Korea Holding Company Structure Formation Process and Dynamics

Since the introduction of holding company law in 1999, there has been increasing number of holding company transformation cases in Korea. In this paper, we focus on detailed processes and dynamics that took place during holding company structure formation. Most Chaebols prefer demerger over spin-off as major shareholders can increase their ownership in holding company without cash injection. In short, a group selects a company with the maximum number of group affiliates as a holding company. Then, demerger, tender offer, new share issuance by holding company, and equity swap between major shareholder and holding company follow. We believe that this is due to double-counting of operating company's value through NAV valuation for holding company, as well as value unlocking of investment assets. More interestingly, we found that major shareholders and minority shareholders make different decisions during the equity swap process. Having investigated the whole process in holistic approach, we learned that holding company formation actually delays separation of owner and management, delays ownership dispersion, and provides too much benefits to major shareholders, even though there are a few good aspects including clearer corporate governance. Ironically, Chaebol structure, which means dominance of economic power causing many problems in Korea, can be maintained longer with holding company structure formation.