Doosan’s Bobcat Division Sucking Wind

Today’s BusinessWeek outlines the struggles of Korea’s biggest (in terms of purchase dollars) acquisition of a foreign company.

Per the article:

Doosan’s $4.9 billion acquisition in 2007 of Bobcat, a North Dakota maker of compact earth movers, was modest by U.S. standards. But it was a seminal moment for Korea Inc….

But today, Doosan Infracore, the unit that controls Bobcat, is reeling…. “The timing [of the takeover] was bad,” concedes Lee Sang Hoon, Doosan’s chief strategist. “But no one could have thought the worst recession in 70 years was in store.”

Discussed in TMH here in late July 2007, much was made of the acquisition at the time.  Personally, I was lukewarm on the deal and wrote a comment that foreshadowed the present:

[Doosan] Infracore, in the short term, overpaid. The only way this deal makes sense is if Bobcat’s sales and profits rise at least 30% in the next 5 years, otherwise, it may be an albatross around Doosan’s neck, sucking up free cash flow that can otherwise be used to fund growth and new product development….

The problem is Bobcat hasn’t grown (it’s done the opposite) and now that’s causing problems.

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  • 8675309

    Used to have a Bobcat mower till someone walked off with it straight out of my garage. Damn, I miss that mower!

  • http://www.xanga.com/wangkon936 WangKon936

    “The timing [of the takeover] was bad,” concedes Lee Sang Hoon, Doosan’s chief strategist.

    Hey Lee Sang Hoon. You guys OVERPAID… 14x EBITDA is a “drunken sailor” valuation for a capital goods business regardless of the timing… Goldman Sachs played you guys like a fiddle..!

  • PineForest

    “Now that the business has drastically shrunk, Doosan this year has to pay back $600 million of the $2.9 billion Bobcat borrowed to pay for its own acquisition. ”

    Umm….what? Bobcat borrowed money for its own acquisition? Can someone explain this to me?

  • http://www.korealawblog.com Brendon Carr

    Leveraged buyout (LBO). Don’t worry — nobody in Korea understands the concept either.

  • http://www.xanga.com/wangkon936 WangKon936

    Brendon,

    In cases like this, a Korean chaebol should really hire a buy-side investment banker and listen to his advice.

    PineForest,

    It’s kind of like borrowing money to buy a house, except the house generates money to pay for the amount borrowed. In the basic concepts, there isn’t a lot of differences between commercial real estate and LBO M&A (with the exception that real estate has, typically on paper, greater assets).

  • http://www.korealawblog.com Brendon Carr

    In cases like this, a Korean chaebol should really hire a buy-side investment banker and listen to his advice.

    After hiring a professional advisor, the only listening a Korean manager wants to happen is for the professional advisor to shut up and listen to the manager’s every ignorant and misinformed word. I see this same behavior on Mad Men from time to time, in between vignettes of Don Draper driving around drunk, so it’s not exactly unique to Korea — but self-centered egotism seems to abound in the large, successful Korean enterprise. Luckily, so does a (racist? cultural?) aversion to hiring non-Korean advisors, so I get to observe from afar.

    It’s kind of like borrowing money to buy a house, except the house generates money to pay for the amount borrowed. In the basic concepts, there isn’t a lot of differences between commercial real estate and LBO M&A (with the exception that real estate has, typically on paper, greater assets).

    It’s even simpler: LBO is like borrowing money to buy a house that is intended for rental to a tenant. The house is the collateral for the loan, which should be evaluated on the basis of the prospective landlord’s ability to get the house rented and at what price. The problem in Korea is that decades of sub rosa Marxist indoctrination in the colleges, coupled with Koreans’ natural propensity toward jealousy, has resulted in judges and prosecutors thinking it’s their role to avenge the house (!) and protect only the interests of the tenants rather than the landlords.

    To these numbskulls, it doesn’t matter that the new landlord can borrow money on the house, fix it up and get it rented for two or three times its current rent. It only matters to them that the new landlord was able to do this without spending “his own money” (never mind the effort expended by the new landlord, the value created, or any guarantees he may have provided). They think it should be bright-line unlawful to do so — cash on the barrelhead, amigo.

  • http://www.xanga.com/wangkon936 WangKon936

    I agree with with pretty much everything you said Brendon. My Korean American IB and PE friends talk about this all the time. There’s no way in our minds that the typical hard assed Korean ajoshi we grew up with could replicate what we do or how we have been trained to see things.

    However to be fair, Japanese companies haven’t had all that much success in big international M&A or big real estate investments for that matter either. So, it might be a cultural thing. Perhaps Confucian business practices are not good in deal making.

    It may take Asians raised in Western countries to help improve Asian deal making capabilities.

    Case in point:

    http://www.mbkpartnerslp.com/

  • PineForest

    So, in the Doosan case, Bobcat borrowed big to get itself out of debt just prior to the sale? Nope… that would be taking on debt in and of itself… if the business (bobcat) is the house, then who is bobcat the borrower? This isn’t adding up yet for me.

