Botardo, Czerny Gale P.

Acctg Synthesis

HANBO STEEL COMPANY

CASE OVERVIEW Hanbo, Koreas second largest steel company, collapsed in 1997 after amassing over $6 billion in debt. This debt was incurred in the process of expanding the companys steel making capacity by nearly 9 million metric tons (MT). While steel was not part of Hanbos core business, the decision to expand into steel was typical of the diversification strategy pursued by Korean chaebol in the 1990s. Hanbo financed its new steel mill with borrowings from private commercial banks and government-owned banks, including the Korea Development Bank (KDB), Koreas largest lender. According to one report, 80 percent of Hanbos

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imported mill equipment was financed with a preferential 1.5 percent loan from a government-owned bank. An investigation ultimately revealed that

government officials, after taking large sums in bribes, had exerted pressure on bank executives to provide unsecured loans to Hanbo. Subsequently, ten peoplea former Cabinet minister, four legislators, three bank heads and two Hanbo executiveswere indicted on charges of giving or receiving millions of dollars in bribes in exchange for helping to arrange the loans to Hanbo. THE PROBLEM This case has its roots in the relationship of South Korea's government and business. Analysts note that the government exercises strong control over business and the economy, and that paying off politicians or bureaucrats can open big profit opportunities for companies. In South Korea, as in other countries, especially in East Asia, relationships are an important part of business, and such relationships are often facilitated by money. During decades starting in the 1960's, the government chose some family-owned companies, known as chaebol, to be the engines of industrial development. The chaebol, which have grown into huge conglomerates that dominate the economy, were given loans at favorable interest rates by commercial banks that functioned essentially as arms of the government. This access to cheap debt soon became an addiction and many of the chaebols had loaded themselves up with an enormous of amount of debt obligations. When growth is strong, the chaebols can maintain high debt loads. However, when growth starts to slow and plateau, it becomes

difficult to maintain a high debt load and it's at this stage where problems can develop. By early 1997, the top 30 largest chaebols had debt to equity ratios of an unheard of 600 percent, compared to 420 percent in 1989. For a perspective, in the U.S., a debt to equity ratio of 150 percent would be considered high. In fact, most American companies would consider

this a seriously high level and certainly a level where the company's lenders would start to worry. In most cases, foreign investors and debt holders did not invest directly into the chaebol, but into the South Korean government and select Korean banks, which parcelled out the capital to the private companies and offered implicit guarantees to overseas lenders that they would be paid back. The Korean government had used some of their currency reserves to back the debt of the chaebols, which thus made that capital unavailable to defend their currency against speculators. This is what had happened on Hanbos case, banks lent amounts to Hanbo far in excess of what would have been prudent, in part because of pressure from government officials who are then actively bribed by Hanbo.

U.S. INVOLVEMENT AND SOLUTION In late 1997, the U.S. government initiated bilateral consultations with the Korean government regarding the financial support being provided by the Korean government to Hanbo Steel. The Administration engaged the Korean government at the highest levels in discussions aimed at ending any marketdistorting subsidies to Hanbo and ensuring a market-driven sale of the company. Working closely with the industry to gather information about potential subsidies to Hanbo, the Department of Commerce was then able to direct several rounds of detailed questions to the Korean government concerning any financial and operational support provided to Hanbo both prior to and following the companys 1997 bankruptcy. The Administration did not limit raising issues concerning Hanbo to bilateral consultations but also addressed these issues in other appropriate forums. Hanbo has now been sold through a process led by an independent investment bank. RECOMMENDATIONS In order to avoid future crises and keep what has happened on Hanbo Steel Co. from recurring, the following may be implemented: 1. Steel Industry Restructuring Due to decrease in demands and increasing competitors in the steel industry globally, restructuring the Koreas steel industry in a way can alleviate potential high risked borrowings. Support for selected steel producers that are financially weak, but potentially viable must be promoted. Support to be offered by a companys major creditor banks includes conversion of debt into equity, reductions in interest rates, and new loans. In addition, rationalizing

the steel industry by promoting mergers, acquisitions, liquidations, and plant shutdowns is also encouraged. 2. Reform banks lending practices and policies on corporate governance External bodies in charged of regulating corporations must implement policies and practices to increase transparency, enhance disclosure, improve accounting standards, develop risk management, strengthen supervision, and establish effective insolvency regimes. Koreas unsound lending practices contributed to the build up of excess capacity that led to bankruptcies for many chaebols. Lending decisions are also subjected to government influence. Thus, a major reform in Koreas financial sector is a need to address this problem and to stop further government intervention. Intensive monitoring must also be practiced for transparency and prudence.

CONCLUSION The case of Hanbo is important because it illustrates the close relationships among the Korean government, private banks, and the countrys chaebol that resulted in imprudent lending to steel producers. It is also important to recognize that government policies and private practices in the years leading up to Koreas financial crisis contributed to the structural weaknesses in their economy. Yes, maintaining close ties in the business sector are indeed beneficial, but beware, it could later on turn out to be a snare and lead one in compromising and engaging to actions, practices and norms contrary to law and moral. That so-called tie may harm and even slay ones reputation and peoples trust.

