Elliott Management targets Samsung right at the moment when the company is in the midst of the Note 7 recall scandal as well as dealing with uncertainty in the company's management after its "patriarch" leader Lee Kun-Hee was hospitalized with a heart attack in 2014.
Elliott Management, an activist hedge fund created by an American billionaire Paul Singer, has contacted Samsung (OTC: SSNLF) on Wednesday suggesting some drastic changes in the company's corporate structure that, according to the hedge fund, will help the Korean producer to simplify the "web" of its smaller holdings and allow its stock to trade higher. On the news of Elliott's proposal, Samsung's shares soared to the record-high values, indicating the market's approval of a suggested "makeover".
According to the activist fund, the giant smartphone manufacturer, with a market cap of $230 billion, is considerably undervalued by as much as 30% as compared to the peers in the industry, reports CNBC. Elliott has submitted a 10-page letter with a detailed description of the Samsung's major makeover proposal, which was also made available to the public. The main fund's suggestion was to separate Samsung Electronics into 2 operating and holding companies as well as to merge the latter one with Samsung's C&T division.
By that, the giant company will get both organizational and taxation benefits through separating the Lee-family holdings from the treasury stock, reports Bloomberg. Splitting the company into operating and holding company will also allow Samsung to boost its valuation that is being constantly dragged down by the current complex corporate structure. On top of that, Elliott pushes for listing the newly-splitted operating company on Nasdaq stock exchange in order to push the company's stock price higher by attracting more international investors.
After the split, the fund's scheme suggests Samsung to issue a one-time dividend payment to stakeholders of about $27 billion (30 trillion won) coupled with regular dividends of a smaller size. And, last but not least, Elliott asks to invite 3 independent members to join Samsung's management board as the company has been "patriarchally" governed by Lee Kun-Hee and his family for many years.
An analyst Ahn Sang-Hee of Daishin Economic Research has precisely described yesterday's situation:
"This came at the right time for Samsung. It's as if someone came and hit their cheek just when they wanted to cry," he told Reuters.
What the analyst is pointing at here is the difficult situation that Samsung has found itself in in the recent months. First of all, the notorious scandal around Galaxy Note 7 self-inflaming batteries has put the company under enormous pressure and in risk of having long-term reputation damage. It seemed that the issue was slowly receiving less attention in the press while yesterday's news about a Note 7 device starting smoking on the board of a plane in the US brought about another wave of negative attention to the Korean manufacturer.
Next to that, Samsung has been functioning without a chairman for almost 2 years, ever since its long-standing leader Lee Kun-Hee was hospitalized with a heart attack. The Chairman's only son, Lee Jay Yong is most likely to take over the chairman's seat after his father, yet the official decision has not been made by now, what only adds more issues for the company. The combined stake of the Lee family in Samsung is 4.9% at the moment. According to the analysts, these are some of the main reasons why Elliott has spoken up about the company's makeover, even though the fund owns only a 0.67 stake in the company.
However, this is not the first time Elliott has "interfered" into Samsung's business plans. Last year, the hedge fund has unsuccessfully advised against the merger between the 2 affiliated entities of the Samsung Group. The Lee family's company Cheil Industries has acquired Samsung C&T, a construction subdivision of the firm, what allowed the Lee family to get over $10 billion in Samsung's shares, reports Bloomberg. The analysts were unsatisfied with the merger as they perceived it as a move to tighten the family's control over the Samsung Group rather than to provide any additional value for the shareholders.
It is yet to see whether Elliott's suggestion will get through this time, considering the small stake of the hedge fund in Samsung as well as relatively "unfriendly" relationships between the companies. But it seems that the market is favoring the fund's scheme as Samsung's shares have jumped 5% to the record intraday highs, as reported by the Financial Times. In a short statement today, Samsung promised to "carefully review" the fund's proposal in the upcoming days.