Individual investors are suffering losses due to the delisting of private equity-owned companies

An image that represents the idea of ​​private equity funds
An image that represents the idea of ​​private equity funds

There are concerns that some small shareholders are suffering losses due to the increasing incidence of voluntary delistings by companies owned by private equity firms.

According to industry sources, private equity firm MBK Partners will make an offer for Connect Wave, an e-commerce platform known as ‘Danawa’, on May 20.

MBK Partners currently has a 70.39 percent stake in Connect Wave, making it the largest shareholder. This position would allow the company to pursue a “comprehensive share swap,” which would require a special resolution at the shareholder meeting. Industry analysts predict that MBK Partners could effectively go public by acquiring an additional 3 to 4 percent through the offer.

Private equity firms often cite “management convenience” as a reason for delisting, but their fundamental goal is to recoup their investments through asset sales, dividend increases and capital reductions.

Another private equity firm, Hahn & Company, acquired medical beauty device company Lutronic last June. Through two tender offers and open market purchases, it acquired almost 98 percent of the shares and subsequently delisted the company. After this, in December of the same year, it recovered 145 billion won (about US$106.54 million) through a reduction in paid-up capital, and three months later it recovered another 235.3 billion won through another reduction in paid-up capital. .

Individual investors are outraged by two key issues. They are forced to stop investing in promising companies, and private equity firms also push down share prices during the tender process.

Connect Wave’s consolidated operating profit reached 32.3 billion won ($23.6 million) in 2022 when MBK Partners acquired the company and merged it with its subsidiary. This figure represented an increase of 85.6 percent compared to the previous year. In addition, operating profit increased by 12.7 percent last year compared to 2022.

The company’s revenue has also consistently reached record highs every year, but its stock price has fallen. At the time of the acquisition announcement on November 26, 2021, the stock price was around 28,400 won. However, three trading days before the takeover bid announcement on April 24, the closing price had halved to about 12,900 won.

Small shareholders, who collect voting rights through the shareholder activism platform ‘ACT’, have raised several concerns. They stated: “Since MBK took over, it has abolished the dividend paid for nineteen years in a row, and its share price has fallen continuously for nine months, reaching the lowest price-to-earnings ratio (PER) in history.” Some also said, “Given the positive outlook for this year’s performance, the public offering price of 18,000 won is unreasonable,” while others claimed, “This is a suitable method to delist a financially sound stock and sell it later to be noted again.”

According to last year’s annual report, there are approximately 39,200 retail shareholders of Connect Wave, who own a total of 12,914,234 shares, accounting for 27.64 percent of the company.

Particularly noteworthy is the observation by retail investors that there was a sudden surge in the stock price just before MBK launched the takeover bid for Connect Wave, similar to what happened with Hankook & Company, formerly known as the Hankook Tire Group, and Osstem Implant. .

In the case of Hankook & Company, in the two days preceding the announcement of the takeover bid last year on December 5, its share price rose by 5.5 percent on December 1 and by 9.1 percent on December 4, representing a total increase of 15 percent. percent over the two days. Similarly, earlier this year, just before the takeover bid announcement on January 25, Osstem Implant saw its share price rise by 7.2 percent on January 19 and by 8.6 percent on January 20.

Furthermore, on the trading day immediately preceding the announcement of the takeover bid for Connect Wave on April 29, the share price rose by 18.85 percent on April 26.

Meanwhile, global private equity fund manager Affinity Equity Partners, which has begun its second bid for food container company Lock & Lock, is also facing conflict with Lock & Lock’s small shareholders.

Affinity, which had a 69.64 percent stake in Lock & Lock at the end of last year, originally planned to acquire 100 percent of Lock & Lock’s shares and take the company private. However, due to opposition from small shareholders, the subscription rate for the first offer was only about 16 percent, roughly half of the initial target of 30.33 percent.

Small shareholders of Lock & Lock claim the company’s operating profit has fallen steadily over the past five years, from 2019 to last year, with the operating profit margin turning negative last year. They claim management was negligent, leading to a fire-sale situation that prompted the bid.

A specialist in the sector stated: “Maximizing profits within legal proceedings by private equity firms themselves is not the problem. If tactics such as undervaluing companies through pre-mergers with weak companies and deliberately suppressing stock prices emerge, this would certainly be a problem. However, the reality is that there is currently no system in place to prevent such tactics.”