KOSDAQ-listed SAMYOUNG M-TEK has decided to acquire Dong-A Hwasung, a manufacturer of industrial special rubber parts. SAMYOUNG M-TEK makes core structures for ship engines and plans to diversify its business through the acquisition of Dong-A Hwasung. But after the news broke, Dong-A Hwasung's share price plunged on the 16th. What is the reason?
Dong-A Hwasung disclosed on the 15th that it signed a stock purchase agreement to transfer the equity held by related parties, including Chief Executive Im Gyeong-sik, the largest shareholder, to SAMYOUNG M-TEK. It is selling a little over 6.66 million shares for about 133.3 billion won, and once the deal is completed, SAMYOUNG M-TEK will become the largest shareholder with 42.18% of Dong-A Hwasung's shares.
The contract is expected to move forward at a relatively fast pace. According to the payment schedule disclosed by the company, SAMYOUNG M-TEK will pay a 13.3 billion won deposit on the 23rd of this month, then pay the interim and final payments in December to close the transaction on Dec. 16.
What caught investors' attention was the sale price. This year, Dong-A Hwasung's stock traded in the 5,000–7,000 won range, but SAMYOUNG M-TEK stepped up to acquire the shares at 20,000 won per share. The control premium rate is about 200%, an unusually high premium.
Inside and outside the company, the view is that as shipbuilding market conditions improve, SAMYOUNG M-TEK is actively pursuing mergers and acquisitions (M&A). SAMYOUNG M-TEK logged losses until three years ago, but turned a profit two years ago and has been increasing earnings.
Despite that view, Dong-A Hwasung's share price tumbled sharply on the 16th. A new investor valued the stock at more than twice the current price, yet the price fell, a paradoxical phenomenon.
Industry watchers point to the somewhat unusual method by which SAMYOUNG M-TEK is acquiring Dong-A Hwasung as the cause.
According to the company, SAMYOUNG M-TEK plans to establish a new subsidiary to acquire Dong-A Hwasung shares. The company will invest 15 billion won to set up SAMYOUNG Partners, whose main business will be investment advisory, and SAMYOUNG Partners will be the acquisition vehicle for Dong-A Hwasung.
However, to raise more than 130 billion won in acquisition funds, this subsidiary said it will issue corporate bonds to the counterparty to the transaction. According to the company, the bonds will be issued to an individual, and this individual is from the Dong-A Hwasung side. While SAMYOUNG M-TEK is acquiring Dong-A Hwasung's equity, in fact a significant portion of the funds is being provided by the Dong-A Hwasung side. It is a structure that raises the question of whether the owner is truly changing.
The funds invested by SAMYOUNG M-TEK are expected to be only a very small portion, including the 15 billion won contributed to SAMYOUNG Partners. The company said, "We plan to raise the remaining acquisition funds by attracting external investment."
Unlike Dong-A Hwasung, SAMYOUNG M-TEK's share price is surging. The market appears to view favorably the company's decision to diversify its business through the acquisition of Dong-A Hwasung. The company said, "We will expand our business scope, which has been focused only on shipbuilding equipment, and expect top-line growth in revenue and profit."