Samsung stock tumbled on Monday as analysts and investors weighed the costs associated with recalling the Galaxy Note 7. The shares slipped by about 7% to 1.465 million won as reports of another Note 7 explosion started circulating. This time the story hurt a six-year-old child.
Samsung is also selling its printer business to HP. This could be good timing because the South Korean smartphone maker is going to need a large chunk of change to deal with the Galaxy Note 7 recall. The sale also supports management’s plan to focus only on core and growth businesses.
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Galaxy Note 7 owners told to stop using it
Last week Samsung advised owners of a Note 7 to stop using the device and issued a recall. Owners of the device are told to apply for a replacement device and/ or visit a Samsung service center to receive an exchange. Before the recall was issued, the U.S. Federal Aviation Administration told airplane passengers to stop using or charging a Note 7 while on board and not to pack it in checked luggage. The Consumer Product Safety Commission also advised users to turn the smartphone off and quit using it and said it is discussing a formal recall with the Securities and Exchange Commission. Other safety agencies around the world are following suit.
The safety measures follow a growing number of reports about the smartphone’s battery exploding. In many of the cases, the Note 7 was charging when the battery exploded, but in others, such as the latest case involving a young boy, the phone was simply in normal use. The boy was reportedly watching a video on the phone when it exploded in his hand.
A one-off incident for Samsung?
Analyst MS Hwang of Samsung Securities (which is affiliated with Samsung), said he believes investors will see the Note 7 explosions as a “one-off.” He added that the extent to which Samsung’s brand is damaged by the recall depends on how he handles it. The company said it is expediting the replacements.
Between August 19 and the recall on September 1, there were 35 reported cases of Note 7 explosions, but after the recall announcement, there have only been ten reported explosions. Hwang expects the number of incidents to continue declining as people heed the latest warning.
He expects Samsung to enact new quality control measures but notes that as competition in the smartphone industry, companies have felt pressured to beat their rivals through rollout and design differentiation. These factors complicate new product launches. Hwang suggests that Samsung “beef up quality control by reducing its dependence on affiliates for parts,” noting that it has embraced vertical integration, making its affiliates its most important parts suppliers.
Samsung sells printer business
Aside from the Galaxy Note 7 recall, we also started hearing reports that Samsung is considering selling its printer business to HP. Reuters reported this on September 9, and then HP confirmed it later. The U.S.-based company said it will pay $1.05 billion to buy the business, although there were no specifics on the cash / equity split. According to Goldman Sachs analysts, the printer business is part of Samsung’s Consumer Electronics segment and generated about 2 trillion won in revenue or 1% of total sales in 2015. They estimate that the segment posted an operating loss for the year as well.
Samsung recently acquired B2B printing service provider Simpress in a clear attempt to boost its printer business, but it has been struggling to capture any meaningful market share, the analysts explained. They believe that the sale of the printing business points to a clear shift in Samsung’s long-term B2B strategy and reaffirms management’s intent to focus only on core business and long-term growth drivers.
With the acquisition, HP is trying to accelerate its position in the A3 copier market, which Stifel analysts say is valued at $55 billion. The company is trying to disrupt the market by replacing A3 copiers with better multi-function printers. It expects the acquisition to be accretive within the first full year.
Stifel analysts say IDC data shows that Samsung holds only a 2.3% share of the hardcopy hardware market, compared to HP’s 17.3% market share. Investors seem pleased with the acquisition, however, as HP shares edged higher by as much as 2.32% to $14.28 on Monday.