Will Elliott Demand Special Dividends from Hyundai Motor?

Hyundai Motor Group has decided to call off its governance reform plan, succumbing to pressure from U.S. activist hedge fund Elliott Management Corp. Having achieved its goal, the hedge fund is highly likely to raise its voice to maximize short-term profits. Its ultimate goal is to realize profits from the upswing in Hyundai Motor stock prices.

According to investment banking (IB) industry sources on May 22, Elliott Management still has not made any announcement regarding Hyundai Motor Group’s latest decision to scrap the reform plan. A senior official from the IB industry said, “Hyundai Motor Group’s cancellation of its planned restructuring is only one of the various demands from Elliott. There is no reason for Elliott to welcome it.”

Elliott has stated its demands several times after March 28 when Hyundai Motor Group said it would push for the governance reform plan. It asked Hyundai Motor to turn into a holding company through a merger between Hyundai Motor Co. and car parts manufacturer Hyundai Mobis Co., a proposal brushed aside by the auto giant. Since the general meeting of Hyundai Mobis stockholders has been canceled, Elliott is expected to wait until Hyundai Motor Group comes up with a new restructuring plan.

Elliott is most likely to step up its pressure on Hyundai Motor Group to improve the shareholder value by raising the stock prices of the group’s key affiliates, including Hyundai Motor, Hyundai Mobis and Kia Motors Corp.

Experts point out that Elliott is eyeing the 12 trillion won (US$11.06 billion) cash holdings of Hyundai Motor Group. Elliott has demanded that the group additionally cancel treasury stocks by making the best use of reserves of Hyundai Motor and Hyundai Mobis as well as sell Hyundai Mobis and Hyundai Glovis shares owned by Kia Motors Corp.

The heart of the problem is a request for huge dividends. Elliott has demanded more than 8 trillion won (US$7.37 billion) -- 6 trillion won (US$5.53 billion) in special dividends and 2 trillion won (US$1.84 billion) in year-end dividends -- from Hyundai Motor and over 7 trillion won (US$6.45 billion) -- 6 trillion won (US$5.53 billion) for special dividends and 1 trillion won (US$921.32 million) for year-end dividends -- from Hyundai Mobis. The figures are up to eight times higher than last year’s total dividends paid by Hyundai Motor and Hyundai Mobis. In addition, Elliott has asked the group to increase the dividend payout ratio to 40 to 50 percent from the average of 20 percent during the past three years. The reason is simple. Elliott wants Hyundai Motor Group to measure up to the level of global companies. However, all these demands are intended to raise the stock prices of Hyundai affiliates.

Elliott is expected to particularly focus on restructuring the board of directors of Hyundai companies. It has ordered Hyundai Motor Group to appoint three non-executive directors who have experience in managing multinational automakers and auto parts manufacturers. Earlier, Elliott asked Hyundai Motor Group to “adopt additional measures to satisfy the global standards and management structure that fit the status of global automaker brand.” Therefore, it will possibly issue additional demands besides the known ones.

Hyundai Motor Group doesn’t have to accept Elliott’s requests. Expanding dividends and restructuring the board of directors will partly help improve the shareholder value. The thing is Elliott has put forward unreasonable demands simply to raise stock prices in a short period of time.

However, Hyundai Motor Group cannot flatly turn down Elliott’s demands. This is because the hedge fund can hinder the group’s new governance structure reform plan in the future. Given the circumstances, Hyundai Motor Group has no choice but to lower its corporate value by unwillingly complying with Elliott’s requests, as it is under pressure the government to improve its corporate governance.

An official from the financial industry said, “The current domestic systems and management conditions are favorable to hedge funds like Elliott Management. Under these circumstances, it is practically impossible for Korean conglomerates to come up with measures for long-term growth. The government needs to introduce measures, such as a dual class share system, to protect the management rights of corporate owners.”