It is proving to be a very busy year for Asia-Pacific M&A, with the number of deals on track to exceed 300, comfortably exceeding the previous peak of 242 (figure below). Hong Kong, Singapore and Japan have shown the greatest leaps in activity, with run rates of 3.5x, 3.0x and 2.1x the post-2009 average, respectively.

Announced M&A deals with target listed in Asia-Pacific, 2009 to present

Japan remains an area of particular interest. This year’s surge in dealmaking seems mostly driven by two Tokyo Stock Exchange initiatives:

1. In February the exchange published a presentation containing views sharply critical of listed parent-subsidiary structures8. Since then at least $50 billion of clean-up transactions have been announced, including NTT / NTT Data, Toyota Industries / Toyota Motor, KDDI / Kyocera and Aeon / Aeon Mall. Japan still has more than 200 listed subsidiaries9 so there is plenty more to be done on this front.
2. Next month the exchange will significantly tighten protections for minority investors in going-private deals10. A broader range of deals will now be caught by the requirement to obtain a special committee (SC) opinion. The SC will now have to consider whether any increase in corporate value will be fairly distributed to minority shareholders. The new rules also require greater transparency for any valuations performed in the analysis.

Some acquirers are clearly taking advantage of the rush to get deals done at very low prices, and a number of these situations offer interesting optionality, according to Metrica’s analysis.

The result of the Korean presidential election came in just as this newsletter went to press. Metrica was pleased to see Lee Jae-myung win the race by a comfortable margin. Mr. Lee’s campaign platform included a large number of pledges to improve Korea’s corporate governance and stock market functioning, including:

• Improving corporate governance transparency
• Revising the commercial act to expand corporate directors’ fiduciary duties beyond the company to include shareholders
• Ensuring that cumulative voting cannot be excluded by the articles of incorporation
• Ensuring that new shares are allocated to existing parent company shareholders (including minority shareholders) in the event of a split-off listing
• Implementing policies which institutionalise the mandatory cancellation of treasury stocks by listed companies, ensuring these shares are returned to shareholders as a benefit
• Setting a mandatory independent director ratio for companies of a certain scale, ensuring certain level of independent oversight
• Gradually expanding the separate election of audit committee members for large listed companies
• Implementing electronic voting for large listed companies
• Introducing of advisory shareholder proposals
• Implementing fair price framework that considers stock prices, asset values, and revenue values when determining the acquisition or merger prices for publicly listed companies
• Implementing mandatory public purchases to share management control premiums and guarantee opportunities for minority shareholders to redeem their shares during company acquisitions
• Implementing system allowing minority shareholders to request an examiner through the courts when merging publicly listed companies and their affiliates
• Strengthening monitoring and sanctions against unfair internal transactions Importantly, Korea finally has a president and majority government from the same party. For the first time in three years, the government will be able to progress its legislative agenda without being constantly hindered by an uncooperative veto-holder.

A bill submitted by Korea’s ruling Democratic Progressive Party with the firm support of the incoming president could have a significant impact on the valuations of certain listed companies.

It seeks to remove the incentive for major shareholders deliberately to depress their companies’ share prices around succession events.

Currently, inheritance tax for listed companies is calculated using a four-month average of the share price around the time of the transfer. This has led to companies conducting deeply-discounted rights issues, intra-group transactions or mispriced mergers, intending to drive the price down and thereby minimize inheritance taxes.

By contrast, for unlisted companies, inheritance tax is determined using a blended average of earnings value and net asset value. If the blended average amounts to less than 0.8x net asset value (NAV), then 0.8x NAV is used as the floor valuation.

The proposed bill would apply the unlisted company formula to listed companies in cases where the listed company’s shares are valued at less than 0.8x NAV.

At the same time, for companies trading above 0.8x NAV, a 20% surtax for controlling shareholders would be removed and it would also become possible to pay the tax bill in stock rather than just cash.

