Less than a year ago Hyundai Electronics Industries (HEI) was a symbol of just about everything that was wrong with the Korean economy. The country’s largest chaebol and the world’s third largest computer memory chip maker was floundering under a mountain of debt built up over years of poor financial management and unfocused expansion. HEI was run at the behest of the original controlling shareholders, the Chung family, often to the benefit of other Hyundai affiliates but to the disadvantage of minority holders.
The outlook for 2001 was decidedly bleak. HEI had $4.4 bn of debt repayment looming and forecasts of first quarter net losses. Many observers believed the company would and should be left to sink, but the Seoul government, aware that the chaebol would take three of its creditor banks down with it, intervened and forced a rescheduling of debt. HEI was to be given one last chance.
At the end of March, the company was reborn as Hynix Semiconductor. But cosmetic changes were not enough. The only way the company would be able to repay its debt mountain was through overseas financing. Two months later, Hynix took its fight for survival to the global markets and set out to sell $1.5 bn worth of stock and bonds in a 100 percent recapitalization.
From any perspective, the deal was ambitious. From an IR standpoint, the challenge was positively Herculean. The roadshow was launched into sluggish global equities markets. The price of DRam (dynamic random access memory) chips, which account for more than 80 percent of Hynix’s production, had slumped 57 percent since the beginning of the year and continued to fall.
With 90 percent of the global depositary receipt (GDR) program reserved for foreign investors, Hynix would face a skeptical audience. For many, the Hyundai name represented a mixed bag of foreign investors’ fears – an unwieldy and essentially bankrupt family-run conglomerate operating in a troubled sector being rescued and forced to restructure by the government.
In addition, the GDR offering was uniquely complicated in that it linked debt and equity. Equity investors would be buying into a huge debt that would only be refinanced by banks on successful completion of the equity offering.
Hynix pulls it off
When the deal closed in late June, it became clear that the company had succeeded in pulling off what Finance Asia described as ‘the most ambitious recapitalization that Asia’s capital markets have ever seen.’ Both the international and domestic offerings were substantially oversubscribed.
‘In terms of the degree of interest from the market, it was surprising,’ says Simon Woo, head of electronics and semiconductors research at Hyundai Securities in Korea. ‘The market consensus was very negative about the possibility of a GDR issue.’ Woo might well express surprise, for his company advised clients against participating in the offering on the basis of Hynix’s debt-to-equity ratio and the securities house’s own predictions on the direction of future development in the semiconductor industry.
‘Many people thought this was a deal that couldn’t get done,’ agrees one analyst from a foreign brokerage house in Hong Kong. ‘Hynix and Salomon Smith Barney have pulled off a bit of a coup.’
In fact, Hynix’s recapitalization was then Asia’s largest equity offering of the year, raising $1.44 bn from the GDR, including an underwriter’s greenshoe option and a $100 mn strategic investment from Texas Instruments. The issue was so successful, indeed, that the bond offering was dropped. The company reduced its debt-to-equity ratio from 206 percent at year-end 2000 to a more-manageable 130 percent and the debt rescheduling that accompanied the deal gave the company an estimated 18 months of breathing space.
Despite almost 100 percent dilution of existing stock, the deal provided the company with an important degree of financial stability. ‘Until now the share price of Hynix has underperformed,’ suggests Woo. ‘The major reason for this was the company’s financial stress and the high possibility of bankruptcy. After the GDR and the successful rollover of maturing debt beyond the year 2000, that kind of risk has been alleviated so there’s a very minimal downside.’
IR strategy
While a large discount, a short lock-up period, an enormous upside potential and changing sentiment toward the semiconductor industry were all factors in the deal’s success, much credit has gone to Hynix’s investor relations activities. The company’s management, along with lead manager Salomon Smith Barney, were able to convince investors that the company would be able to ride out its current difficulties and be in a good position when the semiconductor market improved. So how did they do it?
According to Daniel Behrendt, a member of Hynix’s IR team, efforts were focused on building investor confidence in the company rather than dwelling on the fate of the sector. ‘There’s nothing we can do about confidence in the semiconductor industry,’ he says. ‘That depends on whether people start buying more PCs, cell phones and servers – it’s out of our hands.’
Instead, the IR team concentrated on addressing investor concerns and communicating the positive side of the story. ‘There were a lot of concerns from the US perspective that the company was tied into a very opaque method of management and financing,’ recalls Behrendt. ‘The focus of the roadshow was to show an entirely new management team, a very transparent operation and a disaffiliation with Hyundai.’
‘Key to the success of this deal was proving that Hynix is no longer pursuing the old Hyundai model of business,’ agrees the Hong Kong-based analyst.
The roadshow team pointed to a number of substantive reforms. Under the leadership of chairman and CEO CS Park, Hynix was being transformed from a traditional chaebol into what he describes on Hynix’s web site as ‘a truly international organization specializing in the semiconductor industry.’
By March, the representatives of Hyundai group affiliates who owned stock resigned their board seats and renounced their voting rights. The new chairman showed he was willing to get into legal battles to avoid bailing out Hyundai affiliates. ‘It’s fully independent and out of the Hyundai group; there are no major shareholders,’ says JJ Park (no relation), Hynix’s IRO. The completion of the recapitalization diluted the Chung family’s stake to under 10 percent and any remaining ties were to be severed by the end of June.
