Tuesday, October 18, 2016

Elliott Management Corp. Pressuring Samsung Electronics to Simplify Its Structure

Why is Samsung Electronics Co. being pushed to restructure?

Samsung Electronics Co. is being pushed by Elliott Management Corp. to restructure and simplify its complicated ownership structure. The management company puts forth the argument that streamlining Samsung's structure would level the playing field with its international electronics rivals.

While Samsung Electronics is the world's largest manufacturer of smartphones and televisions, with a market value of about $230 billion, Elliott Management has stated that the "unnecessarily complex" structure of Samsung is holding down the value of its shares. Samsung Electronics is the centerpiece of a conglomerate controlled by the Lee family. What complicates the situation is that this conglomerate, which plays a dominant role in the South Korean economy, covers a broad spectrum of businesses, including real estate, insurance and fashion. This intricate network, according to Elliott Management, results in a cumbersome, sometimes risky interconnection.

The Proposal

Elliott proposes removal of Samsung Electronics from Lee's web and combining Samsung entities into a new holding company that would be listed in New York and Seoul. This proposal is part of a larger effort across Asia to improve corporate administration by simplifying ownership structures. An example of the trend is reflected in Japan's Prime Minister Shinzo Abe strategy of governance reform to stimulate his country's stalled economy. The goal in both cases is, of course, is to increase value. The proposal by Elliott includes an expectation that the company will pay shareholders approximately $27 billion as a special dividend and will also add independent directors to its payroll.

Elliott's point of view is that Samsung's shares are undervalued by as much as 70 percent because of its many "bottom-tier" shareholder returns and its inadequate governance. The firm states that its proposed restructuring would increase the value of Samsung shares to a competitive level by appealing to a wider spread of international investors.

Timing is Everything

Elliott's proposal may be appealing, but it comes at a sensitive time. As most of the world is aware, Samsung it now facing a public crisis -- the worldwide recall of its premium Galaxy Note 7 smartphone. Although Samsung Electronics shares have so far continued to trade at almost their highest level, the massive recall of dangerous devices threatens to tarnish the Samsung brand. At this time, the electronics giant remains noncommittal to Elliott's proposing, having its spokeswoman announce only that, "We will carefully review the shareholders' proposals."

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