A key amendment to Korea’s Capital Markets Act has just passed a National Assembly subcommittee, marking a significant move to change how company mergers are priced.
For years, Korean merger values were primarily based on a company's recent average stock price. This created a major problem: if a company's stock was trading low, far below its actual asset or earnings value—a common issue tied to the 'Korea Discount'—a merger could severely undervalue it, harming minority shareholders. Imagine a stable, asset-rich company like Doosan Bobcat (with a low Price-to-Book ratio or P/B) merging with a high-growth, high-multiple affiliate like Doosan Robotics. Based on market price alone, Bobcat's immense asset value could be almost ignored, giving its shareholders an unfair deal.
This amendment introduces a 'fair value' (공정가액) requirement. Instead of just looking at the stock price, merger valuations must now also consider a company's fundamental worth, specifically its asset value and earnings value. The goal is to ensure the merger ratio reflects the company's true economic contribution, not just temporary market sentiment.
This change is not happening in a vacuum. It is a core component of the government's broader 'Corporate Value-Up Program', which aims to resolve the chronic undervaluation of Korean stocks by improving corporate governance and shareholder rights. The push for this reform gained momentum from years of public debate following high-profile mergers, from the landmark Samsung C&T deal in 2015 to more recent controversies involving the Doosan and SK groups in 2024. These cases provided clear evidence of how the old system could be exploited.
If this bill becomes law, the M&A process will change. Companies will need to conduct more thorough valuations, which could make deals more complex and time-consuming. However, the ultimate goal is to create more predictable and fair outcomes for all investors. The challenge will be to implement the new rules with clear guidelines to prevent a wave of legal disputes that could stall corporate restructuring. This is about trading a little 'certainty of closing' for a lot more 'certainty of fairness'.
- Fair Value: A valuation method that considers not just the market stock price but also the intrinsic worth of a company, including its assets and earnings potential.
- Korea Discount: A term describing the tendency for South Korean companies to have lower valuations compared to their global peers, often attributed to factors like weak corporate governance, low dividend payouts, and geopolitical risks.
- P/B Ratio (Price-to-Book Ratio): A financial metric used to compare a company's market capitalization to its book value. A ratio below 1 suggests the company might be undervalued.