Samsung has finally confirmed that it is considering splitting into two separate firms to ease shareholder pressures but this might be a too big step to take for the company.
Samsung Electronics (KRX: 005930) has been heavily criticized for its business practices and corporate structure, after it had suffered from the worst recall scandal in the company's history this September. Among the crowd of disappointed shareholders, an American activist hedge fund Elliott Management was the one that came up with an action plan aimed at "reshuffling" Samsung's intertwined corporate structure. As a result, Elliott predicted a recovery of Samsung's hugely undervalued stock and a clear valuation of its many assets that are being dragged down by the complex corporate structure. This, according to the hedge fund, would put Samsung back on track but to achieve that, the giant manufacturer needs to split in two.
"This came at the right time for Samsung. It's as if someone came and hit their cheek just when they wanted to cry," an analyst Ahn Sang-Hee told Reuters last month.
The idea of splitting a 47-year old company into two separate firms was considered to be bizarre at first but this week the Seoul Economic Daily reported, citing an anonymous person familiar with the matter, that the Korean company was actually considering a split. Samsung said it planned to hold a conference call with shareholders today to discuss it.
Elliott's suggestions
Back in October, Elliott Management submitted a 10-page letter to Samsung's management board outlining a number of organizational changes the activist fund believed were necessary in order to shake off the devastating influence of the Note 7 failure. The main suggestion, that went along the lines of splitting the firm into an operating and a holding company, would result in both better organizational clarity and taxation benefits. Cross-shareholding is a very common practice for Samsung that links together numerous Samsung's sub-companies and affiliates, ranging from heavy industries and shipping to insurance business. Many of those smaller companies are quite distant from Samsung's main smartphone and chip manufacturing business, says BBC.
“It’s difficult to argue with the logic of Elliott’s proposals. A simpler structure is certainly preferable, and yes most would agree they can afford to pay out more. What is important is that these changes should benefit all involved, including family, group, and minority shareholders,” David Smith of Aberdeen Asset Management Asia told Reuters.
Another Elliott's proposal that Smith also mentions in his comment says that Samsung should pay out a one-time dividend payment of $27 billion to its shareholders together with smaller regular dividends. The restructuring scheme suggested by the activist hedge fund has been majorly favored by Samsung's international shareholders that claimed that dividing the company into two would help Samsung's founding Lee family to strengthen their control and develop the company further as the world's leading smartphone, TV and chip manufacturer. And, in the situation when investors are irritated, to say the least, from September's Galaxy Note 7 recall craze that is projected to cost over 6 trillion won, the company wouldn't want to alienate the investors even further, adds Reuters.
Samsung is hesitant
Earlier today, Samsung has published a press release that outlines the steps the company plans to take to provide long-term value for the shareholders. Corporate structure, the most controversial topic on the agenda, was not given that much detail neither in the press release nor in the conference call. However, Samsung mentioned the "possibility" of creating a separate holding company, which is exactly what Elliott suggested, though the company decided to delay this "highly complex" decision until an independent 6-month review by a group of external advisers was done.
"The review does not indicate the management or the Board’s intention one way or another. The process is expected to require at least 6 months and Samsung Electronics will make a decision only after the review is complete," the company said in the statement.
However, Samsung made some important statements with an immediate effect such as paying out half of its free cash flow to shareholders for 2016 and 2017: the step that many shareholders have been waiting for. The dividends will be raised by 36% as compared to last year and amount to 4 trillion won whereas from April 2017, quarterly dividend payments will also be in place, said the company. On top of that, at least one "new independent board member with international corporate experience" will be invited to join Samsung's Board of Directors. Clearly, Samsung incorporated a big part of what was suggested by Elliott, although the hedge fund was not mentioned in the press release.
"I don't think Samsung said much that was surprising or beyond what investors already had in mind," an analyst Park Jung-hoon told Reuters.
Reuters adds that even though Samsung did not mention Elliott Management directly, it promised to officially respond to the activist fund's suggestions by the end of the month. According to Elliott, Samsung has the highest net cash and the lowest dividend payout among its industry peers like Qualcomm (NASDAQ: Qualcomm [QCOM]), Apple (NASDAQ: Apple [AAPL]) and TSMC (NYSE: TSM), all because of Samsung's conservative approach to cash management that needs to be changed to avoid yet another crisis.