Spurred by restructuring of industries and the government’s move to ease regulations, Korea’s mergers and acquisitions are expected to see another boom in 2016 after 2015, when M&A deals reached an all-time high, dealmakers said.

Amid a prolonged global economic downturn, a growing number of Korean firms, once used to pursue the octopus-style business diversification, are now move to streamline their business portfolio to concentrate on their flagship businesses through M&A deals. 

In 2015, a total of 427 mergers and acquisitions deals worth 77 trillion won ($65.4 billion) were struck here, including tie-ups between leading conglomerates’ affiliates, such as SK C&C and SK, as well as Samsung C&T’s merger with its sister firm Cheil Industries.

Samsung Group’s decision to sell its chemical affiliates and a chemical unit of Samsung SDI for about 3 trillion won to Lotte Chemical was one of the mega deals aimed at business restructuring.

Stock market analysts predicted such trend in the big business circles will be continued this year as global volatility spurs the need for companies to aggressively pursue income sources.

“Large conglomerates tend to focus on businesses what they’re good at and depart from their conventional diversification strategies as competitions heat up while global economies are facing low growth,” said Yoo Myung-gan, KDB Daewoo Securities’ analyst.

He said companies see little reason to invest in new equipment and plants due to oversupply concerns and opt for M&A deals for growth.

This year, large companies will continue to put their noncore businesses up for sale to secure fund for investments in new businesses or for financial health.

“For example, Hyundai Motors is likely to sell nonessential affiliate firms to rev up eco-friendly car business while POSCO is expected to cut the number of its affiliates by a half until 2017,” Nam Sang-wook, Deloitte Anjin director, said.

Big cash reserves

Dealmakers see an increased amount of cash Korean companies are hoarding will provide a supportive backdrop for robust levels of deal activities.

“The M&A market will continue to expand in 2016 as local enterprises are showing improved liquidity,” Yoo said.

According to Daewoo Securities, the country’s 300 largest companies by market capitalization are sitting on cash worth 128 trillion won, up 32 trillion won from a year earlier.

Local companies’ cashable asset in proportion to their total sales reached 8.1 percent in the third quarter in 2015, the highest in the past 10 years.

The larger cash pile is partly due to their tight preparation for economic uncertainties and low interest rates. Cash reserves mean that they can afford to finance transactions.

Easing M&A rules

M&A experts said the government’s push for restructuring of troubled companies and newly adopted measures to facilitate companies’ restructuring and investment are expected to accelerate transactions in 2016.

The National Assembly passed the revisions to the Commercial Code in November which newly adopts various M&A measures to facilitate companies’ restructuring and investment through expanding M&A market and promoting economic growth. The revisions will become effective in March.

In order to meet economic demands for various deal structures using a subsidiary, the rules for triangular share exchange, reverse triangular merger and triangular split-off merger are newly introduced in addition to the existing triangular merger.

“These amendments of the commercial code will make companies to strike takeover deals easier,” Yoo said.

The government also has proposed a “one shot” business reinvigoration law to provide a shortcut for business reshuffling in two ways.

The law would allow waivers on acquisition and registration taxes for companies that eliminate underperforming affiliates or rearrange their business units overall.

“Buoyed by the government’s effort to accelerate the corporate restructuring drive, M&A activities will continue to increase,” Korea Development Bank said in a recent report.

According to the Financial Supervisory Service, 15 troubled large companies are to be put under creditor-led rehabilitation, in addition to 35 already undergoing forced restructuring. That pushed the total number to 54, the highest since 2010 when the figure stood at 65.

Sectors to watch

A surge of tie-ups in the finance industry, including banks, securities and insurance, will drive the M&A market growth in 2016.

According to CEO Score, an online business information provider, some 12 companies in the sector with the combined assets approaching 420 trillion won are expected to go on sale.

Of the 12 firms, the privatization of state-controlled Woori Bank originally scheduled for 2015 will be the biggest deal to be on the M&A market in the sector this year.

Four life insurance companies including PCA Life Insurance and two a credit specialty company such as KDB Capital as well as four securities firms are expected to make offers.

“Foreign life insurance companies that entered Korean market such as ING, PCA and Allianz Life are potential targets in the spotlight,” Nam said.

He added that not only conglomerates such as Samsung, Hanwha and SK Groups that had sought to improve their corporate governance structure and business restructuring through mega deals last year, but also medium-sized enterprises are expected to boost the M&A market this year.

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