Industrial capital and financial capital are two wings that drive the economy. For industries to grow, a strong financial foundation is needed, and for finance to profit, industries must thrive. Traditionally, industrial capital has been dominant in South Korea. While there are many globally renowned companies like Seosung Electronics and Eunsung Cars, it’s fair to say there are no globally famous financial companies.
The power held by finance is enormous, comparable to that of industries. If asked where the wealthiest company in South Korea is, most would point to Seosung Electronics. However, in reality, the largest capital holder is the National Pension Service.
Currently, the National Pension Service’s assets are around 600 trillion won. This massive institution, fueled by contributions from individuals, has created an entity exceeding twice the market capitalization of Seosung Electronics.
The National Pension Service invests its substantial capital not only in domestic stocks, bonds, and real estate but also globally. “Norway’s sovereign wealth fund has over 1,000 trillion in capital,” Taekgyu exclaimed in surprise.
Compared to the vast amounts of money globally, our holdings may seem insignificant. Sovereign wealth funds operated by governments and private equity funds managed by individuals control trillions to hundreds of trillions.
Financial capital has swallowed numerous companies with money. Recognizable franchises, supermarkets, insurance companies, and savings banks are often owned by private equity funds.
I read the information given by Hyunjoo Noona. X Cop is an unlisted company wholly owned by the U.S. Tyco Group. After 15 years of acquisition, they’re putting it up for sale again. The sale was already assigned to Morgan Stanley long ago. Even if sold for 2.5 trillion won, Tyco Group would profit 2 trillion won. Considering management advisory fees and dividends received in the meantime, the profit would be even greater.
Even before the start of bidding, Tyco Group announced through interviews that X Cop is worth over 3 trillion and they wouldn’t sell at a bargain, no matter how urgent the need for money.
As a response, the large companies and private equity funds hoping to acquire the company reacted by saying, “Three trillion is an unreasonable amount. Two trillion is still expensive. We would rather not participate in the bidding process.”
Of course, both sides are just bluffing.
Typo Group needs cash immediately, while large companies and private equity funds want to acquire X Cop.
The important thing is how much it is worth…
For listed companies, their value is already evaluated in the market (not always accurate, though). But for unlisted companies, evaluating their value is not easy.
According to the financial statements, X Cop’s equity is around 400 billion. It includes deposits, land, buildings, vehicles, equipment, etc.
The value of equity does not always match the books. Deposits may have the same actual value, but everything else can differ.
Bonds or notes may not guarantee the full amount at maturity, and various equipment, even though recorded at a high value in the books, may fetch a low price when sold.
Even if the equity is considered, the value of goodwill can vary greatly depending on how it is calculated, from 10% to more than double.
If X Cop is valued at 2.5 trillion won, excluding the 400 billion equity, the remaining 2.1 trillion is the value of goodwill.
This includes current customers, revenue, operating profit, future growth prospects, etc.
X Cop’s main business areas are security, security systems development and sales, and building management. The largest revenue comes from security services provided to schools, government offices, stores, homes, apartments, shopping malls, etc.
Sometimes in movies, we see scenes where hundreds of monitors are being watched in a situation room, communicating via radios.
While the industry related to corporate demand is showing growth trends, there are also significant negative factors.
As I skim through the data, I sigh.
“This is really complicated.”
The selling side wants to sell as expensively as possible, while the buying side wants to buy as cheaply as possible.
The price is determined at the point where both sides’ understanding meets.
The problem is where that point is.
Although I may be the CEO of OTK Company with assets exceeding tens of trillion, in reality, I am just a young man in his mid-20s who has not even graduated from college.
“CEO or M&A experts running a private equity fund are not to be compared with.” Taek-gyu said. “Instead, you have a special ability that they don’t, right?”
“I’m grateful to have that at least.”
How much do you think they are considering elsewhere? 2 trillion? 3 trillion? Or even more?
If I carry around about 5 trillion and say, ‘I’ll buy it,’ the problem will easily be resolved. However, if I do that, it will only end up benefiting Tyco Group and the selling company, Morgan Stanley.
