Faulty adviceAs American hedge fund, Elliot Associates, escalated its battle to block the merger of two Samsung Group companies - Samsung C&T Corp. and Cheil Industries Inc. The proxy advisory firm Institutional Shareholder Services advised Samsung C&T investors to vote against the all-stock takeover bid from Cheil. It supported Elliot’s reasons for opposing the merger, saying the offer from Cheil, Samsung Group’s de facto holding company, significantly undervalued Samsung C&T’s shares and therefore would be a losing proposition for its shareholders.
The report from the supposedly reliable advisory group was hyped by the media as likely to have some effect on the outcome of the deal, but ISS is no United Nations. It’s a for-profit organization set up by MSIC to provide consulting and advisory services to hedge funds and other equity investors. It is the biggest player in its industry. In 2014, the company was acquired by the Vestar Capital Partners, an American equity firm founded in 1988 by members of the First Boston Corporation’s Management Buyout Group. ISS, therefore, has its roots in corporate hunting.
Activist hedge funds have been both pioneers and agents of change in the art of corporate buyouts. They pool capital from a number of investors and invest in a targeted company until they become their single largest shareholder. They can seek profits through sales of assets or mergers and acquisitions.
But such buyouts cost a lot and were too risky. From the 1990s, they acquired just enough shares to wield power in the board room or at shareholders’ meeting, or through court battles to seek gains. The ISS report underscores the nature of typical short-term capital investing practices. The group, which has influence over foreign shareholders, sided with Elliot’s demand for change in the corporate articles to allow shareholders to receive dividends in kind to bolster the share value.
But would that really benefit the company and shareholders in the longer run? The company must do well for its shares to rise. More dividends do not make the business any better. It only fattens the shareholders. Farsightedness is necessary to improve business. Samsung Electronics incurred losses for seven years to succeed in the memory chip business. ISS has no interest in the business side. It is either ignorant of the local bourse or disregards it. In its report, it wondered why Samsung C&T shares rose 14.8 percent and Cheil 15 percent when the merger was announced on May 26 despite little benefit from engaging in one.
Was it implying that the investors are all fools? Why would people invest in the stocks when there are no upsides? Was it suggesting that the conglomerate could be behind the share price rises? Samsung Group couldn’t have sustained a 20 percent price gain through manipulation for more than a month while investors and supervisory authorities were watching.
If the group did its homework, it could have found that share prices were boosted by the expectation of a better corporate outlook after a realignment in management. Cheil would officially become the holding company of Samsung Group through its merger with Samsung C&T, not an acting one. Samsung C&T does not have any reason to see stock gains. The trade sector is hardly profitable anymore. The construction division has also been doing poorly due to a prolonged slump in the construction market. Its shares benefited from the outlook. Samsung C&T cannot offer the upside alone.
It is not easy for chaebol to create a holding company. Samsung Group is under suspicion of doing everything to make the company prosper. That is how Samsung manages to succeed in new businesses.
In comparison with Samsung Electronics shares, which cost 1.3 million won ($1,155) each, Cheil Industries’ stock value of 200,000 won could look cheap. Samsung C&T shares shot up 15 percent purely on expectations of the holding company’s value.
We tend to overestimate appraisals of overseas organizations. One local media said the ISS decision could be a turning point in the court dispute. Proxy advisory groups’ opinions cannot be overlooked, but they must be studied with scrutiny. The investor has to do his own homework too.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, July 6, Page 29
*The author is an economics professor at the National University of Singapore.
by Shin Jang-sup