FinanceAsia Achievement Awards 2000 - Most Innovative Deal

Carlyle''s acquisition of 40.5% of Koram Bank
  • Salomon Smith Barney - Adviser to Carlyleá
  • Goldman Sachs - Adviser to Koram Bank

Innovation grows out of adversity. In Carlyle's case there was quite a lot of adversity. This was a deal that almost died on six occasions and faced enormous opposition from the Korean authorities.

Carlyle's acquisition of a 40.5% stake in Koram Bank was a saga to say the least. The process lasted almost a year and would have seen many lesser men than Michael Kim - Carlyle's Asian boss - throw in the towel. The core problem faced by Carlyle was a Korean regulation that said only another bank could buy more than 4% of a healthy Korean bank. Obviously, Carlyle is a fund and not a bank.

Kim's eventual solution was to bring JP Morgan's bank fund Corsair into the deal as a partner, and persuade the authorities that Corsair was a financial institution because it was 100% owned by JP Morgan. However, Corsair didn't want to buy as big a chunk of Koram as Carlyle did. Indeed, Carlyle wanted to gain control.

That raised a structuring problem. In an ideal world the Korean authorities wanted this to be a transaction where 51% was owned by JP Morgan and 49% by Carlyle. Yet, neither Carlyle nor JP Morgan wanted this. That is because Carlyle sourced the deal and wanted control; and JP Morgan did not want to own more than half because that would have triggered problems of its own. As the owner of the bank, its holding company might have to bailout the bank should there be trouble in the future. From JP Morgan's point of view this was strictly a financial investment and not a strategic one.

The answer was a cleverly devised structure. This saw Carlyle and Corsair create a main investment vehicle that was 50% owned by each and which invested $200 million in the deal. The remaining $250 million was injected via a series of trusts.

These trusts included Carlyle monies as well as monies raised from other investors. Carlyle retains voting control of the trusts. This clever structure was the only way to get round the so-called 4% rule.

The deal was a landmark in many respects. It is Carlyle's biggest ever and is the biggest deal to be done in Korea by a foreign acquiror in 2000. It is also unusual by Korean standards in that the buyer gained control ? getting seven out of 13 board seats.

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