Hynix also refocused on its core semiconductor business and spun off its unrelated water treatment facilities, mobile handset operations, LCD flat panel operations and high-speed internet service. ‘Hynix electronics is now a semiconductor business – a pure, one-industry company,’ says JJ Park.
The traditional chaebol management structure, with its heavy reliance on the orders of the chairman, was replaced by an independent, western management style. ‘We brought in a lot of outside people to benefit from their expertise gained at other companies,’ adds JJ Park. New recruits included a chief accounting officer from Pricewater-houseCoopers and a COO from IBM.
CS Park appointed nine out of the board’s ten new directors, seven of which were independent and came from companies such as Intel. ‘These are guys who have no affiliation with Hynix outside the board of directors,’ insists Behrendt. ‘In a lot of Korean companies, the decisions of the chairman are just put before a puppet board. Our board has all the power of a board of directors that you’d find in the US or anywhere else.’ Indeed Hynix became the first company in Korea to issue stock options to all employees; and management pay is linked to earnings rather than market share.
All of these changes were received positively by analysts and investors. ‘The management got a pretty high approval rating,’ reports Jonathan Ross, head of Asian technology research at Goldman Sachs in Hong Kong. ‘The management was definitely a significant plus in the transaction. It made sense to investors.’
‘We got a lot of positive feedback from investors about the management’s ability to increase corporate value,’ explains JJ Park. ‘They fully understood Hynix’s current situation due to the weak Korean financial markets and the inevitable semiconductor market situation.’
Tough task
Hynix presented some unique challenges to the IR team. ‘For a company like Hynix, shareholders will have many different interests,’ says the Hong Kong-based analyst. Existing shareholders don’t want to see the price go down, new shareholders will have to be offered shares at a discount to existing shareholders and the original owners of Hyundai would have been loath to see new shares being sold. ‘Hynix management had a tough job deciding on a strategy to keep everybody happy, and in the process stop everything blowing up,’ he adds.
JJ Park confirms that delivering the IR message to four groups – foreign equity investors, foreign debt investors, domestic individual investors and domestic institutional investors – was a challenge. ‘They have their own investment objectives and their own interests. The challenge is for IR to customize the message to meet each group’s needs,’ he says. ‘In the past, we would deliver the same message with the same content. We didn’t know how they were going to think or how they were going to react so we just acted from our own perspective. Now we use a different strategy for each group.’
The IR team employs a range of means to broadcast the message – including the web, phone, regular mail, and, working closely with the PR department, print and TV advertising. There was also some legwork involved. ‘The offices of Korean domestic investors are concentrated in a certain area,’ explains JJ Park. ‘We visited their offices to present our updated company and operational strategy.’
While many Korean firms are still struggling with IR basics, Hynix’s IR department has evolved quickly. ‘Four years ago I had to go through four layers to deliver the message to management,’ Park recalls. ‘The first idea I brought forward was totally changed once the message got through to the top.’
Under the new management, the eight-person IR team operates independently, benchmarks against international companies, brings in talent from outside (including Behrendt, who had a Seoul-based IR consultancy called Bizsens) and reports directly to top management. ‘Unlike other Korean companies, we don’t have to go through middle management to deliver our IR messages,’ says Park. ‘Events and IR-related issues can be delivered to top management in good time and without distortion.’
A future for Hynix
Hynix’s success will inevitably be judged by the performance of its stock. ‘The share price is intimately linked with the direction of DRam pricing,’ says Ross. ‘There may be a little bit more downside but we should be coming towards the bottom. The share prices are not too far from the bottom.’
Regardless of the long-term outcome of the deal, the fact that the recapitalization was completed at all represents a major victory for Hynix. Furthermore, its success ensures it should be seen as indicative of a number of trends that will continue to shape South Korea’s corporate landscape.
Investor relations and corporate governance are becoming more prominent issues for Korean investors. ‘Because of the rising voice of the Korean people, lots of minority shareholders and investors are strictly monitoring corporate governance risk,’ observes Woo. ‘The Korean government is also continuously pushing companies to minimize corporate governance risk. We see a lot of improvement compared to before, but it’s gradual improvement. Minority shareholders, local journalists and foreign investors have more power now and they react if they see corporate governance risk.’
Government reforms designed to prevent bank wipeouts in the face of chaebol bankruptcy have also eroded the mystique and power these companies and their chairmen wielded. ‘It’s a symbolic act to show that the government, legislature and national assembly are no longer going to bend to the will of these traditional chairmen,’ says Behrendt.
Woo also highlights the changing ownership structure of traditional companies as a driver of change. ‘If you look at the ownership structure of chaebols you see a growing percentage of foreign ownership. That will cut any dictatorship of a founder or his family.’ Behrendt agrees that the influence of foreign investors will drive improvement. ‘As rules become more liberalized, you’re going to hear a louder voice from foreign minority shareholders. They are going to say, We want to invest in this company at a certain level, but we need the uncertainty removed.’
As these trends continue, more and more Korean companies will follow Hynix and transform into organizations that are customer and shareholder oriented. Hynix could serve as an important precedent. ‘We think this is a milestone for a Korean company,’ says JJ Park, ‘to show we can turn around traditional Korean corporate governance by adapting to westernized management systems.’
‘What the deal shows other Asian companies is that if they are willing to dilute their ownership, sell their stock cheaply and actively meet the needs of foreign investors, then there’s demand for this kind of turnaround story,’ says the Hong Kong analyst.
Of course, no-one knows what that future will hold for Hynix, but the very fact that it has one is itself a significant achievement.