  • DLBarch

    Meanwhile, Caterpillar’s 3Q beats estimates and its stock has been on a tear since March. Maybe Lee Sang Hoon’s just a bad businessman.

    DLB

  • http://www.xanga.com/wangkon936 WangKon936

    Lee Sang Hoon is an okay business man. You have to remember, Caterpillar killed it’s unions… they stood their ground against the UAW… they didn’t pussy out like GM… I think that has a big part to do with it.

  • PineForest

    Ok, I think it might have been pushed through my pea brain.

    Bobcat borrowed big to but other vested interests and get full ownership before selling to the Koreans, right?

  • DLBarch

    I know there’s a strange (to me at least) bias to blame unions when times are bad and praise management when times are good (go figure?), but that is a bad habit that needs to be broken.

    On the other hand, bashing American workers and iconic American companies is a cottage industry on MH, so I’m not holding my breadth.

    Cheers,
    DLB

  • http://www.xanga.com/wangkon936 WangKon936

    For the record… I LIKE unions for skilled labor like engineers, actors, screen writers, sports players, carpenters, plumbers, etc. However, I dislike unions for unskilled laborers who artificially manipulate labor prices and ruin expense flexibility for American corporations who are struggling to be competitive in a global market place.

    I believe Caterpillar and GM and how each respectively handled (or mishandled) the demands of the UAW is a case study of how American companies must make a stand against unreasonable demands from labor.

  • http://www.xanga.com/wangkon936 WangKon936

    PineForest,

    As before, the best analogy here is real estate…

    When one buys a house (or other real estate property like a condo, apartment, etc.) one usually buys it from someone who has a mortgage on it as well. People use financing to buy big ticket items, be it houses or companies.

    Let’s say you buy a $300k house. You put in 20% down so that’s $60k your money and $240k the bank’s money. The house is yours, you are on title but the bank takes it from you if you can’t make your mortgage payments. Any ways, you get $300k in your hands and you pay the former owner. He or she will usually have debt on the house as well because he/she bought the house with bank financing as well. So the former owner gets money, pays off the bank whatever they owed and pockets the rest.

    Similar for companies.

  • PineForest

    Gotcha , thanks.

  • DLBarch

    Wangkon,

    We’re cool. I happen to think auto workers fall into the “skilled worker” category, and I definitely think that if management is going to demand and receive the financial benefits and popular accolades that come with success, then they need to also own their mistakes.

    Japan, Germany, and especially Korea all have strong (if not radical) unions and yet still manage to have healthy manufacturing sectors. I expect management to manage. Instead, too often management fucks up and its the grunts on the line who pay the price.

    The next time a company gets into trouble, watch to see how quickly its management will blame union wages, government regulation, the yen-dollar exchange rate, or commodity prices, as if all of this wasn’t part of the bundle of things they’re (over-)paid to anticipate and prepare for.

    And don’t even get me started on corporate bond holders….

    Cheers,
    DLB

  • gbnhj

    Before you get too down on Doosan Infracore, you should take into account that their overall strategy with Bobcat wasn’t primarily one of increased profits in the short term, but rather increased market share in both the short and long terms. With Doosan Infracore coming up behind the much larger companies Catapillar and Komatsu, their purchase of Bobcat wasn’t so much about the purchase of technology or production lines, but rather more about the purchase of market share. Fault them for taking such a big bite if you will, but they’re not really complaining. Frankly, I’d guess other domestic issues have them more concerned.

    If you want to check out something interesting on the company, have a look at what they’re doing in China. Doosan Infracore already maintains a production facility in China, but this joint venture offers them an inroad for the Chinese market. XCMG is China’s largest manufacturer of construction equipment, and DI’s parnership with them goes beyond expanded engine production: XCMG has also agreed to use engines produced at the facility for all its excavation equipment sold both domestically and abroad. Pointedly, this does not include the American market. American laws allow the use of only Type IV engines, which offer relatively cleaner emissions. This facility will produce the Type III engines used throughout the rest of the world. Again, this a long-term strategy intended to increase market share as well as profitability.

  • http://www.korealawblog.com Brendon Carr

    Managers of Korean companies, even at the top level, are not overpaid, Dave. Their (official) wages are utter crap, in fact. Only the “owners” of chaebol make out very well. I’m guessing your practice specialties didn’t lead to you being dragged into too many acquisition due-diligence projects, or that when you were there your areas of focus were not on the employment aspects.

  • DLBarch

    Well, that’s only partly true, and certainly it’s true in comparison to their U.S. counterparts. I know I took a pay cut when I went to Seoul last time around, and I was a lowly associate! You would definitely know more about this than I.

    But I also know that even outside Korean law firms, remuneration for upper management at large Korean companies includes a lot of benefits that are not reflected in just base salary. Annual bonuses, cars, drivers, housing allowances, entertainment allowances, education allowances, whore-mongering allowances…you see where I’m going with this. Jeez, the money Korean companies spend on room salon girls for their executives alone must be staggering!

    I don’t know whether this kicks in at the 이사 level or higher, but it definitely kicks in at somewhere around that point.

    DLB

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