On Friday, construction-and-trading arm Samsung C&T Corp. approved a US$7.7 billion all-stock takeover offer from Samsung’s de facto holding company Cheil Industries Inc. This merger marks a major victory for the conglomerate’s controlling Lee family, reminding us how powerful these family run conglomerates, known as chaebols, are.

After the Samsung merger, the company’s C&T’s shares dropped by 9%, and Cheil Industries went down by 7%. Samsung Electronics (KRX: 005930) shares, increased by 2%.

This deal is part of a restructuring program conducted by the Lee family, who want to consolidate power over Samsung Electronics. As Samsung C&T owns 4% stake worth $6.7 billion in Samsung Electronics, the merger led to Chiel’s control over it, making the new entity one of the largest investors in the smartphone maker.

Chiel will keep the name of Samsung C&T and will be relisted in September, with Mr Lee owning a direct 16.5% stake. It is also a strategic move for the Lee family to gain a strong grip on the Samsung brand before the leadership transfer occurs.

Indeed, Lee Jae-yong, currently vice-chairman at Samsung Electronics and son of the chairman Khun-Lee, is expected to replace his father soon as this latter suffered from a heart attack last year.

“Looking at [Thursday’s] share price of Cheil Industries, the stock was up quite a bit so I think the market was betting that Samsung would get the merger to go through,” said Michael Na, Nomura’s Korea strategist. He added that Samsung struggled at winning over retail investors. On Thursday, Cheil went up by as much as 5%.

But the merger was a close bet as it had to go through a weeks-long fight with U.S. hedge fund Elliott Associates LP., Samsung C&T’s third largest shareholder with 7% stake. They were opposed to the merger as they believed it greatly undervalued the company while overvaluing Cheil industries.

Its CEO Paul Singer was very critical about the deal. At the Delivering Alpha conference in New York, Singer shared his strong disagreement about the merger and explained it should be rejected to serve as an example of more stringent corporate governance in South Korea.

“For the past few years, Samsung C&T’s stock price has gradually decreased. Markets say current prices don’t reflect the firm’s intrinsic value, while Cheil Industries has hit its peak. Furthermore, Cheil just went public six months ago so it seems like the merger ratio is quite unfair to C&T shareholders,” said Singer.

As for the South Korea’s National Pension Service (NPS), the largest stakeholder in Samsung C&T owning 9.9%, they showed support for the takeover as they also have about a 5% stake in Cheil Industries.

 

Not All Shareholders Support the Samsung Merger

Last Thursday, Elliot had tried to block the merger at South Korea’s Supreme Court, which the lower court ruled against. That same day, the fight turned ugly as Samsung C&T had allegedly published cartoons depicting Singer as a vulture-like figure, Singer being Jewish. It was removed following protests from Jewish Groups.

Even though Elliot has lost this fight, it still has raised concerns and renewed debates about chaebols, a key pillar to Asia’s fourth-largest economy.

Earlier this year, President Park Geun-hye had announced his intention to cut the number of South Korea’s chaebols and promised to promote an environment favorable for start-ups and a creativity-driven economy instead.

“Recently, chaebols haven’t been delivering growth or creating jobs so from the public’s perspective, what have they done for us lately? I think the public is turning their back on them, they have to improve going forward in terms of shareholder return policy,” Na added.

“The chaebol system has been highly criticized over the past decade but it hasn’t changed much, so I hope Samsung learns a lesson from this,” said Lee.

 

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