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Government's Reform Drive Opens Way for Hedge Funds to Pounce on Korean Firms
Reform Threatens Corporate Owners' Control
Government's Reform Drive Opens Way for Hedge Funds to Pounce on Korean Firms
  • By Jung Suk-yee
  • May 2, 2018, 12:29
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The Samsung Group is feeling pressure as Samsung Life Insurance's disposal of its Samsung Electronics shares can weaken the owner family’s control on the electronics giant.
The Samsung Group is feeling pressure as Samsung Life Insurance's disposal of its Samsung Electronics shares can weaken the owner family’s control on the electronics giant.

Samsung Group is expected to accelerate corporate governance reform as its vice chairman Lee Jae-yong has officially been designated as the head of the group by the Korea Fair Trade Commission (KFTC).

The designation followed the recent move by the Financial Services Commission (FSC) to put pressure on the group to sell off the Samsung Electronics shares owned by Samsung Life Insurance.

Market watchers say that the insurance company has no other option but to sell the shares. Yet the disposal of the shares is likely to weaken the ties between Samsung C&T, Samsung Life Insurance and Samsung Electronics and, in turn, the vice chairman’s control of the group.

The issue surfaced after FSC Chairman Choi Jong-ku urged the financial companies of large business groups to sell their stakes in group affiliates.

The disposal of Samsung Electronics shares by Samsung Life Insurance also has to do with the proposed revision of the Insurance Business Act currently pending in the National Assembly.

According to the amendment bill, an insurance company can own the shares of group subsidiaries up to 3 percent of its total assets, with the value of the shares calculated in terms of market value, not acquisition cost.

Under the proposal, an insurance company should dispose of its stakes in group subsidiaries that exceed 3% of its total asset. The strengthened rule for supervision of financial groups is targeting Samsung Life Insurance as well.

Samsung is feeling the pressure as the disposal of the shares can weaken the owner family’s control of Samsung Electronics. As of the end of April 30, Samsung Life Insurance has a 8.23 percent stake in Samsung Electronics. The market value of the stocks is estimated at 28 trillion won, exceeding 3 percent of Samsung Life Insurance's assets. But when caluculated in terms of acquisition cost, the value of the stocks is less than 3 percent of the insurance company's assets.

If the proposed revision bill is passed by the National Assembly, Samsung Life Insurance has to sell 21 trillion won worth of Samsung Electronics shares.

Samsung’s owner family and other affiliates are unlikely to take over all of these shares from the insurance company as the cost is too high. If these shares are sold out to non-Samsung investors, the group’s shareholdings in Samsung Electronics, including those of the owner family, drop significantly. This would open the way for global hedge funds like Elliott Management to mount an attack on Samsung.

The current best-case scenario for Samsung is Samsung C&T selling its Samsung Biologics shares to Samsung Electronics and using the proceeds to purchase Samsung Electronics shares from Samsung Life Insurance. The Fair Trade Act, however, may put the brake on this scenario because Samsung C&T has to sell Samsung Life Insurance shares while being compelled to turn into a holding company.

If Samsung Life Insurance puts its Samsung Electronics shares on the market, which is rather unlikely, the foreign shareholdings in Samsung Electronics may further increase and the company may become more vulnerable to hedge funds or the like. In this context, some in the industry point out that the government may reduce its pressure on Samsung once Samsung Life Insurance sells even a small portion of its Samsung Electronics shares.


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