'No guts, no glory'


Cornelis Smaal, global head of corporate finance at PricewaterhouseCoopers (PwC), answers questions from The Korea Times during an interview at the Samil PwC headquarters in downtown Seoul, April 22. / Courtesy of Samil PwC

Veteran accountant urges Korean companies to pursue M&As

Korean companies should become an active player in the global merger and acquisition (M&A) market if they want to find new growth engines and become world-class corporations, according to an accountant specializing in the M&A advisory business.

Cornelis Smaal, global head of corporate finance at PricewaterhouseCoopers (PwC), says domestic firms need to acquire corporate entities in the leisure and consumer goods industries in rapidly-growing emerging economies to capitalize on the rising household income there.

“I would say ‘no guts, no glory’ describes the nature of M&As. This means that if you do not take a risk, you won’t gain anything,” Smaal said. “Korean companies largely remain unwilling to take risks overseas, following the 2008 global financial crisis. But to become a truly multinational company, they should be more open to cross-border M&As. With the right partners and advisors, they can turn risks into handsome returns.”

Korean businesses tend to prefer greenfield investments over M&As when investing overseas, thinking that the former is less risky. They build plants and hire local workers in China and other developing economies to produce various industrial goods at lower costs and export them to advanced markets or sell them to local consumers.

“Greenfield investment is a safer way to establish presence abroad but the process takes longer. In contrast, an M&A takes a shorter period of time but is associated with greater risks. But if Korean companies have the right management team and buy entities at reasonable prices, returns tend to be much larger,” the Dutch national said.

The accountant said there have been many M&A deals among Korean companies over the years, adding that they acquired several foreign firms based in the developed markets of Europe and the United States. “However, Korean businesses haven’t been active in emerging markets. They have made a number of greenfield investments in developing countries but have not actively pursued distressed corporate assets there. Now is the time for them to pay attention to the growing M&A market in emerging economies.”

With the rising household income in developing countries, Korean businesses should seek to acquire companies in the sectors of consumer goods, leisure, infrastructure, and food and beverage, according to Smaal.

“It makes sense for Korea’s electronics and other consumer goods producers to expand their presence in Brazil, India and Southeast Asian nations where consumers are getting richer,” he said. “Korean construction firms and other infrastructure developers have lucrative business opportunities there so they should seriously consider acquiring local entities.”

However, Smaal pointed out the risks associated with cross-border acquisitions, urging Korean companies to find the right business partners before making inroads into foreign markets.

“Pursuing M&As in emerging markets is not easy, given the different ownership structure and complex regulatory environments in host countries. So, Korean companies must get proper advice from a reliable partner,” the accountant said. “Samil PwC offers a professional advisory service to help companies make balanced decisions. We have a global network of corporate finance teams in 50 countries, with a total of 1,500 professional accountants and consultants.”

The world’s largest accounting firm has been focusing on M&A deals worth $500 million or less, he said, adding that most corporate acquisitions take place in that segment.

“I came to Korea to meet with corporate clients here interested in cross-border M&As. I told them about the global M&A market and provided them with the information they seek so that they can make informed decisions. What PwC does is to provide the best solutions for any given scenario,” said Smaal, who visited Korea on April 21-22.

In February, Samil PwC successfully brokered the transaction between SeAH Steel Corp. and Italy’s Ronda Group. The Korean steelmaker acquired Inox Tech, a steel pipe manufacturer from Ronda Group for 67.4 million euro.


Howard Lee, left, CEO of SeAH Steel Corp., shakes hands with Gianantonio Ronda, chairman of Ronda Group, after signing a sales agreement at the Grand Hilton Hotel in downtown Seoul, Feb. 10. Samil PricewaterhouseCoopers(PwC) brokered SeAH’s acquisition of Inox Tech, a steel pipe manufacturer, from the Italian business group for 67.4 million euro. Korea’s largest accounting firm has been fostering its corporate merger and acquisition advisory business as its growth engine amid the sluggish earnings from its audit and accounting business. / Courtesy of SeAH Steel Corp.

