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South Korea’s family-run conglomerates – or chaebols – have been big drivers of economic growth, and because of that, they’ve largely been seen as untouchable — until now. The chaebols are being challenged, at a time when the stakes have potentially never been higher, with the country mired in political turmoil.
On today’s Big Take Asia Podcast, Rebecca Choong Wilkins talks to Bloomberg reporter Youkyung Lee about how a surprise takeover bid for one of the world’s biggest refined metal producers, Korea Zinc, is sending a chill through the chaebol world.
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Here is a lightly edited transcript of the conversation:
Rebecca Choong Wilkins: For decades, South Korea’s economy has been dominated by conglomerates like Samsung, SK and Hyundai Motor. These business groups are run and controlled by some of the wealthiest families in the country. They have a specific name in Korean – chaebol.
Youkyung Lee: We call them chaebol or chaebol family. So it can be referring to the business group or the family behind this business group.
Choong Wilkins: Bloomberg reporter Youkyung Lee covers South Korea’s stock market in Seoul.
Lee: Chaebol are really, really big part of the South Korean economy. According to one estimate, if you combine all the turnover of the five biggest chaebol that's equal to about almost half of South Korea's gross domestic product as of 2022.
Choong Wilkins: Youkyung says chaebols’ huge contribution to South Korea’s GDP has, in return, given them unchallenged power. That’s despite the long-standing criticism that chaebols make deals that unfairly benefit the founding families, at the expense of other shareholders. But recently, that power is being rattled. In September, a bitter takeover battle was launched for control over Korea Zinc – one of the biggest chaebols in the mining industry.
Paul Allen: Among the stocks we are watching Korea Zinc jumping by a record. This is after MBK launches a tender offer to buy Korea Zinc that follows…
Choong Wilkins: The private equity firm – MBK Partners, backed by Korea Zinc’s largest investor, tried to wrestle control of the chaebol from one of its founding families. The chaebol family that runs Korea Zinc responded with a share buyback and eventually regulators got involved. Youkyung says the case is sending shockwaves across the country.
Lee: I've been covering Korean stock market for more than 10 years and this is really the first time we see individual retail investors exerting big political power and we saw in this case of the Korea Zinc how their anger got translated to the regulators’ intervention.
Choong Wilkins: And the stakes of this effort to reign in chaebols may now be higher than ever following the events in South Korea last week. On December 3, President Yoon Suk Yeol suddenly imposed martial law, and then withdrew it hours later. The act has plunged the country into a political crisis and spooked investors.
Lee: Since the martial law declaration, policymakers are under greater pressure to make sure that global money managers and investors want to put their money in the South Korean stock market, and they have to demonstrate that to global investors.
Choong Wilkins: Welcome to the Big Take Asia from Bloomberg News. I’m Rebecca Choong Wilkins. Every week, we take you inside some of the world's biggest and most powerful economies, and the markets, tycoons and businesses that drive this ever-shifting region. Today on the show: the fight against the powerful chaebols. How a cutthroat power struggle over Korea Zinc is rallying retail investors – and rattling South Korea’s richest families. And what does it mean for Korea’s $1.6 trillion stock market?
Choong Wilkins: The takeover bid for Korea Zinc was announced on a Friday – right before a big holiday called Chuseok – South Korea’sThanksgiving. Youkyung says that day, people were already in a holiday mood – ready to travel and gather with families after work. But just 20 mins before the South Korean stock market opened for trading –
Lee: There was this sudden takeover offer by a private equity firm called MBK Partners. What MBK Partners did is that it teamed up with the largest investor in Korea Zinc and they launched a tender offer to buy a controlling stake in Korea Zinc.
Choong Wilkins: Youkyung, tell us a bit more about Korea Zinc.
Lee: Sure. So, Korea Zinc first of all, it's not really well known outside South Korea, but it's one of the biggest producers of refined metals in the world. It produces zinc, which is very crucial for the energy transition in the world. It was founded by two families who fled North Korea. And the current generation of these two founders’ family have been drifting apart. And now this company is run by one of the grandson of the two founders, Mr. Choi Yun-beom.
