A couple of days ago New York-based hedge fund Elliott Associates publicly proposed that Samsung Electronics be split up into a holding and operating company as well as give shareholders a one-time dividend amounting to $27 billion from the company’s cash reserves. Elliott owns 0.62 percent of Samsung Electronics so it’s well within its rights to publicly make that demand which has also found support from countless minority shareholders. Samsung Electronics shares surged to a new record high following the proposal, but there’s more here than meets the eye. Samsung – particularly the founding Lee family – and Elliott Associates have a strained relationship after the bitter proxy battle of 2015.
We first need to get a sense of Samsung’s corporate structure to gain a better understanding of what Elliott wants to achieve and what it tried to achieve last year. The Samsung Group is a family-run conglomerate, they are commonly known as chaebols in South Korea and the country has quite a few of them, such as Samsung rival LG. There are 58 affiliates under the conglomerate’s umbrella all of which are bound together by a complex web of cross-shareholders.
Elliott’s fight with Samsung and by extension with the Lee family last year was over the proposed merger of Samsung C&T and Cheil Industries. It argued that the Lee family orchestrated this deal to consolidate their power over Samsung Electronics – which is most certainly the crown jewel of the Samsung empire – at the expense of minority shareholders. Elliott had a 7.1 percent stake in Samsung C&T at that time while heir apparent Lee Jae Yong who is also the vice chairman of Samsung Electronics and his family members owned 42 percent of Cheil Industries which itself owned just 1.4 percent of Samsung C&T.
Now stay with me here because this is where it gets interesting. Prior to the merger, Samsung C&T owned 4.2 percent of Samsung Electronics. A takeover of Samsung C&T by Cheil Industries would allow the Lee family to further consolidate their stake in Samsung Electronics, they already own 4.8 percent of it directly. Samsung C&T also owns 19.3 percent of Samsung Life Insurance Co. while the Lee family has a 20.8 percent stake in this affiliate. Samsung Life owns 7.4 percent of Samsung Electronics. So even with a direct single-digit stake in the conglomerate’s crown jewel, these cross-shareholdings, and last year’s merger have helped the Lee family cement their hold over Samsung Electronics.
Elliott rallied minority shareholders behind it and also approached the courts in South Korea in a bid to block this merger but the Lee family was able to put together two-thirds of the votes needed for the merger to go through. While the conglomerate said that it would listen to those who proposed the deal and take action on some proposed measures, Elliott then asked Samsung C&T to buyback its stake after it lost the proxy battle.
Industry watchers say that this merger was just one of the first steps that the Lee family took last year to increase their control over the conglomerate as they initiate the succession. Samsung has only had a chairman in name only as the current 73-year-old patriarch Lee Kun-hee suffered a heart attack in 2014 and has since been confined to the bed. His 47-year-old son Lee Jae Yong is undoubtedly the heir apparent and the C&T-Cheil merger was widely accepted as one of the ways he and his two sisters firmly brought the entity under their control. Lee Jae Yong was recently named to a seat on the company’s board of directors which was another crucial step before his eventual elevation to the chairman of the group.
To appease investors and shareholders after last year’s events, Samsung took some initiatives to increase shareholder value. It has completed a $10 billion share buyback program and has also promised to increase the dividend ratio. It was even said back then that splitting Samsung Electronics was one of the ideas that the heir apparent was considering to embrace change and restructure the conglomerate as a new leadership gradually takes its place at the helm of one of the biggest companies in the world.
Elliott wants Samsung’s crown jewel to be split into two. It has proposed that the holding company should be merged with Samsung C&T “on fair terms,” which means that some conditions might be attached to the Lee family’s control over the entity. It wants the operational company of Samsung Electronics to be listed on the Nasdaq in the US. The hedge fund has also proposed that Samsung should pay a one-time dividend amounting to $27 billion from its cash reserves of almost $70 billion and promise to dole out 75 percent of the company’s profits each year as dividends after meeting capital expenditures. Samsung’s existing dividend yield is around 20 percent. This is one proposal that the vice chairman and other executives might particularly be opposed to as Samsung Electronics has long resisted calls for increasing dividend ratio because it prefers to have a huge amount of cash in the bank as a cushion in the challenging business environment.
The hedge fund’s move to make these unsolicited corporate restructuring proposals public might have taken Samsung by surprise. It’s a rare attempt by a US-based activist investor hedge fund to push for corporate restructuring in one of South Korea’s biggest conglomerates which holds a lot of power and influence in its country. Following Elliott’s proposal, other offshore investors that back the hedge fund’s position are likely to put pressure on Samsung as well, and that might be concerning for the company because 11 of the top 20 shareholders of Samsung Electronics are international investors.
However, the proposal does come at an interesting time for Samsung. It’s in the process of paving the way for Lee Jae Yong to eventually take over as chairman of the conglomerate from his father. Samsung is unlikely to do all that Elliott proposes particularly given that it was able to beat Elliott last year and the conglomerate would not want to be seen bowing down to the demands of a foreign hedge fund. Even if the Lee family has considered splitting up Samsung Electronics so that the crown jewel can achieve its true intrinsic value as they prepare for the future, they are certainly going to engage with Elliott on their own terms. Whether or not things will get bitter like they did last time remains to be seen. Samsung has said that it’s going to “carefully consider” this proposal but there has been no confirmation as yet regarding direct contact with the hedge fund, it’s going to be very interesting to see how things progress from here.
What’s clear right now is that Samsung is more likely to work with Elliott Associates this time around rather than against it.
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