Poison pills: one more reason to avoid Korea

Korea is already famous as one of the least shareholder-friendly markets. Now investors' rights look set to take another blow, as the government mulls a daft plan to allow firms to set up 'poison pill' defences.

Cris Sholto Heaton
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Korea is already famous as one of the least shareholder-friendly markets. Now investors' rights look set to take another blow, as the government mulls a daft plan to allow firms to set up 'poison pill' defences.

The 'poison pill' tactic allows a company to fight off hostile takeovers by giving existing shareholders the right to buy large numbers of new shares cheaply. The effect is to dilute hugely any stake that a bidder may try to build up.

The proposal is explicitly aimed at stopping foreign takeovers - the Korean authorities generally dislike the idea of foreigners controlling local firms.

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Take US private equity firm Lone Star, which picked up a controlling stake in Korea Exchange Bank in the aftermath of the 1997-1998 Asian financial crisis. Last year, Lone Star attempted to sell the stake to HSBC. The deal would never happen, I heard at the time. Sure enough, HSBC eventually gave up after regulators kept delaying approval. Only a Korean buyer - probably Kookmin Bank - is ever likely to get clearance.

But aside from this clumsy attempt to lock out foreigners, there are other reasons for not investing in Korea. One major reason is the contempt that Korea's chaebols have for the interests of their shareholders.

Chaebols are sprawling conglomerates with multiple-listed subsidiaries and cross-shareholdings. To illustrate how large they can be, Korea has several ETFs devoted to investing in individual chaebols (including Samsung, which accounts for 20% of the Kospi benchmark index).

The complex structure of chaebols has let them shrug off any pressure to deliver better returns for shareholders, such as dividends visible to the naked eye. Promises of reform have always rung hollow, and poison pills would just confirm that.

Add in the country's other negatives, such as high debt and the risks from North Korea, and the infamous 'Korean discount' between local share valuations and the rest of Asia is fully justified.

Korea remains a market to avoid.

Cris Sholto Heaton
Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.

 

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