Why aren’t Korean firms pursuing more M&As?

In contrast to many Chinese and Japanese private equity firms (PEFs) and corporations that aggressively acquire corporate assets abroad, Korean companies and PEFs haven’t shown much appetite in cross-border acquisitions.

Domestic firms have been largely reluctant to spend money to buy foreign companies. Experts say that many fear the so-called winners’ curse. For instance, Kumho Asiana Group and Woongjin Group nearly collapsed in the wake of the global financial crisis in 2008 following their buying spree.

Others say companies are reluctant to expand their size and make inroads into new business areas following the government’s push for “economic democratization,” which has weakened the business sentiment here.

However, Korean businesses should pay attention to acquiring foreign companies as a way to expand their overseas business, given the increasingly saturated domestic market, rather than sit on the huge pile of cash and focus on risk management, Smaal said.

“Japanese and Chinese companies are more aggressive in obtaining positions in foreign countries. Many Chinese investors have been looking to acquire businesses in Europe,” he said. “They have acquired famous consumer goods brands and technology firms in Europe, and leveraged them to become bigger. They also brought the brands and technologies back to the domestic market.”

On the back of “Abenomics,” Japanese Prime Minister Shinzo Abe’s fiscal and monetary expansionary policies, Japanese businesses have been more outbound-focused, seizing many opportunities to acquire companies outside the country.

“In contrast, Korean firms have remained largely reluctant to be the part of the booming global M&A market even though they have huge cash reserves,” the accountant said. “Investing within Korea has limits. If they want to continue to grow, they should think about cross-border M&As.”

He said Korea has expertise in various industries, including electronics and shipbuilding, and urged domestic companies to more actively head overseas amid the improving global economy.

The time is running out fast because distressed corporate assets in Europe and other parts of the world have become expensive in line with improving macroeconomic conditions, according to the accountant.

“U.S. firms have been an active buyer in their home country and Europe. Many Japanese and Chinese firms have snatched up companies in Europe at relatively low prices. However, the M&A market is stabilizing fast, meaning corporate entities for sale have become more expensive,” Smaal said. “But there are still attractive companies in Brazil, India and Southeast Asia. Korean firms should look at emerging markets and seek M&A opportunities there.”

He then suggested that the government encourage Korean firms to be more aggressively pursue cross-border M&As.

“I think the Korean government should make it easier for companies to head overseas and purchase foreign companies because this will raise their productivity and fuel business activities at home,” Smaal said. “But Korea’s tax regime and financial regulatory rules are not favorable toward cross-border M&As. The government should abolish unnecessary barriers to facilitate outbound investments. In addition, Korean entrepreneurs should be more willing to take risks to seize opportunities abroad.

Urging chaebol to focus on core businesses

When asked about how Korea’s large family-controlled conglomerates, or chaebol, can boost their strengths and overcome their weaknesses, Smaal said they need to focus on what they do best and expand their overseas business.

“Korean companies, collectively, have a focus ranging from automobiles to heavy industries, leisure, construction and so on. When we look at other world-class companies, most focus on several core sectors and continue to invest in what they do best,” he said. “Korea’s large companies may want to think about following the footsteps of their larger peers in the U.S. and other advanced countries.”

The accountant also suggested that Korean business groups expand their overseas presence across the globe, given the greater growth opportunities outside Korea.

Smaal then said chaebol’s family-controlled ownership structure has made it possible for large domestic companies to make timely management decision in line with the rapidly changing business environment. “There is no universal solution as to what corporate governance structure is the best. Some work better under family-controlled management, while others do under the shareholder ownership structure. Each company has to decide what is best for it.”

When asked about what Korea needs to do to attract more foreign investments, the accountant said Asia’s fourth-largest economy should change its tax regime to be more business-friendly and build cooperative labor-management relations, among others.

