Elliott Management Launches Another Assault At Samsung Electronics by Activist Insight
Elliott Management grabbed headlines this week by launching its second assault on South Korea’s Samsung Group in as many years. Last year, the activist sought to solicit votes against the merger of Samsung C&T and Cheil Industries, arguing that the deal undervalued the former. That campaign was widely described as “bitter” in spite of the watermelons allegedly handed out to shareholders to persuade them to back the deal. Korea’s sovereign wealth fund, which invests in Elliott, reportedly tried to convince the firm to keep its activism – which takes place in Hong Kong, Germany and the U.K., as well as the U.S. – out of the country.
Now, Elliott is attempting to get on the front foot. Its plans are less a reaction to a specific event – although they are helped by the knowledge that the controlling Lee family would like to extend its control over certain group companies – and driven more by what it perceives as deeply hidden value at Samsung Electronics, where it owns a 0.6% stake.
Elliott’s plans, unveiled in an online presentation earlier this week, appear deeply complicated on first glance. Indeed, the financial analysis and tax planning required to implement them could take some time. Yet the underlying thesis is not hugely different to that which enticed Carl Icahn to juice Apple’s stock price. Like Apple, Samsung Electronics has massive, largely stable revenues which have led it to become flush with cash and overcapitalized. In some ways, the appeal is even greater: Samsung Electronics is less reliant on one product (problems with its smartphones failed to create much of a dent in its share price, which had risen 33% year-to-date even before Elliott’s intervention) and is already repurchasing shares and promising greater pay-outs (without having to worry so much about Apple’s tax problems). Shares rose 4.5% on the news of Elliott’s plans, so further changes will probably be well received.
Elliott could have limited its plans to a special dividend ($27 billion) and the cancellation of Samsung Electronics’ treasury shares. Instead, it is offering the Lee family an opportunity – split the company into operating and holding companies, using the treasury shares to give “Holdco” a 17% stake in “Opco.” The group could then be further rationalized by merging Samsung C&T with Holdco, for “a capital gains tax efficient way of simplifying the structure of and control over the Samsung Group and unlocking the value of Samsung Electronics’ treasury shareholding.”
As I said, the plans appear deeply complicated. But they are perhaps best thought of as a series of compromises. Elliott wants Samsung Electronics to use its balance sheet more efficiently and is offering the Samsung Group closer, if not greater control over the remaining assets. To compensate for higher free cash flow distributions (it has called for a 75% target, against management’s 30-50%) it proposes to improve the valuation of the stock through greater transparency and liquidity, including by joint-listing Samsung Electronics on the Nasdaq. As a counterbalance to the governance implications of that and the addition of new, independent directors, Elliott offers flattery. “The Lee family’s important position as part of the Samsung Group would be expected to continue and would be likely to be reflected in the composition of the board of Samsung Holdco and Samsung Opco,” it says.