South Korea's mergers and acquisitions market is expected to take a hit from the ongoing prosecution probe into Lotte Group over alleged slush funds as it has been a big player over the past years under the stewardship of a hard-charging chairman, industry watchers said Wednesday.

Since the prosecution opened an investigation into the group's alleged embezzlement and slush fund creation earlier this month, investigators have raided Lotte headquarters, affiliates and houses of senior executives twice to gather evidence. 


Several working-level officials have been called in for questioning, with founding family members and senior executives facing summonses. Prosecutors are now widening their probe to look into whether the group capitalized on M&As and real estate deals to create slush funds.

Lotte, South Korea's fifth-largest family-controlled conglomerate, has flatly denied any wrongdoing, insisting those deals were conducted in line with the group's long-term business strategy.

Market sources say the high-profile investigation has almost put Lotte's M&A push to a screeching halt, spawning concern it could deal a harsh blow to local accounting firms and investment banks, which make money mainly by brokering large corporate takeovers and marriages.

"Lotte has been a big investor in M&As for the past several years," said an official at a global investment bank, asking not to be named. "The M&A industry will be hit hard by the prosecution investigation."

Large global investment banks such as Goldman Sachs earn commissions, usually about 2 percent of the sale price, for lead-managing M&A deals, while accounting firms make money in return for conducting due diligence.

Some watchers said Samil PricewaterhouseCoopers may be hit hardest as Lotte has been one of its main customers over the years.

Lotte, whose business ranges from food and retail to chemical and construction, has adopted an aggressive M&A growth strategy under the leadership of hard-driving Shin Dong-bin, the second son of group founder Shin Kyuk-ho. The younger Shin was promoted to the chairman of the group in 2011.

According to corporate tracker CEO Score and industry sources, Lotte bought 21 firms through M&As worth 7.6 trillion won ($6.59 billion) between 2010 and 2015, the largest among the country's top 10 conglomerates. Hyundai Motor Group came second with 5.4 trillion won, followed by SK Group with 4.4 trillion won.

By the amount of money spent, Lotte accounted for more than 20 percent of all M&As carried out by the nation's 30 largest business groups over the past six years. The local M&A market is estimated to range from 80 trillion won to 100 trillion won.

Industry sources attribute Lotte's gung-ho approach to the chairman's tendency to do so. Unlike his father who clung to a conservative management style and focused on real estate investment, the junior Shin, who has an MBA from Columbia University, has sought to pursue growth through M&As. 

The 61-year-old Shin has played a pivotal role in pushing for a series of takeover deals since he served as a senior management executive in 2004, bagging 36 deals worth 14 trillion won at home and abroad over the past 12 years.

In 2012, Lotte bought electronics store HiMart for 1.24 trillion won and acquired KT Rental, the nation's top rental company, for 1.2 trillion won in 2015. Last year, Lotte purchased two chemical units of South Korea's top conglomerate Samsung Group for 3 trillion won to further bolster its chemical business.

But the full-fledged prosecution investigation has put the brakes on Lotte's M&A push as investigators are closing in on the founding family and key executives.

"Crucial management activities such as M&As have come to a virtual stop as prosecutors are set to start investigating founding family members and the group's major policymakers," a Lotte official said.

Indeed, Lotte Chemical Corp. on June 13 canceled its bid to take over Axiall Corp., a leading U.S. chemicals maker, in a deal estimated at over 3.3 trillion won.

The prosecution investigation, which also forced Lotte to shelve its plan to list Hotel Lotte Co. earlier this month, comes amid Shin's bitter feud with his elder brother over control of the conglomerate that also has businesses in Japan.  (Yonhap)