Rights of Succession
The Samsung Group’s decision behind Samsung SDI and Cheil Industries’ merger on March 31 is interpreted to serve multiple purposes, including restructuring and inheritance.
Naturally, Samsung stresses that it does not have any further meaning other than streamlining affiliates and fostering a business that can be a driving force for the future.
The company has been engaged in major restructuring operations since last year, such as handing over Cheil’s fashion business to Samsung Everland and merging Samsung SDS and Samsung SNS.
It was in the same line that last year, Samsung Everland gave its property management business to Samsung S1 and split its cafeteria business with Samsung Welstory.
Also, Samsung Corning Precision Materials separated itself from Samsung Group when its major shareholder, Samsung Display, forked over all of its stock to Corning.
After Samsung Corning, the group has been keeping low key. However, the industry observes that it is highly likely that Samsung will get a second wind in restructuring with the Samsung SDI-Cheil Industries merger.
In particular, financial circles see the restructuring as also playing a part in the succession for the third generation of the owner’s family, and streamlining business areas for the transition.
Mapping Out Samsung’s Third Generation Inheritance Layout
The merger between Samsung SDI and Cheil Industries follows after the latter handed over its fashion business to Samsung Everland on December 1, 2013.
Lee Seo Hyun, at the time vice president of Cheil Industries, jumped ship to be president of Samsung Everland Fashion, to be in charge of management strategies and to pursue the business that she majored in.
After the move, the attention was centered around who among the third generation of the Samsung royal family would take over Cheil Industries’ remaining business, Chemicals and Materials. The materials business in particular is a strategic area that the Samsung Group is focusing on, as also ordered by Chairman Lee Geun-hee, to secure its competitiveness.
The merger helped the inheritance alignment through Samsung Electronics Vice Chairman Lee Jae-yong seizing Cheil Industries’ flagship materials business. He is in charge of Samsung SDI, so the absorption of Cheil Industries makes sense. Samsung Electronics is also the biggest shareholder of Samsung SDI. The move also completes the vertical integration by aligning Cheil and Samsung SDI as materials businesses, Samsung Electro-Mechanics in the components business, and Samsung Electronics that produces finished products.
The industry foresees that out of Samsung’s third generation ruling family, the chairman’s sole son and vice chairman will take electronics and finance affiliations. The eldest daughter Lee Bu-jin, president of Hotel Shilla and Samsung Everland, will take hotels, construction, and heavy chemicals. Finally, the second daughter Lee Seo-hyun, president of Cheil Worldwide Inc. and Samsung Everland, will take fashion and media.
Shift in Ownership Composition Noteworthy
The merger is meaningful at this time in that it resolves the problem of Cheil Industries’ unstable ownership composition.
Currently, its biggest shareholder is the National Pension Service with 11.6 percent, and the second biggest is Korea Investment Management Co. with 7.3 percent.
Not much stake was held by Samsung-affiliated companies such as Samsung Card (7.3 percent) and Samsung Asset Management (4 percent). However, with the completion of the merger between Samsung SDI and Cheil Industries, the combined company’s biggest shareholder will be Samsung Electronics (13.5 percent), and the National Pension Service will be second (10.5 percent).
The merger is also linked with the group’s management goals like “Break Through Limits” and “Mach Management” stressed by Samsung’s Chairman this year. In his new year’s address, he emphasized that “We need to break through the market and technological limits. Mach management means transforming the company through and through to survive and sustain as a top corporation.”
Analysts say that the merger reflects his intention that Samsung needs to reinforce the materials areas that are being touted as Samsung’s weakness, since the tech giant already has strength in finished products and components. Furthermore, Samsung sorely needs a new breakthrough because their flagship business, smartphones, is entering into a mature stage.
The industry best guess is that, for the next target areas for restructuring, Samsung may eye construction, chemicals, and finance.
With construction, last year Samsung C&T Corp. hiked its stake in Samsung Engineering to 7.81 percent, triggering rumors about the merger. Se securities circles are talking about the possibility that in the wake of the merger this time, Cheil Industries might sell its Samsung Engineering stake to Samsung C&T.
Another rumor is also being raised that there could be a merger initiated by Samsung Petrochemical, where President Lee Bu-jin is the biggest shareholder, targeting relatively smaller chemical affiliates that suffer from worsening profitability.