Samsung and LG electronics companies are getting ready for mergers and acquisition to find new sources of revenue, since their mainstay businesses, including semiconductors and household appliances, have matured. The CEOs of the two electronics giants have been making a series of comments regarding M&A plans, auguring major changes in a global IT industry that has been stagnant due to the global economic slowdown.

Sources of growth

Kown Oh-hyun, president of the semiconductor business of Samsung Electronics, said Wednesday the world's largest memory chipmaker will acquire a large integrated circuit non-memory maker to acquire new technology and expand business. He added that if a good opportunity arises at a good price, Samsung Electronics will make its move. Recently, the memory chip market has been in a slump with DRAM and NAND flash memory chip prices dropping, but the non-memory chip market has been expanding.

Since the end of last year, Samsung Electronics has been using M&A as a means of expanding business growth. Spearheading the efforts is Samsung's semiconductor operations. At the end of last year, Samsung acquired Israeli non-memory producer TransChip and has been looking into acquiring memory card maker SanDisk.

Last year, Nam Yong, vice chairman of LG Electronics, said he would personally take the lead in using acquisitions of foreign companies to spur growth at the electronics giant and considered the home appliance division of GE as a potential target. More recently, LG Electronics has been looking for potential targets for M&A, investment or tie-ups in the field of solar energy.

Why M&A?

The reason why Samsung and LG electronics companies have turned to aggressive M&A is because they have reached the limits of growth in their existing businesses. For instance, total semiconductor revenue at Samsung Electronics has shrunk from W4.48 trillion (US$1=W1,110) in the first quarter of 2005 to W4.39 trillion in the first three months of this year. Even business areas like LCDs that boasted relatively stronger growth are facing prospects of slow growth due to oversupply and a global economic slowdown.

International patents pose other problems. Both Samsung and LG are having to pay higher royalties to U.S. and other companies due to a weaker Korean won and new terms of use. In the case of SanDisk, Samsung Electronics is already paying W400 billion in royalties and is said to have to pay more when it renews its contract next year. Considering that SanDisk's market value has fallen to around W3.5 trillion, it is possible to think that acquiring the patents by acquiring the company or investing in it makes more economic sense.

Falling share prices of global IT companies also make them more enticing targets of acquisition for Samsung and LG. Samsung Electronics has cash reserves of more than W6 trillion as of the first half of this year.

Chances of success

Both Samsung and LG have had bad experiences when it comes to M&A. Samsung's acquisition of the personal computer division of AST in 1994 is viewed as a failure, and LG initially suffered huge losses after acquiring America's Zenith. But the evaluation of outsiders is that the M&A of these two companies has become a lot smoother and more sophisticated.

In the case of TransChip, which Samsung acquired last year, the Korean chipmaker dispatched only one or two of its executives to the acquired company but retained management. And core staff at TransChip have been given loyalty compensation in the tens of thousands of dollars. As a result, existing staff continue to work at TransChip with hardly any turnover.

When Samsung acquired AST back in 1994, it reshuffled management at the acquired company, and Samsung employees took over key positions to resemble an occupying force. As a result, staff left in droves, with the company being viewed as just a husk of its former self. Experts say Samsung and LG will not repeat this mistake. But the remaining task is to find ways to create synergistic effects with existing business areas.

Song Jong-ho, an economist at Daewoo Securities, says the value of patents is growing ever greater in the IT industry, driving up royalties into the trillions of won. Song added there is a strong possibility that Korean electronics companies will start acquiring foreign companies that hold patents on technologies.

By: DocMemory
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