The world's No. 1 and 2 shipbuilders, Hyundai Heavy Industries and Daewoo Shipbuilding and Marine Engineering, have merged. State-run Korea Development Bank, the main shareholder in Daewoo, signed a deal on Friday to sell its 56-percent stake to Hyundai Heavy.

A new holding company will be established with the two firms as separate subsidiaries. KDB will receive equivalent shares to the Daewoo stake in the holding company, which will make the bank its second-largest shareholder. Hyundai Heavy will have to spend W2.5 trillion to pay off Daewoo's debts (US$1=W1,137).

The merger creates the world's biggest shipbuilder as Hyundai already has Samho Heavy Industries and Hyundai Mipo Dockyard under its wings.

KDB and Hyundai Heavy say the merger will make Korea's shipbuilding industry more efficient and competitive. "At present, Chinese and Singaporean shipyards are catching up quickly and there was a sense of desperation that a failed deal would cause Korea's shipbuilding industry to follow the deterioration of Japanese rivals," KDB chairman Lee Dong-geol said.

Daewoo has been in the hands of KDB for 20 years, but many obstacles lie ahead. Industry watchers say due diligence and reviews by rival countries will take another year.

Another problem is the possible backlash from unionized workers. Hyundai Heavy, Daewoo and KDB pledged management freedom, job stability and the retention of existing subcontractors, but 500 Daewoo workers and around 100 workers from Hyundai Heavy held a protest rally in front of KDB headquarters in Seoul on Friday.

The new giant also faces a tough road as rival countries review whether it constitutes a monopoly. The merged company accounts for more than 21 percent of global order backlogs and 50 percent of the global market for lucrative LNG transport vessels.

Japan has already filed a complaint with the World Trade Organization claiming that the Korean government unfairly supports shipbuilders in violation of treaty rules.