US activist investor Elliott urges overhaul at Samsung Electronics

Paul Singer

U.S. hedge fund Elliott Management is urging changes at Samsung Electronics, calling on the South Korean tech giant to streamline its structure and to pay out a special dividend.

The activist investor sent a letter to the world’s No. 1 smartphone maker on Wednesday, spelling out changes that include splitting into a holding company and listing its operating company on the Nasdaq stock exchange.

Elliott’s latest activist target is in the middle of a leadership succession and is under pressure after issuing a huge recall of all of its Galaxy Note 7 smartphones last month.

The $27 billion hedge fund also called into question Samsung’s corporate governance and said the family-run company should add three new independent directors to its board.

Samsung, which with a market value of $230 billion is one of the world’s largest companies, was not immediately available for comment.

Elliott said the new holding company should look at a possible all-stock merger with Samsung C&T – a subsidiary that the New York hedge fund targeted in a heated shareholder battle last year. Elliott ultimately failed to derail Samsung C&T’s merger with sister firm Cheil Industries.

U.S. hedge funds rarely target foreign companies for activist campaigns.

Other than Third Point, a hedge fund active in Japan, Elliott is the only major U.S. activist with a significant presence in Asia.

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Elliott, founded by billionaire Paul Singer, owns 0.62 percent of Samsung’s shares.

With such a small stake and an already adversarial relationship, Elliott faces an uphill climb in convincing other shareholders and Samsung’s leadership team to implement its changes.

One factor that could help Elliott in its efforts is Samsung Electronic’ s more international shareholder base.

Unlike the Samsung C&T battle, where the majority of shareholders were domestic investors, 11 of Samsung Electronic’ s top 20 shareholders are international investors, according to Thomson Reuters data.

U.S. activist ValueAct Capital was given a board seat at Microsoft in 2013, while holding only 0.8 percent of the company’s stock.

According to a person familiar with the matter, Elliott is seeking to speak with Samsung’s leaders and board, and work with the company collaboratively to implement its proposed changes.

Elliott’s investment comes after Samsung has undertaken a series of moves to pave the way for a stable handover from the ailing, 74-year-old Lee Kun-hee, who runs the group, to his three children.

Lee’s son, Jay Y. Lee, 48, is seen as the heir apparent, and his profile at the company has risen during the past few years.

Among the hurdles to the handover is South Korea’s inheritance tax, which could cost the company around $6 billion.

Speculation on how Samsung could restructure its business has loomed for at least a year, with analysts offering up a variety of options, including the so called “opco/holdco” division that Elliott proposed on Wednesday.

Elliott nodded to Samsung’s recent stock buyback, but said its “substantial and excess net cash position comes at a very real and tangible cost to shareholders.”

Elliott said it wants Samsung to pay a $37 billion special dividend from its $70 billion cash pile.

Samsung’s shares have risen 27 percent this year, though by Elliott’s calculations, the company’s stock trades at a more than 30-percent discount compared to peers.