Choong Wilkins: MBK Partners, which launched the takeover attempt, is a private equity firm run by billionaire dealmaker Michael Byungju Kim – who’s known as the “godfather of private equity in Asia.”
Lee: MBK was founded by this ex-Goldman banker who was born in Korea and educated in the US. And he once wrote this interesting novel about this young banker who finds himself tangled in the dealings of South Korea's wealthiest families. Now, MBK has launched a takeover battle saying that it wants to improve the corporate governance of Korea Zinc.
Choong Wilkins: So it seems like he’s living out his own fictions.
Lee: (laughter) Yeah I think you can say that.
Choong Wilkins: MBK Partners teamed up with Young Poong in launching the tender offer – Young Poong is controlled by the Chang family – the other founding family of Korea Zinc. Before the takeover bid, Young Poong was already Korea Zinc’s largest shareholder with a 25.4% stake in the firm. But even so, Young Poong says it has little say in how the firm is run. Instead, Korea Zinc is controlled and run by the Choi family – even though the CEO, Choi Yun-beom, only owns less than a 2% stake. But Youkyung says this kind of management is typical in a lot of chaebol companies in South Korea.
Lee: A lot of these chaebol companies are publicly traded, so the owners of the public companies are actually the shareholders. But in South Korea, we often call the chaebol family as the owners of these publicly traded companies, even though chaebol family do not have more than 10 percent or 20 percent stake in this company.
Choong Wilkins: And MBK Partners says this kind of management structure of letting chaebols have the final say – even though they don’t own much of the company – was one of the main reasons it launched the tender offer alongside Young Poong.
Lee: MBK's argument is that there isn't much independence in the board members or the management, because Mr. Choi, even though he holds minority stake in Korea Zinc, basically decides who gets appointed on the Korea Zinc’s board member seats. So that was the one thing that MBK said they wanted to fix. Now, all these argument from MBK has been denied by Korea Zinc.
Choong Wilkins: When the bid was launched, shares of Korea Zinc surged as much as 24% – the most on record. Choi, the CEO, responded in a statement, calling MBK Partners “a predatory corporate raider.” And he soon countered with a share buyback aimed at defending his control of the company.
Lee: What happened in the following month is that we saw the series of counter-offers to this tender offer and another counter offer to tender offer and no sides trying to yield their position at all.
Choong Wilkins: So how did investors react to all of this?
Lee: This was the tipping point when I felt like the public sentiments was turning a little sour against Mr. Choi. When Mr. Choi's side decided to sell new shares in the company to raise money for the company. And on that day when the share sale was announced, the Korea Zinc shares just tanked and it probably took a toll on other shareholders on that day.
Choong Wilkins: Korea Zinc shares tumbled as much as 30% that day, wiping some $7 billion off its value. Investors were upset with the share sale proposal because the price offered was at a sharp discount to the market price and they saw it as a move that was all about defending Choi’s control. And Youkyung says Choi’s decision didn’t just irk Korea Zinc’s investors, it also hit a nerve with other South Korean investors.
Lee: I remember on the day when that decision was announced, a lot of the individual retail investors watching this takeover battle unfolding were saying, “this is why we don't invest in the South Korean market. This is why we don't invest in chaebol, because, see, the chairman of a company is selling a new shares to defend his own management control at the cost of other shareholders in the Korea Zinc.”
Choong Wilkins: The share sale even prompted regulators to step in. The nation’s financial watchdog launched a probe to investigate whether Korea Zinc’s board intentionally misled investors about the buyback. And two weeks later, Korea Zinc – facing increasing public scrutiny — pulled the share sale, and Choi vowed to step down as chairman of the board. He remains CEO as the takeover fight continues. In an interview with Bloomberg last month, Choi admitted the share sale was a mistake:
Choi Yun-beom: We misread the market. It was perhaps a smart move, but definitely not the wisest move. It was a tactical error on our part. We definitely put the cart before the horse as they say.
