An Investor Who Sees The Future

The fact that Chairman Im Jin-yong is coming to the U.S. has not been reported in the media.

What reason could someone so busy with group management have for suddenly appearing here?

The issue of equity exchange can be discussed after I return to Korea. However, the reason for bringing it up at this gathering is that now, while struggling with mass production, is the perfect timing… In other words, from the perspective of Seosung Electronics, it is determined to be the best opportunity to acquire CarOS shares at the lowest price.

So, after pointing out the problems with mass production, they likely bring up the equity exchange while pretending to make concessions.

If I had suddenly received a proposal, I might have been flustered and dragged along throughout the negotiations, but thanks to the foresight, I had some time to think.

I mentioned that we could supply software to other companies, but that also has its issues. If cars equipped with the same autonomous driving technology are released, who would buy our cars?

Once again, Chairman Im pointed that out.

“If that happens, the differentiation of CarOS cars will disappear.”

“However, it would allow us to quickly seize the autonomous driving market.”

“Manufacturers developing their own technologies won’t adopt CarOS software even if it means giving up their own technology.”

“That may be true for companies with some technological capability, but the situation is different for those who are already behind in the competition.”

Once software becomes dependent, it’s hard to break free.

Therefore, brands like Mercedes, BMW, and Nikola are likely to reject our offer even if we provide the software for free. However, smaller companies with less scale and technology would willingly embrace the hand we extend.

Chairman Im looked troubled.

“I acknowledge that CarOS has high technological capability and growth potential. The ratio calculated considering that is 1 to 4. 150 trillion is out of the question.”

That is true.

However, while the value of CarOS is important, what’s more crucial is how much value CarOS holds for Seosung Electronics.

The reason for paying a premium above the market price in M&A is to expect synergies from it.

Seosung Electronics paid a 30 percent premium on the stock price during the acquisition of Herman.

Herman’s value was estimated at 6 trillion when operating independently, but it is believed to exceed 9 trillion since integrating into the Seosung Electronics group.

What will the driver do while the car drives itself?

They will likely engage in other leisure activities like searching for news, watching movies, listening to music, or resting.

Since the self-driving car is a connected car equipped with GPS and various communication devices, Seosung Electronics is naturally considering integration with its smartphones for in-car entertainment and external control.

Seosung Electronics is the world’s number one smartphone seller, selling over 300 million units annually. However, they are fiercely competing in the premium market against brands like Enple and facing intense pressure from Chinese companies in the mid-range market.

For Seosung Electronics to maintain its dominance in the smartphone market, it needs to offer differentiated value compared to other companies, and autonomous vehicles will play a crucial role in this.

Looking back, it was also Chairman Im Jin-yong who extended his hand first during the Seosung SB collaboration. This is because there is much to gain from our partnership.

In the end, it’s disappointing for them, isn’t it?

“For the continued cooperation between both companies, wouldn’t it be better for CarOS to hold as many shares of Seosung Electronics as possible?”

That way, they would be more generous with the volume.

“Even so, a 1:2 ratio is impossible. Shareholders will never agree.”

While a 1:4 ratio might be considered a managerial discretion, a 1:2 ratio could lead to accusations of breach of duty.

I have thought of a way regarding that.

“Isn’t it better to decide on the future value in the future? How about offering a right of first refusal to exchange shares in a year?”

“……”

Chairman Im Jin-yong showed an expression of having received a solid blow.

***

The negotiation went on for quite a while.

What started as a discussion about the equity swap ratio expanded to various conditions across the entire business. I may fall short in overall management capability, but when it comes to equity negotiations, I’m no slouch.

I’ve closely observed these processes while investing in startups, either negotiating myself or watching Hyunjoo negotiate.

After several hours of discussions, we aligned our opinions.

We first agreed to exchange 3% of Seosung Electronics for 10.5% of CarOS. Additionally, we decided to exchange another 7% of Seosung Electronics for 14% of CarOS a year later.