“It certifies that you are indeed a global sucker.”
“Do we really need to go that far to get our hands on it?”
“We don’t, so I’m still undecided.”
From our perspective, X Cop is a company that we don’t mind having, but we won’t easily let it go to Eunsung Cha.
Ultimately, the strategy is divided into two. “Either we acquire at a fair price, or make it so that Eunsung Cha acquires at a very high price.”
***
“At 8 p.m.”
We had a separate gathering with Senior Sang-yeop after a long time.
The menu was sirloin, which Senior Sang-yeop likes. Due to the CEO’s taste, K Company employees were rotating around the Gangnam area sirloin restaurant every team dinner.
Now is probably the time when the conversation of ‘Let’s have pork belly this time’ will come up among the staff.
We were guided to a private room that we had reserved in advance. This time, Senior Gi-hong was also with us.
Did he nag you to bring him along a bit?
As the staff grilled the meat, beer arrived. Senior Gi-hong politely raised his beer and said,
“I’ll pour you a drink, CEO.”
“Even though it’s formal, just feel free to speak up.”
Senior Gi-hong looked at me.
“Is, is that so?”
Senior Sang-yeop loosened his tie and said,
“Do as Jin-hoo says.”
“Got it!”
I remembered the days when I used to gain knowledge with Senior Gi-hong every day in my junior years. But now, time has passed and I find myself buying beef for Senior Gi-hong with a corporate card.
After clinking glasses a few times, Gi-hong, seemingly starting to relax, returned to his usual smiling face.
“If this hadn’t happened, were you planning to keep it hidden forever?”
“Well…”
It was just a matter of time, it would eventually be revealed. However, we probably wouldn’t have publicly announced it ourselves.
“Still, it’s a bit disappointing. Couldn’t you have at least given me a hint?”
“…”
If that were the case, wouldn’t the entire nation have found out before the press conference?
We started serious discussions while eating the meat. When I shared what I heard from Noona Hyun-joo, Senior Sang-yeop asked,
“The X Cop sale? Why is that?”
“Interest has piqued a bit.”
Senior Gi-hong quickly remarked, “The companies participating now are no joke. Among the major corporations are Eunsung Group and Retech Group, and among the private equity funds are KRR, TM Consortium, Citigroup, Golden Gate PIA… Not to mention the world’s largest private equity fund, Canline Group, and Korea’s largest RCK Bros. Looking at the list of participants, it’s the most spectacular in the Korean M&A market.”
“You seem to know a lot,” I said, wearing a surprised expression, to which Senior Gi-hong chuckled.
“I’ve always been quite interested in that area. But I heard RCK Bros recently acquired a stake in BuyOne, and they don’t seem to have much financial strength.”
BuyOne is a beverage company jointly established by a Swiss company, Nestle, and a Chinese company for Nestle’s expansion into China. Nestle withdrew from the Chinese market, selling their 49% stake, which RCK Bros acquired not long ago, for 12 billion yuan, equivalent to around 2 trillion Korean won.
Senior Sang-yeop remarked, “Temasek is said to step in as an anchor LP again.”
When private equity funds create investment funds for fundraising purposes, wealthy individuals, pension funds, sovereign wealth funds, financial institutions, etc., invest the needed funds. These investors are called LPs (Limited Partners), with the main LP being referred to as an anchor LP.
Gi-hong nodded, “They must be planning to support from behind again.”
“That’s how much they trust Chairman Ryu Cheol-gyun.”
Temasek is a sovereign wealth fund owned 100% by the Singapore Ministry of Finance and has had a cooperative relationship with RCK Bros since its inception.
“I really wanted to join RCK Bros before.”
Since his school days, Gi-hong had a keen interest in M&A and private equity funds. Despite joining KYB Investment Securities, he resigned due to mismatched responsibilities and aimed for a position at RCK Bros, which he unsuccessfully obtained. After wandering as an unemployed for a while, he later joined K Company.
“Are you considering changing jobs? Shall I write you a recommendation letter?”
In my words, Senior Gi-hong looked serious.
