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It never rains but pours for Samsung

If you’re into the high octane thrills of riding roller coasters, try being an investor in Samsung.

Within six months the company has been rocked by two major scandals: the unprecedented recall of the occasionally-exploding Galaxy Note 7, and recently, the Arrest of its de facto head and billionaire heir, Jay Y.Lee.

How big a problem is this for Samsung as a business? Prosecutors have accused Lee of paying $38 million to a controversial presidential advisor – a bribe that they say helped get regulatory approval for Samsung to buy one of its subsidiaries, and help strengthen the Lee family’s control over the company.

It’s an unsavoury state of affairs, and given the current climate in South Korea – where the population is frustrated with yet more corruption charges surrounding their own president – Lee’s arrest could be a step towards a radical shakeup of the country’s powerful family-owned conglomerates or chaebols.

That’s no bad thing.

The whole system could come under scrutiny now, says Daniel Gleeson, a Senior Analyst at Ovum, giving greater credibility to regulators or investors who want to push for a radical overhaul of the company’s corporate structure. “It’s the opportune moment,” he says.

One reason the timing is so good: Samsung is already dealing with an activist shareholder, New York hedge fund Elliott Management, run by billionaire Paul Singer, which has argued for well over a year that Samsung should split itself in two.

One part, Elliott argues, should be a holding company for its wealthy, founding family and the other an operating unit that controls Samsung Electronics, the business behind the Galaxy phone line and successful chip and components businesses.

Such a move would unlock significant value for shareholders, Elliott claims. Samsung has since agreed to a strategic review looking into a split.

Samsung is also on a path towards better relations with its investors. About a year ago the company announced a “rock solid” share buyback scheme for investors in which, crucially, it would cancel the shares that it bought back.

Plenty of other companies aren’t as committed in their buybacks, notes Edison Research senior analyst Richard Windsor. “They’ll buy back shares and then give them back as options.”

Samsung’s willingness to respond to investors in this way — however grudging in the face of Elliott’s activism — is one reason why shares in Samsung Electronics have risen by more than 60% in the past year. That’s a better performance than Apple, whose shares are up 35% in the same time period.

And even with the spectre of Lee’s potential arrest looming large over the past month, Samsung shares have continued to climb. After the announcement that a court had finally called for his arrest on Thursday, the stock slipped by just 0.4% in Asian trading on Friday.

“It’s a perfect storm if you want to break up Samsung,” says Ovum’s Gleeson. “Under normal circumstances you’re talking about one of the largest and most powerful companies in the world, which has its fingers in so many pies and is so massively entangled, that trying to break it up would be a mammoth task.”

Now with the presidential corruption probe taking a dramatic turn, a radical corporate overhaul looks more likely to happen. Samsung’s various businesses, from handsets to OLED screen manufacturing to chip fabrication, run independently enough such that problems at the very top shouldn’t have too much of an impact on day to day running of the business, other than act as a short-term distraction.

The business also managed to get passed a similar storm in 2008, when Lee’s father Kun-hee Lee, resigned as head of the company because of a slush funds scandal.

“Worst case scenario is [Jay Y. Lee] goes to jail and never becomes the boss of Samsung Electronics,” says Windsor. “So what?”

The post It never rains but pours for Samsung appeared first on Innovation Village.



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