A half-baked victory

It’s comforting and pleasing to have global brands among domestic corporate names. Familiar corporate names on the streets of a cosmopolitan foreign city make any Korean proud. I remember looking up at a Samsung TV ad on the streets of Stockholm to lift my spirits, while being awed and jealous of Swedish craft in social democratic policy 10 years ago.

The LG banners on the bridge were comforting while I was lost in the majesty of the Red Square in Moscow. I make a habit of placing my Samsung smartphone on the table while attending international conferences in the United States and Europe. It’s a kind of silent confidence builder, reminding me and others that I came from a nation that makes a best-selling phone.

But Samsung Electronics, which has become almost synonymous with Korean branding, and has sustained the local economy since the Asian financial crisis, can also fall prey to foreign hedge funds. Large Korean shareholders are virtually on their own to protect management rights, and Korean companies were up for grabs at fire-sale prices after the financial crisis in the late ’90s. Drawing foreign investment is essential to elevate a company to multinational status, but at the same time, a company can lose its national identity when foreign stake-holding becomes large. Foreigners own 51.8 percent in Samsung Electronics and 51 percent in Hyundai Mobis. Owners and domestic investors possess about 30 percent in major Korean companies, and their management could be threatened if they come under attack by foreign hedge funds.

Hedge funds are vulture funds. They roam around in large flocks in search of prey and feed mercilessly and ravenously. They have no mercy or ethics. Profit making is their upmost value.

Despite its noble name, Elliott Associates is no different from a vulture that can spot a good feed from far away and snatch it away before any rivaling predators come near it. They circle around areas with volatile swings in bond prices, assets and equities. They prefer fresh meat - or promising companies. Many came under its assault.

SK Group’s owner, with low stake-holding, had a hard time fighting off hedge funds like Tiger Management and Sovereign. A kettle of vulture funds with funds worth 20 trillion won ($17.3 billion) are circling the Korean Peninsula.

Samsung C&T won the first war on its turf with minority shareholders giving support to Samsung Group in its fight with Elliott Associates. But a heavyweight vulture like Elliott didn’t expect to win easily. It tested the country’s mightiest company.

Other hedge funds likely watched with deep interest. The contest should be a valuable lesson to other strong corporate candidates like Hyundai Motor, SK Telecom and LG. Vultures know no borders. If Elliott had won over shareholders, the investment plans for Korea Inc. would have experienced a major setback.

Companies would have had to pour what they have in order to defend their management. The supplementary budget of 10 trillion won that the government has raised to combat the damage from the outbreak of Middle East respiratory syndrome (MERS) and this year’s drought is a petty sum compared to what domestic companies would have had to spend.

The National Pension Service, the largest investor, and local shareholders decided to back Samsung C&T in its contest with Elliott - its third-largest shareholder - not because they were thrilled about the idea of a merger. The market was equally unimpressed: Shares of Samsung C&T fell by 10.39 percent upon news regarding the vote on the merger.

None of the shareholders were fully briefed on the purpose and vision behind this internal decision on reorganization. Their interests weren’t on the company’s mind when it pushed ahead with the merger. Only after Elliott waged a legal and proxy campaign to overturn the plan for the merger, did Samsung unleash an army to persuade its shareholders. Investors coolly responded that the briefing came too late.

Disclosure and respect for shareholders’ votes is fundamental to shareholders’ rights. They entrusted their vote, but remained suspicious. The company’s pitch that the corporate value will be heightened through synergy and future potential from the merger is too abstract. What would interest shareholders more would be the immediate impact on the stock price. They are shaken by Elliott’s argument that C&T shares have been undervalued and losses would be inevitable.

The company has been reasoning that the merger would streamline the group’s intricate cross-affiliate structure. But the equation also ensures a stronger hold by founding family members and legitimizes the power succession from father to son. The decision to vote yes or no comes down to a pretty simple choice. Korea’s conglomerates are indebted to the people. Samsung and Hyundai have become global names because Korean citizens were forced to save to support national companies and consume national brands. Most of the assets at a Korean home have domestic labels. Again, a Korean company had to turn to nationalistic sentiment to save itself. So companies must return the favor. They must respect and appreciate stockholders to make the citizens their stakeholders. The people could lose their patience and turn their backs.

Hwang Young-key, head of the Korea Financial Investment Association, called Elliott’s bid “a blessing in disguise.” It was a wake-up call for companies to change their corporate governing styles and boost interests for shareholders.

At the same time, the financial industry must be strengthened so that Korea doesn’t become an easy target for predatory foreign hedge funds. The 69.53 percent vote of approval was not a vote of confidence in the company. The predators would have sensed that the triumph stemmed from nationalism. It is now Samsung’s turn to show its appreciation.

Translation by the Korea JoongAng Daily staff

JoongAng Ilbo, July 18, Page 27

*The author is a sociology professor at Seoul National University.

by Song Ho-keun