Tech

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Victory has been rare for activist shareholders in Korea. The impeccable timing of Elliott Management's campaign against Samsung Electronics, however, may be key to an elusive win. 

Affiliates of the Paul Singer-led firm on Wednesday unveiled a plan to shake up the maker of smartphones and other consumer electronics. It believes the company should split into two, pay a one-off dividend worth roughly $27 billion, seek a Nasdaq listing for its core operating business and lift its number of independent directors, among other things.

The $206 billion company's management turmoil isn't exactly a crisis, but it certainly presents an opportunity for Elliott. Heir apparent Jay Y Lee has helped run the company for the past two years since his father's heart attack, and his recent appointment to the board was inevitable.

Right now, Samsung needs stability and strength. Simply putting Jay Y on the board of the Korean chaebol doesn't guarantee either. He knows it, and so does Elliott.

Bridge the Gap?
Elliott Management has proposed a series of remedies that could help Samsung recoup its discount
Source: Bloomberg

With the Note 7 recall as his first major challenge, Jay Y must now face his second: a showdown with Elliott. But rather than seeing it as another fire to put out, the scion could view it as an opportunity to stamp his mark on the company and its future. Equally, it's no mistake that Elliott speaks of "retaining the founding family’s controlling interest" in Samsung since any restructuring would be almost impossible without the Lee family on board.

As Gadfly wrote previously, Samsung's challenges go beyond a few exploding handsets. They include the long-term health of the smartphone industry it dominates, and the fact that a lot of its revenue and assets are tied to supplying competitors who are keen to find ways to diversify. Now, it must also weigh whether Elliott's suggestions will, in fact, maximize shareholder value.

A fast-paced capitulation from the largest Korean conglomerate is unlikely, but the company shouldn't be too hasty to rebuff any or all of Elliott's proposals. After all, its shares are trading at an undeniable discount to peers by almost any measure.

Laggard
Samsung trails its rivals on a number of metrics, including price to earnings
Source: Bloomberg

A quick glance at the company's cash pile shows capital management is an issue: already in the first six months of this year, it has ballooned 6 percent to a 77 trillion won. A $27 billion dividend equivalent to roughly 15 percent of the company's market capitalization isn't too much of a stretch, considering Apple in April said it would pay dividends and buy back shares for a combined $87 billion (15 percent of its market cap at the time) in a program that runs through March 2018. It would also help rein in Samsung's cash as a percentage of total assets to around 19 percent (from 31.6 percent), which is more in line with peers like Apple, at 20 percent. 

And while Elliott's proposed 75 percent return of free cash flow to shareholders sounds heady compared to the company's recent dividend payout level of roughly 22 percent in 2015, it's not ridiculous. Qualcomm recently reiterated the fact that it's on track to achieve a targeted capital return figure of 75 percent of free cash flow, at a minimum. 

When Cash Isn't King
Samsung Electronics is under pressure from activist Elliott Management to make a host of changes, including a one-off special dividend of 30 trillion won

The hedge fund's argument for a Nasdaq listing also deserves credit. Not only would it boost liquidity and accessibility, but it'd likely force an improvement in the company's corporate governance standards. 

Elliott has had over a year to shake off its failed efforts at blocking a cozy merger between two of Samsung's affiliates: Samsung C&T and Cheil Industries. It has a good chance of forcing change this time around.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Gillian Tan in New York at gtan129@bloomberg.net
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net