Controversy over Arbitrary Decision
As South Korea’s top business heads are expected to testify before the National Assembly special committee over their alleged connections with the Choi Soon-sil scandal on December 6, there are concerns about causing unnecessary disputes on last year’s between Samsung C&T and Cheil Industries with a political approach rather than an objective judgment.
According to financial and securities industry sources on December 4, politicians are throwing accusations whether there was some kind of deal between President Park Geun-hye and Samsung about the National Pension Service (NPS)’s decision about voting in favor of the merger of Cheil Industries and Samsung C&T Industries with the merger ratio of 1 to 0.35 when the situation was favorable to Cheil Industries and unfavorable to Samsung C&T.
Neither Samsung nor the NPS can make an arbitrary decision on the merger ratio. It was decided by reflecting stock prices and trading volumes on days a month, a week and a day earlier than the resolution at the board meeting and calculating with a weighted average according to the Financial Investment Services and Capital Markets Act.
However, new regulations that can apply discounts and extra charges within 10 percent of standard stock prices in case of mergers between subsidiaries have been introduced after the amendment of the Capital Market Act in 2013. When bending the rules to favor on Samsun C&T as much as possible and provide 10 percent extra charges on Samsung C&T and 10 percent discounts on Cheil Industries, the merger ratio can be adjusted to 0.43 to 1. In this case, however, it weights against the NPS.
With the merger ratio of 0.35 to 1, the value of the NPS’ shares in Samsung C&T reaches a total of 976.8 billion won (US$834.52 million), 55,767 won (US$47.64) per share, while that in Cheil Industries amounts to 1.04 trillion won (US$888.42 million), 159,294 won (US$136.09) per share. The combined value of the NPS’ shares in the two firms stands at 2.02 trillion won (US$1.72 billion).
With the merger ratio of 0.43 to 1, on the other hand, the value of its shares in Samsung C&T can jump up to 1.07 trillion won (US$917.98 million) with 10 percent extra charges per share of 61,344 won (US$52.41) and that in Cheil Industries decreases to 935.9 billion won (US$799.57 million) with 10 percent discounts per share of 143,365 won (US$122.48). The total value of the NPS will be 2.01 trillion won (US$1.71 billion). When applying the merger ratio of 0.43 to 1, the total value of the NPS’ shares in the two companies will drop by 6.3 billion won (US$5.38 million). This is because some said that the merger ratio of 0.46 to 1 was more appropriate at the inside minutes of the NPS recently revealed. Once the claim is accepted, the NPS’ shares in the two firms will decrease.
In addition, criticisms that the NPS suffers from losses on valuation due to the decrease in stock price of the new Samsung C&T after the merger between Samsung C&T and Cheil Industries don’t add up.
The stock price of the merged Samsung C&T dropped by 10.4 percent from May 22, 2015, the day released the news of the merger, to November 21, 2016, but it exceeded the figure of construction and distribution indexes by 14.4 percent point and 9.4 percent point, respectively, over the same period. When evaluating valuation profit and loss with 159,294 won (US$136.09), the price of the merger at the shareholders’ meeting, it shows losses of 200 billion to 300 billion won (US$170.87 million to 256.3 million) according to the fluctuations of stock prices, but it showed profits of 120 billion won (US$102.52 million) with 169,000 won (US$144.38) of the closing prices on December 25.
Above all, the NPS was not the only one in favor of the merger between Samsung C&T and Cheil Industries. At that time, almost 100 percent of domestic institutional investors approved the merger, while 84 percent of individual investors voted in favor of it. About a third of foreign investors, excluding U.S. hedge fund Elliott Associates, also approved the merger.