A Challenge to Samsung's Ruling Family
Paul Elliott Singer's recent investment in Samsung might seem innocent enough. But the powerful family that controls South Korea's biggest company wouldn't be wrong to see it as a declaration of "war," as Heo Pil Seok of Midas International Asset Management puts it. Singer's move may prove a nightmare for the Lee clan -- and, precisely for that reason, it's a tremendous opportunity for Korea's economy.
Singer's stake in Samsung C&T, the company's construction subsidiary, may be small at 7.12 percent. But the investment is terribly ill-timed for Lee Jae Yong, who has been minding the family business while his father has been ailing. In recent weeks, Lee has been trying to buy out shareholders in Samsung C&T through the family's de facto holding company. Some investors cried foul, arguing the move would consolidate Lee's power at their expense, as the subsidiary is worth more than the proposed $9.4 billion price.
It's entirely possible Singer will be rebuffed in his attempt to acquire a role in Samsung C&T management. When a company generates revenue equivalent to more than a quarter of a country's gross domestic product, its existing caretakers tend to get their way. But Singer's pressure will make an impact nonetheless, by forcing the currently reigning Lee to reveal his true intentions.
Lee, at 46, claims to represent a new generation that's less insular than Korea's traditional business elite; he presents himself as an internationally minded visionary who spent time at Harvard Business School and earned facetime with Steve Jobs when rivals couldn't. But if Lee stamps out Singer's voice, he will have to engage in management tactics more akin to his father's -- or grandfather's -- generation.
His push to acquire control over Samsung C&T, after all, leaves little room for compromise or transparency, since it's primarily about solidifying his family's power, not making Samsung more productive, innovative or profitable. "These mergers are designed primarily to enhance the control of the family shareholders so that they can continue to dominate the management of their group," says Hank Morris, Seoul-based adviser at Triple A Partners. "And they're not particularly concerned as to whether or not this places some burden on the performance of the merged company that might detract from its earnings potential and therefore hinder its share price."
Lee's encounter with Singer also spotlights an awkward question about Samsung that few in Korea have felt comfortable asking out loud: When exactly will Samsung's widely anticipated changing of the guard take place? Family patriarch Lee Kun Hee has been out of sight since his May 2014 heart attack. Everyone knows the younger Lee is next in line. So why has the company delayed making it official? The widely cited excuse that the Lee kids are delaying an estimated $6 billion inheritance tax bill doesn't make sense -- that bill will have to be paid whether it comes due tomorrow or three years from now.
The Korean media, however, has avoided posing any uncomfortable questions. And that complaisance has allowed the Lees to like a royal family, one that allows its heir apparent to quietly consolidate his control over a kingdom that technically isn't his yet. Needless to say, hardly anyone has been minding the best interests of shareholders amid this process.
Singer is likely to challenge any plans for an easy handover to the Lee family's next generation. And he won't go away quietly -- he's a battle-tested activist who has previously waged campaigns in Argentina (over government debt), Houston (Enron) and Hong Kong (Wing Hang Bank).
All this is great news for Korea's 50 million people. As I've argued before, Korea needs to end the stranglehold of the chaebol, the country's five largest family conglomerates, over the national economy. Their political connections, monopolistic ways and ability to buy out any startup that one day might pose a challenge undermine Korea's job and wage growth and its ability to innovate.
If President Park Geun Hye is too busy, or too diffident, to challenge the chaebol, the job should be given to market agitators like Singer. Critics will say Singer is just looking to make a quick profit before abandoning South Korea for good. That may be true. But if Singer breaks up the Lee family's grip over Samsung before he leaves, his stay would have still been worth it.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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