Korean playbook

24 Jun 2015 By Una Galani

Samsung has cast a spotlight on South Korea’s quirky M&A rulebook. A $9.2 billion merger led by the holding company of the country’s biggest conglomerate helps the ruling Lee family plan its succession at the expense of independent shareholders. For foreign investors, it’s key to understand how the system is stacked in favour of the giant chaebols.

In most countries, companies that decide to join forces set the terms by negotiation. Not in South Korea. For mergers between listed related parties, the ratio at which one set of shares is exchanged for another is set by a formula based on previous trading prices.

The rule is supposed to protect independent investors by preventing friendly parties from under- or over-paying for each other. But the Lee family has abused the spirit of the safeguard. Its holding company Cheil Industries launched its offer to merge with related construction company Samsung C&T in May. At the time, the latter’s relative value was at its lowest since Cheil joined the market in December. C&T is important because it owns 4 percent of smartphone maker Samsung Electronics.

To smooth its controversial deal, Samsung has exploited two loopholes. The first involves issuing treasury shares: stock held by a company that can be transferred to third parties without approval from other investors. Faced with resistance, C&T sold a 6 percent stake to friendly South Korean builder KCC Corp, diluting the voting power of the deal’s opponents.

The maneouvre relies on a second loophole: the lack of restrictions on interested parties. In most developed markets, investors with ties to an acquirer are barred from voting on a transaction. In South Korea, however, Samsung affiliates which own around 15 percent of C&T as well as KCC will be able to vote on the deal on July 17.

U.S. hedge fund Elliott, which owns 7.1 percent of C&T, is opposing both the merger and the stake sale. Though a victory for the foreign investor would send shockwaves through South Korea, an upset is possible. In the meantime, investors hoping to influence Samsung’s broader restructuring should remember how the South Korean system can work against them.


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