Samsung sold affiliates in the defense and chemical industries to Hanwha for 1.9 trillion won (US$1.72 billion).
During recent meetings, the Samsung board of directors and management committee approved a deal that will transfer 32.4% of shares in Samsung Techwin to Hanwha for 840 billion won (US$758.9 million) and 57.6% of shares in Samsung General Chemicals (excluding treasury stock) to Hanwha Chemical and Hanwha Energy for 1.06 trillion won (US$1.45 billion), the company announced on Nov. 26.
While Samsung has sold off certain subsidiaries and business areas before, the group has not let go of affiliates in the same business area since the Asian financial crisis 17 years ago. Lee Jae-yong, Lee Kun-hee’s son and vice chairman, and Hanwha chairman Kim Seung-youn, reportedly made the final decision on the deal, which suggests that Lee Jae-yong has begun to exercise his control of the group and is starting to unveil a new strategic direction. Kim was released from prison earlier this year, and is in the process of retaking management of Hanwha.
The Private Sector’s First Big M&A Deal
Through the sale, Samsung sheds all of its affiliates in the defense industry, while only retaining Samsung Fine Chemicals and Samsung BP Chemicals from its current chemical-related subsidiaries.
For its part, Hanwha gains managing rights over Samsung Techwin and its subsidiary Samsung Thales along with Samsung General Chemicals and its subsidiary Samsung Total Petrochemicals. The group also acquires a 10% share in Korea Aerospace Industries, which had been held by Samsung Techwin.
Samsung C&T Corporation, which had been the largest stockholder of Samsung General Chemicals, with a share of 38.4%, held on to 18.5% of its share as part of its plan to maintain a cooperative relationship with the Hanwha Group in the chemical industry.
The sale is expected to be wrapped up in the first half of the next year, after the groups complete a due diligence study next January and February and receive government approval for the sale.
Samsung is using the deal to trim the fat, dispensing with a shotgun-style approach that has scattered affiliates across a wide swath of fields and narrowing its focus to the fields of electronics, heavy industry, construction, and service. At the same time, it enables Hanwha to strengthen its presence in the defense and petrochemical industries.
The sale is also being seen as the first big M&A deal of its kind between Korean conglomerates, representing a departure from the government-organized swaps that occurred during the Asian financial crisis.
Doing What It Does Best
Samsung‘s decision can be summed up as a push to only do what it does best. “Until now, Samsung has carried out business in a variety of areas, but in the future, we’re planning to concentrate on business areas that we’re good at,” said a high-ranking executive at Samsung Electronics, on condition of anonymity.
The implication is that, while Samsung under Lee Kun-hee’s watch adhered to a strategy of stretching its tentacles into any business area that would yield a profit, Lee Jae-yong hopes to set his unique mark on the group through a strategy of targeted specialization.
Moving forward, Samsung announced that it will have three (or more accurately, five) core business areas: electronics led by Samsung Electronics; finance and service centered on Samsung Life Insurance; and heavy industry and construction focusing on Samsung Heavy Industries.
“The group’s new business model appears to be cultivating companies that will become global leaders. In a world where the Samsung brand is no longer enough to guarantee success, it has opted for the strategy of targeted specialization,” said No Geun-chang, head of HMC Investment Securities Research Center.
At the same time, Samsung brought attention to the fact that the deal offers a new paradigm for business, not only to Korea’s other chaebol, but also to the national economy as a whole.
“Through voluntarily moving forward with the sale, Samsung hopes to contribute to the efficiency of the national economy by reorganizing its business structure and strengthening its competitiveness. We expect that this business restructuring will serve as a breakthrough for overcoming the low growth that the South Korean economy currently faces, just as the big transactions brokered by the government became a catalyst for leading South Korea out of the Asian financial crisis,” said a source at Samsung.
Another apparent motivation for the group is to repair the tarnished image of the Samsung leadership in South Korean society. That image was not helped when Lee Jae-yong acquired stock in Samsung SDS and Cheil Industries (formerly Samsung Everland) for ultra-low prices, a purchase that is expected to net him the vast sum of 10 trillion won (US$8.15 billion) in profit.
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