Legal Woes Should Roll Right Off Samsung

The electronics giant is accused of patent infringement and price-fixing, but possible penalties are pinpricks compared to its likely earnings

Samsung Electronics (SSNGY), already facing scrutiny by antitrust regulators in South Korea, the U.S., and Japan, for possible price fixing of liquid-crystal display panels, has another legal headache. It has been accused of patent infringement in the use of Bluetooth wireless technology in its products. If found guilty, the South Korean electronics heavyweight could be fined or made to pay for the damages. On news of the lawsuits, Samsung's shares fell 2.24% to $662.76 on Jan. 3, while the Seoul bourse's benchmark Kospi index fell 1.81%.

Yet when you are a non-stop cash machine like Samsung is these days, such challenges are far from life-threatening. Analysts say the legal disputes will only have "very small" impact on the company's financial results and businesses. "We are talking about payments totaling a maximum of up to $300 million to $400 million, but such a sum won't really be a substantial burden for a company that's expected to post a profit of nearly $10 billion this year," says Michael Min, semiconductor analyst at brokerage Korea Investment & Securities.

Min and other analysts note Samsung—the world's largest memory-chip maker and the third largest mobile-phone maker—is poised to benefit from a booming memory-chip market and ever-growing cell-phone demand. Min forecasts a net profit of $9.94 billion for Samsung in 2007, up from an estimated $8.52 billion in 2006. Chip analyst Simon Woo at Merrill Lynch puts Samsung's net profit at $9.81 billion in 2007 against $8.41 billion in 2006 (see, 9/25/06, "Samsung: A Rosy Future for Memory Chips").

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In a suit filed on Dec. 21 in Seattle federal court, the Washington Research Foundation accused Samsung, Matsushita Electric Industrial (MC), and Nokia (NOK) of using patented Bluetooth technology without permission. Bluetooth allows users of mobile phones and digital gizmos to exchange data and voice signals with nearby PCs and other electronic devices.

Samsung spokeswoman Eunhee Lee declined to comment on the alleged patent infringement, saying it was her company's policy not to discuss a pending lawsuit. The Seattle-based Washington Research Foundation seeks a court order barring the sale of products that use the patented technology. It calls on the defendants to use Bluetooth chip sets made by Broadcom (BRCM), which licenses the technology.

Samsung, also the world's largest maker of LCD panels, was last month subpoenaed by Korean fair-trade officials as part of a cross-border investigation into possible price-fixing among makers of display panels, including Sharp (SHCAY) of Japan, Korea-based LG.Philips LCD, and some Taiwanese makers. U.S. and Japanese trade watchdogs are also probing the industry for alleged production-limiting agreements to counter price declines of LCD panels, widely used in personal computers and flat-panel TVs.

Still in the Chips

In 2005, Samsung was fined $300 million in a U.S. probe into a price-fixing scheme with other computer memory device makers to keep the prices of chips artificially high (see, 12/21/06, "Feds 5th Samsung Exec to Plead Guilty"). Most LCD display makers had been enjoying good times until 2005 when a supply glut hit the industry. A demand wave persists as consumers continue to trade in their bulky, cathode-ray tube sets for thinner, bigger screens.

But the biggest money earner for Samsung is dynamic random access memory (DRAM) chips used for computer memory. Samsung controls nearly a third of the global DRAM market, which is expected to total around $40 billion in 2007, and has been posting a high margin, exceeding 35% in recent month, as the chips are in tight supply. "Samsung will continue to enjoy a high margin this year" in view of greater demand for the chips created by this month's introduction of Microsoft's Windows Vista operating system," says Kim Soo Kyoum, semiconductor program director at market researcher IDC.

Woo at Merrill Lynch figures Vista will increase the use of DRAM chips to an average of 1.2 gigabytes per PC in 2007 from 0.8 gigabyte in 2006. Merrill expects Samsung to post a profit margin of 37% from its DRAM sales in 2007, up from 35.8% in 2006.

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