“Countries that attract the most foreign investments are characterized as very open and flexible. Korea needs to have the efficient tax restructure, the good corporate governance and the transparent financial regulatory system,” Smaal said. “I think Korea is an attractive consumer market so if the government maintains a sound fiscal structure and set up an anti-trust body that works closely with the business circle, the nation shouldn’t have a big problem.”

Bullish outlook for global M&A market

Smaal projected that the global M&A market will become more robust over the next several years as both corporations and PEFs continue to hold massive amounts of cash and stable interest rates.

“The M&A market has steadily recovered from the global financial crisis in late 2008. Corporations and PEFs have become more aggressive across the globe,” he said. In 2007, M&A transactions worldwide totaled $4.6 trillion, but fell sharply to $2.41 trillion in 2008 and $1.71 trillion in 2009, according to MERGERMARKET. The figure was tallied at $2.21 trillion in 2013, down slightly from $2.29 trillion in 2012 and $2.25 trillion in 2011.

The accountant said large cash reserves will play the most important role in facilitating M&A activities throughout the globe in 2014. “Particularly, the mid-market of up to $500 million will be the main focus rather than blockbuster deals. We have witnessed a sharp increase in buying appetites among investors targeting mid-sized corporate entities.”

Smaal said the industries where most structural changes have taken place and registered high growths will be the areas for consolidation. “As an example, industries such as technology, media, telecommunications, healthcare and life science are likely to see continued deal activities. But we should not ignore the huge amount of cash sitting at the corporate that could fuel M&A activities in other industries.”

About Cornelis Smaal

Smaal currently leads the global corporate finance team at PwC and has been with the accounting firm since 1992 in various roles and responsibilities. He received a bachelor’s degree in business economics at the Hogeschool West-Brabant in Breda, the Netherlands, in 1992. He is a registered accountant, the Dutch equivalent to the certificated public accountant, through training at the University of Amsterdam in 1997.


By Lee Hyo-sik
The Korea Times

Cornelis Smaal, global head of corporate finance at PricewaterhouseCoopers (PwC), answers questions from The Korea Times during an interview at the Samil PwC headquarters in downtown Seoul, April 22. / Courtesy of Samil PwC

Veteran accountant urges Korean companies to pursue M&As

Korean companies should become an active player in the global merger and acquisition (M&A) market if they want to find new growth engines and become world-class corporations, according to an accountant specializing in the M&A advisory business.

Cornelis Smaal, global head of corporate finance at PricewaterhouseCoopers (PwC), says domestic firms need to acquire corporate entities in the leisure and consumer goods industries in rapidly-growing emerging economies to capitalize on the rising household income there.

“I would say ‘no guts, no glory’ describes the nature of M&As. This means that if you do not take a risk, you won’t gain anything,” Smaal said. “Korean companies largely remain unwilling to take risks overseas, following the 2008 global financial crisis. But to become a truly multinational company, they should be more open to cross-border M&As. With the right partners and advisors, they can turn risks into handsome returns.”

Korean businesses tend to prefer greenfield investments over M&As when investing overseas, thinking that the former is less risky. They build plants and hire local workers in China and other developing economies to produce various industrial goods at lower costs and export them to advanced markets or sell them to local consumers.

“Greenfield investment is a safer way to establish presence abroad but the process takes longer. In contrast, an M&A takes a shorter period of time but is associated with greater risks. But if Korean companies have the right management team and buy entities at reasonable prices, returns tend to be much larger,” the Dutch national said.

The accountant said there have been many M&A deals among Korean companies over the years, adding that they acquired several foreign firms based in the developed markets of Europe and the United States. “However, Korean businesses haven’t been active in emerging markets. They have made a number of greenfield investments in developing countries but have not actively pursued distressed corporate assets there. Now is the time for them to pay attention to the growing M&A market in emerging economies.”

