ISS report on Samsung C&T unconvincing
Stupid market or stupid analysis?
By Shin Jang-sup
Shin Jang-sup
What do you make of the following two passages from an “influential” market report?
“The (market) reaction at the announcement on May 26 was very positive, with Samsung C&T’s stock increasing by 14.8 percent and Cheil Industries by 15.0 percent, despite the fact that the merger carries no premium.”
“A combination of public market undervaluation of Samsung C&T shares, and a public market overvaluation of Cheil Industries shares, makes the deal significantly disadvantageous …”
The assumption of the report? A stupid market. My conclusion? Stupid analysis.
A merger advisory report released by Institutional Shareholder Services (ISS), an advisory firm on shareholder votes, advised Samsung C&T shareholders to reject the merger plan between the two Samsung companies and endorsed the position of activist hedge fund Elliott Associates.
But the main problem with the report is that it does not want to explain the market movement, although it contains extensive analyses of assets and the “intrinsic values” of the two companies.
If share prices jumped without a “premium,” this would have been due to one of two possibilities: the market is stupid or somebody is manipulating the market.
The Korean stock market is almost completely open and all sorts of foreign and domestic institutional investors have their stakes in Samsung C&T and Cheil.
Many of them would have sold their shares if they thought the prices rose without reason, and, as a result, the prices would have returned to reasonable levels. It is unthinkable that some stupid investors pushed the prices up and the remaining stupid investors did not act on it.
The perception of the all-powerful Samsung to manipulate the stock market is somehow widespread among foreign journalists. The Seoul correspondent from quite a reputable foreign outlet asked me “what is stopping Samsung from doing so?”
This is demeaning to the Korean financial regulatory authority and other foreign and domestic institutions operating in Korea. Are they so powerless?
In fact, the reasons for the price movement can be found from the existence of the “premium.”
Cheil’s share price has continued to rise mainly due to the premium on the de facto holding company of the Samsung Group. It is not simply a financial holding company but a business holding company.
Investors had expected that Samsung Group would mobilize all available resources to make this de facto holding company a success and, if so, its share price, lower than 200,000 won, looked very cheap compared with Samsung Electronics, whose share price was hovering over 1.3 million won.
The movement of Samsung C&T’s share price also can be explained by this premium. A saying in the stock market goes, “stocks are fed on dreams.” Stocks rise on future prospects, rather than on past performance or existing assets.
Considering the current market situation of the construction and trading sectors, it is impossible to dream about a 15 percent rise in a day. With the merger plan, however, it was able to ride on the premium of the de facto holding company. It can then dream its new future as a New Samsung C&T.
Dismissing these reasons, the ISS report only focuses on the possibility of “unlocking” values of the company by distributing assets as dividends. This will certainly benefit the current shareholders who are entitled to them.
However, it does not guarantee the growth of the company. If so, managing a company would be a fool’s job.
This recommendation does not sound strange if one pays attention to the fact that the owner of ISS, Vestar Capital, a private equity fund, was founded by corporate raiders from First Boston’s leveraged buyout team and their investment philosophy was shared later by activist hedge funds like Elliott.
The ISS report only made that philosophy clear again: “unlock” value by distributing assets rather than by creating value by making businesses work.
The writer is an economics professor of the National University of Singapore.