Samsung to speed up ownership restructuring
By Yoon Ja-young
Lee Jae-yong, Samsung Electronics vice chairman
With Samsung Electronics Vice Chairman Lee Jae-yong joining the board of directors, the country’s largest conglomerate is expected to accelerate the reform of its corporate governance structure, which the market expects will not only help him inherit managerial control but also enhance shareholder value.
Founded by Lee Byung-chul in 1938 as a trading company, Samsung Group has grown into a global giant under the charismatic stewardship of the owner family. The management by the family enabled strategies based on long-term perspectives, unlike hired CEOs who are often tempted to focus on short-term achievements at the expense of long-term benefits.
As the group has grown to its colossal size, however, it has become a complicated issue for the owner family to protect their managerial control over the business, especially the group’s flagship Samsung Electronics. The stake under control by the owner family stands at slightly over 18 percent even when including shares held by other Samsung subsidiaries. Foreign investors, meanwhile, hold over 50 percent of the company.
Other conglomerates that succeeded in smooth transition of managerial control changed governance structure. Lee Sang-hun, an analyst at Hi Investment and Securities, points out that there is one prerequisite for the process ― the juniors should prove their managerial capability. In the case of Lee Jae-yong’s capability, the analyst said it has been somewhat proven through the business restructuring he led and the rising share price of Samsung Electronics. It has risen over 30 percent since January.
“The rally was mainly due to improving performance, which would be proving the managerial capability of Lee. He is also displaying his qualifications in top management, coping with the Galaxy Note 7 crisis,” the analyst said.
Governance restructuring to benefit shareholders
Though Samsung Group has not announced its plans yet, the market has been speculating about how governance restructuring will go. The most-often mentioned scenario is setting a financial holding company and a non-financial holding company based on Samsung Electronics. In this case, Samsung Life Insurance is likely to be transformed into a financial holding company. It has already been increasing its stake in the group’s financial subsidiaries such as Samsung Fire and Marine Insurance and Samsung Card.
Samsung Electronics, meanwhile, may be split into a holding company and an operating company. The shareholders of Samsung Electronics will receive shares of the new operating company, through which the owner family will likely be investing in the holding company in exchange for shares. By merging the Samsung Electronics holding company with Samsung C&T, the owner family can further increase their stake in the holding company.
Analysts point out that governance restructuring will enhance shareholder value. The holding company system in fact has been recommended by the government for better transparency.
Oh Jin-won, an analyst at Hana Financial Investment, said the splitting of Samsung Electronics will lead to higher share prices of not only Samsung Electronics and Samsung C&T but also all Samsung Group subsidiaries.
He analyzed 27 scenarios which involved splitting the corporation into a holding company and an operating company. After nine months since the decision to split, the share prices rose on average 90.86 percent.
“The splitting and transformation into a holding company entails stronger governance by major shareholders. Hence, dividend payout increase is evident after the split,” Oh said, adding that it would be especially so with companies such as Samsung Electronics which has ample room to give back to shareholders.
He estimated that the tech giant would see share prices rise 35 percent if the value of its business units are properly reflected.
“There will likely be efficient management of capital as well as restructuring of unnecessary stakes,” he said, pointing out that Samsung Electronics holds stakes in unrelated businesses such as Samsung Heavy Industries, Hotel Shilla, Cheil Worldwide and Samsung Biologics, unlike other global IT giants.
Morgan Stanley also noted in a recent report that the group’s restructuring will lead to “greater transparency, revaluation of assets and higher dividend payments.”
That is why Elliott Management is also suggesting that Samsung Electronics split into a holding company and an operating company. It also requested the company list its shares on Nasdaq. The activist fund based in New York, which has 0.62 percent stake in Samsung Electronics, said that the “unnecessarily complex” structure of Samsung Group was undermining the shares of the tech giant.
While acknowledging the achievements of the founding family and management of Samsung Electronics, which has grown into one of the world’s most important technology companies, the fund also pointed out that “the remarkable achievements of Samsung Electronics are not being properly reflected in the market’s valuation of its shares,” adding that the problem needs to be addressed.
“We see this as a defining moment and a tremendous opportunity for the forthcoming new leadership of Samsung Electronics to further advance the company’s remarkable legacy. Now is the time for real shareholder value, corporate governance and transparency improvements, which we believe will help Samsung Electronics achieve an equity market valuation that properly reflects its first-class portfolio of businesses. We sincerely hope that Samsung will seize this opportunity,” the fund said in a letter sent to Samsung Electronics.
At a conference call on Thursday, Samsung Electronics’ chief of investor relations said that the board and the management are carefully reviewing “the entire proposals” by Elliott, implying that it is considering governance restructuring and special dividends. Samsung Electronics announced that it plans to respond with “broad directions” by November.