The Story of Samsung Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

The Story of Samsung Case Study Solution

How did the chaebol culture and cross ownership structure in South Korea affect shareholders? Are the rights of foreign and institutional shareholders protected? If Elliott were to be a Korean hedge fund instead of a US company, could things have turned out differently?

Under the Chaebol culture, all the owners of the company belonged to the same company and they strived to hold a significant stake of their group companies to exercise control over their groups. This we can clearly see in the case of then Samsung Group. Samsung was one of the largest chaebol of the South Korea. Within each Chaebol, the shareholders of the company had their respective holdings and these holdings were based on a circular holdings relationship within the entire group. For instance, Samsung had 17 major circular holding relationships within the group and C&T was one of them.

Although, the Lee family owned only a combined 1.53% of the entire group but due to the circular holding relationship they owned and exercised a control of 49.7%. The Lee family owned around 42.2% in Cheil. Therefore, the ownership structure of the Lee family in the case shows that although the shares owned by the Lee Family in Samsung in South Kore are less however, their control stake is significant. This is only possible under the circular holdings structure of ownership.

From the case, we can conclude that there is some protection for the rights of the institutional investors but there is no protection for the rights of the foreign investors and this is evident from the example of Elliot who was against the merger between Cheil and C&T on the basis that the consideration offered was undervalued and the deal was not in the best interests of the shareholders of the company. Elliot had placed two injunction requests in from of the court and he also announced a critical attack of slides to lay out the case against the deal. These slides laid out some of the most important negative points of the deal and on the basis of which this deal should have been blocked however, the court had denied the attempt of Elliot and had stated that the price was correctly not significantly unfair and it was based on the relevant laws of the country.

If Elliot had been a Korean hedge fund, instead of a US company, the power of his opposition would have been more strong and the shareholders would have considered the rationale behind his opposition. This we can see the power of NPS in playing the role of preventing the merger. If Elliot had been a South Korean hedge fund, then the influence and his power for opposition would have been comparable to NPS.

Question 2

Given that Chairman Lee was hospitalised, was the need for his successor Lee Jae-Yong Pledging to solidify his stake in the Samsung Group a legitimate reason for the merger? Were the reasons against the merger provided by Elliott justifiable in your view? Explain the divergence of interests between both parties.

When Chairman Lee was hospitalised, then the need for his successor Lee Jae-Yong Pledging to solidify his stake in the Samsung Group was not a legitimate reason for the merger because this was a related party transaction and the deal was being carried forward within the family. Under the existing circular structure, Lee Jae Yong already owned around 23.3% stake in the Cheil industries and the proposed merger would give him an additional control of 16.5% within the merged entity and allow him to control Samsung’s C&T stake in the Samsung Electronics. Although, through this move Lee would be able to exercise more control however, this did not justify the merger between Cheil and C&T.

The reasons outlined by Elliot against the proposed merger seem to be justifiable. The current worth of the shares seems to be undervalued in the market since the IPO of the company in 2014. This is evident by the fact that the stock of the company was trading at a 40% discount to the net asset value of the company. The terms provided to the new shares in Cheil were highly overvalued. The historical merger formula had been used in determining the value of the consideration ratio also did not seem to be correct.

The value of the consideration should have been based on the current fair values of both the companies and this should have been determined through the DCF method. The complete evidence of the synergies should be taken into account. Elliot had also stated that the merger was an attempt of Lee to strengthen his position of the acting chairman of the company. The proposed merger also would create new active and circular shareholdings for the company. Overall, all these points stated by Elliot are justified and the purpose behind this merger was to increase the stake of the Lee family within Samsung Electronics.

On the other hand, C&T had mentioned a number of benefits of the proposed merger such as optimal diversification of the business portfolio, attractive growth opportunity to improve the top line of C&T and many more. These synergies had been stated in terms of revenue and cost targets in each of the core areas of the company. C&T had also claimed that the merger had been thoroughly reviewed by the board of directors and the other third party professionals and they all considered it to be in the best interests of the shareholders. This shows the divergence of the interest of both the parties and both parties have stated different reasons behind this proposed merger.

The Story of Samsung Harvard Case Solution & Analysis

Question 3

After the merger has passed, Samsung C&T promised to increase the amount of dividends and to include a governance committee. How effective do you think these would be in improving the corporate governance of Samsung C&T?

If the dividends are increased after the merger, then this would have a positive impact on the shareholders and they would be motivated. All those shareholders that have voted in favour of the merger would be more satisfied when they would get increased dividends from the management. However, this might not have a positive impact on the corporate governance of C&T and the future decisions would also be made without taking any input from the foreign investors of the company.

On the other hand, Samsung C&T had also proposed to include a merger committee after the merger. This governance committee comprises of one financial expert and three independent directors from the Board. The total members of the governance committee are six. The governance committee will have a positive influence on the corporate governance of the company. For instance, the issues that impact on the value of the shareholders would be discussed in detail and all the results would be presented to the board of the directors. These significant issues would include acquisitions, transfer of the business, purchasing another business, mergers etc.....................

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