However, Seosung Electronics secured a buyback option. After a year, based on the stock trend of Seosung and the valuation of CarOS, if the ratio seems unfavorable, they can choose not to exercise the option or partially do so. It’s essentially a call option.

Several conditions were added.

Since the goal was to strengthen the partnership, there was a ban on selling shares for ten years, priority allocation of production volume to Seosung Electronics, preferential and continuous cooperation on comprehensive vehicle solutions including autonomous driving, telematics, and in-car entertainment, and a right of first refusal for Seosung in case of future sales of CarOS shares.

Once the negotiations on the contract details were finished, a lawyer from Seosung’s legal team brought in a contract prepared in the existing format.

Since OTK Company has a U.S. corporation, the contract was drafted in both Korean and English.

On our side, Ellie reviewed the contract on my behalf.

Ellie, having primarily dealt with M&A alongside Hyunjoo at the Golden Gate Asia branch, is an expert in this field. She meticulously examined every detail without overlooking a single word.

In contracts, a single word or comma can change the meaning.

For instance, “principal guarantee” in an investment contract means a 100% guarantee of the principal, while “principal preservation” implies an effort to protect the principal but does not hold the party responsible for losses.

Ellie requested modifications for a few phrases and words, and the lawyer from Seosung accepted them.

After both lawyers completed their reviews of the contract, Chairman Im Jinyong and I each provided our electronic signatures.

The issue of handling treasury stock must be resolved through a board resolution. I also need to obtain the consent of CarOS management for conditions beyond the equity exchange. Thus, the contract will take effect afterward.

There should be no issues on our side, and since Chairman Im Jinyong has solid control, the board will likely pass the resolution without problems.

Once the share exchange is executed, Seosung Electronics will immediately become the second-largest shareholder of CarOS, holding 10.5% of its shares. It’s uncertain whether they will exercise the purchase request later, but this alone marks the realization of the predictions.

If, one year later, Seosung Electronics exercises the purchase request, they will hold 24.5% of CarOS, while CarOS will hold 10% of Seosung Electronics.

CarOS will rise to become the largest shareholder of Seosung Electronics, surpassing the National Pension Service!

Chairman Im Jin-yong sighed as he spoke.

“Now, persuading the shareholders will be our task.”

While the board of directors is scarcely more than a rubber stamp, the shareholders are different.

Chairman Im’s stake in Seosung Electronics is less than 3%. Even when adding up shares from affiliates that hold power, it amounts to about 20%.

In contrast, the Korean National Pension has over 9%, and foreign pension funds and firms hold 53%.

Major shareholders will need to meet and explain the situation to convince others.

For now, the shares they are exchanging amount to only 3%. Although the exchange ratio of 1 to 3.5 may seem like a loss, considering the various conditions tied to the contract, they are likely to be convinced.

They will probably think a 1 to 2 ratio is unreasonable, but that will be decided when the time comes.

If, at that point, it’s determined that CarOS’s value does not reach half of Seosung Electronics’s value, there’s no obligation to exercise the purchase request.

I thought of the largest shareholder of Seosung Electronics.

“The National Pension will likely oppose, right?”

Eunsung Motor and Park Si-hyeong will certainly not welcome the merger of CarOS and Seosung Electronics.

“Given the aftermath of the savings bank crisis, their influence over the National Pension Service will be diminished. They’ll also be busy fending off political attacks from the opposition.”

Regardless, the collusion between politics and business is an old practice, and few people, politicians or bureaucrats, are completely free from Seosung Group’s influence. Probably, there are still a few individuals related to Seosung Group within the National Pension Service.

Of course, if the president issues a strong directive, it might change things, but as I just mentioned, it’s not that kind of situation now.

“If we can get the support of other shareholders, it won’t be easy for the National Pension to find legitimate grounds for opposition.”

“You’ve already thought about the future developments.”

