Can Samsung remain one of ours?
The author is a senior columnist of the JoongAng Ilbo.
The government has turned up the heat on Samsung Group to overhaul its ownership structure through three pieces of legislation on equity holdings, banking and insurance enterprises. The question is how Samsung Life Insurance can dispose of a 7.92 percent stake in Samsung Electronics in compliance with a revised insurance business law. When the insurance law changes to meet the requirement for a maximum 3 percent equity holding in a non-insurance company of the same group at current market value instead of the acquisition cost of the shares, Samsung Life would have to dispose of 16 trillion won ($14.2 billion) worth of shares in Samsung Electronics. Civic groups argue that an insurance company running on customers’ premiums must not own a large portion of shares in an industrial company like Samsung Electronics.
When the shares are disposed of, Samsung Electronics Vice Chairman Lee Jae-yong and other family members’ combined stake in the company will be reduced to around 11 percent from a current 19.78 percent. Control of the country’s top company could be challenged. Samsung C&T, which acts as the holding entity for the Samsung corporate empire, cannot afford to assume all the shares from Samsung Life Insurance. Even if Samsung Electronics buys back its shares from Samsung Life, its management is not safe since treasury stock does not have voting rights. Selling the shares to institutional players like the National Pension Service is also a bad idea as that could put the company potentially under state influence.
The remaining option is foreign capital. The most likely candidate is Capital Group. The Los Angeles-based fund is the third single largest shareholder with a 5.17 percent stake in Samsung Electronics. BlackRock, the world’s largest asset manager with $4 trillion in assets under its management, is another candidate. It is the largest shareholder in Apple and Microsoft and owns stakes of over 5 percent in Korean tech companies such as SK Hynix and LG Electronics. Samsung has trust in the New York-based fund as it backed the merger of Samsung C&T and Cheil Industries when Samsung’s corporate governance structure was at risk earlier this year.
One setback is their cut-loss rule. Asset managers are required to sell shares if their value has come down 30 percent or more from their acquisition price. Capital Group dumped its 3 percent stake in Samsung Electronics in the early 2000s. In hard times, foreign institutions cannot be relied on to act as white knights. They can be the first to abandon the ship.
Some are recommending the Vision Fund created by Softbank Group Chairman and CEO Masayoshi Son. Son created a $100 billion fund to invest in future technologies. In 2010, he predicted “an information revolution” brought by artificial intelligence and backed by data gathered from billions of sensors. The fund bought a British semiconductor company called ARM for 35 trillion won and also put 4.5 trillion won in Nvidia, a U.S. artificial intelligence company, to invest in future technologies. Together with a Saudi sovereign wealth fund, it wants to create another $100 billion Vision Fund.
Son and Lee of Samsung have kept up a good relationship, playing golf regularly. Son is a master in forecasting technology trends. Even when Softbank shares plunged to one-tenth of their peak following the bursting of the dotcom bubble, he invested in Chinese e-commerce startup Alibaba and reaped big returns. To Samsung, Son can be a friendly investor in the long term.
The most feasible option for Samsung Electronics would be to have Samsung C&T acquire a 3 to 4 percent stake in the company and sell the remaining 3 to 4 percent stake to a friendly foreign force. But the owner still would have to please foreign investors more. Samsung Electronics spent 33.5 trillion won over the last three years on stock buybacks and dividend payouts. Such spending will surely increase under the banner of “shareholder-friendly” policies.
Samsung Electronics could be forced to continue with its buying and cancelling of shares in order to please foreign shareholders. Money that should go into investment and jobs would end up in the pockets of offshore funds. Investment in future technologies and mergers and acquisitions would be spent to protect management’s control of the company.
Even China, a socialist country, moves faster than Korea to defend valuable IT companies. In 2014, Alibaba chose to go public on the New York Stock Exchange instead of the bourses in Shanghai and Hong Kong. Its founder Jack Ma said the reason was simple. The New York exchange allowed voting rights for preference stock. Ma, with just a 7 percent stake, can exercise voting rights tantamount to 40 percent. Google and Facebook owners also run their companies that way. Hong Kong quickly adopted the system and attracted Xiaomi. To keep homegrown tech unicorns — venture startups worth at least $1 billion — Beijing vowed to introduce preference shares.
The Moon Jae-in administration must end its showdown with large corporations. Facilities investment contracted for the sixth consecutive month after chipmakers wound up their expansion cycle in the first half. The Korean economy is going backwards. While others are galloping toward the future, Korea Inc. is backtracking due to red tape. Samsung Electronics one day may not be one of ours.
JoongAng Ilbo, Oct. 4, Page 29