On November 1, 2001, the new Kookmin Bank was born with $119.9 bn in assets, making it Korea’s largest bank by far, and the 66th largest globally. Korea had seen bank mergers before, although none of this scale – this was something different.
In the wake of the Asian financial crisis in 1997-98, the Korean government was being pressured by the IMF to get the financial sector in order. One response was to encourage a round of consolidation among smaller banks that had failed or were on the brink of collapse.
But when the initial MOU was signed in December 2000 between Housing and Commercial Bank (H&CB), a former state-run mortgage monopoly, and Kookmin Bank, the country’s largest deposit taker, it was the first time such a merger had been proposed between two healthy banks.
Besides being among the most profitable banks in the country, Kookmin and H&CB also had some of the highest levels of foreign investment. Goldman Sachs was the major stakeholder in Kookmin with a 14 percent stake it purchased for $520 mn in 1999 and ING owned 9.9 percent of H&CB. Even though the major shareholder of the new combined entity is the government, with 9.6 percent, over 70 percent is now in the hands of foreign investors.
This high foreign ownership dictated the investor relations activities of both banks during the merger and beyond, and has made meeting international standards of transparency, communications and corporate governance major priorities. Now that the successful Kookmin merger has given international investors a boost of confidence in Korea’s financial sector, other banks such as Chohung Bank, Seoul Bank, Hana Bank, Korea First Bank and Shinhan Bank are looking for mates among themselves and with other financial services companies. The Kookmin merger has given the IR teams of these banks a good example to follow, but also a few pitfalls to avoid.
Throughout much of 2000 both Kookmin and H&CB had been eyeing potential acquisitions or partners. When they sat down to start discussing a possible friendly merger in December, market commentators generally praised the idea, but noted that as both were strong in retail lending, the synergies might not be ideal.
Not everyone accepted the proposal, however, particularly Kookmin’s strong labor union. It had seen the job cuts that followed government-led bank mergers, such as the creation of Hanvit Bank; and it wasn’t about to stand by idly and see that repeated. So in a dramatic turn, Kookmin workers held their CEO Kim Sang Hoon hostage at the firm’s headquarters for two days as a show of protest.
Kim was unhurt by the ordeal, but the run-in with the unions influenced the message the two banks would communicate about the merger over the ensuing months. On one hand, they had to assure the unions there would be no involuntary lay-offs; on the other they had to communicate to major foreign shareholders that this would not unduly affect the cost savings the merged entity hoped to realize.
The long road
After the initial MOU was signed, investors were presented in January with a merger blueprint that set a July deadline for the merger. However, the major decisions to be made before a merger could occur – the swap ratio, the new CEO, the name of the new entity and whether it could maintain H&CB’s listing on the NYSE – all turned out to take longer than planned.
Both banks jockeyed for position, sometimes giving out conflicting signals to investors. Initial indications from H&CB that the new CEO would be named by a specially appointed committee in February were scotched in the press by Kookmin spokespeople. The banks’ general shareholder meetings passed by in March and there was still no agreement on the swap ratio, let alone the identity of the new boss.
During this time of uncertainty, investors say, both banks maintained a high level of communication through roadshows, frequent conference calls and web updates. Most agree that H&CB’s IR team had a more professional approach, and that this skill must have benefited them during negotiations with Kookmin.
One investor relates that the banks’ inexperience in merger IR led to a few confusing moments. ‘During the dust-up over the exchange ratio, Kookmin’s IR people made some pretty bombastic statements to investors and analysts,’ he says. Kookmin agreed that the swap ratios should be based on market value, as per the original agreement, but complained that the market value of its Kosdaq-listed credit card subsidiary, Kookmin Card, had not been added to the total. This was despite the fact that, as most analysts and investors were aware, Kookmin’s 75 percent stake in the subsidiary was already fully consolidated in the bank’s results.
Hanky panky
‘It would be perfectly okay for Kookmin to say to its international investors that it thought it was the better bank of the two and deserved more in the swap,’ says the investor. ‘But it wasn’t ideal to have someone who clearly didn’t understand consolidation and accounting talking to investors like that.’
Eventually, on April 11, the swap ratio was finalized at one H&CB share to 1.6883 Kookmin shares, which was seen as a slight concession to Kookmin on H&CB’s behalf; and it was agreed that the new corporate entity would maintain the Kookmin name. This was a slightly controversial move because by setting up a new entity rather than characterizing the deal as one bank buying another, the new organization would incur an additional W80-120 bn ($61-91 mn) in corporate tax liability.
Saving face
Some observers criticized the banks as being too stubborn and trying to save face. The unions later used this opportunity to lodge a legal claim to annul the merger on the grounds that the banks were wasting money and riding roughshod over minority shareholder rights. The lawsuit, though, turned out to be unsuccessful and the unions remained a lone voice in opposition to the momentum-gaining merger.
