What Prodded Vice Chairman Lee of Samsung into Selling His Equities in Samsung SDS?

It was confirmed that Lee Jae-yong, vice chairman of Samsung Electronics, sold off some of his equities in Samsung SDS because he judged that it was difficult for Samsung SDS to merge with Samsung Electronics. Many experts forecast that Samsung SDS’s marriage with Samsung Electronics would bolster vice chairman Lee’s control over a unified Samsung Electronics as the vice chairman hold 11.2 percent equities in Samsung SDS.  

According to multiple sources in the industry, even though the Future Strategy Office of the Samsung Group had considered a plan to marry Samsung Electronics and Samsung SDS since last, they came to a conclusion that the merger was virtually impossible. Last year, the price on book-value ratio (PBR) of Samsung Electronics stood at about one while that of Samsung SDS at four to five. Thus, in the event that the merger ratios are calculated based only on stock prices, controversies may swirl over fairness like the merger of Samsung C&T and Cheil Industries in 2015. 

At that time, Samsung C&T’s PBR was 0.85, which meant that its market capitalization was outweighed by its book value while that of Cheil Industries stood at 4.56, which meant that its market capitalization towered over its book value. Under these circumstances, they calculated the merger ratio (1:0.35) based only on stock prices only to face an opposition by Elliot Management, a US-based hedge fund. 

On March 23, the BPRs of Samsung Electronics and Samsung SDS stood at 1.09 and 3.15, which means their gap narrowed down to 2.9 times. But this can hardly excuse controversies over fairness. Accordingly, it is said that vice chairman Lee concluded that the merger would be impossible.  

With reference to the merger rumor, Samsung Electronics flatly denied that there will be no plan for the merger in an investor forum in early June and a business result conference in late October last year. Notwithstanding, a merger rumor kept on going around in the market.  Under these circumstances, vice chairman Lee sold off 2.05 percent equities in Samsung SDS in order to secure funds to support Samsung Engineering late January, making people curious about why he did that. “Samsung Electronics’ denial of the rumor was made based on the results of the group’s reviews,” another executive said.  

The possibility of marriage of Samsung Electronics and Samsung SDS is very low although it cannot be ruled out completely since the two’s stock prices can change. “A possibility of the merger between the two is virtually water under the bridge now that it will be not easy for the gap between the two’s BPRs to narrow down to a double or less,” said Kim Sang-jo, director of the Solidarity for Economic Reform.

It is said that the although Samsung Group thought that the merger between the two companies would be very difficult, they did not made it clear due to a possibility of a drop in the stock price of Samsung SDS. Vice chairman Lee does not necessarily need equities in Samsung SDS to secure a control over the Samsung Group.

It is highly likely that vice chairman Lee will sell off 17 percent equities (about 2.5 trillion won as of March 23), which he jointly shares with his two younger sisters, and pay his inheritance tax with the money if it is difficult to merge the two companies.    

Samsung SDS was listed on the stock market for 190,000 won per share in late 2014. Its stock price once peaked at 429,000 won but since then, had been on the skids and stood at 186,000 won, lower than its IPO price, when the market closed on March 24.