With the rising household income in developing countries, Korean businesses should seek to acquire companies in the sectors of consumer goods, leisure, infrastructure, and food and beverage, according to Smaal.

“It makes sense for Korea’s electronics and other consumer goods producers to expand their presence in Brazil, India and Southeast Asian nations where consumers are getting richer,” he said. “Korean construction firms and other infrastructure developers have lucrative business opportunities there so they should seriously consider acquiring local entities.”

However, Smaal pointed out the risks associated with cross-border acquisitions, urging Korean companies to find the right business partners before making inroads into foreign markets.

“Pursuing M&As in emerging markets is not easy, given the different ownership structure and complex regulatory environments in host countries. So, Korean companies must get proper advice from a reliable partner,” the accountant said. “Samil PwC offers a professional advisory service to help companies make balanced decisions. We have a global network of corporate finance teams in 50 countries, with a total of 1,500 professional accountants and consultants.”

The world’s largest accounting firm has been focusing on M&A deals worth $500 million or less, he said, adding that most corporate acquisitions take place in that segment.

“I came to Korea to meet with corporate clients here interested in cross-border M&As. I told them about the global M&A market and provided them with the information they seek so that they can make informed decisions. What PwC does is to provide the best solutions for any given scenario,” said Smaal, who visited Korea on April 21-22.

In February, Samil PwC successfully brokered the transaction between SeAH Steel Corp. and Italy’s Ronda Group. The Korean steelmaker acquired Inox Tech, a steel pipe manufacturer from Ronda Group for 67.4 million euro.
 

Howard Lee, left, CEO of SeAH Steel Corp., shakes hands with Gianantonio Ronda, chairman of Ronda Group, after signing a sales agreement at the Grand Hilton Hotel in downtown Seoul, Feb. 10. Samil PricewaterhouseCoopers(PwC) brokered SeAH’s acquisition of Inox Tech, a steel pipe manufacturer, from the Italian business group for 67.4 million euro. Korea’s largest accounting firm has been fostering its corporate merger and acquisition advisory business as its growth engine amid the sluggish earnings from its audit and accounting business. / Courtesy of SeAH Steel Corp.

Why aren’t Korean firms pursuing more M&As?

In contrast to many Chinese and Japanese private equity firms (PEFs) and corporations that aggressively acquire corporate assets abroad, Korean companies and PEFs haven’t shown much appetite in cross-border acquisitions.

Domestic firms have been largely reluctant to spend money to buy foreign companies. Experts say that many fear the so-called winners’ curse. For instance, Kumho Asiana Group and Woongjin Group nearly collapsed in the wake of the global financial crisis in 2008 following their buying spree.

Others say companies are reluctant to expand their size and make inroads into new business areas following the government’s push for “economic democratization,” which has weakened the business sentiment here.

However, Korean businesses should pay attention to acquiring foreign companies as a way to expand their overseas business, given the increasingly saturated domestic market, rather than sit on the huge pile of cash and focus on risk management, Smaal said.

“Japanese and Chinese companies are more aggressive in obtaining positions in foreign countries. Many Chinese investors have been looking to acquire businesses in Europe,” he said. “They have acquired famous consumer goods brands and technology firms in Europe, and leveraged them to become bigger. They also brought the brands and technologies back to the domestic market.”

On the back of “Abenomics,” Japanese Prime Minister Shinzo Abe’s fiscal and monetary expansionary policies, Japanese businesses have been more outbound-focused, seizing many opportunities to acquire companies outside the country.

“In contrast, Korean firms have remained largely reluctant to be the part of the booming global M&A market even though they have huge cash reserves,” the accountant said. “Investing within Korea has limits. If they want to continue to grow, they should think about cross-border M&As.”

He said Korea has expertise in various industries, including electronics and shipbuilding, and urged domestic companies to more actively head overseas amid the improving global economy.

The time is running out fast because distressed corporate assets in Europe and other parts of the world have become expensive in line with improving macroeconomic conditions, according to the accountant.

