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Brace yourself, Samsung: Activist investor Elliot's in an arm-twisting mood

Demerge, simplify and cough up for shareholders, it demands

person twists another's arm. Photo by shutterstock

Analysis Activist investor Paul Singer's Elliott Management is not shy about on taking on the world's biggest companies, and now it wants Samsung to bend to its will, splitting in two and paying shareholders an eye-watering $27bn.

Elliott famously tried to seize an Argentinian war ship in its pursuit of a payout from the embattled Argentine government, and has had a hand in Dell's purchase of EMC, with its agitation for shareholder value increases at EMC.

Singer has his hooks into Samsung, with a $1.2bn, 0.62 per cent holding of the Korean behemoth's stock. This issue comes on top of Samsung having to deal with the disastrous fiasco of its Galaxy Note 7 mobile phone's original and replacement batteries self-igniting.

Elliott goes into a company's stock when it sees a declining stock price and assets in the company, such as spare cash or subsidiary operations that could be utilised to give money to shareholders. It will typically try to enlist the support of existing shareholders by saying company management has a mistaken strategy and needs to change its ways so as to get the stock price backup. Being successful more times than not in this effort is how Singer's fund makes its money.

Samsung is controlled by the Lee family, and the family's oldest controlling member, 74-year-old Lee Kun-hee, suffered a heart attack in May 2014. Lee Jae-yong, 48, is one of his heirs and he has two sisters. He is the effective leader of Samsung. In 2015 Elliott failed in an effort to stop two Samsung subsidiaries from being consolidated and has written to Samsung's board saying it wants the company restructured with shareholders getting a bonanza payout.

The letter says:

Samsung Electronics' shareholders have suffered from the long-term undervaluation of the business by the equity market. ... Samsung Electronics is currently significantly overcapitalized and its treasury shareholding is held on its balance sheet at cost.

The treasury holding is worth around $70bn. The letter asserts that Samsung's corporate structure is unnecessarily complex. It should be simplified with a demerging into a holding company (Holdco) and a separate operating company, claims Elliott. Other merger changes should then take place "to achieve further benefits for stakeholders in terms of group rationalisation and control."

"The Demerger, along with the Tender Offer and the Samsung Holdco Merger, would in our view be 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."

There seems to be a general expectation that Samsung will re-organise and Elliott receive a reward for its efforts. As Wagnerian opera aficionados have it, operas ain't over till the fat lady sings. Casting Paul Singer as a fat lady is perhaps unkind but he does seem to like threatening company financial Götterdämmerungs. ®

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