Jeong Gyeong-su, head of the Samil PwC M&A Center (deputy CEO), said of the domestic mergers and acquisitions (M&A) market in the second half of this year, "A gradual recovery will continue, but the tilt by industry and size will persist for the time being." While policy funds and large corporations' demand for portfolio reshuffling are creating a favorable environment for the M&A market, he noted that warmth is unlikely to spread across the market and will instead concentrate on a few growth industries such as semiconductors and power infrastructure and on high-quality asset.
Jeong, the deputy CEO, on the other hand, expected a relatively slower recovery for the domestic consumer goods, dining, and retail sectors and the small and mid-sized M&A market. That is because the domestic economy remains sluggish and small and mid-sized private equity (PE) firms that invest through project funds face a tough fundraising environment. Jeong said, "For small and mid-sized deals to come back, policy funds must be supplied to that segment."
The following is a Q&A with the deputy CEO, Jeong.
─Looking back at the domestic M&A market in the first half of this year.
"There was a tilt both in terms of transaction size and by industry. I think it was similar to the domestic stock market. While the index rose, a few large-cap stocks led the gains and domestic consumer goods and some industries barely benefited; likewise, in the M&A market, buyers' interest focused only on certain industries and companies.
By industry, there were two major hot themes in the M&A market. First was strategic industry scalability led by artificial intelligence (AI), and second was global scalability. Semiconductors are the representative field that satisfies both. In particular, semiconductor materials, parts, and equipment (so-called "small materials and equipment") have been steadily popular over the past two to three years. In tandem, power infrastructure also drew attention. In addition, fields where Korean corporations are competitive globally—such as healthcare, medical DEVICE, K-defense, and K-beauty—also saw active M&A. This tilt is likely to continue for the time being."
─What do you expect for the M&A market in the second half?
"I expect a gradual recovery while the same kind of tilt seen in the first half persists. Global large PE and domestic large PE are moving actively with blind funds, and large domestic corporations still have demand for business reshuffling and portfolio rebalancing. There is also an expectation that liquidity supply in the market, including the Public Growth Fund, will become more active. The capital market itself is now flush with liquidity.
However, not all parts of the market improve at the same time. Buyers' interest will concentrate on popular sectors and corporations, while polarization will continue to make other areas difficult."
─What impact will the recent rise in the domestic stock market have on the M&A market?
"It has two sides. Shares of some listed companies, especially those in popular sectors, have risen a lot. In many cases, stock prices have climbed excessively compared to the corporations' intrinsic value. Such corporations inevitably face a wide gap in expectations between sellers and buyers.
Conversely, there is a positive side. For listed companies, it has become much easier to raise capital by using higher valuations through exchangeable bonds (EB), convertible bonds (CB), third-party allotment paid-in capital increases, and stock exchanges. This can secure acquisition funding. In other words, a rising stock market can be a favorable factor for listed companies' fundraising and strategic transactions."
─What is needed for the small and mid-sized M&A market to recover?
"The small and mid-sized M&A market includes many corporations that operate on a domestic demand base, such as dining, retail, and consumer goods corporations. Therefore, for the market to revive, the domestic economy must recover first. If representative industries like semiconductors post strong results in the global market and those profits circulate throughout the broader economy, a warm breeze could reach domestic demand as well. That foundation is necessary.
The second is policy-driven liquidity supply. The Public Growth Fund tends to focus on future industries such as AI, semiconductors, and bio. That is important in itself. However, more policy funds also need to flow to small and mid-sized corporations, regional corporations, corporations that need business succession, and corporations that need growth capital. Through growth finance, policy funds under the Ministry of SMEs and Startups, and regional revitalization funds, investment in small and mid-sized corporations needs to be further activated.
In addition, investment conditions for small and mid-sized PEs need to improve. Right now, the market is active mainly for large PEs with blind funds. In contrast, small and mid-sized PEs that raise money case by case through project funds are in a much tougher spot than before. There are fewer investors than before who proactively supply liquidity to new or small and mid-sized managers. For small and mid-sized deals to normalize, a foundation must be laid for small and mid-sized PEs to grow."
─Do you expect large corporations to ramp up noncore business divestitures and carve-outs in the second half?
"Large corporations' portfolio rebalancing needs will continue to arise. Most major groups, openly or not, are considering trimming noncore asset and reallocating capital. The overall direction is the same: dispose of noncore asset and redeploy the capital secured into areas the group must strategically grow.
