets because states’ economic growth potential decreases with a higher level of economic development . These new emerging nations represent a new potential of economic growth and profitable investments 2. Most of these countries are at the beginning of their development which stands for high long-term growth prospects. Aspects which make the categorisation of all the countries into one group so difficult are that not only their political situation and degree of legal security vary a lot but also their level of economic development, e. . the average income level differs from 770 USD/year in Bangladesh to more than 22. 000 USD/year in Korea (status 2011) 3 . Due to this the appearance of a further concept was created which is called the “Next Eight”. In this connection the countries Egypt, Indonesia, Mexico, Pakistan, the Philippines, South Korea, Turkey and Vietnam are focused on. The states of Iran, Bangladesh and Nigeria are not considered in this localisation since they are politically instable. A further grouping which is only focussing on the countries with an already very high level of economic development is called “MIKTs”.
Mexico, Indonesia, Korea and Turkey are separately grouped in this concept because they are no longer described as emerging markets4. Nonetheless a view on single countries is getting more and more important. Especially South Korea should be regarded as a separate participant in the world conomy due to its outstanding economic performance. 2. 2 Economy of South Korea Over the past decades the economy of South Korea or officially the Republic of Korea developed to the 15th largest worldwide and is ranked 8th out of 41 countries in the Asia- Pacific region5.
Not without reason Korea forms one out of four tiger economies in the Asian area. Next to the countries Taiwan, Singapore and Hong Kong, Korea with a lack of raw material and a small geographic size experienced nevertheless a rapid economic growth in light industry with focus on exporting since the 80’s. High capital inflows from foreign countries enabled the tiger economies and especially South Korea to build up a modern and even high-tech industry which guaranteed their competitiveness with the industrial countries6.
Since its export rates and import quotes are boosting it is meanwhile listed 8th largest exporter and named as one of the world’s premier trading nations 7. Huge harbours in Busan and other locations8 and the International Airport of Incheon with huge capacities in cargo traffic9 facilitate the realisation of these trading volumes. Due to this trading trends Korea ntered into many tree trade agreements witn leading world economies e. g. the European Union and the United States of America, and is still negotiating for further trade liberalisations.
It is member of the World Trade Organisation (WTO), the Organisation for Economic Cooperation and Development (OECD), the 6-20, The United Nations, the ASEAN Plus Three (APT) and has entered into further FTAs with inter alia Australia, China, India and Japan. In year 2009 South Korea received the price for its efforts in economic development and was announced to a country with a developed world status and was therefore no onger described as an emerging market. Korea’s economy is specialised in the areas of sophisticated electronic high-tech industry, telecommunication and automobile and shipbuilding industry.
Moreover it is the Asian leader for oil exports. Worldwide known and successfully recognised brands as e. g. Samsung Electronics, LG, Hyundai Motors, SK, Samsung Life Insurance, POSCO, Hanwha and Samsung have their origin in South Korea and their headquarters are located there as we1114. The well-built industry is complemented by a very educated labour market and large workforce. More than 80 % of all high chool graduates continue their academic career at university which represents the highest rate in OECDI 5. The high level of motivation and the thirst for knowledge turn up in a dynamic labour market with great capacities for innovations.
In recent years, Korea’s economy moved away from a centrally planned and governmentdirected investment system towards a more market-oriented one. Nowadays South Korea embodies one of Asia’s best established democracies and has implemented lots of economic reforms. The competitive regulatory framework supports entrepreneurial activity and innovation. An increased openness to foreign nvestors with a more transparent investment system by introducing the Foreign Investment Promotion Act (FIPA) and the Restriction of Preferential Taxation Act (RPTA) attracts FDI.
Since Korea shows a great performance in the area of technical innovations, the need for innovators to protect their inventions increased over time. The level of piracy of copyright is still especially in Asian countries quiet high that is why a further expansion of the protection of intellectual property rights is necessary. Modern legal regulations ensure strong protection of private property rights and the importance he government places regarding IPR protection has increased considerably.
Maybe those are reasons why South Korea shows the fastest increase in patents registered worldwidel 7. Besides the great economic acting of South Korea there are nevertheless problems which the government and the participant of the Korean economy have to face. One of the major economic problems is corruption. It remains a substantial cause for concern and continues to damage governmental integrity and to destabilize the foundations of economic freedom. 3 Merger & Acquisition 3. 1 Definition and types of mergers and acquisitions
The concept of merger and acquisition (M&A) represents corporate strategies for public takeovers to transfer or burden property rights within an entity. It includes corporate finance and management and deals for one part with the buying and selling of companies (acquisition). The other aspect deals with the division and combination of different companies and similar entities (merger) to form one legal and economic entity. Through these techniques companies have the possibility to expand or reduce rapidly the company’s size within the accompanying business sector or to change their location of origin.
Using these techniques enterprises are allowed to enter a new field of economy or location without the need of establishing an own subsidiary, other child entities or using a Joint venture. Central characteristic of a M;A transaction is the transfer of actively recognised performance and control rights. All M;A transactions are generally regulated through legal provisions regarding company take-overs (inter alia: cartel law), regulations of the capital market and the foreign trade and payments act. The possibilities of acquisitions can be differentiated into three types.
The horizontal cquisition contains the takeover of a firm within the same sector or the same step of the value creation. It is applied in order to realise synergies (economies of scale and scope) or to generate adjustments of the market e. g. elimination of competitors or an increase of the relative market share. Vertical acquisition aims at the purchase of a sector intern firm which is arranged on a down- or upstream step of the value creation. The purposes of this action are the securing of supply and sales and the realisation of economies of integration due to e. . lower communication costs. The ast type of acquisition is the lateral one. Here a firm of a different industry sector is acquired. This technique enables a company to easily and reasonable access a different market or minimise the capital costs due to the perpetuation of the profitability and therefore lower claims of yield. With regard to mergers three strategies exist. The first possibility is the purchase of shares over the stock market. This technique is very rarely applied in companies’ business life because of the threat of rapidly rising prices.
