Are foreign buyouts a national threat?

Are foreign buyouts a national threat?
JP/7/KOREA

Are foreign buyouts a national threat?

Jasper S. Kim
The Korea Herald
Asia News Network
Seoul

A clear pattern has emerged recently of foreigners taking
increasingly larger positions in Korean assets, such as KOSPI
shares, domestic banks and local real estate. But are such
foreign buyouts on balance a threat to the republic?

Examples of prominent foreign buyouts this year include the
sale of Korea First Bank (KFB) to Standard Chartered Bank (SCB),
a large British bank, Citibank's takeover of Koram Bank, Korea's
sixth largest lender, and Lone Star Building to a Singaporean
entity late last year. Foreigners also currently own a
significant proportion of Korean KOSPI-traded blue chip shares.
Thus, it would seem at first instance that such foreign
intervention constitutes an intrusive threat to Korean national
interests.

But contrary to such opinion, foreign buyouts help more than
hurt the republic. First, foreign buyers of Korean assets in
KOSPI represent a clear market signal that a future upside exists
within onshore equity markets. For example, global investors
holding Samsung Electronics paper hold the view that its share
holdings value will increase (not decrease) in the future.
Foreign investment bullishness is a clear sign that such high-
grade corporate entities are healthy (i.e., that they are
operating under sound fundamentals) or will become healthy.

From a corporate perspective, greater inflows, albeit from
foreigners or domestic investors, represent extra cash for
research and development (R&D), hiring of new employees and
expansion efforts into new markets and new products.

From a consumer perspective, greater inflows, albeit from
foreigners or domestic investors, means more cutting edge
technology, new jobs and better products. With greater inflows
come high share prices, and thus much-needed wealth creation for
individuals. Therefore, both the producers and consumers benefit
from foreign buyouts.

Second, regarding foreign buyouts of Korean banks, foreign
ownership of Korean banks also represents a win-win situation.
For example, Standard Charter's stake in Korea First Bank helps
pump needed revenue into KFB. KFB will benefit not only from the
added capital but also from SCB's global banking expertise.

Conversely, SCB also benefits from KFB's domestic banking
knowledge, local brand name and its extensive onshore branch
locations to do business in Korea. Much like Newbridge Capital
(which held a controlling stake in KFB until its sale), SCB hopes
to make KFB even more competitive, whether it plans to keep or
sell its KFB stake interest in the future.

Third, regarding foreign buyouts of Korean real estate,
foreign ownership of Korean property will not lead to a mass
uprooting of all foreign owned buildings out of Seoul into
foreign countries. Much like with foreign ownership of banks, the
physical structures stay in Korea and little adverse change will
occur whether a foreign or domestic entity owns the ownership
paper for a Korean commercial building.

Even if foreign majority shareholders of Korean assets somehow
go against Korean interests, the republic, as a sovereign state,
has the option to nationalize private property located within its
territory. Partially for this reason, the United States does not
view foreign ownership of its assets as a primary threat to its
interests.

Foreigners, including Koreans, are largely able to purchase
real estate and shares of listed corporations in the United
States with little red tape, which adds value to the U.S.
economy. The rationale for this is that market forces should rule
and that foreign investment, even in large sums, is a form of
positive wealth creation that should be welcomed. This open
investment model has proved successful for the United States and
many other economies, and Korea is no exception.

But one impediment to this approach is nationalistic anti-
foreign buyout sentiment that exists in nearly every nation.

For example, many Americans were shocked and concerned when
news broke in 1990 that the Rockefeller Center (which included
Radio City Music Hall) in New York City was sold to Mitsubishi, a
large Japanese corporation.

The sale of such historic American property to the Japanese
was on the back of rising anti-foreign (notably anti-Japanese)
sentiment because of a rising tide in the 1980s of foreign
purchases of U.S. assets. But after Mitsubishi's purchase, the
real estate market slumped and the Japanese entity took a
financial hit, forcing it to sell Rockefeller Center for a
significant loss to the Goldman Sachs Group, a U.S. investment
bank. So, despite all the fears, the prized U.S. asset returned
to American hands, with an American entity realizing upside at
the cost of a large foreign competitor.

But even during Mitsubishi's ownership of Rockefeller Center,
tourists who came to visit the American landmark saw little or no
substantive difference. The classic American flags still flew,
the ice skating rink was still a central attraction and the
building tenants remained pretty much the same. Mitsubishi, much
like any other entity in the free-market global economy, merely
wanted to realize an upside on its investment by investing more
money to create a healthier and more competitive entity.

In the same way, when foreign investors buy significant
interests of Korean assets, few if any adverse changes will most
likely take place except for the exchange of a paper into a
different pair of hands, while Korean entities are positioned to
become healthier and more competitive. And, for that one piece of
paper, certain foreign investors are willing to pay Korean asset
owners extremely large sums of cash. Until the day that such
global enthusiasm stops, Korean entities and owners should not
discourage but encourage such behavior.

After all, such behavior is a win-win situation for both
sides involved and is thus an opportunity, not a threat, for the
Korean republic.