Samsung Electronics Co. didn’t quite come out and actually say it, but South Korea’s most valuable company is probably going to split as soon as next year.
Samsung said on Tuesday it’s looking at a plan to turn itself into a holding company, and would have more to say on the issue at a later date. The idea was presented as a way to improve shareholder value and address calls from Elliott Management Corp. for more responsive management. Perhaps the most important reason for a breakup, however, is that Samsung and the founding Lee family would also see big benefits from such a split.
For decades the family has maintained control with a complicated web of cross-holdings that has generally protected it from outside influence. In recent years, the system has come under fire from critics and South Korean officials who say it stifles competition and undermines corporate governance. Elliott’s proposal to combine some businesses with the new holding company would let the Lee family preserve its sway and boost transparency and accountability.
“Converting Samsung Electronics into a holding company is an indispensable factor in the power transfer to the third generation of the owner family,” said Park Ju Gun, president of corporate watchdog CEOSCORE in Seoul. “The founding family will be able to secure stable management control over the group, which is the final goal of this whole process.”
Elliott popped its proposal last month, when the company was mired in a massive recall of the fire-prone Note 7 smartphone and moving to elevate heir apparent Jay Y. Lee to a more pivotal role. Under the plan, Samsung would split into holding and operating companies, with the former likely to own about a 20% stake in the latter.
The proposal also called for merging Samsung C&T Corp., which currently owns more than 4% of Samsung Electronics, into the new holding company. Jay Y. would be able use his stake in C&T to solidify his position without a massive cash outlay.
Elliott says the plan would make Samsung Electronics’ business more transparent, simplify the ownership structure and provide tax benefits, all of which would push up the stock.
Samsung Electronics said it will spend at least six months on the review, while offering investors additional cash payouts and promising to add at least one outside director to the board. So far, however, Samsung Chief Financial Officer Lee Sang-hoon said on a conference call that the review was limited to Samsung Electronics, and not Samsung C&T, dragging down the unit’s shares by 8.6% on Tuesday.
“We view the plan outlined by Samsung to be a constructive initial step,” Elliott affiliates Blake Capital and Potter Capital, through which the investment was made, said in an e-mailed statement. “We anticipate more meaningful changes following the company’s corporate structure review. We look forward to working with Samsung.”
Samsung said it will add at least one outside director next year, while the investor had sought three independent directors. Samsung said it will use 50% of free cash flow in shareholder returns for this year and next, indicating a return of about 9.5 trillion won ($8.1 billion) in 2016. Elliott had sought a special dividend of 30 trillion won.
Billionaire Paul Elliott Singer, who leads Elliott, had also pushed for Samsung to list shares on a U.S. exchange, but the company said that it would consider a Nasdaq listing only after it makes decision on the holding company.
“The restructuring guidance fell short of investors’ expectations,” said Park Kang-ho, analyst at Daishin Securities Co. “The announcement wasn’t strong enough to offer a further boost to the shares.”
Samsung shares, which are up more than 33% this year, was unchanged at 1,677,000 won at Tuesday’s close of trading in Seoul.
Samsung also said it will increase total dividends by 30% in 2016, bringing the annual dividend amount to 4 trillion won. The rest of the allocated total cash return will be used to buy shares starting at the end of January. Samsung completed a share buyback worth 11.3 trillion won earlier this year.
Vice Chairman Lee has increased his influence at the world’s biggest smartphone maker after officially joining the company’s board last month. The company is also grappling with a scandal linked to Korean President Park Geun-hye, with its offices raided twice as part of the widening political scandal. Prosecutors are looking into links between Samsung and a confidant of the president, who is at the center of an influence-peddling investigation.
“It now has to pull itself together amid ongoing troubles, including the recent political scandal, so it isn’t a great time to execute such a structural reform just yet,” said Lee Sang Hun, governance structure analyst at HI Investment & Securities Co.
Samsung said it’s looking for a “highly qualified” director “with global corporate experience” and plans to nominate at least one new, independent board member for approval at the next annual shareholder meeting in March 2017.
“The outside directors recommended by Elliott are likely to be very independent from the current board, thus we can expect monitoring inside and outside of Samsung Electronics to strengthen,’’ said Cho Sung Ick, a fellow focused on industry structure at the Korea Development Institute.
The electronics giant said it needs to keep a net cash balance of 65 trillion to 70 trillion won, based on its historical and expected capital expenditures, working capital requirements, acquisitions and other financing needs. Still, the company will review its cash position every three years and return any excess cash beyond the target balance to shareholders, Samsung said.
“Samsung has faced multiple challenges in 2016,” said Samsung Chief Executive Officer Kwon Oh-hyun. “In 2017, the global economic outlook will remain uncertain and the competition in key products will continue to intensify but we will continue to invest.”