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M&As solid growth option
May, 10th 2010

Interest in mergers and acquisitions is rising among Korean companies, who view M&A activity as a way to jump-start their sluggish growth.

Sales, which rose more than 15 percent before the 1997 currency crisis, have stalled since then, with growth hovering around 7.4 percent from 1998 to 2008. Given their lackluster performance, Korean companies need to find breakthroughs that can revitalize their sales growth.

Accordingly, a survey of Korean executives conducted by the Samsung Economic Research Institute found that 68 percent of 288 respondents are planning M&As, a reflection of the high interest in business deals from the Korean corporate community.

Still, up to now, M&A activity has not matched the recent interest. Koreas announced M&A volume is quite small in proportion to its economic size as the 10th largest economy on a per capita basis. As of 2008, Korea ranked 32nd in the number of announced M&A deals and 38th in the number of M&As abroad, according to the Korea Economic Research Institute, indicating that Korean companies have thus far relied on organic growth.

According to an analysis of Fortune Global 500 companies, 57.7 percent executed at least one M&A deal worth more than $100 million during the past 10 years, and companies that opted for M&As as a growth strategy were more likely to enjoy sustained growth. What is notable is that companies that remained on the Fortune Global 500 list executed more than three times as many M&As as those that fell off the list.

To attain the desired outcomes from M&As, it is important to identify critical issues and risk factors of various types of deals and to establish different strategies.

For example, in the horizontal expansion type, which looks to realize economies of scale by acquiring a competitor, companies should try to avoid so-called Deal Fever, in which businesses become so excited about completing an acquisition that they skimp on due diligence.

Since a horizontal deal involves acquiring a competitor, it is highly likely that CEOs use it to expand their companys size rather to improve corporate value.

To prevent the side effects of a horizontal expansion deal, it is important to keep CEOs enthusiasm in check by establishing a decision-making system - which reflects not only opinions of top management but also opinions of managers of each business line - and to set a walk-away price in advance before M&A negotiations begin.

In case of large M&A cases, post-merger integration may become a critical issue. This can be resolved by establishing a clean team before the deal is officially completed and setting up strategies for securing synergies from M&As.

Other M&A types include: product expansion to broaden lines of products/services; competency reinforcement, which supplements or reinforces competency by acquiring core functions such as technologies, brands and production facilities; vertical integration, which vertically integrates an entire business operation process; and business diversification in a non-related industry, which involves a new business field outside of core operations.

Companies need to note that in order to get the desired outcome from an M&A deal, it is crucial to identify possible issues and risk factors of these types of agreements and to approach them with different strategies.

While M&As are gaining attention as a breakthrough to slow growth, pursuing M&As only for the sake of bulking up the size of businesses should be avoided.

What is important is to find a suitable M&A type and accumulate M&A experience by executing even a small-scale M&A deal. As shown in the SERI survey results, a majority of respondents answered that they are banking on an M&A to open a new line of business.

Since this type of M&A deal leaves little room for companies to apply their core competencies, they need to understand the risks of the acquisition and minimize the uncertainty of taking on a new business by taking a gradual approach to advancing into the venture.

In addition, companies should set up their own M&A principles and simplify their overall decision-making structure by minimizing the steps of approval or report procedures.

In this way, the pace of execution, which is the key to success in M&A deals, can be quickened.

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