Many believe that the Hyundai-Kia Automotive Group, the world’s fifth-largest carmaker, is trying to snap up Hyundai Engineering & Construction (E&C), the country’s No. 1 builder, without urgent reason.
Such a belief appears to have arisen because the group continues to chalk up fast growth in global markets in competition with conventional powerhouses in the United States, Germany and Japan.
Yet, the conglomerate whose flagship unit is Hyundai Motor contends that it has to acquire Hyundai E&C in order to sustain growth momentum, which has shown signs of slowing of late.
``The group’s growth rate has halved during the first decade of the new millennium. To garner upside momentum once more, we desperately need a new business to spearhead our future,’’ a Hyundai Motor spokesman said.
The head office of Hyundai Engineering & Construction in central Seoul.
``We regard the construction business as a new cash cow for the group, which will generate sufficient revenue streams as the automobile business has done during the past decades.’’
Scores of Hyundai-Kia Automotive Group affiliates combined to record a 10.5 percent average annual expansion rate in sales from 2000 through 2003. The figure plunged to 5.2 percent between 2007 and 2009.
In comparison, Hyundai E&C has racked up an impressive performance in the mid- to late-2000s ― the outfit’s annual growth rate averaged as high as 20 percent over the past five years.
Such feats put the firm at the top of the overstuffed construction industry, and its success story has continued this year ― its global orders topped the $10 billion mark for the first time.
A couple of new players have thrown their hats into the auction for Hyundai E&C ― Hyundai Group and the Hyundai-Kia Automotive Group. A 34.88 percent stake in the builder is up for sale by creditors including the Korea Exchange Bank and Korea Finance Corp.
The preferred bidder is expected to be chosen by the end of the year and the deal is estimated to be worth up to 4 trillion won because Hyundai E&C has strong business fundamentals.
Hyundai E&C was founded in the 1940s by the late Hyundai founder Chung Ju-yung and became the cornerstone asset of the Hyundai empire. Yet, it was handed over to creditors in the wake of the Asian currency crisis in 2001 via a debt-to-equity swap.
Hyundai Automotive Chairman Chung Mong-koo is the second son of the founder while Hyundai Group is presently run by Hyun Jung-eun, the widow of Mong-koo’s brother Mong-hun.
Hyundai Motor said that its takeover of Hyundai E&C would also benefit the latter.
``Korea has fostered global leaders in such businesses as information technology, automobiles, steel making and shipbuilding. However, the country failed to do so in the construction segment for some reason,’’ the spokesman said.
``No builder has ever joined the ranks of the global best 20 companies ever. Currently, we are required to nurture a flagship outfit in the lucrative industry and we will be able to boost Hyundai E&C to become a top-tier player based on our financial leeway and experiences in offshore markets.’’
Hyundai E&C has climbed fast in the global rankings of international contractors, from 59th in 2007 to 23rd last year, according to The Top 225 Global Contractors as compiled by the U.S.-based authoritative journal Engineering News Record.
Hyundai E&C has come up with its own plan of becoming one of the foremost 20 competitors by 2015 but Hyundai Motor is claiming that its stewardship would accelerate this.
Hyundai Motor argues that its acquisition of Hyundai E&C will benefit not only the latter but also the former by creating huge synergy effects.
``Hyundai E&C has set up solid sales networks in South America, the Middle East and northern Africa. By contrast, we have strengths in North America and Europe,’’ the spokesman said.
``In other words, we are a perfect fit for each other. The amalgamation of the two will be a model case of a win-win merger and acquisition (M&A).’’
Market observers concur.
``Hyundai Engineering & Construction is financially healthy and has secure stable sources of cash flow. Yet, it has failed to establish its own unique image and strategy under the control of banks,’’ KB Investment & Securities analyst Heu Moon-wook said.
``It is high time for the builder to do that by channeling lots of energy and funds. Cash-rich Hyundai Motor will be the right outfit to help Hyundai E&C do this so that it can fly high in global markets.’’
Avoiding winner’s curse
In hard-fought auctions for highly coveted treasures, participants take turns jacking up their bidding prices. The treasures end up in the hands of the one who offers the highest price.
The victor may smile at first, but only until they realize that they made a mistake. As they valued the treasures so highly, they’ll have difficulty reselling the item at the price they paid.
This is called the ``winner’s curse,’’ as they are worse off despite beating out the competition and it is one of the most frequently used terms in the M&A market _ experts guess that a majority of M&A suffer the winner’s curse.
But Hyundai Motor contends that its track record in the M&A markets as well as its sufficient cash reserves will remove any concerns on this happening.
``Over the past decade, we showed expertise in acquiring struggling companies and turning them around as amply demonstrated by such cases as Hyundai Card and Hyundai Steel,’’ a Hyundai Motor insider said.
``Furthermore, we have rich liquidity as the group netted about 1.5 trillion won in profits last year alone. We saw many firms languish after locking up a large-sized builder due to a lack of funds. We don’t have to worry about that.’’
The insider seems to mean Kumho Group and Daewoo Engineering & Construction. The former channeled 6.4 trillion won to snap up the latter in 2006 with the support of 18 financial investors.
As it had to pay back funds to the investors late last year, the group eventually gave up Daewoo, which industry watchers say hurt the competitive edge of the country’s No. 3 builder.
By Kim Tae-gyu