“You’re quite confident.”

Chairman Im Jin-yong smiled wryly.

“Still, I should go and express my regrets. I envy you, being a junior who doesn’t have to worry about shareholders at times like this.”

“……”

What a fuss.

“We’re going to invest in facilities for immediate mass production. We’ve already allocated quantities for AP and semiconductors to the Austin and Hwaseong plants.”

I burst into laughter.

“You’ve prepared everything.”

We talked in a relaxed atmosphere.

Chairman Im Jin-yong opened up about his thoughts.

“As you know, the two main pillars of Seosung Electronics are smartphones and semiconductors. However, the growth of smartphones is slowly tapering off, and the current semiconductor boom will eventually end. Both sectors face significant challenges from China.”

Chinese smartphones are entering the global market with excellent cost-performance and a vast domestic market.

Moreover, China has announced a national semiconductor initiative, making substantial investments.

While the technology gap is still significant and not an immediate threat, who knows what will happen in ten years?

Thinking back, who could have imagined that Chinese companies would grow their technological capabilities to this extent just ten years ago?

“My grandfather started with semiconductors, and my father nurtured the smartphone business. Preparing for what comes next is my responsibility.”

“So you’ve chosen the automotive electronics industry.”

Chairman Im Jin-yong nodded.

“It’s a large market with rapid development.”

Autonomous driving is at the core of the Fourth Industrial Revolution.

Not only automobile companies, but also electronics, IT, and ride-sharing companies from around the world are entering the market and competing fiercely.

BMW, Audi, Mercedes, Toyota, Hyundai, Nvidia, Nikola, NPL, Gubl, and Iver, among others.

Level 3 has already been commercialized, and some companies are nearing completion of Level 4. Leading companies like Gubl and Iver have succeeded in driving autonomously for thousands of kilometers.

However, being close and being complete are two different things. Completing the technology and mass production are also different matters.

“Most companies are diving into technology development, but this situation won’t last long. In a few years, the market will be restructured around two or three companies with the highest level of completion, similar to how the smartphone OS market consolidated with NPL’s NOS and Gubl’s Andromeda in just a few years.”

I nodded.

“In a few years, other companies will catch up to CarOS’ technological prowess. But if they release mass-production vehicles first, the technology gap will widen.”

Quality guarantees quantity.

When China entered the high-speed rail business, everyone laughed. In reality, China demonstrated operational inexperience and caused numerous accidents.

However, a few years later, it succeeded in winning the contract for California’s high-speed rail project, shocking everyone.

That’s the power of the Chinese domestic market.

China caught up by operating 100 routes in one year, accumulating the expertise that other countries built over ten years with ten routes.

“Now that the contract is over, I can speak honestly: I believe CarOS will establish a monopoly, not just two or three companies.”

Once they release mass-production vehicles, while other companies collect data with dozens or hundreds of experimental cars, CarOS will collect various data with millions of cars.

Based on that data, they will improve the system and release better products.

“Will the cars sell well?”

I do feel some anxiety deep down. If the new car fails, not only CarOS but also OTK Company will suffer significant damage.

In response to my question, Chairman Im Jin-yong simply replied.

“You should worry more about how much you can produce rather than how much will sell.”

I laughed out loud.

After the conversation ended, he stood up from his seat.

“Well then, I’ll see you at the presentation.”

“Yes.”

As I looked out the window, I realized the sun had already set. Noticing it, I remembered that I had skipped lunch. Suddenly, a wave of hunger hit me.

I was about to suggest we go eat, but Ellie was already staring at me intently with her chin resting on her hands.

“What’s wrong?”

“You’re just too cool.”

“Excuse me?”

Ellie narrowed her eyes playfully.

“Negotiating with the chairman of Seosung Group without backing down at all and getting what you wanted. Jinhoo, you were really impressive today, weren’t you?”

I humbly replied, “It’s not always like this; remember it well for today.”