Gone are the days here when a company is considered too big to fail. While Daewoo Group, South Korea's second-largest conglomerate, was saved from bankruptcy just last month, it now has been ordered to sell all but six of its remaining 25 subsidiaries by the end of the year.
Analysts say the push to sell shows South Korea's determination to reform the companies responsible for triggering the 1997 economic crisis. While the chaebols - the family-controlled companies that led the rapid industrialization of the country - have been the beneficiaries of government largesse for decades, chaebol restructuring was a key condition placed on South Korea by the International Monetary Fund for the $58 billion bailout begun in December 1997.
It also represents a major opportunity for foreign businesses.
The American investment group Walid Alomar has already agreed to buy part of the subsidiary Daewoo Electronics for $3.2 billion. General Motors is in ongoing negotiations on a possible "strategic partnership" with Daewoo Motors.
GM may be particularly interested in factories here and in Poland. On the verge of membership to the European Union, Poland has a lower wage base and the potential to ship duty-free in Europe, say analysts.
Daewoo, which accounted for more than a tenth of South Korea's exports last year, has been the laggard in reform among South Korea's conglomerates. (Another chaebol, LG, last month agreed to sell half of its flat-screen TV business to the Netherlands' Royal Philips Electronics for $1.6 billion, making it the largest foreign investment in the country.) With some of its $47 billion in debt coming due, Daewoo was forced to ask for help from creditors last month, and the prospect of its bankruptcy led the government to form a quick bailout program.
Daewoo Chairman Kim Woo Choong has said he will step down later this year. Mr. Kim is one of the business legends of South Korea, rarely taking a day off in 32 years of building his chaebol into a $65 billion company. He is known for buying bankrupt companies, installing new management, and turning them around. Usually, the government wrote off debts and extended Kim fresh loans. "It's not a miracle ... to build up a [conglomerate when] the government keeps handing you companies on a platter," says Henry Morris at Industrial Research and Consulting in Seoul. "Kim "was not a corporate raider."
Like other chaebols, Daewoo was so accustomed to debt-fueled expansion that it acquired new businesses even at the height of South Korea's economic crisis. While chaebols were being admonished to slim down or bow to market forces, Daewoo bought bankrupt Ssangyong Motors.
In the current plan to stave off Daewoo's bankruptcy, Korean banks are rolling over $5.8 billion in debts and extending $3.3 billion in fresh loans in exchange for $8.7 billion in collateral from Daewoo. The chaebol's debt-to-equity ratio is thought to be over 500 percent, but no reliable figures are available. Last December the government asked companies to reduce debt ratios to 200 percent by late 1999.
Daewoo and the government have asked foreign bankers, which hold $9.9 billion in debt, to roll over loans without further collateral. Daewoo is presenting its plans to them Aug. 18.
The government would like to see Korean companies become more independent and competitive. "Without restructuring the corporate giants, the chaebol, the most problematic element in our economy, economic reforms cannot be completed," said President Kim Dae Jung in his Aug. 15 Liberation Day speech. Transparency, focus, better financial structure, and more legal responsibility for management have long been touted as the answer.
But an immediate problem for everyone involved with Daewoo will be time. "Daewoo is too complicated to sell quickly," says Mr. Morris. Foreign buyers will not want whole companies - just certain assets or individual factories. And then there's the web of loan guarantees between subsidiaries. That burden will likely be borne by the banks.
(c) Copyright 1999. The Christian Science Publishing Society