South Korean-based Samsung is one of the world's largest conglomerates. The business has interests in all manner of different products and services and when we write "Samsung" in the scope of Android and technology, we almost always mean "Samsung Electronics." This is Samsung's largest division and the one that captures the most news flow and interest around the world. Samsung's business is based around entering a market with the intention to be the best and it's rare to find a Samsung business unit outside the top three for that industry. As a business, Samsung also has certain traits: it has not paid out a high dividend to investors but instead prefers to retain cash, which is is able to use for reinvestment and as a buffer in difficult markets. Furthermore, Samsung is a family-run collection of 58 businesses - known as a chaebol in South Korea - and the family is currently part-way through handing over the role of chairman from the current to the future generation. This succession is because the named Chairman, Lee Kun-hee, suffered from a heart attack in 2014 and has since then been confined to bed. His son, Lee Jae Yong, is the heir to the Samsung empire.
Last year, Samsung proposed a merger between Samsung C&T and Cheil Industries, a means of consolidating the Lee family's hold over Samsung Electronics. At the time, the family held 4.8% of Samsung Electronics but the merger increased this because Samsung C&T owned 4.2% exposure to Samsung Electronics, bringing the total holding up to 9%. Samsung C&T also has exposure to various other Samsung divisions and the most prominent is the 19.3% stake in Samsung Life Insurance Co. The Lee family has a 20.8% holding in the life insurance division, which itself holds 7.4% of Samsung Electronics. The merger between Samsung C&T and Cheil Industries approximately doubled the Lee family's holding in Samsung Electronics.
The above sounds like something we might watch in American soap, Dallas, or perhaps even Frank Herbert's "Dune" universe but it is missing something: a third party trying to disrupt Samsung's plans. In 2015, a US-based hedge fund, Elliott Associates, entered the fray by trying to disrupt Samsung's plan with an argument that they were at the expense of minority shareholders. Samsung was able to gather enough votes to push through the deal despite Elliott taking the matter to the South Korean courts and rallying support from other minority shareholders. At the time, Samsung conceded that it listened to Elliott's arguments and had taken action on some of the proposed changes. Following the 2015 merger, Samsung bought back $10 billion worth of stock (which supports the share price) and has also promised to increase the dividend ratio, reversing its standing policy of retaining cash. Importantly, the business explained that the heir apparent was "considering" splitting the business. After the deal was pushed through Elliott asked Samsung C&T to buy back the 7.1% stake it had acquired in the business.
In the first week of October, that very same hedge fund publicly proposed that Samsung Electronics be split up into a holding company, to be listed on the US technology NASDAQ exchange, and an operating company. Elliott wishes for this split to be conducted "on fair terms," although it has not elaborated what exactly this means. It also asked Samsung to distribute around 40% of its significant cash reserves as a special dividend to investors (in effect asking Samsung to write a check to the tune of around $27 billion from its $70 billion cash reserves). Elliott have also asked Samsung Electronics to adjust its dividend policy to promise to pay out 75% of annual profits to shareholders. Elliott Associates currently own around 0.62% of Samsung Electronics and once again has found support from other shareholders: Samsung's stock price climbed to a new high on the day of the announcement as investors perceived this as being good news: dividends, special or regular, represent a (cash) return to shareholders.
Elliott Associates' move is aggressive, especially considering the hedge fund manager lost the 2015 proxy even if it did manage to make Samsung shift its position. Samsung is unlikely to concede to a foreign investor but will have to be careful as eleven of its top twenty shareholdings are overseas investors. The South Korean business explained that they would "carefully consider" Elliott's proposals but no business likes to be told what to do by a shareholder. Some of Elliott's proposals appear more realistic than others: Samsung are less likely to accept such a radical change to their dividend policy given that they have traditionally kept significant cash deposits, but may concede that money in the bank earning a very limited interest rate is close to being dead weight. As regards Samsung's internal politics, the Lee family is preparing for Lee Jae Yong's succession as Chairman. Lee Jae Yong has shown a willingness to adapt and change the business, even if he is not yet at the helm. It would appear to be more likely that the business and the hedge fund will cooperate and that this will not turn into another battle for votes and investor mindshare, but it will be interesting to see how the situation develops.