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Opinion

A well-timed assault on Hyundai

Billionaire US investor strikes just as South Korea readies for chaebol reform

Elliott Management's $1 billion-plus bet on Hyundai Motor rides the country's reform wave.

Few billionaires have the trolling skills of Paul Singer. In recent months, he dismissed Bitcoin as "one of the most brilliant scams in history," made life difficult for American media baron Rupert Murdoch and launched a proxy fight at Italy's Telecom Italia that turned heads across Europe.

But it is the 73-year-old's provocation in Asia that might have the greatest impact -- and the biggest payoff should the stars align for his New York hedge fund.

In early April, Singer's Elliott Management placed a $1 billion-plus bet on Hyundai Motor Group, South Korea's second-largest family-run conglomerate.

It was Elliott's second assault on a Korean chaebol, after its 2015 tangle with Samsung, the biggest such business grouping. That saga ended badly for Singer. The activist fund warned Samsung's opaque plan to merge two group companies would squander shareholder value, but failed to stop it.

Since then, the landscape has shifted in ways that lend urgency to Elliott's effort to prod Hyundai Motor to raise its game. In 2017, Samsung's de facto leader, Lee Jae-young, was jailed over his alleged role in a bribery scandal that saw former President Park Geun-hye impeached. Lee was released in February after one year; Park has since been sentenced to 24 years in prison.

The public backlash has chaebols on the defensive as rarely before. President Moon Jae-in seeks to harness this anger. Since his term began in May 2017, Moon has been preoccupied with North Korea and U.S. President Donald Trump's trade bluster. Yet he has not given up on his long-cherished plans to cut the chaebol down to size. One of his first acts as president in June 2017 was hiring Kim Sang-jo, known as the "chaebol sniper," as Fair Trade Commission chairman. The FTC brings anti-monopoly and price-fixing cases. But earlier this month, officials advised five leading chaebols -- Samsung, Hyundai Motor and Lotte Group among them -- to unwind cross-shareholding structures. It is a crucial step aimed at curbing intra-group transactions.

To Scott Seaman of Eurasia Group, such moves are "evidence that Moon's government remains serious about promoting corporate governance reform, reining in chaebol excesses, and otherwise working to reduce the 'Korea discount' that can lower investor valuations of stocks."

Much more remains to be done, though. Taming chaebol excesses and illegal business practices is important, but so is reducing and controlling their dominant presence in the economy. Moon must roll up his sleeves to add teeth to antitrust enforcement, penalize unproductive cross-shareholdings, mandate more outside directors on boards, offer tax incentives for entrepreneurs and prod cash-hoarding companies to fatten paychecks and invest.

These giants have a complicated place in the Korean psyche. On the one hand, chaebols powered Korea's rise from the ashes of the Korean War in the early 1950s into the ranks of the top 12 economies. The ubiquity of flashy Samsung gadgets and Hyundai vehicles around the globe are sources of pride.

On the other, the chaebol system makes Korea a borderline oligarch economy. The vast monopolies enjoyed by a handful of companies impedes the development of a vibrant small-to-medium-size enterprise sector. The status quo focuses Korea Inc. more on protecting wealth than generating new energy that boosts wages and reduces the 11.6% youth unemployment rate.

The first real push to rein in chaebols came after the 1997 Asian financial crisis, which hit South Korea particularly hard. In the years since, though, the chaebol craftily found ways to evade new regulations and push their tentacles ever deeper into the economy.

Paul Singer   © CNBC/NBCU Photo Bank/Getty Images

In 2013, Park entered office pledging to "democratize" the economy away from concentrated control. Instead, she got co-opted by a system she was elected to smash. In May 2017, Moon rode the chaebol-reform wave into office. And now, that effort may be aided indirectly by Singer's wager on Hyundai Motor.

Singer's Samsung experience grew ugly at times. Back then, his efforts to stop Samsung's de facto holding company, Cheil Industries, from buying Samsung C&T in July 2015 at a below-market price angered many. Some saw echoes of how Western hedge funds swooped in to buy Korean assets on the cheap in 1997 and 1998. Others alleged more sinister motives, including a media outlet or two warning about the "Jews of Wall Street" intruding on the nation.

Yet Singer is shining a timely spotlight on a big problem: how Korea Inc. answers to no one, damaging national competitiveness. Rather than circle the wagons, Moon would be wise to welcome an intrusion that dovetails with efforts to internationalize chaebols -- and public anger.

The controlling families' sense of entitlement that colors perceptions of chaebols is all over the front pages. The early release of Samsung's Lee raised eyebrows. So has a family feud at Lotte Group that has two brothers brawling over who replaces their 95-year-old father. And then there is the family at the center of the "nut gate" controversy at Korean Air. The reference is to a 2014 incident at New York's John F. Kennedy Airport where one daughter of Korean Air Chairman Cho Yang-ho was so enraged by the peanuts she was served that she had the plane return to the boarding gate. In April, another Cho daughter was fired for allegedly throwing water in the face of an advertising executive.

Hedge funds like Elliott do not act altruistically. This is about making money, pure and simple. Elliott's push to get Telecom Italia to spin off units, for example, is about profits. So is taking a stake in Sky Plc, just as Rupert Murdoch's 21st Century Fox was fine-tuning its bid for the European pay-TV company. And while some analysts doubt Elliott will have more luck with Hyundai Motor than Samsung, the odds of success are higher. That is partly because Elliott makes a great case.

Singer and his team are targeting the right pressure points, not just with Hyundai Motor but with Korea Inc. The wager here is on interlocking companies -- Hyundai Motor, Kia Motors and parts maker Hyundai Mobis. Last month, Hyundai Motor unveiled  rather limited and vague plans to streamline its ownership structure. It centers on a $9.9 billion merger of two units.

Elliott stepped into the fray to demand a "more detailed roadmap as to how it will improve corporate governance, optimize balance sheets, and enhance capital returns at each of the companies." Granted, Elliott may be overly ambitious in his demand for a new holding-company structure, a clearer dividend policy, and for the Seoul-based operation to return roughly $11 billion of excess cash to shareholders and add more independent directors. Any of these concessions, though, would be a step forward.

Timing is everything in investing, of course. Elliott's gambit comes just as Hyundai patriarch Chung Mong-koo, 80, angles to turn control over to son Chung Eui-sun. This kind of generational swap is frequent in Korea these days. Talk about a pressure point -- Singer strikes just as Hyundai Motor plots a leadership change and a new course for the next 20 years.

Korea, too. The activism comes at a moment when Moon seeks to regain the reformist momentum. Public opinion is behind his push to modernize business practices and prod chaebols to care more about shareholders than family loyalty. If Singer's trolling helps sharpen the argument, then the end justifies the means.

William Pesek is a Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He has written for Bloomberg and Barron's.

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