'Samsung SDS needs merger with Samsung Electronics for rebound'
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A file photo of the Samsung SDS headquarters building in Jamsil, eastern Seoul. / Courtesy of Samsung SDS
By Kim Yoo-chul
A merger between Samsung Electronics and Samsung SDS is needed to help the latter find new growth momentum, analysts said Tuesday.
“Samsung SDS is losing its fundamental competitiveness,” Shinhan Investment analyst Kong Young-kyu said in a report to clients. “Without structural changes, its stock prices will further fall. The best-case scenario for Samsung SDS is a merger with Samsung Electronics.”
Kong added the premium in Samsung SDS stocks has been dropping after the company’s biggest shareholder Samsung Electronics Vice Chairman Lee Jae-yong recently reduced his stake in Samsung SDS.
“Samsung SDS’s key businesses are being challenged and actually the company is losing its momentum,” the analyst said.
Samsung Electronics officially denies the continuing rumors of a merger Samsung SDS. Still, major investment banks said they don’t have a firm view on how or when Samsung Group’s still-complex ownership structure would be sorted out and how that would affect Samsung Electronics' minority shareholders.
But according to the data from the Korea Exchange (KRX), the country’s main bourse operator, Samsung SDS shares have dropped 36 percent so far this yeark, mostly hit by massive unloading by local institutional investors.
Since February, when Samsung’s vice chairman sold 1.58 million shares of Samsung SDS, local institutional investors continued cutting their portions in Korea’s top IT service provider.
By April 8, their combined selling of Samsung SDS reached 102 billion won or 569,000 shares.
“Investment sentiment on Samsung SDS worsened after Vice Chairman Lee’s unloading of shares,” said Kwon Seong-ryeol, an analyst at Dongbu Securities.
Kim Dong-yang at NH Securities said a fall in Samsung SDS shares will hurt the best interests of key shareholders and complicate possible merger plans.
“Samsung SDS shares will rise only if Samsung SDS strikes merger and acquisition (M&A) deals using its internal cash reserves, which is known to be 1.9 trillion won, or a merger plan with Samsung Electronics gets momentum,” said the analyst.
E-Best Investment cut its target on Samsung SDS to 220,000 won from 310,000 won in anticipation the momentum will remain weak.
Samsung SDS has become Samsung group’s logistics control tower. It is Korea’s largest IT service provider, with 54 percent of its IT revenue last year coming from Samsung Group affiliates.
“We see SDS as the key funding vehicle for the children to expand control of the group as it trades at premium multiples and has no strategic stakes that the Lee family cannot afford to surrender. This will allow them to ultimately relinquish control of the stock,” investment banking company CLSA said in a recent report.
“Our base case assumes the children tender their Samsung SDS shares into a tech holding company to maximize the after-tax value of the position and the control for the end structure,” it added.