In the end, it was Korea Inc that finally came out on top in its battle with the activist US hedge fund.
The long-winding struggle between Elliott Management and Samsung drew to a close on Friday after the powerful Korean chaebol won a crucial shareholder vote for the merger of Samsung C&T and Cheil Industries. However, its narrow win is also a warning to other South Korean conglomerates eyeing potential mergers on opportunistic terms.
Given the high-profile nature of the deal, 83.5% of Samsung C&T shareholders turned up at the extraordinary general meeting, an usually high percentage. After weeks of campaigning by both sides, 69.5% of those present voted in favour of the merger, narrowly ahead of the 66.7% required.
Samsung and its affiliates, which includes chemical and auto parts group KCC Corporation, own about 20% of Samsung C&T stock and were naturally among those who voted for the deal. But also crucial was the support of Korea's National Pension Service, which holds about 11.9% of Samsung C&T stock.
"NPS is in a very awkward position. Usually they don't like to be in a spotlight but Elliott is viewed as a typical vulture fund trying to get a quick capital appreciation and from NPS's perspective, it is protecting one of Korea Inc's companies," said one senior Seoul-based banker, who did not advise on the deal.
He added that the sovereign wealth fund has shares in other Samsung-affiliated companies and that the value of those shares might have been adversely affected if the merger hadn't gone through.
But foreign institutional investors were less than thrilled with the outcome. "[It's] not a victory for good corporate governance," Hugh Young, managing director at Aberdeen Asset Management Asia, told FinanceAsia by e-mail.
Elliott's contention is that the all-stock merger terms proposed in May undervalues Samsung C&T and is unduly beneficial to Cheil Industries, which is 42.2% owned by Samsung's founding Lee family.
The merger between Samsung C&T and Cheil Industries is a keystone of the conglomerate's plans to re-organise itself ahead of an expected once-in-a-generation change in leadership. Lee Jae Yong, heir apparent to the Samsung Group, is expected to step up and take control of the country's largest conglomerate after his 73-year-old father was hospitalised in May last year.
The merger will also enable the group to consolidate its grip on crown jewel Samsung Electronics.
Construction company Samsung C&T holds a 4.2% stake in Samsung Electronics as well as stakes in other companies such as Samsung SDS. So there is now widespread speculation in the marketplace that a merger between Samsung SDS and Samsung Electronics could be next, enabling Lee to further tighten his control over Samsung Electronics.
Elliott's main beef with the merger is that the offer is unfair to Samsung C&T shareholders because of the swap ratio used — one Samsung C&T share per 0.35 shares in Cheil Industries — which was computed according to the preceding month's closing share prices for both companies.
Since listing in December last year at W53,000, the Cheil Industries share price more than tripled to W180,000 in June. In contrast, Samsung C&T's stock headed south, touching three-month lows on May 21, shortly before the merger was announced on May 26.
"Samsung was opportunistic in its timing but from their point of view, everything they have done is according to the letter of the law," one source familiar with the group told FinanceAsia. He also pointed out that Cheil Industries' has a growing bio-life and healthcare business that is difficult to evaluate on book-value basis.
According to a previous release by Elliott, the net asset value attributable to Samsung C&T is W13.4 trillion while that of Cheil Industries is W4.7 trillion, based on published net assets as of March 31. But based on the proposed merger ratio Samsung C&T shareholders will effectively get W5.6 trillion of net assets, while Cheil Industries shareholders will get W12.5 trillion of net assets, the hedge fund said.
The amount of scrutiny Samsung has received could make other chaebols more cautious when planning similar moves, the senior banker in Seoul told FinanceAsia.
"I think going forward other chaebols will be more careful to make sure terms are fairer so they don't attract as much attention," he said.
For its part, hedge fund Elliott suggested that it is not quite ready to throw in the towel in its battle with Samsung, without specifying what else it might be able to do.
A spokesman for the fund said, "Elliott is disappointed that the takeover appears to have been approved against the wishes of so many independent shareholders and reserves all options at its disposal."
But two banking sources contacted by FinanceAsia noted that there is now no reason for Elliott to keep its 7.1% shareholding, tipping an exit via a block deal.
Cheil Industries and Samsung C&T shares fell by 7.7% and 10.4%, respectively, on Friday.
The restructuring of Samsung Group — which includes a diverse range of businesses spanning televisions, smartphones, insurance and construction — will ensure that the-heir apparent Lee and his siblings retain control of the company. The three heirs will face inheritance taxes of more than $5 billion out of their father Lee Kun-hee’s $11.2 billion fortune.
Goldman Sachs and Credit Suisse advised Samsung C&T and Morgan Stanley advised Cheil Industries. Goldman Sachs has also advised Wing Hang Bank and Bank of East Asia on their recent fights against Elliott.