Choong Wilkins: In a statement, Korea Zinc says that all measures taken were aimed at protecting the nationally important zinc industry and improving corporate value for all shareholders. MBK Partners says that Choi’s unilateral decision-making at Korea Zinc has hurt its corporate value and shareholders significantly. As for who will win the battle to control Korea Zinc, we are likely to find out more about this early next year. As it stands today, MBK and Young Poong hold just under 40% of the stock in Korea Zinc. Choi’s shares, including those of his allies, are at roughly 35%. After the break: What Korea Zinc’s bitter fight says about the pressure on chaebols to change. What it means for the broader economy if those efforts succeed — and what if they don’t?
Choong Wilkins: South Korea’s chaebols, or family-run conglomerates, are seen as one of the main driving forces behind the country’s rapid economic growth. After the Korean War ended in 1953, the chaebols propelled South Korea to become Asia’s fourth-largest economy. And today, Korea’s Fair Trade Commission says that there are more than 80 chaebols in the country. But more than 70 years after the war ended, some investors feel chaebols have become more of a liability for the Korean stock market – accountable for something called the “Korean discount.”
Lee: Chaebol family they have gone from being the engine of growth for South Korea's success story to hampering the country's growth. When you see South Korean stock market’s peers such as Taiwan or Japan, they have been enjoying these market rallies, but now the chaebol family are holding back South Korea from achieving that kind of rally.
Choong Wilkins: Chaebols are criticized for making deals that advance families' interests rather than prioritizing shareholder value. And one of the structures that enable them to do this is the complex web of cross-holding among hundreds of listed and private companies. So it can be difficult for everyday investors to figure out who is exactly running the companies. And on top of all of that, the families that control the chaebols don’t actually want their share prices to go up.
Lee: Because the more expensive the share prices are, the more inheritance tax they have to pay. And South Korea has one of the highest inheritance tax in the world.
Choong Wilkins: Criticisms of this “Korean discount” and the role of chaebols isn’t new. But Youkyung says one of the reasons the tide is turning now is because of the growing clout of individual investors. During Covid, the number of retail investors in Korea doubled. They now account for about two-thirds of the market turnover – a powerful force in the market and for the first time – an influential voice in elections too. And that is part of the reason why the government is also joining in on this push to get chaebols to change.
Lee: Right now, what the financial regulators are trying to do is that they are trying to make those chaebol companies to come up with plans to give more money back to shareholders and make sure they do the right things for the shareholders, the general shareholders, and not just the minority few founding families. So their roles, what they do in the next few years, will be really crucial to where the South Korean stock market are headed.
Choong Wilkins: Broader reforms are on the table. The financial regulator is reviewing rules to make it easier for shareholders to secure fair merger terms, as well as changes to protect shareholders’ rights when it comes to buying and splitting up companies. So Youkyung, these moves made by regulators, and with what’s happened with Korea Zinc, it’s all really a reality check for the chaebols, right?
Lee: That's exactly right. There will be more public resistance and there will be more regulatory interventions if they don't play with the rules. One of the institutional investors in Seoul, he told me that a lot of the chaebol should be getting a message from what's happening in Korea Zinc, which is that if you don't really take good care of the shareholders, you may be taking this kind of a external attack or external takeover attempt from outsiders. So the lesson here is that take good care of your shareholders and make them happy.
Choong Wilkins: These proposed changes come at a crucial time for the country’s economy. Last week, six hours of martial law and a failed impeachment vote against South Korean president Yoon sent jitters through the market. Korean stocks tumbled and the won slumped following the weekend’s events.
Lee: Ever since we saw president Yoon declaring and then lifting the martial law decree, we're seeing on a daily basis South Korea's top financial and monetary policymakers trying to restore confidence in the South Korean economy and South Korean market. So even though we experienced some of the weaknesses in the stock market during the first four trading days since the martial law, I think the hope is brewing and there is even bigger motivations for South Korean policymakers and lawmakers to make sure that the corporate reforms go through, and the stock market find its proper value.
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