‘There was really no reason for shareholders, minority or majority, not to like this deal,’ maintains Lehman Brothers banking analyst Paul Sheehan. ‘There wasn’t any kind of hanky panky. The swap ratio was basically based on market value. It was slightly adjusted from the original agreement, but that was a legitimate business decision. Certainly the unions have a clear ulterior motive. After all, bank M&A works on cost cuts and unfortunately most of the costs at a bank are in people and branches.’
Fortunately for the banks, they were able to promise the unions there would be no involuntary lay-offs, while at the same time letting investors and analysts know that a large proportion of workers at both banks were employed on a contract basis, so were not covered by the union agreements. In addition, positive growth forecasts for Korea’s banking market meant Kookmin and H&CB could argue that massive job cuts were unnecessary and would hold them back from achieving that expected growth.
At the same time as the swap ratio was announced, a new deadline of October 31 was set for the merger. But sources close to the deal were still concerned that a high degree of execution risk was developing. They feared the infighting at the new Kookmin could dash any gains for shareholders; and without a new CEO there could be no indication about which bank was in the driver’s seat.
A tale of two Kims
When Kim Jung Tae took over H&CB in 1998, it was a newly privatized mortgage lender that had just lost its regulated mortgage monopoly, had no focus, and was losing enormous amounts of money. He is widely credited with the huge turnaround in the bank that saw it quickly become Korea’s most profitable, with a return on equity of 22 percent, and achieve international recognition as one of Korea’s best managed companies.
His management philosophy of maximizing shareholder value through transparency, customer service and performance-based staff management is par for the course in many countries, but in Korea he had developed a reputation as a bit of a maverick for publicly expressing his views on management.
This made Kim Jung Tae a popular choice for the top job in investor circles, but some analysts predicted that Goldman, as a substantial shareholder, would prefer to work with someone they already knew – Kookmin CEO Kim Sang Hoon.
Kookmin’s union members were also loyal to the boss they had held hostage only months before. And they made it clear they would take action if their man wasn’t given the top job at the bank.
In May, FinanceAsia, a capital markets magazine, conducted a survey of analysts at 20 international and Korean securities houses as well as 16 major international fund managers on their preferred choice for CEO. Given a choice of the two Kims, another Korean with a background in banking, or a non-Korean with a background in banking, 53 percent of analysts chose Kim Jung Tae. A massive 79 percent of the fund managers preferred H&CB’s Kim as CEO, and none voted for the Kookmin CEO.
The results were similar to a survey of senior management at other Korean banks conducted by Chosun Ilbo, a Korean national daily newspaper. A member of H&CB’s IR team at the time admits these polls played a very influential role in the selection committee’s final decision on the choice of CEO in July, which saw Kim Jung Tae named president and CEO, while Kim Sang Hoon was to take the position of chairman after the completion of the merger.
Although these positions and the merger itself were not to become official until the shareholder meetings on September 29, it was now clear the new bank’s direction would be a further development of the policies Kim Jung Tae put in place at H&CB. Such questions of personality would be of little consequence, however, if the US SEC didn’t approve the new entity taking over H&CB’s listing on the NYSE.
But on September 10, after a few delays, the SEC finally gave approval to the US Gaap financial statements submitted in June, paving the way for the merged bank to take over the Big Board listing. Kookmin’s global depositary receipts (GDRs) were converted to American depositary receipts (ADRs) and merged with H&CB’s ADRs.
The SEC also gave the go-ahead to a proposal to issue further ADRs in the new Kookmin Bank, an option many analysts expect them to pursue early in 2002. ING is reportedly keen to increase its stake in the new bank to around the 10 percent level it had previously at H&CB. The joint ventures in investment trusts and insurance that the Dutch financial giant has with the new Kookmin are dependent on holding a minimum of 8 percent.
And eventually
With the last major hurdle out of the way, the shareholder meetings of the two banks on September 29 were a formality, though both were attended by the ubiquitous union protesters keen to maintain the pressure on management to stick to their promises on job cuts.
The merger became official on November 1 and the integration work that had been proceeding throughout much of 2001 kicked up a gear. As well as senior management appointments, the bank for the first time had a single team dealing with investor relations.
Plans for the first twelve months of the new bank’s life include, among other things, merging the existing investor relations resources of the two banks’ web sites into ‘a world-class cyber IR system’; starting to file financial reports on the SEC’s Edgar system; and ensuring that the banks gets Korea’s best credit rating from both Standard & Poor’s and Moody’s.
Only a few months into the plan, the last goal came a step closer to reality when S&P assigned the bank a long-term rating of BB-plus and B for short-term credit. Both ratings have a positive outlook. ‘The new ratings reflect the merged bank’s extremely strong franchise, particularly in the retail business,’ S&P said, describing Kookmin as ‘the largest and one of the few financially sound banks’ in South Korea.
