Samsung Electronics has confirmed it is considering splitting itself into two separate entities and undertaking new public offerings, following a push by activist hedge fund, Elliot Management, for the company to restructure in a bid to unlock investor value.
The confirmation comes as part of a detailed roadmap of actions the company expects to undertake in a bid to enhance long-term, “sustainable value creation” for shareholders.
The South Korean technology giant told shareholders on November 29 that it intends to take several measures to help shore up investors’ returns and appease shareholders’ concerns.
“Samsung Electronics has taken steps to simplify its business to concentrate on core capabilities in the past several years and the company continues to review opportunities to optimise long-term value,” the company said in a statement.
“This includes the possibility of creating a holding company structure and the potential benefits and feasibility of listing the company’s shares on additional international exchanges.
“As determining the optimal structure is a highly complex undertaking involving important strategic, operational, legal, regulatory and financial considerations, the company has retained external advisors to conduct a thorough review of the optimal corporate structure.
“The review does not indicate the management or the board’s intention one way or another. The process is expected to require at least six months and Samsung Electronics will make a decision only after the review is complete,” it said.
The roadmap proposals come after intense industry speculation that the tech leviathan, which makes up a substantial proportion of South Korea’s economy, was considering splitting itself into two companies.
The speculation followed the publication in early October of an open letter to Samsung’s board of directors by Blake Capital LLC and Potter Capital – both of which are affiliates of activist hedge fund, Elliot Management – that called on the company to restructure in a bid to unlock investor value.
The letter recommended that, to simplify its existing structure, Samsung Electronics should be demerged from the group’s broader interests into a listed holding company, with the remainder of the group residing in a separately-listed operating company – a proposal that has now been mirrored in the company’s own roadmap plans.
The roadmap also includes other measures to enhance its shareholder return program. These include the allocation of 50 per cent of free cash flow to shareholder returns, an increase in total dividends in 2016 by 30 per cent, and a quarterly dividend payment starting in 2017.
The trick to achieving these goals on a sustained basis, according to the company, is in maintaining a net cash balance of 65 to 70 trillion Korean won ($74-$80 billion).
With this in mind, Samsung will review its cash position every three years in light of business and economic developments, and will return any excess cash beyond the target balance to shareholders.
“This new policy will enable Samsung Electronics to increase shareholder returns on a continuing basis while maintaining the financial flexibility to execute its long-term business strategy and seize attractive opportunities as they arise,” the company said.
In recognition of the increasingly global nature of its business, the company’s board of directors is planning to invite new independent board members with international corporate experience into the fold.
With the help of outside advisors, the Samsung board is in the process of identifying “a number” of candidates, and plans to nominate at least one new board member with global C-level experience, for approval at the next annual shareholder meeting in March 2017.
Further, the board aims to further strengthen its corporate governance procedures by creating a new Governance Committee, comprised solely of independent board members.
The proposals are set to bring big changes to the company which, despite its unwieldy size, remains tightly-controlled by the 72-year-old chairman of the company, Lee Kun Hee, and his family, which hold sway over the group’s 74 companies through a web of various holdings.
It is this complex structure that Elliot Management wants to simplify.
The move comes after the company's smartphone division struggled to break even between July and September, as sales plunged due to the recall of its high-end Note7 smartphone following several cases of spontaneous combustion due to issues with the batteries in the devices.
If the company does, indeed, split into two independent entities, it will follow in the footsteps of Hewlett-Packard, which separated its operations into Hewlett Packard Enterprises (HPE), selling servers and enterprise services, and HP Inc, which deals with PCs and printers.
For Samsung Electronics vice-chairman and CEO, Dr. Oh-Hyun Kwon, the roadmap plans extend the actions the company initiated last year, and represents the next phase in the evolution of our shareholder policy and governance.
“We are committed to enhancing sustainable long-term value for our shareholders and to remaining good stewards of capital,” Oh-Hyun Kwon said.