REFERENCES http://www.nytimes.com/1997/06/02/business/hanbo-steel-founder-given-15years-in-korean-scandal.html http://askakorean.blogspot.com/2011/07/imf-bailout-of-korea-during-eastasian.html

HAWAIIAN TELCOM
CASE OVERVIEW Hawaiian Telcom has a proud legacy dating back to 1883. Founded on a charter granted by King Kalakaua, the company has deep ties to the people and cultures of Hawaii. Hawaiian Telcom started as a landline phone entity named the Mutual Telephone Company. Over the years it became GTE Hawaiian Telephone Company, and later Verizon Hawaii, Inc. In 2005, the name was changed to Hawaiian Telcom when Verizon sold the company to a private equity firm. The transition was anything but smoothfollowing Verizons departure, Hawaiian Telcom had to replace several critical back-office systems. Combined with service offerings and technology that lagged behind competitors, and the need for loans to restore itself, Hawaiian Telcom was soon losing customers at an unprecedented rate. Under the strain of declining profitability and substantial debt, the company filed for Chapter 11 bankruptcy protection in December 2008. The downfall of Hawaiis dominant landline provider, despite decades of stable service from its progenitors GTE/Hawaiian Telephone Company and Mutual Telephone came as no surprise to telecommunications analysts and consumer advocates who saw trouble right from the start. The Carlyle Group and Verizon structured a deal that loaded $1.2 billion in debt onto Hawaiian Telcoms balance sheet. Critics of the deal werent impressed by the fact Carlyle had no experience running a telephone company either, and was likely to dump the company after dressing up the pig to inflate the companys value and walk away with big profits from the sale, as one analyst predicted. Long time Stop the Cap! readers know how this works only too well. Anyone who followed the exhaustive coverage of the downfall of FairPoint Communications this past year will see plenty of familiar warning signs piling enormous debt on the buyer, lots of promises made and broken, and plenty of billing and customer service problems that cause customers to flee to other providers. By 2008, 21 percent of the companys 700,000 customers did just that. Remarkably, the only people who suffered from the failing business plan Hawaiian Telcom subjected on the islands were

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customers, lower-level employees, and company vendors. The top management that made all of the bad decisions were insulated from the impact with fat bonuses, even as other employees were terminated.

THE PROBLEM Hawaiian Telcom would have taken steps to open itself up for gateway access between the mainland U.S. and Asia. It could have become a hub for the Pacific Region. Hawaiian Telcom seemed to almost trip from the start. It is likely a series of problems caused the companys distress. Once those issues have been identified then the company can be turned around. The fall of the company can be traced on its management and bad contracts. When it was acquired by the Carlyle Group, critics werent impressed because Carlyle has still no experience in running a telephone company and questions arises such as if Carlyle would just be going to mine the company for profits for its investors from rate increases, slash costs by reducing investment and firing employees and eventually resell the business for profit. Aside from these, it was also due to the companys billing problems. It managed to batch thousands of customer bills, double-changing them, crediting their accounts only to rebill them months later, and other irregularities. Last was the enormous morale issue. Years of ownership changes had left employees feeling disconnected and embittered leading to poor customer service. ALTERNATIVE SOLUTIONS 1. Develop a strong, strategic vision and mission for the company Hawaiian Telcoms survival depends on its future plans, thus, it must have a vision of what does the company want to be when it grows. After establishing vision is the mission or what must it do to attain its goals. This involves innovations on its services in order for this wireless carrier company to be and to stay competitive. 2. Hire an expert or seek another company to manage billing problems Due to billing issues which caused customers to complain and retract, the company must now consider changing Bearing Point as its billing manager and hire another before incurring further losses and lose 10,000 clients. 3. Be more employee-oriented

The company must establish and strengthen its relationship with its employees because for a servicing firm, they are valuable assets. If the employees are motivated and empowered, their productivity increases and thus customer service will be improved. EMERGED FROM BANKRUPTCY Due to the companys efforts, Hawaiian Telcom officially emerged from bankruptcy in 2009 concluding two years of bankruptcy proceedings. The companys reorganization reduces its debt by more than $850 million, or 74 percent. It retains $300 million of debt. Governed by a new board of directors, and retaining its management team, the company is now positioned to be more competitive in the changing telecommunications market. It has invested in its advanced fiber optic network and launched a new consumer portal, hawaiiantel.net, which combines e-mail, voice mail, streaming capabilities for music and video and weather and sports feeds.

CONCLUSION Having a one-proud legacy then concluding to a tragic bankruptcy, who would have thought that Hawaiian Telephone Company will be able to emerge from its pitfall? This clearly highlights the importance of having a good management and valuing your employees and commitment to clients. It also proves that ones mistakes can be a fuel to start again. By continuously developing strategies to have a competitive advantage in the business world, Hawaiian Telcom will indeed bring back its then lost legacy.

REFERENCES http://landor.com/#!/work/case-studies/hawaiian-telcom/ https://www.hightable.com/tax-issues/insight/hawaiian-telcom---a-sign-oftrouble-with-private-equity-in-the-phone-business-23428 http://www.washingtonpost.com/wpdyn/content/article/2008/12/01/AR2008120102575.html http://dealbook.nytimes.com/2008/12/02/carlyles-hawaiian-telcom-files-forbankruptcy-protection/