“U.S. firms have been an active buyer in their home country and Europe. Many Japanese and Chinese firms have snatched up companies in Europe at relatively low prices. However, the M&A market is stabilizing fast, meaning corporate entities for sale have become more expensive,” Smaal said. “But there are still attractive companies in Brazil, India and Southeast Asia. Korean firms should look at emerging markets and seek M&A opportunities there.”

He then suggested that the government encourage Korean firms to be more aggressively pursue cross-border M&As.

“I think the Korean government should make it easier for companies to head overseas and purchase foreign companies because this will raise their productivity and fuel business activities at home,” Smaal said. “But Korea’s tax regime and financial regulatory rules are not favorable toward cross-border M&As. The government should abolish unnecessary barriers to facilitate outbound investments. In addition, Korean entrepreneurs should be more willing to take risks to seize opportunities abroad.


Urging chaebol to focus on core businesses

When asked about how Korea’s large family-controlled conglomerates, or chaebol, can boost their strengths and overcome their weaknesses, Smaal said they need to focus on what they do best and expand their overseas business.

“Korean companies, collectively, have a focus ranging from automobiles to heavy industries, leisure, construction and so on. When we look at other world-class companies, most focus on several core sectors and continue to invest in what they do best,” he said. “Korea’s large companies may want to think about following the footsteps of their larger peers in the U.S. and other advanced countries.”

The accountant also suggested that Korean business groups expand their overseas presence across the globe, given the greater growth opportunities outside Korea.

Smaal then said chaebol’s family-controlled ownership structure has made it possible for large domestic companies to make timely management decision in line with the rapidly changing business environment. “There is no universal solution as to what corporate governance structure is the best. Some work better under family-controlled management, while others do under the shareholder ownership structure. Each company has to decide what is best for it.”

When asked about what Korea needs to do to attract more foreign investments, the accountant said Asia’s fourth-largest economy should change its tax regime to be more business-friendly and build cooperative labor-management relations, among others.

“Countries that attract the most foreign investments are characterized as very open and flexible. Korea needs to have the efficient tax restructure, the good corporate governance and the transparent financial regulatory system,” Smaal said. “I think Korea is an attractive consumer market so if the government maintains a sound fiscal structure and set up an anti-trust body that works closely with the business circle, the nation shouldn’t have a big problem.”


Bullish outlook for global M&A market

Smaal projected that the global M&A market will become more robust over the next several years as both corporations and PEFs continue to hold massive amounts of cash and stable interest rates.

“The M&A market has steadily recovered from the global financial crisis in late 2008. Corporations and PEFs have become more aggressive across the globe,” he said. In 2007, M&A transactions worldwide totaled $4.6 trillion, but fell sharply to $2.41 trillion in 2008 and $1.71 trillion in 2009, according to MERGERMARKET. The figure was tallied at $2.21 trillion in 2013, down slightly from $2.29 trillion in 2012 and $2.25 trillion in 2011.

The accountant said large cash reserves will play the most important role in facilitating M&A activities throughout the globe in 2014. “Particularly, the mid-market of up to $500 million will be the main focus rather than blockbuster deals. We have witnessed a sharp increase in buying appetites among investors targeting mid-sized corporate entities.”

Smaal said the industries where most structural changes have taken place and registered high growths will be the areas for consolidation. “As an example, industries such as technology, media, telecommunications, healthcare and life science are likely to see continued deal activities. But we should not ignore the huge amount of cash sitting at the corporate that could fuel M&A activities in other industries.”


About Cornelis Smaal

Smaal currently leads the global corporate finance team at PwC and has been with the accounting firm since 1992 in various roles and responsibilities. He received a bachelor’s degree in business economics at the Hogeschool West-Brabant in Breda, the Netherlands, in 1992. He is a registered accountant, the Dutch equivalent to the certificated public accountant, through training at the University of Amsterdam in 1997.


By Lee Hyo-sik
The Korea Times