Samsung, You Don't Need $60 Billion

It's a miserly response to Elliott Management's call for widespread changes.
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What the heck does Samsung Electronics Co. need with all that cash!

In a statement Tuesday, the company said that its business objectives:

"...require maintaining a net cash balance of 65 to 70 trillion Korean won, based on historical and expected capital expenditures, working capital requirements, M&As and other financing needs."

That's $56 billion to $60 billion. Seriously, is the Lee family spiriting it away for a rainy day, when they suddenly need to crack open the piggy bank to buy umbrellas and tarpaulin? Exploding phones and self-destructing washing machines are about as close as the company will ever get to the urgent need for a large wad of Ben Franklins, and even those disasters won't set them back that much.

In its response to Elliott Management Corp.'s call last month for widespread changes, Samsung made the bold claim that its cash haul allowed it "to seize compelling opportunities, withstand challenges and pursue strategic goals throughout all economic cycles."

To recap, Elliott affiliates Blake Capital LLC and Potter Capital LLC summarized their proposals in a few key points:

  • Split Samsung into a holding company and an operating company;
  • Pay a special dividend of 30 trillion won ($25.6 billion), equal to 245,000 won per share;
  • List the operating company on the Nasdaq, to help it globalize; and
  • Improve corporate governance, including the addition of at least three independent directors.

Of all these suggestions, it's the call to return cash that's a no brainer. In fact, at just 37 percent of Samsung's 82.1 trillion won in cash, cash equivalents and short-term investments, I'd argue that Paul Elliott Singer's request for 30 trillion won is conservative.

Drowning in Liquidity

Samsung's current assets are enough to pay off all its debts, twice over

Source: Bloomberg

What Samsung offered instead was a 30 percent boost in the 2016 dividend from the prior year to just 4 trillion won. It also said it would allocate 50 percent of free cash flow to "shareholder returns," a figure at the top end of its previously announced 30 percent to 50 percent range, with the rest going toward share buybacks. (Samsung also said it'll nominate one independent board member and take at least six months to review its corporate structure.)

That pledge to burn off future cash flow doesn't address the fact Samsung is currently sitting on around $70 billion.

Money Bags

Samsung's cash pile has continued to grow despite spending billions on factories

Source: Bloomberg

Note: Data is for cash, cash equivalents and short-term investments.

Samsung claims it has a proven track record of successful long-term capital management. I disagree.

The company is under-leveraged, with 93.7 percent of its capital coming from equity, according to data compiled by Bloomberg. What it has done with that cash is very little. Samsung has spent an average of just 24 trillion won a year over the past five years on fixed and intangible assets -- mostly factories and equipment -- well below the average 37 trillion won in cash it gets from operations. Its biggest acquisition to date is the $8 billion it plans to fork out for Harman International Industries Inc., announced after Elliott's pitch.

Cash Doth Flow

With investment in factories set to slow, net cash flow will stay strong even if sales take a hit

Source: Bloomberg

Instead, Samsung has allowed its cash pile to grow fourfold over the past five years, despite boosting capital expenditure to fight wars on multiple fronts, including against Taiwan Semiconductor Manufacturing Co.,  Apple Inc., Foxconn Technology Group and LG Display Co.

It's true that sales are slowing and operating cash flow will moderate accordingly. But on the flip side, the arms race in chips and displays is losing pace and the next battle will be around production quality rather than capacity.

If Samsung does need more cash, there's plenty of moolah to go around. Even a Trump-inspired rate rise is unlikely to make the cost of debt too high.

The board hasn't offered investors a concession to Elliott's demands, rather a rebuttal. And a poor one at that.

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

    To contact the author of this story:
    Tim Culpan in Taipei at

    To contact the editor responsible for this story:
    Katrina Nicholas at

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