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Friday, Dec 17, 2004

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Reliance and LG: A tale of two successions

Vinod Mathew

Both the Indian and Korean giants are second-generation Asian companies that set store by corporate governance and Western management philosophies. Both are family-centric and the final call is taken by the core group within the families. The similarities end there.

WHEN Reliance launched Infocomm in December 2002, the Indian company turned to the South Korean conglomerate LG to provide it with mobile handsets. Two years later, Reliance and LG are linked by another common denominator: Succession-related issues but that the two companies are tackling differently.

The battle that rages between Mr Mukesh Ambani and Mr Anil Ambani, with considerable media help, raises questions about washing dirty linen in public. For Indians, attuned to the battles within the corporate houses of Bajajs and Birlas, the Ambani feud is nothing new.

In contrast, a 57-year-old South Korean conglomerate, LG Group, has been quietly crystallising its succession plan, even in the absence of a `proper' heir.

In both cases, it is the son who carries on family affairs. While in India, the fight is over which son gets to control the behemoth, in Korea, it is the son and never the daughter who controls the empire — and the chairman of the Chaebol does not have a son. Instead, he has his younger brother's son.

Both the Indian and Korean giants are second-generation Asian companies that set store by corporate governance and Western management philosophies. Both are family-centric and the final call on crucial issues are taken by the core group within the families.

The similarities end there. The Indian fight has moved to the front pages of financial dailies around the world, with daily blow-by-blow accounts gripping the readers. The LG battle is virtually unknown in India. Last month, the Group Chairman, Mr Bon-Moo Koo, adopted his 26-year-old nephew, Mr Kwang-Mo Koo. Even as LG officials continue to scoff at there being any link between the adoption and the Chaebol's succession plan, dismissing all such talks as speculative, the South Korean media is convinced that it is a blueprint to LG Group's future.

LG Corp. split into LG Corp. and GS Holdings Corp. in July, a process that began five years ago. It was internally debated and without a fuss. After the board met on May 28, eight retail and service firms morphed into GS Holdings and the rest — manufacturing and technology-related businesses — became LG Corp. A month later, the Korean giant split as per a formula that had been decided upon decades ago. Both LG and GS Holdings now list separately in the Korean Stock Exchange. Though the separation resulted in a reshuffle in the top-three positions among the chaebol: Hyundai replaced LG in the second spot behind Samsung.

LG Corp. says the restructuring was designed to strengthen the group's competitive edge and shareholders' value by focussing on manufacturing and shedding the eight service and retail businesses. In the Indian case, Mr Anil Ambani says the concern is about protecting shareholder interest; his older brother, Mukesh, allays fears of investors, saying the recent market cap loss is fully recoverable.

The Korean separation, which was meant to maximise the profits of LG shareholders by boosting business specialisation of key LG companies, Goldstar (GS) the former brand name of LG's electronics products, cleaved the original company into two entities.

LG Corp now serves as the holding company for manufacturing companies under LG Group, such as home appliance maker, LG Electronics, LG Chem (earlier Lucky Chemical) and LG Telecom. GS Holdings Corp is the holding company for the retail units of LG Group, including LG Mart, LG Home Shopping and LG-Caltex Oil.

Over nearly six decades, the erstwhile Lucky Goldstar was controlled by the progeny of the two founding partners — Mr In-Hwoi Koo and Mr Joon-Koo Hur.

As per an agreement between them, the Koo family became hands-on managers of the group businesses, while the Hur family opted to be sleeping partners. And till date, the two families have never had any public dispute, either on ownership issues or on control over the group companies.

And when the group was split with effect from July 1, 2004, the consolidated assets were divided as per the formula laid down many decades back, at a 6.5:3.5 ratio between LG Corp and GS Holdings Corp respectively.

Post-demerger, LG Corp.'s capital base of 1,352.9 billion Won was divided into 879.4 billion Won in favour of LG and 473.5 billion for GS, the approximate conversion rate being 1,000 Korean Won per one US dollar. And the 6,175-billion Won asset base of the undivided company was carved up into 3,995 billion Won for LG and 2,180 billion Won for GS.

Thus, a split approved by the LG Corp board of directors on May 28 has seen six months ago by with almost no damage being wreaked on the group's image with the public. LG Electronics India, which at Rs 6,500 crore currently accounts for nearly 5 per cent of the company's global total turnover, is expected to double its share by 2010 by becoming a $10 billion unit, where export earnings alone would account for $ 3 billion.

Clearly, there has not been much of a negative fallout on account of the recent split within LG Corp and the ongoing succession issue that is getting a discreet treatment.

In contrast is the Indian case, with e-mails between the Chairman and Vice-Chairman of Reliance Industries being made public in a serialised fashion and private talks within the Ambani household and even the goings-on in the group company board meetings get spilled over into public domain.

Perhaps, it is time to look to LG for more than mere handsets.

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