South Korean companies are taking a keen interest in the US market. So far this year nine deals have been recorded, a stable continuation in volume from 2017 when 19 deals were announced, the highest figure on record.
The largest deal in H1 2018 is the ongoing US$500 million purchase of New York exchange-traded fund manager Global X Management Company by Mirae Asset Global Investments, followed by the US$216 million planned acquisition of DSC Logistics by CJ Logistics Corporation, and restaurant firm Our Home's US$91 million investment into Hacor.
Policy changes
Still, South Korean companies are acquiring their US counterparts like never before. There are a number of reasons for this. One is that the Korean won has stretched further in recent times, appreciating more than 12% against the dollar in 2017, although has since lost around half of those gains.
This has been compounded by recent changes to government policy. South Korea’s “jobs president,” Moon Jae-in, has pledged to raise the minimum wage by 55% to 10,000 won per hour by 2020, in an effort to boost consumption amid a slowing economy. The policy has already taken effect, with wages hiked by more than 16% in 2018.
The country has notched up its tax rate on its highest-earning companies. In December 2017, parliament agreed that businesses with a taxable income of more than 300 billion won (US$270 million) would pay an additional three percentage points, up from 22% to 25%.
At the same time that the cost of doing business in South Korea is increasing, the Trump administration has taken a starkly different approach. In the same month that the Republic of Korea upped its rate, Congress agreed to slash corporate taxes from 35%, the highest in the world, to 21%. This has made US M&A comparatively attractive for South Korean companies.
Tariff effects
One of the most widely reported policy developments of recent months has been the trade war between the US and China, although South Korea has not been immune to rising protectionism. In May, the country's Ministry of Trade, Industry and Energy sought to initiate a dispute settlement process via the World Trade Organization, after the US imposed tariffs on washing machines and solar panels.
Tariffs against Chinese products also have implications for South Korean companies, which sold around US$112 billion worth of intermediate goods into China last year. Therefore, if Chinese exports to the US ebb, so too will Korean exports to China.
In principle, recently introduced trade barriers create an incentive for direct investment into the US. If goods from Korea or any other country become less competitive, one solution is to acquire companies in the US to establish a foothold in the world's largest economy and sell directly into that market.
It is not clear whether this strategy will succeed, as such radical policy changes also foster uncertainty. Foreign direct investment (FDI) has already been falling, down 32% in the US in 2017 to US$310 billion and down 16% to US$1.52 trillion globally. If uncertainty remains high and FDI, which includes M&A figures, remains depressed over the coming 12 months, we are likely to see South Korean companies invest in the same manner as they have over the past 18 months: little and often.