Samsung faces greater foreign investor risks

By Yoon Sung-won

Foreign shareholders of Samsung Electronics and other Samsung units are expected to press the world’s top smartphone maker and other affiliates harder to gain short-term benefits, such as more dividends, amid a leadership vacuum, officials and analysts said Sunday.

Samsung Group heir Lee Jae-yong, also vice chairman of Samsung Electronics, was sentenced to five years in prison for bribery and other charges Friday.

Some analysts worry foreign vulture capitals might target Samsung, as U.S. hedge fund Elliott Management did last year.

“Those who run a business in Korea lack proper political protection on corporate control as politicians focus on putting limits on CEOs and business leaders instead of helping them establish a stable corporate control,” said Lee Byung-tae, a business administration professor at the Korea Advanced Institute of Science and Technology (KAIST). “In such an environment, enterprises are more likely to be struck by foreign vulture capitals in times of crisis.”

Samsung Life Insurance owns 8.13 percent of Samsung Electronics and Samsung C&T has 4.57 percent.

Samsung Chairman Lee Kun-hee holds a 3.82 percent stake in Samsung Electronics, his wife Hong Ra-hee 0.83 percent, and his convicted son Jae-yong 0.64 percent.

This means the owner family and Samsung units only have about a 20 percent share of Samsung Electronics. Vice Chairman Lee indirectly controls Samsung Electronics with his 17.08 percent stake in Samsung C&T.

With the chairman remaining hospitalized, Elliott demanded Samsung Electronics last year separate itself into two entities and make one of them a holding company to become more transparent.

The U.S. hedge fund also requested the company provide shareholders with about 30 trillion won in extra dividends.

At that time, Samsung Electronics was able to resist Elliott’s demands by promising to retire its own shares worth 49.3 trillion won ($44 billion), aiming to improve shareholder value.

Alongside Elliott, KAIST professor Lee cites another past case regarding SK Group hedge fund Sovereign Asset Management in April 2003. At that time, Sovereign became the second-largest stakeholder of the group’s holding company by acquiring a 14.99 percent stake and demanded the executives step down.

“As we could observe in cases regarding Sovereign and Elliott, foreign vulture capitals have been quite successful here in the past as they targeted Korean enterprises at a time when their largest stakeholders committed moral, legal faults,” he said.

“Now that they have all the reason to attack Samsung Electronics, it is more likely for a foreign vulture capital to target the company.”

Lee also said Samsung may not seal major acquisition deals in the near future without its chief in his post.

“Under Korea’s unique business atmosphere, CEOs will hardly decide upon acquisition deals worth billions of dollars without the owner of the business,” he said.

Analysts said foreign activist investors are likely to demand Lee be stripped of board membership at Samsung Electronics, taking issue with his bribery conviction.

Another economics professor in Seoul, who asked not to be named, concurred.

“There might be direct attacks from foreign shareholders including vulture capitals. But they can make bolder requests for dividends or governance restructuring,” he said.

Upon growing demands from foreign investors, Samsung has steadily increased dividends and wrote off existing shares to boost shareholder value, which will in turn undermine its capabilities to expand investments for future growth.

“Without Lee, Samsung is also unlikely to make major investments and merger deals in the near future. Major acquisitions and investment deals are not just about paperwork and more about trust-building procedures between actual leaders of the businesses. The leaders should be there to persuade major stakeholders.”

IBK Securities research head Lee Jong-woo, on the other hand, said the absence of the Samsung heir is unlikely to have a significant impact on the conglomerate’s business administration.

“Korea’s stock markets have highly nationalistic characteristics,” he said. “If a foreign investor tries to interfere with Samsung’s business management, all its local stakeholders, from the National Pension Service to smaller institutional investors, will do everything to stop the interference.”