Why KOSPI Investors Hate This One Corporate Trick: The 'Mul-jeok Bun-hal' Story

You’d think if a company announced it was spinning off its hottest, most valuable division—say, its new EV battery unit—investors would be celebrating. Popping champagne, right?

Well, in Seoul, it’s the opposite. They’re often furious. You’ll just see the parent company’s stock on the KOSPI start to tank.

This reaction looks totally illogical from the outside. But it’s all because of a specific Korean corporate trick called “Mul-jeok Bun-hal.” It’s a phrase every local investor knows and, honestly, has learned to fear. It might translate to "physical spin-off," but the way it's used is the real story, and it explains so much about the headaches of the Korean stock market.

What 'Mul-jeok Bun-hal' Actually Means (And Why It’s Not a Normal Spin-Off)

So, what is it? On paper, it’s a vertical spin-off. But the details are what kill you.

Let’s use an example. Say Company A (the parent) decides to spin off its amazing battery division into a new company, Company B.

• In a normal spin-off (like in the US or Europe): If you owned stock in Company A, you would automatically get shares in the new Company B. Simple. You now own both.

• In a Mul-jeok Bun-hal: Company A creates Company B... but it keeps 100% of Company B’s shares for itself. The original shareholders in Company A? They get absolutely nothing. No new shares.

  
  

So after the split, you’re just left holding stock in Company A, which is now basically just a holding company. The valuable battery business you thought you owned? It's now locked inside a separate company that you have no direct stake in.

The Infamous Case: LG Chem and LG Energy Solution

The case that everyone in Korea points to is LG Chem. It’s the textbook example.

Back in 2020, LG Chem announced it was using Mul-jeok Bun-hal to carve out its booming battery division. This new company would be called LG Energy Solution (LGES).

Now, you have to understand, people were buying LG Chem stock specifically to get a piece of that battery business. It was the entire future of the company.

The market reaction was instant and ugly. LG Chem’s stock price just collapsed, dropping over 30% in the following months. Investors weren't stupid; they knew they were being completely sidelined.

It was so bad that even Korea’s National Pension Service (NPS)—a huge, state-run fund—publicly voted against the plan. They said it destroyed shareholder value. But, of course, the plan passed anyway.

The Double Discount Problem: The IPO After the Spin-Off

The real pain for regular investors almost always comes in step two. This isn't just about rearranging boxes on an org chart. It’s about raising money.

Usually, about a year or two after the spin-off, the parent company takes that new, valuable subsidiary and lists it on the stock market with its own Initial Public Offering (IPO).

This is where the double discount kicks in.

• First Discount: The parent company (LG Chem, in this case) already lost value because it’s now just a holding company. Holding companies in Korea almost always trade for less than the value of what they own.

• Second Discount: When the subsidiary (LGES) has its own IPO, investors can just go buy the "pure" battery stock directly. Why would they bother owning the complicated parent company anymore? It makes the parent stock even less attractive.

  
  

This is exactly what happened. LGES had a huge, record-breaking IPO in 2022. It was a massive success... for LGES. For the original LG Chem investors? It was just the final nail in the coffin.

This spin-off and re-list strategy was also used by the tech giant Kakao. They spun off and listed KakaoBank and KakaoPay one after another. It created a lot of investor fatigue and a feeling that the parent company was just hollowing itself out.

The Hidden Logic: Why Do Companies Do This?

So why do they do it? From a regular investor's point of view, it looks like a complete rip-off.

But from the company’s controlling family's point of view, it’s a brilliant move.

The main goal is to raise huge amounts of cash for the new business without losing control of the parent company.

Think about it: they keep 100% of the new subsidiary, sell off 20-30% of it in an IPO, and all that cash flows right back to the parent company (which they control). They get to fund their new venture using public money, all while their own grip on the entire empire remains unchanged.

For decades, this was a perfectly legal and almost perfect way to raise funds while making sure minority shareholders had no say.

If You're Outside Korea, Know This

So, if you're looking at the Korean market from the outside, here’s the takeaway.

• Ask the Right Question: When you hear a KOSPI company is doing a spin-off, the first and only question you need to ask is: Who gets the new shares? If the answer is "the parent company," you’re looking at a Mul-jeok Bun-hal.

• The Korea Discount: This whole mess is one of the biggest reasons for the infamous Korea Discount. It’s the term for why Korean companies are often valued so much lower than their global peers. It’s a discount for bad corporate governance, plain and simple.

• It's About Control: These moves are rarely just about making the business more efficient. They are almost always about raising money while protecting the controlling family's ownership stake.

  
  

The Market Is Forcing a Change

The public anger after the LG Chem deal was so intense that regulators finally had to step in. It was just too much. So, things are slowly, finally, starting to change.

The government has new rules. If a company does a Mul-jeok Bun-hal and then tries to list that new subsidiary within five years, it faces a much tougher review from the Korea Exchange.

The biggest change, though, is something called appraisal rights. Now, shareholders who vote against the spin-off plan have a new power. They can legally demand that the company buy back their shares at a fair price—specifically, the price before all the bad news sent the stock crashing.

It’s a big step forward. But the distrust is still there. The legacy of Mul-jeok Bun-hal explains a lot about the cynicism many Korean investors have toward their own stock market.

Disclaimer: This article is for educational and informational purposes only and should not be considered as financial, investment, or trading advice; always conduct your own research and consult with a qualified financial advisor before making any investment decisions.