Ford drops Daewoo bid, blow to Korea reform drive

"We believe that a proposal was not possible that would be in the interest of Daewoo and Ford and their respective shareholders," Ford vice-chairman Wayne Booker said in a two-paragraph statement. The US auto giant in June beat out joint bids by GM and Fiat SpA and DaimlerChrysler and Hyundai Motor for the right to conduct exclusive negotiations with Daewoo about taking over its assets.

Under the original guidelines for Daewoo’s auction, those companies may be invited to re-submit proposals, along with Ford. "There is a strong possibility of another auction," a Daewoo Motor spokesman said.

Ford had reportedly offered $6.9 billion for Daewoo in its preliminary bid in June, earning it exclusive negotiation rights. But after conducting due diligence the past two months on unlisted Daewoo Motor’s far-flung assets, Ford wanted to cut the price, possibly to below $5 billion, industry analysts said.

At issue apparently is the murky state of Daewoo’s books, which analysts have long said failed to reflect deterioration in the auto company’s assets since its parent group nearly went bankrupt last year and is now being dismembered by creditors.

Analysts say the Firestone tire recall may have had as much to do with Ford’s sudden loss of interest as anything in Daewoo’s books. "Ford Motor called off its deal to take over Daewoo Motor because it has its own problems, not because it found any hidden liabilities during the due diligence," said Richard Pyo, auto analyst with Credit Suisse First Boston in Seoul.

"The Firestone tire recall, fitted to Ford Motor cars, has dragged down the share price of Ford." Firestone recalled 6.5 million tires on August 9 because of complaints they shred and cause deadly accidents. Most of those tires are on popular Ford Explorer sport utility vehicles.

Acting to reassure investors who have driven its stock down 13 per cent since the recall, Ford announced a $5 billion share repurchase on Thursday, its largest buyback programme ever. Whatever the reason, the inevitable delay in selling Daewoo Motor puts a major dent in Korea’s corporate restructuring drive.

Analysts have viewed the sale of Daewoo Motor to a foreign entity as a key benchmark for judging Korea’s progress on reforming its bloated and opaquely managed corporations. The over-leveraging and interlocking debt guarantees of Korea’s chaebol — the giant family-run conglomerates that dominate the economy — have been identified as root causes of Korea’s Financial crisis of three years ago.

The biggest victim of that crisis was the Daewoo Group. A year ago, its creditors took control of Daewoo Motor and 11 other core units as the group verged on bankruptcy. Due diligence by creditors published in January showed unlisted Daewoo Motor had 17.9 trillion won ($16.4 billion) in liabilities against just 11.8 trillion won in assets.

But only the assets of Daewoo Motor and related firms were to be sold to Ford, meaning the US automaker would not have had to shoulder those debts.

South Korean stocks, already down 39 per cent on the year, plunged again on Friday, rattled by the news. The key KOSPI index closed down 3.37 per cent at 628.20, off 21.94 points.

"Daewoo’s setback is a bad news for South Korea’s stock market both in the short and longer terms," said Song Jong Ho, a auto analyst at Shinhan Securities Co Ltd. "A delayed Daewoo deal means its creditors would not get their money back soon. With the financial market unstable, such delay could affect other sectors, such as manufacturing, in a negative way," Song said.

Ford is foregoing what analysts have described as a strategic opportunity to build market share in Asia, billed to be the world’s most rapidly expanding auto market in the next decade. With the acquisition of Daewoo Motor’s annual capacity of 2.1 million vehicles, Ford could have approached the output level of the world’s top-ranked General Motors.

The purchase of Daewoo would have offered Ford immediate access to emerging markets such as Poland and those in Asia. Ford spokeswoman in Seoul Meera Kumar told Reuters that Ford continued to view Asia as important. "It’s the market to grow in."

Daewoo Motor sold about 945,000 vehicles last year, including almost 340,000 in South Korea, and is regarded as a strong competitor in the small car market at home as well as in Southeast Asia and Eastern Europe.