However, large corporations do not conduct divestments in the open. They quietly test the waters with potential buyers behind the scenes, and if there is no suitable buyer, they often drop the process quietly. Deals that become known to the market are generally those where buyers' interest has already been confirmed to some extent."
─Within the AI value chain, which areas are likely to see the most active transactions in Korea over the next one to two years?
"Those where global competitiveness has already been proven, scalability exists, and the ability to generate operating cash flow is strong. From that perspective, the first to name would be semiconductor materials, parts, and equipment companies. Next is power infrastructure. There is strong interest in corporations related to transformers, power equipment, and power facilities. Global large PE, domestic large PE, and small and mid-sized PE all single out these sectors."
─In industries such as petrochemicals, steel, and construction, where structural reshaping is highly needed, what forms of M&A do you expect to see mainly?
"These sectors commonly face issues of changing global supply chains and oversupply from China, but restructuring methods vary by industry.
Petrochemicals are an industry where the government or creditor banks can play a role to some extent. Because petrochemical plants cluster in specific regions, restructuring is possible by bundling and consolidating facilities within the same area. For example, discussions proceed around complexes such as Daesan or Yeosu. Each company selects an accounting firm or advisor to align terms, and a financial institution that provided facility funds to both sides, such as Korea Development Bank (KDB), can coordinate.
Steel, by contrast, is difficult for the government to lead restructuring by industrial complex as in petrochemicals. It is more likely to proceed by individual corporations selling low-return asset or winding down business units.
Construction is more ambiguous. Independent construction companies facing severe liquidity problems can be sorted out through court receivership or closure. Construction companies under corporate groups are often stabilized with group support. Builders with some operational stability are likely to avoid aggressive bidding and choose strategies to secure cash."
─Will the growing need for exits by domestic PEs serve as a major supply factor in the second-half M&A market?
"Yes. The share of PE in the domestic M&A market has already become very large. Over the past five to eight years, PEs have effectively led the entire M&A market. In terms of transaction value and in terms of the number of transactions, PEs' share has grown to around half. Therefore, sales of PE-held portfolios—i.e., secondary deals—will remain a major theme in the second half. However, PEs do not try to sell at any cost by cutting prices. They wait until market conditions change or try to create conditions to secure better valuations."
─In the past, there was a perception that sellers could get a higher price only if strategic investors (SI) like large corporations stepped in as buyers, but that doesn't seem to be the case these days.
"These days when we meet SIs such as mid-tier groups, some say, 'If we have to compete with PE, it's scary to even review the deal.' That is how different the valuation expectations have become. In the past, SIs were thought able to bid higher for synergy, while PEs were seen as relatively less able to bid high. Now it is the opposite. Based on capital-raising capacity and investment strategy, PEs often bid more aggressively than SIs."
─Do you expect more continuation funds to be formed?
"Yes. In an environment with more secondary deals, the formation of continuation funds can also increase. If a company has stable cash flows and strong growth, there is a tendency not to sell to another PE but to recruit new limited partners (LPs) and keep holding it. As it has become common for one PE to buy assets sold by another, managers more naturally choose the option of 'I'll just set up a new fund and keep it.'
Continuation funds allow existing LPs to realize a certain level of returns and give new LPs a chance to invest in a proven asset. For the general partner (GP), they can earn some performance fees while continuing to manage the asset and collect management fees."
─What is the competitive edge of the Samil PwC M&A Center?
"It has become important to provide one-stop service from strategy development to deal execution to post-deal integration. Samil PwC is strengthening its Strategy & Deals function within the deals organization. We provide everything from pre-deal strategy development to financial due diligence and commercial due diligence (CDD, objectively verifying a target's market competitiveness, growth potential, and risks in M&A or investment), and after the deal, we aim to internalize post-merger integration (PMI) and carve-out consulting.
The second is our network. Samil PwC prides itself on having the broadest customer touchpoints in Korea. While global investment banks often operate with small teams focused on large corporations and large PEs, Samil PwC has wide touchpoints not only with large corporations and large PEs but also with regional mid-sized corporations, small and mid-sized PEs, and small businesses.
These days, even if clients have a willingness to sell, they strongly dislike rumors. Rather than putting assets on the market publicly, they prefer to quietly approach only a handful of likely buyers to test the possibility of a transaction. In that respect, a broad network and a quiet approach are crucial."