2015 merger re-scrutinized

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2015 merger re-scrutinized

After the country’s financial regulator Wednesday fined Samsung BioLogics for deliberately breaching accounting rules in valuing a joint venture with U.S. pharmaceutical company Biogen, attention is now fixed on another Samsung unit: Samsung C&T.

Suspicion has arisen that the alleged accounting fraud played a role in a highly controversial merger in 2015 of Samsung C&T and Cheil Industries and some civic groups and politicians are already squawking about it.

“We urge prosecutors and the Financial Services Commission (FSC) to embark on a swift and proactive probe and special audit into Samsung C&T,” said the People’s Solidarity for Participatory Democracy in a statement Thursday.

The group, which champions reforms for Korea’s big conglomerates or chaebol, argued that Cheil Industries submitted a financial statement by auditors KPMG and Deloitte Anjin that valued Samsung BioLogics at around 19 trillion won ($16.8 billion) to the National Pension Fund to get its approval for its merger with Samsung C&T in July 2015.

That was an inflated valuation, the group said.

On Wednesday, FSC Vice Chairman Kim Yong-beom told reporters that the commission will “closely analyze the need for an audit of Samsung C&T,” adding that the National Assembly had already brought up the question.

Whether the fraudulent accounting by BioLogics improved the financial statement of Cheil Industries will be the key. Having set bio business as one of its growth drivers, Samsung Group established Samsung BioLogics in 2011. Samsung Everland, of which Vice Chairman Lee Jae-yong was top shareholder, took a 40 percent stake in BioLogics, Samsung Electronics a 40 percent stake and Samsung C&T a 10 percent stake.

Everland acquired Cheil Industries in 2013 and changed its own name to Cheil Industries, which was later listed on the Kospi.

Then in 2015, Cheil Industries, the de facto holding company of Samsung Group at the time, announced it would merge with Samsung C&T. One Samsung C&T share was exchanged for 0.35 of a share in Cheil Industries.

At the heart of the issue is BioLogics’s 2015 decision to change the status of its subsidiary Samsung Bioepis to an affiliate. Samsung Bioepis was a joint venture by BioLogics and Biogen, a U.S. biotech firm, formed in 2012.

The Financial Supervisory Service (FSS), the country’s financial watchdog, has said that BioLogics changed the status to improve BioLogics’s financial statements, given the conversion allowed the company to use a different accounting standard which factored in market value, not book value, of Bioepis.

The value of Samsung Bioepis went from 290 billion won to 4.8 trillion won. That increased the value of Cheil Industries and justified the merger ratio of 0.35 to 1, which worked favorably for Vice Chairman Lee, who was top shareholder of Cheil Industries. It also cemented his control over the group.

Rep. Park Yong-jin of the ruling Democratic Party disclosed internal documents of BioLogics on Nov. 7 at the National Assembly and claimed the deliberate accounting fraud by BioLogics was related to the merger, proposing that the FSC audit the deal. FSC Chairman Choi Jong-ku said the proposal “made sense.”

The chance of Samsung C&T being audited is high. Under the regulations on external audits and accounting, the Financial Supervisory Service should embark on an audit if the FSC and the Securities and Futures Commission conclude that a specific company needs to be audited or if any investigation authority files a request.

Shares of Samsung C&T posted a 52-week low at 99,400 won during the session and ended 2.37 percent lower at 103,000 won on Thursday.

BY SEO JI-EUN [seo.jieun@joongang.co.kr]
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