[Inside Chodong] How to Avoid the "Winner's Curse" in the HMM Acquisition Battle

"After the exit (investment recovery), the company must perform better."

The words of a private equity fund manager I recently met made me reconsider the relationship between capital and industry. Listening to him, I recalled the recent hot topic in the M&A market: the HMM acquisition battle. Considering the weight and role of the company HMM holds in the national economy and industry, I thought this was a maxim that the sellers, KDB Industrial Bank and Korea Ocean Business Corporation, should repeatedly reflect on throughout the entire M&A process.

The HMM acquisition battle, involving about 7.4 trillion KRW of public funds, is in full swing. It has narrowed down to a three-way competition among LX, Harim, and Dongwon Group, with the sale price mentioned to be around 5 trillion KRW including the management premium. HMM, which once required government assistance as a struggling company, has transformed into a top-tier company through the shipping industry boom. Its market capitalization has reached around 8 trillion KRW, making it solid enough for the government and the Industrial Bank to argue for maximizing profits beyond the invested amount.

As the HMM acquisition battle officially begins, the HMM headquarters located in Park One Tower, Yeouido. Photo by Jo Yongjun jun21@

However, the market views this acquisition battle with concern. The so-called "winner's curse" is the worry. The winner's curse refers to the situation where the actual benefit gained after fierce competition turns out to be less than the cost, resulting in a loss rather than a gain. This often occurs in M&A processes. It is difficult for both sellers and buyers to accurately assess the objective value of the target company.

If the company had substitutes, there would be less concern about the occurrence of the "winner's curse." But HMM is not such a company. It is the largest domestic shipping company and the only nationally flagged global deep-sea shipping company. Especially since this company was barely saved with taxpayers' money, if it wavers again, our economy and industry could suffer a significant blow.

The concern about the winner's curse arises because the acquisition candidates are smaller in scale compared to HMM. All three companies on the shortlist?LX, Harim, and Dongwon?are indeed lacking in asset size and financial power to acquire HMM. In terms of asset size, Harim Group has 17 trillion KRW, LX Group 11 trillion KRW, and Dongwon Group 9 trillion KRW, all significantly smaller than HMM’s 26 trillion KRW. Although they have secured allies such as financial companies, private equity funds, and institutional investors, borrowing several trillion KRW externally remains a persistent risk factor in terms of management stability. Additionally, the worsening global shipping market conditions add further burden to the HMM acquirers.

Of course, there is also anticipation of synergy effects after the acquisition. Each acquisition candidate has drawn up a blueprint to avoid the winner's curse. Even so, from the seller’s perspective, it is best to sell to a company with a clear funding plan and growth strategy. Not only the acquisition price but also the post-acquisition growth strategy must be carefully examined. For example, maximizing logistics synergy effects between the buyers such as LX, Harim, Dongwon, and HMM.

As industry and capital markets develop and the pie of expected returns grows larger, the roles of each player also increase accordingly. The role of the Industrial Bank, which is both a bailout fund and an investor, should not be limited to just rescuing HMM from bankruptcy risk. An investment philosophy that draws a roadmap together to ensure the company performs better after the exit is necessary. The ultimate winner of the HMM acquisition battle should be found not in the simple acquisition price but in future value.

This content was produced with the assistance of AI translation services.