In Metrica’s view, the heavy burden of inheritance taxes is a primary cause of the “Korea discount”, depressing valuations for the whole market but particularly for conglomerates, which have reached valuations as low as 0.2x or 0.3x NAV. So to the extent that this bill succeeds, it could create a very powerful rally in the affected names.

The long-awaited impeachment trial verdict in Korea is due the day after this newsletter goes to press. If the impeachment is upheld, a presidential election must be held within sixty days. A victory for the opposition candidate Lee Jae-myung, who narrowly lost to President Yoon in the last election, would have positive implications for the market, as it would allow the Democratic Party of Korea (DPK) to push through its corporate governance reform agenda unhindered. Conversely, a continuation of the status quo whereby the People Power Party holds the presidency and the DPK controls the National Assembly would be less favourable, as it would prolong the political stalemate. Even so, much progress was made on Yoon’s “Corporate Value-up” initiative in 2024 under essentially the same structure, and we would expect the governance reform momentum to continue in any case. It is worth remembering that Japan was able to achieve significant progress towards the same goals through non-legislative measures.

Korea’s government and main opposition party continue to push their respective stock market and corporate governance reform agendas. The vice-chairman of the Financial Services Commission (FSC) appeared at several conferences in February to highlight the government’s continued commitment to “Value-up”. On one measure – share buybacks – Value-up is already proving to be a success, with Korean companies increasing buybacks by 72.8% year-on-year to $9.8 billion in 2024. However, both the FSC and Korea Exchange want to boost the number of listed firms releasing general Value-up plans beyond the current 114. As such, the government is promoting a bill to reduce corporate taxes for companies practising Value-up and to lower dividend income taxes for investors in such firms.

On the opposition side, the Democratic Party of Korea (DPK) has been pushing through its amendment to the Commercial Act which makes company directors answerable to shareholders as well as companies.

The bill is likely to be presented to the National Assembly in March. Both the government’s and the opposition’s bills face obstacles given Korea’s turmoil, but the important point is that both ends of the political spectrum want to see the stock market higher.

As such, if the presidential impeachment issue is resolved soon (current projection is mid-March) and stability returns, via elections or otherwise, it should be a positive for the reform programme.

In the meantime, another upcoming catalyst for the market is the lifting of the short-sell ban at the end of March.

Metrica believes that the 15-month ban has hurt the market’s liquidity and depressed valuations, to the extent that Korea is now the only market in Asia-Pacific trading below book value and one of two below 10x earnings (figure below).

Asia-pacific market price-to-earnings and price-to-book ratios, 28 February 2025

Looking at the relative value universe presents a similar picture, with Korea spreads on average far wider than anything else seen in the region. If the original objective of this ban was to support the stock market, it has been unsuccessful. During the period since the ban was enacted, the Korean market has returned exactly 0.0%. By comparison, markets which freely allow short-selling such as the US, Europe and Japan have returned 36.4%, 31.4% and 13.6% respectively over the same period. MSCI also cited the short-sell ban as a reason not to upgrade Korea to Developed Market status.

There is always a risk that, given the depressed state of the Korean market, the ban will be extended yet again. However, Metrica is cautiously optimistic that the authorities will do the right thing. A resumption of short-selling should draw capital back into the market, and in particular into some of the more extreme spreads that can be found in the RV universe.

Minority shareholder protection

It was good to see the Korea Exchange following though on its commitment to protect minority shareholders in the case of spin-off re-listings. Binggrae, a manufacturer of dairy products, was forced to withdraw its plan to split into a holding company + operating company after the exchange refused to approve the listing of the new company. This is historic as the exchange has previously waved through such restructurings.

In the past, majority owners of Korean companies loved to convert them into holdcos + opcos, as this allowed them to take capital out while maintaining control. It also depressed the prices of holdcos, lowering potential inheritance taxes. Perhaps the Binggrae case is a sign that Korea is finally starting to move on from this abusive and outdated practice which is no longer tolerated by any developed market globally.