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Samsung’s Ruling Family is Put to the Test

June 8, 2015 - Written By Cory McNutt

It is amazing when you think about it – that Paul Elliott Singer’s small 7.12-percent hedge fund investment in Samsung C&T, the company’s construction subsidiary, could cause so much aggravation for the Samsung dynasty in South Korea…but it is.  Especially the timing of it all as Samsung is slowly transitioning the young 46-year-old Lee Jae Young into the head of the company as his father and the family patriarch Lee Kun Hee, is still recovering from his May 2014 heart attack and has been out of sight.  Everybody knows that the young Lee is taking over the company and many are asking why they do not make it official, although there is talk about Lee’s kids are trying to delay an estimated $6 billion of inheritance taxes, but it will eventually have to be paid.

Samsung has their hands in everything in South Korea – known in the West mostly for their electronics (smartphones, tablets and Smart HDTVs) and appliances (washer, dryers and kitchen appliances) – in South Korea they are known as one of the largest construction companies in the world as well as the world’s largest shipbuilder, and are into insurance and own an advertising agency.  Samsung’s business accounts for close to 25-percent of the country’s gross national product (GNP)…so it is safe to say that how good Samsung does is how good South Korea’s economy is doing.

With power like that, how can a relatively little 7.12-percent investment in Samsung’s construction arm by hedge fund investor Paul Elliott Singer be of such concern?  The powerful Lee family – one of five chaebol, or large family conglomerates that controls the country – needs to be broken up, at least that is what many in South Korea are thinking, but are too frightened to come out and say.  Even the media there is reluctant to print anything negative about Samsung for fear of reprisals.  Many believe that if the country’s president, Park Geun Hye, is too afraid to challenge the chaebol, then market agitators like Singer are the next best thing.

The young Lee does not rule with an ‘iron fist’ like his father or grandfather’s generation often did.  But if Lee tries to drown Singer’s voice for control over Samsung C&T, some say he may have to use strong armed tactics and it will expose the fact that it is all about solidifying the family’s power, not necessarily about make Samsung more productive or profitable.  Hank Morris, Seoul-based adviser at Triple A Partners said, “These mergers are designed primarily to enhance the control of the family shareholders so that they can continue to dominate the management of their group.  And they’re not particularly concerned as to whether or not this places some burden on the performance of the merged company that might detract from its earnings potential and therefore, hinder its share price.”

Singer will likely challenge any plans to hand the reins over to the young Lee, and they all know that Singer means business and is not afraid to challenge other countries’ governments, let alone a company.  Many believe this will be a good thing for South Korea’s 50 million people as the controlling chaebols dictate the politics, promote monopolistic ways and squash any new businesses that may threaten their status quo.  Some say that Singer is just looking for a quick profit and will then forget about South Korea, and while that may be true, if he can break up the Lee’s family grip over Samsung, many think his short time in South Korea will be well worth it.