Another strategy is the tender offer where a large amount of all share owners is requested to sell their hares to a given price within a certain period of time. The last possibility is the purchase of a huge block of shares from a large-scale investor. The potential buyer needs on the other hand another large-scale investor who is willing to sell his shares. The potential “seller” receives either cash (cash offer) or shares from the overtaking company (share offer) or even a combination of the two before mentioned alternatives. 3. M&A Market in South Korea – Review Until the beginning of the 90’s Korea was able to record Just a few mergers or acquisitions witn no great intluence on the Korean companies’ organisation. Mergers or acquisitions by tender offer of a publicly listed company did never, until then, take place. The lack of mergers and acquisitions was attributable to “… a combination of cultural aversion to the selling of a company, substantial government discretion to control the conduct of private companies, the vested interests of company founders and a general reluctance to permit foreign ownership of domestic businesses. (Lee, 1994, p. l). In 1994 South Korea, with a fast growing economy and a rising demand and interest from foreign countries, experienced legislative changes which contained he implementation of regulatory bodies which should have the duty to facilitate, monitor and control the merger and acquisition activities.
One of these regulations is the Securities and Exchange Act (Republic of Korea) which has inter alia to the duty to apply and enforce Korean mergers and acquisitions. Other simplifications and improvements of the merger and acquisition situation in Korea were e. . the allowance for companies to acquire their own shares as treasury stocks and in 1997 the abolition of the law which limited the ownership of shares of a listed company of all single domestic and foreign shareholders to not exceed 10%. From the 90’s until today South Korea tried to improve and succeeded in the liberalisation of its M;A market more and more (see Figure 1). After the Asia Crisis in 1997 the need for an integrated financial supervision system which regulates public takeovers and mergers increased.
The resulting association of the Ministry of Finance and Economy and the Bank of Korea led to the establishment of the Financial Supervisory Commission (FSC) in 1998 and the Financial Supervisory Service (FSS) in 199924 which represents the execution arm of the FSC. The responsibilities of the FSC are located in the area of the financial policy and services. It is responsible for the determination of policies and their implementation by the FSS. The investigation and supervision of financial institutions are duties of the FSS.
In general the FSS and the FSC are faced with the tasks of the administration and the review of tender offer reports, reports of substantial shareholdings, and fillings for issuances of securities, merger fillings and public disclosures. Moreover the FSC has the authority to dispose shares in case of a violation of these regulations. Figure 1: Announced Mergers ; Acquisitions: South Korea, 1994 – 2011 (Source: Institute of Mergers, Acquisitions and Alliances (IMAA), 2012) All acquisition and sale transactions in Korea take place via the Korea Exchange (KRX) which represents the stock exchange of South Korea and which was founded in 195626.
Next to the processing of purchase and sales actions, the KRX is additionally responsible for back- door listings, public disclosures, reviewing public takeovers of substantial shareholdings 27 and settlements in its three divisions: the Korea Composite Stock Price Index (KOSPI) Market, KOSDAQ and the Derivatives Market. The Korea Fair Trade Commission (KFTC) which exists since 1981 is a further regulatory body which has the responsibility to enforce prohibitions of business ombinations that would lead to substantial restrictions in market competition.
It also nas to conduct investigations among affiliated enterprises and gross amounts ot investments by firms belonging to a large business group which would result in a concentration of economic power. Therefore it guarantees a competitive environment and strengthens consumer’s rights. In 2008 the Ministry of Knowledge Economy (MKE) was introduced. It is the revised and latest version of the Ministry of Trade, Industry, and Energy (MOTIE) from 1993. The MKE is responsible for the establishment of policies regarding FDIs.
Next to the establishment of regulatory organisations and bodies, public takeovers on the merger and acquisition market of South Korea are also settled by laws. One of these laws is the Korean Commercial Code (KCC). Its content aims at the regulation of companies’ equity stocks, the incorporation of a company and business transfers, the registration of shareholders and all other transaction structures relating to companies and their stocks. Further laws concerning public takeovers are the Financial Investment Services and Capital Markets Act (FISCMA), which inter alia provides criminal sanctions for breaches of this law.
Another one is the Monopoly Regulation and Fair Trade Act (MRFTA) which contains all matters which are duties of and are enforced by the aforementioned KFTC. Moreover the Foreign Investment Promotion Act (FIPA) regulates foreign investments, is subject to certain reporting requirements and is therefore the legal support of the MKE. A public notion of the FSS which provides rules for all FSS matters is the Regulation on Issuance of Securities and Public Disclosure (RISPD). The RISPD provides inter alia rules for the issuance of securities and for public disclosure and special regulations for public companies.
Certain laws and rules concerning mergers and acquisitions which may be specific for individual industries as e. g. finance, telecommunications and defence are also applied. Many countries with a growing economy in the Asian region and especially South Korea increased their volition for international corporate finance activity, FDI and public take-overs. In Korea the focus of actions is concentrated in the industrial sector and the one of hightechnology. The public M;A market in South Korea was able to develop effectively in the recent years with the help of the beforehand mentioned regulations and liberalisation.
In 2011 the Korean economy did not only increase the involvement in above mentioned sectors but also in these of the construction and logistics sectors. Moreover a growth in the volume of cross- border transactions was recorded and restructuring attempts in the financial industries also led toa rise in financial sector deals. In the beginning of 2012 one of the world leading accounting firms Ernst ; Young published their Maturity Index 2012 about 148 countries around the world. This index shall show the level of activity and attractiveness of the single M;A markets in the different countries worldwide.