Lessons for Samsung

Shareholders of Samsung C&T endorsed a $7.7 billion all-stock takeover bid by Samsung affiliate Cheil Industries, paving the way for a generational power succession at the country’s largest corporate empire. Samsung Group was able to convince 69.53 percent of shareholders at a meeting to vote yes to the merger plan, far more than the necessary threshold. Elliott Associates, a U.S. hedge fund and the third-largest shareholder in Samsung C&T with a 7.12 percent stake, had been trying to block the deal through court action and a publicity pitch claiming the deal undervalued Samsung C&T. The 44-day battle between Samsung and Elliott ended with Samsung’s victory.

The merger will accelerate a realignment in Samsung Group’s structure. The merged entity will be the de facto holding company of the country’s largest conglomerate with a controlling stake in Samsung Electronics. That will pave the way for a smooth power transfer to Jay Y. Lee, the vice chairman of Samsung Electronics and the largest shareholder of the merged entity, from current Chairman Lee Kun-hee. The merger would also create a new company on Sept. 1, specializing in bio-industry, with sales of 34 trillion won ($29 billion).

The fight with Elliott renewed awareness of how local large companies can defend their management rights from assault by international hedge funds. The deal raised calls for stronger protection for corporate management. Authorities must consider legalizing differential common stocks, poison pills and golden parachute systems to help corporate owners better protect their management rights from hostile takeover bids. But these protections should be limited to companies that do their best to raise shareholders’ value. Only then can local companies be saved from costly battles to protect their management and spend more to contribute to growth and hiring.

The fight also exposed how conglomerates have been neglecting the rights of minority shareholders. Only after Elliott attacked did Samsung expand dividends to 30 percent and created a governance committee to promise more benefits to shareholders. If the company had tried harder to raise corporate value and shareholders’ interests, it could have avoided a costly fight with a foreign investor.

But the battle isn’t over yet. Elliott has filed an appeal and could demand a higher price for its stake. Samsung must remember that individual shareholders agreed to back the merger not because they liked it, but because they disliked siding with a foreign hedge fund.

JoongAng Ilbo, July 18, Page 26