Samsung clears major hurdle for power succession
Samsung C&T CEO Choi Chi-hun talks to shareholders and investors on Friday after the shareholders meeting at the aT center in Yangjae, southern Seoul. / Yonhap
By Kim Yoo-chul
Lee family now more aligned with minority shareholders. Focus shifted on Samsung SDS
By Kim Yoo-chul
Samsung Group cleared the biggest hurdle in its bid to transfer power to the third-generation of the Lee family after a major win over one of the most threatening global hedge funds ― Elliott Associates.
Friday’s approval by Samsung C&T shareholders for the firm’s merger plan with Cheil Industries means Samsung C&T will be the de facto holding firm at Samsung, helping Samsung-heir and Samsung Electronics Vice Chairman Lee Jae-yong increase his influence on the conglomerate.
“Samsung’s move to succeed its power to the third generation will be accelerated. It’s fair to say that the move is entering its final stage,” said a Samsung official, adding that the approval will help streamline Samsung’s ownership structure consisting of about 70 affiliates tied together by a complex web of cross-shareholdings.
The Samsung vice chairman Lee holds a 16.5 percent stake in Samsung C&T with Samsung C&T holding 4.1 percent of Samsung Electronics.
“Samsung Vice Chairman Lee will get an additional 4.1 percent share in Samsung Electronics via Cheil Industries. Before the merger between C&T and Cheil Industries, Lee’s holdings in Samsung Electronics were a minor 0.57 percent. The key question is how Vice Chairman Lee will increase his share in Samsung Electronics, the most-crucial affiliate of the group. Friday’s approval addressed the issue,” said another Samsung executive, separately.
Samsung’s cross-holding systems will be simplified with C&T-Samsung Life Insurance and Samsung Electronics. Lee Kun-hee, chairman at Samsung, holds a 3.4 percent stake in Samsung Electronics.
Chung Dae-ro at KDB-Daewoo Securities said the approval of the merger has strongly been needed in terms of views about the shift.
Shin Jang-sup, an economics professor at the National University of Singapore, said the merger approval doesn’t necessarily mean that the power succession plan will be completed “easily,” as Vice Chairman Lee is under pressure to address issues raised by leading foreign investors.
Positive impact on Samsung Electronics
Analysts and officials say Elliott Associates is expected to focus on Samsung SDS as the group’s IT solutions affiliate is also considered to hold the “key” for the completion of the power succession.
The junior Lee holds an 11 percent stake in Samsung SDS.
Bernstein Research said in a report that the merger would be positive long-term for Samsung Electronics’ share price.
“For Samsung Electronics, we believe strengthening of control over the Samsung Group by the next generation of the Lee family is in the long run positive for minority shareholders, with better prospects of improved cash return going forward. We continue to believe Samsung Electronics is grossly undervalued at its current share price,” Mark C. Newman at Bernstein said in the report after the merger approval.
Newman also stressed that a simplified Samsung ownership structure after the merger shows stronger control over the major Samsung affiliates by the family, especially Vice Chairman Lee.
“While our investment thesis on Samsung Electronics does not depend on this news, we continue to find a strong investment case for the company’s shares,” it said.
Although there’s speculation that Samsung SDS will be merged with Samsung Electronics, the possibility of this scenario has been reduced at least in the “short-term.”
“The main concern for Samsung Electronics’ minority shareholders about the potential merger with SDS is the share price-based exchange ratio that was used in Cheil-C&T would have more than 10 percent dilution,” the research firm said.
“With Elliott’s challenge toward this method, we believe an excessive transfer of value from Samsung Electronics to Samsung SDS has become unlikely,” it said.
Samsung officials said the attacks by Elliott awakened its top management to the importance of measures to tackle further challenges by foreign hedge funds.
“Reports such as Nomura Securities have said Samsung Electronics will become the next target by hedge funds as foreign holdings at the world’s leading technology firm have reached 52 percent. Samsung has to agree that a strengthened shareholder-return policy will be introduced by all Samsung affiliates,” said the Samsung executive.