Case Study: Chaebol

South Korea’s antitrust watchdog has ordered Hyundai Motor and sister company Kia Motors to sell part of their stakes in affiliate Hyundai Steel by Thursday to comply with the country’s law against newly formed or expanded cross-shareholdings. The Fair Trade Commission said on Wednesday the duo should sell down their stake in one another to weaken “circular shareholdings” that were built up by the July merger of Hyundai Steel with fellow steel company Hyundai Hysco. As an option, the regulator recommended Hyundai and Kia sell their combined 6.6 per cent stake, worth Won461bn ($393m), in the merged entity that trades under the Hyundai Steel name. South Korean regulators, facing growing public complaints over chaebols’ opaque ownership structures, have pledged to crack down on newly formed cross-shareholdings, through which chaebol founding families control their vast business empires despite having only direct minority stakes in key units. Analysts expect regulators to step up checks on chaebols for any violations of the law that took effect in July last year banning the creation or strengthening of circular shareholdings. “Chaebol companies will pay more attention to the issue as more mergers and acquisitions are expected as part of their business realignment in the succession process,” said Park Ju-geun, head of corporate information provider CEO Score. The FTC’s move against Hyundai comes after the regulator told Samsung Group this week to reduce cross-shareholdings that were expanded by a controversial merger of Samsung C&T and Cheil Industries in September. To comply, battery-maker Samsung SDI said it would sell its 2.6 per cent stake worth about Won727.5bn in the merged Samsung C&T entity by the end of March, one of the options advised by the FTC. Hyundai and Kia hold 11 per cent and 20 per cent, respectively, of Hyundai Steel. Hyundai said it had asked the regulator to extend the deadline, given the difficulty of selling the stakes at short notice. News of the FTC order sent shares of Hyundai Steel down 4.7 per cent on Wednesday, heading for their biggest decline in almost five months. Kia Motors fell 1.5 per cent, versus a 0.3 per cent decline in the benchmark Kospi Composite index. Hyundai Motor was flat. Mr Park said the FTC order against Hyundai would not have a big impact on Hyundai’s founding family’s control over key units as Hyundai Steel was not at the center of the group’s circular shareholdings. Hyundai Mobis, which makes automotive parts, is a key node in the group’s complex ownership structure because it holds 20.8 per cent of Hyundai Motor.

Questions:

1- What is a conglomerate and how does it relate to a Keiretsu and to a Chaebol?

2- What are good examples of cross-shareholdings from the case?

3- What is the main goal of minimizing cross-shareholdings according to the article?

4- What is Hyundai doing according to the case when it comes to cross-shareholding?

5- How much percent of the shares does Hyundai Mobis owns of the Hyundai Motor Company?