Samsung investors fall in line

Samsung is giving Korea’s National Pension Service an offer it can’t refuse: Support the nation’s biggest conglomerate in its fight against a foreign hedge fund, or else.

The Lee family that rules Samsung wants affiliate Cheil Industries to take over Samsung C&T at a price far lower than investors like New York-based Elliott Associates say it’s worth. Elliott is rallying support to block a deal it alleges is less about good business than the children of hospitalized CEO Lee Kun-hee wanting to solidify their claims to the company’s throne. As the biggest shareholder in Samsung C&T, with 10.15 percent of common shares, the state-run NPS arguably has the final say.

On the merits, the NPS should vote “no.” The mission statement of Korea’s largest investor - its “principle of public benefit” - gives it a responsibility to promote better corporate governance. That requires working to reduce the influence of the Lee family, which has lorded over Samsung for decades, at the expense of the company’s stock valuations.

But NPS is almost certain to side with Samsung - and for reasons that sum up everything that’s wrong with Asia’s fourth-largest economy.

The NPS is already in far too deep with the Lee family. In addition to its ownership of Samsung C&T shares, it holds stakes in at least 11 other Samsung affiliates, worth $18 billion. That means that what’s good for the Lees - including a low purchasing price for C&T - is good for NPS’s returns, and vice versa. To be fair, no one outside Chairman Choi Kwang’s inner circle knows how NPS will vote at the July 17 extraordinary general meeting. But the extent of NPS’s involvement with Samsung suggests Choi will have little choice but to back the Lee family.

President Park Geun-hye, for her part, has done little since her election 28 months ago to rein in Korea’s family-owned conglomerates, the so-called chaebol. Her plans to empower small and midsize enterprises, tighten anti-monopoly laws, and tax excess cash hoards haven’t gone farther than the drawing board. And when the economy slowed, Park actually turned to the very magnates she pledged to curtail to ask for their help boosting the economy. It’s entirely possible she will turn to the chaebol anew as the fallout from Korea’s outbreak of Middle East respiratory syndrome continues to slam retail sales and tourism.

(Even here there’s a Samsung connection. On Tuesday, heir apparent Lee Jae-yong, also known as Jay Y. Lee, apologized after one of the company’s hospitals was identified as a source of the MERS outbreak that has killed at least 27 people in the country.)

The Samsung name, meanwhile, has arguably become the global face of the Korean economy. That’s why lawmaker Kim Ki-sik is so worked up over Samsung’s brawl with Paul Elliott Singer’s hedge fund, which Kim sees a litmus test for global confidence in the country. “Samsung’s reaction so far has been disheartening in that it doesn’t seem to have put in much effort to convince its shareholders of the validity of the merger,” Kim, an activist turned legislator, tells Bloomberg News.

If Samsung succeeds in merging two of its units under such questionable circumstances, it would send a terrible message. Other chaebol will be sure to follow the Lee family’s example. The Lees, too, would surely feel emboldened to see what else they could get away with. As these family affairs play out, global investors, who already assign lower valuations to Korean companies than their peers in other countries, might begin leaving the Korean economy entirely. Meanwhile, the biggest domestic investment pools would get in even deeper with the chaebol.

It would be a heartening surprise if NPS said “no” to Samsung. Sadly, it has 18 billion reasons to say “yes.”

*The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.

by William Pesek