The ruling family gets its way.

Photographer: David Becker

Samsung's Win Is South Korea's Loss

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Long before the South Korean media began indulging in anti-Semitism, Samsung's recent effort to pull a fast one on its own investors was already firmly in insult territory. The company's affront extended both to shareholders and to the Korean public.

The bid by Samsung's de facto holding company, Cheil Industries, to buy Samsung C&T at a laughably below-market price was a naked power grab  by the company's founding Lee family. But Samsung so dominates South Korea that it managed on Friday to convince the subsidiary's shareholders to ignore their own interests.

The merger marks a defeat for South Korean President Park Geun Hye, who won office in late 2012 with promises to rein in the family-owned companies that stifle Korean innovation. Friday's vote was Park's economic Waterloo, the moment her government decisively lost the fight against the oligarchs.

QuickTake Samsung

It's also a defeat for activist investor Paul Elliott Singer. Last month, Singer began publicizing his 7.12 percent stake in Samsung C&T, the group's construction subsidiary, in order to block Samsung Group's proposed deal. Foreign hedge funds are always controversial in Korea, where they're often derided as "vultures" and "parasites" picking at the nation's hard work for a quick profit. But Singer was confronted with particularly nasty attacks from Samsung's sympathizers; media reports referred to him as the face of the "Jews of Wall Street" and their "ruthless and merciless" ways.

The attacks harkened back to 1997, when then-Malaysian Prime Minister Mahathir Mohamad blamed a shadowy Jewish cabal led by George Soros for crashing his economy. In its dealings with international investors, Malaysia is still trying to move beyond the ugliness of that moment. Unless Samsung heir-apparent Lee Jae Yong and President Park condemn the attacks on Singer, corporate Korea won't easily move on from this episode, either.

To be sure, Singer, like every hedge fund manager, was motivated by profit not altruism. But his critical assessment of Samsung's cozy merger was spot-on.

Now that it's likely to go through, the deal will embolden Korea's other family conglomerates -- known as chaebol -- to act even more selfishly than they do already. It's also sure to perpetuate the so-called "Korea discount," which depresses stock valuations relative to developed-market peers. That's the price for the sort of dodgy corporate governance regularly displayed by Samsung, Hyundai and other Korean companies.

Corporate Korea needs to understand shareholder skepticism is a normal part of business, not an existential threat. Unfortunately, Korean companies are often abetted by a national media quick to indulge in xenophobia. Last year, Hyundai Motor Chairman Chung Mong Koo spent $10 billion, three times the assessed value, on land for a new corporate headquarters. When shareholders cried foul -- including Norway's Skagen Funds, the biggest holder of Hyundai preferred stock -- they were castigated by the media as meddling foreigners.

These issues contribute to Korea's other economic problems, including its inability to innovate. In recent months, much has been written, including in the New York Times , about Korea's latest startup boom centered around Seoul's Gangnam district. It's not all hype; venture capitalists from Silicon Valley are indeed eyeing the country's new mobile and Internet businesses. But they will all almost certainly hit Korea's chaebol ceiling. With deep pockets and even deeper political connections, the country's dynastic companies can easily scoop up any potential disruptor that enters the playing field.

Game-changing ideas regularly die inside the rigid, top-down, risk-averse institutions that dominate Korea's economy. So does any sense of corporate self-awareness. The Lees are pulling off this merger because it benefits the family, not Samsung's shareholders or the group's some 500,000 employees. South Korea's problem isn't foreigners or Jews. It's an economic system that insults its people's intelligence.

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

To contact the author on this story:
Willie Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net