Samsung Electronics Is Heading for a Split

Samsung didn’t quite come out and actually say it, but South Korea’s most valuable company is probably going to split as soon as next year, according to Bloomberg. Samsung said it’s looking at a plan to turn itself into a holding company, and would have more to say on the issue at a later date.

The idea was presented as a way to improve shareholder value and address calls from  Elliott Management for more responsive management. Perhaps the most important reason for a breakup, however, is that Samsung and the founding Lee family would also see big benefits from such a split.

For decades the family has maintained control with a complicated web of cross-holdings that has generally protected it from outside influence. In recent years, the system has come under fire from critics and South Korean officials who say it stifles competition and undermines corporate governance. Elliott’s proposal to combine some businesses with the new holding company would let the Lee family preserve its sway and boost transparency and accountability.

“Converting Samsung into a holding company is an indispensable factor in the power transfer to the third generation of the owner family,“ said Park Ju Gun, president of corporate watchdog CEOSCORE in Seoul. “The founding family will be able to secure stable management control over the group, which is the final goal of this whole process.“

Elliott popped its proposal last month, when the company was mired in a massive recall of the fire-prone Note 7 smartphone and moving to elevate heir apparent Jay Y. Lee to a more pivotal role. Under the plan, Samsung would split into holding and operating companies, with the former likely to own about a 20 percent stake in the latter. The proposal also called for merging Samsung C&T, which currently owns more than 4 percent of Samsung Electronics, into the new holding company.

Jay Y. would be able use his stake in C&T to solidify his position without a massive cash outlay. Elliott says the plan would make Samsung Electronics’ business more transparent, simplify the ownership structure and provide tax benefits, all of which would push up the stock.

Samsung Electronics said it will spend at least six months on the review, while offering investors additional cash payouts and promising to add at least one outside director to the board. So far, however, Samsung Chief Financial Officer Lee Sang-hoon said on a conference call that the review was limited to Samsung Electronics, and not Samsung C&T, dragging down the unit’s shares by 8.6 percent on Tuesday.

Samsung said it will add at least one outside director next year, while the investor had sought three independent directors. They will use 50 percent of free cash flow in shareholder returns for this year and next, indicating a return of about 9.5 trillion won ($8.1 billion) in 2016. Elliott had sought a special dividend of 30 trillion won.