Samsung is under attack by the U.S. activist hedge fund Elliott Management. The standoff pits Samsung, a company that controls US$270 billion in business, including some of the most popular smartphones in the world, against an activist investor who’s waged shakedown campaigns across the globe for pure profit. Based on Elliott's track record, experts worry that the company's actions will go beyond seeking simple profits to harm Korea's economy as a whole with its strong-arm financial tactics.
On the surface, Elliott’s contention is that the merger of Cheil Industries with Samsung C&T undervalues Samsung C&T, and, thus, Elliott argues, it is “unfair.” But at the heart of the matter, Elliott – the current third-largest shareholder of Samsung C&T with a 7.12 percent stake – is challenging the plan of the conglomerate's founding family to orchestrate a smooth transition of control of the Samsung Group to Lee Jae-yong, the son of the company founder Lee Kun-hee, a process started after the father suffered a heart attack last year. Lee Kun-hee still remains at Samsung Medical Center.
Analysts who are familiar with Elliott’s past shareholder activism around the globe criticize the move by saying that Elliott is purposefully trying to create conflict over the leadership succession in the Samsung Group rather than just pursue short-term profits. This is evidenced by the fund's token investments in other Samsung subsidiaries.
Preying on Companies
Elliott is known for taking positions in distressed companies, such as Corning and Enron, and then exploiting such positions for profit. When Elliot bought Owens Corning, it was financially distressed and being sued by workers who were injured by asbestos. The company filed for bankruptcy and agreed to pay compensation to the victims. Elliot bought Corning at next to nothing. Then, Elliot began a campaign attacking the workers, claiming that they were faking their claims.
According to Professor Shin Jang-sup of Singapore University, who has dug up past merciless activism pursued by Elliot comments, “[Elliott made] legal, political, and PR attacks on the dying workers, which chiseled away the compensation expected to be paid by the asbestos companies, boosting the firms' net worth. Elliot then flipped Corning, selling it for a near-billion-dollar profit.”
Preying on Countries
But the attention of this financial organization may be more than just a conglomerate-wide problem for Samsung. It could possibly threaten Korea itself. It wouldn't be the first time that the company has gone after a country – Elliott brought Argentina to its latest default, as it is currently embroiled in an activist battle there as well. In a 10-year-long campaign against the Argentinian government, Elliot has sought to enforce U.S. court judgments against the country for its 2001 default on US$95 billion of debt. Elliott sued the Argentinian government for full repayment and won judgments worth US$1.7 billion from a U.S. court, which Argentina refuses to pay.
Actually, Elliott is famous for taking advantage of the vulnerability of governments with distressed national economies. To achieve its target, Elliott has deployed various and sometimes unthinkable tactics, earning the nickname “vulture fund” in the financial community.
In the past, Elliott targeted distressed debt in countries where governments have been struggling to repay it. Elliot bought the defaulted debts at large discounts, then either sold them for a profit when the country's circumstances improved or sued for full payment. This happened with Peru and Argentina.
In Peru, Elliott bought US$20.7 million worth of defaulted loans made to Peru for a deeply discounted price of US$11.4 million. Elliott then filed a lawsuit against the Peruvian government in a New York court for the original amount of the loan, plus interest. Elliott won a US$58 million settlement and made US$47 million in profits.
The Argentinian case revolves around a decade-long legal fight between the Argentine government and a group of hedge funds led by Elliott. Elliot purchased US$630 million of bonds as the country was headed for default in 2001 for a reported US$48 million, about 7 percent of the value. It then and demanded that Argentina pay US$2.3 billion, including unpaid interest.
Elliott won a judgment from a New York court worth US$1.6 billion, but the Argentinian government refused to pay. In 2012, Elliott made an unthinkable move. It confiscated an Argentine naval vessel, the Libertad, which was anchored in Ghana, and persuaded one of the country’s judges to hold the vessel in port until Elliott was paid the debt owed.
Samsung Faces Same Tactics
Elliott is able to wage these sorts of agenda-based financial moves across the globe because Paul Singer, CEO of Elliott, is a former lawyer from Harvard Law School and knows the details of the U.S. legal system's loopholes. He is also known to have strong connections with U.S political and legal elites.
In the current battle with Samsung in Korea, Elliott started to ramp up pressure on the company by first filing a lawsuit. Elliott Management filed an injunction against Samsung C&T with the Seoul Central District Court, claiming that the stock valuation ratio of 1:0.35 applied to Cheil Industries and Samsung C&T for the merger would incur losses for Samsung C&T shareholders. It seeks to prevent the proposed takeover from going ahead at the shareholders meeting.
In its second legal action against Samsung C&T, Elliott sought to bar Samsung C&T from selling its treasury shares to chemicals maker KCC Corp., a friendly party to Samsung C&T. Elliott claims that this is a move to bolster its hand at the shareholders' meeting and is also “unfair.”
Korean courts have ruled against Elliott in both cases, allowing the shareholder vote on the merger to proceed, and also declining to block Samsung C&T’s sale of treasury shares to KCC.
Although Samsung has won a round against Elliott, the success of Samsung’s pending deal is far from assured. The deal’s fate will be decided in a shareholder vote on July 17.
The merger needs a two-thirds majority of voting shareholders to succeed. Elliott has a 7.12 percent stake in Samsung C&T, and foreign investors including Elliott hold about another third. A key swing vote will be Korea’s National Pension Service, which owns a 9.98 percent stake.
Meanwhile, Elliott is intensifying the Samsung merger battle, even after losing twice. First, Elliot filed an appeal against a court ruling in favor of the proposed merger. Subsequently, Elliott has acquired stakes in two other companies in the group: 1 percent each of Samsung Fire & Marine Insurance and Samsung SDI. Both of these companies own stakes in Samsung C&T. Samsung Fire & Marine owns 4.8 percent of the construction company and Samsung SDI holds 7.4 percent. With this purchase, Elliott gains the standing to raise formal complaints with the two companies’ boards on how they vote on their shares. Elliot has also called on other shareholders to vote against the merger deal at a meeting scheduled for July 17.
Some industry watchers said that Elliott can file an investor-state dispute (ISD) and file a lawsuit against the Korean court in the U.S. in the future if Elliot’s injunctions are not accepted in the local court. If Elliott's purpose is to cause conflict in the Samsung Group, they are likely to prolong any legal battle.