“What upsetting words are you saying, sir? I will dig deep into K Company.”
With words like these, in the end, it turned out well.
“From the viewpoint of Typos Group, they had to sell due to fraudulent accounting, but it was good timing. It will probably be more successful than expected.”
The success of the sale depends on the market sentiment. During a boom, people are willing to buy even at a premium, while during a downturn, it’s hard to sell even at a low price.
Though not distinctly felt, the global economy has entered a period of prosperity recently.
Despite some shocking events like Brexit or Ronald’s election (?), it’s not enough to slow down the growth trend.
With the emergence of new industries, new startups continue to emerge, and global corporations have seen an increase in revenue and profits.
The financial industry naturally feels this prosperity first. Stock prices are rising, IPOs are happening, and financial companies are making huge profits.
Thanks to this, the financial sector has been hosting money parties since last year. CEOs of prominent financial companies like JP Morgan, Moody’s, Morgan Stanley, Citigroup, Deutsche Bank, Rothschild, Macquarie, have been pocketing multimillion-dollar salaries through incentives and stock options.
The market is overflowing with liquid funds seeking investment opportunities. Some of these funds flow into private equity funds in pursuit of high returns.
“Most private equity funds probably have funds filled to the brim through Blind Funds,” Tae-gyu asked.
“What is a Blind Fund?”
“It’s raising funds without setting an investment target initially.”
In other words, it entrusts the judgment of where to invest solely to the management.
As investing wrongly can lead to significant losses, unless they are well-known private equity funds, one may not have the nerve to try this method.
“What do you think, Senior? Where is the highest possibility?”
“I think Eunsung Cha is the most promising, right? Canline Group and RCK Bros are also worth considering. Canline Group even replaced the Korean representative and reorganized the front line.”
Either way, any choice wouldn’t be unreasonable.
“Wow, it’s a real battle of the stars.
Somehow thinking it will be tough makes me even more eager to give it a try. And even if I fail, it doesn’t really matter.
I got straight to the point.
“I’m thinking of participating in the acquisition battle with OTK Company.”
“What?”
Senior Sang-yeop and Gi-hong were surprised at my words.
“Are you serious?”
“Yes. Having a security company would be great, too. I’m not keen on entrusting the most important issues to other companies.”
Gi-hong remarked, “Do you think the security sector will grow in the future?”
“I don’t know if the security sector will grow, but I’m sure we will grow.”
As the sizes of companies holding shares increase, the demand for security will also continue to rise. Moreover, we have holdings in various companies both domestically and abroad. Depending on our determination, it’s also possible to expand into international markets.
After a moment of thought, Senior Sang-yeop nodded.
“As long as the price is right, it should be fine. But there are too many strong candidates. If we make a mistake, the acquisition cost could skyrocket.”
“Don’t worry. If it doesn’t feel right, we’ll pull out.”
“How about due diligence and bidding? We don’t have experts in that area.”
I had already thought about that issue.
Sipping my beer, I said, “We’ll form a Golden Gate Consortium.”
***
The next day,
I met with Hyun-joo and Ellie along with Taek-gyu and Henry to discuss forming a consortium. We finalized the conditions there.
The stake is 7:3. If the acquisition is successful, OTK Company will receive 80% of the acquisition funds from Golden Gate on a first-priority loan basis.
Considering the value of OTK Company, there is no concern about detaching first-priority loans. It’s a good deal for the lending party to get a firm grip on the market.
Of course, this is only if the acquisition goes through. If it fails, we’ll just end up losing the cost of the due diligence.
***
Rumors spread rapidly throughout the business and finance industries that OTK Company had entered the acquisition race for X Cop in partnership with Golden Gate.
“Are they looking to absorb X Cop as a subsidiary?”
However, opinions differed among those who knew about the ominous history between Kang Jin-hoo and Eunsung-cha.
“Is this to feed Eunsung-cha’s ambitions?”
The crucial point was that OTK Company had nearly succeeded in all of its investments up to now.
As competing companies anxiously buzzed about the emergence of a strong competitor, the deadline for the preliminary bidding was approaching.
Gogo