Photographer: Krisztian Bocsi/Bloomberg

Here's Why Samsung Surprised the World With a $10 Billion Buyback

Samsung Electronics Co. isn't known for its generosity with investors. It's been stingy with its cash, though there are billions on the balance sheet. The founding Lee family has also kept tight control, despite holding a mere sliver of stock.

So the news that Samsung would spend $10 billion buying back and canceling shares came as a huge surprise. It's the largest buyback ever for the company and 10 times the size of some analyst estimates. "A big unexpected treat," said Lee Sang Hun, an analyst at HI Investment & Securities Co.

Samsung and the Lees aren't suddenly growing altruistic. Rather, the buyback reflects their need to win back investor confidence in preparation for a once-in-a-generation leadership transition. Lee Jae Yong, the grandson of Samsung Group's founder, is poised to take over from his father, Chairman Lee Kun Hee, who has been hospitalized since last year.

The handover hasn't been smooth. Profits in the smartphone business have been plummeting, dragging down shares. Earnings in the third quarter came in below analysts' estimates, and the company said the fourth quarter would be worse.

Samsung also angered some investors this summer as it rearranged pieces within the group of about 70 companies to prepare for the succession. When it proposed combining two Samsung affiliates, American activist Paul Elliott Singer fought to stop the deal and force the Lees to give more to minority shareholders. He failed, but investors only narrowly sided with the founding family.

So buying back shares -- even $10 billion's worth -- is a small step in restoring trust with investors. It's also designed to signal a cultural shift under the younger Lee, showing he's attuned to the international investment community and won't depend on the protections that come with wielding the Samsung name in South Korea.

Lee Jae Yong has big plans for remaking Samsung. As the mobile-phone business becomes less profitable, he's pivoting to invest in components, including chips and displays, sold to Apple and other phonemakers. He's also pouring money into the Internet of Things, biopharmaceuticals and more futuristic ventures underway in the research labs.

Lee Jae Yong is instituting less visible changes, as well. Employees and executives used to bow to his father at a 90-degree angle. The bows are long gone; now they greet the vice chairman with a warm smile.

To guide Samsung into the next decade, the scion of South Korea's biggest business empire will have to do many things differently.