Deal with Hanwha shows Samsung doing what it does best

Posted on : 2014-11-27 16:10 KST Modified on : 2019-10-19 20:29 KST
Under Samsung Group heir Lee Jae-yong, group is moving to narrow its business, focus on areas of strength

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.

 

New Insight into the Group Succession
 
Since Lee Boo-jin, president of the Hotel Shilla and eldest daughter of Lee Kun-hee, held a 4.95% share in Samsung General Chemicals, one plausible scenario was that she would inherit the groups‘ affiliates in the chemical industry along with its hotels. But the sale of these affiliates lends support to the view that the management of the company will mostly end up in the hands of Lee Jae-yong, Lee Kun-hee’s eldest son.
The succession scheme that is taking shape shows Lee Jae-yong in control of the group’s core business areas of electronics and finance, along with the service, heavy industry, construction, and medical fields, with Lee Boo-jin handling hotels, trade, and distribution and their younger sister Lee Seo-hyun in charge of fashion and textiles.
Lee Jae-yong is taking brisk action not only in Samsung Electronics and other affiliates in the field but also in the areas of medicine and finance. Unlike his two sisters, Jae-yong has been “marking his territory” in the group’s financial affiliates by purchasing stock in Samsung Life Insurance and Samsung Fire and Marine Insurance. He has also been meeting with CEOs of global businesses in the areas of medical equipment, biotechnology, and pharmaceuticals as he moves to expand into those fields, which are considered promising growth industries for Samsung.
If Lee can lay claim to the group‘s core areas of business, it will clear the way for him to let his sisters have affiliates in less essential business areas.
 
Who’s the Winner?

The two groups are heralding the deal as mutually beneficial, with Samsung choosing specialization and Hanwha opting for economies of scale. But evaluations in the market are mixed.
Those who think that Samsung came out ahead point out that that shale gas is muddying the waters in the petrochemical industry and that stiffer regulations mean the defense industry does not offer the easy money it once did. Thanks to this deal, the argument goes, Samsung was able to rid itself of some dead weight.
“Prospects in the government-funded military acquisition industry are not bright at the moment. Allegations of corruption in the industry are pushing the government to beef up regulations, and there are no special plans for acquiring additional military equipment for now,” said a source working in the field.
In addition, Samsung Techwin was already in the process of restructuring. It had handed over its mobile phone camera division to Samsung Electronics and had shut down its security camera operations.
In terms of price, Hanwha may have gotten the better deal. When Samsung C&T decided to only sell part of its stocks and to allow the cost of the sale to be paid in installments, it appears to have been taking into consideration the funds available to Hanwha .
The official announcement by Samsung C&T noted that the company might be paid more depending on business performance, suggesting that the company’s worth was undervalued when negotiators settled on a price.
Stock prices at Samsung Techwin, which is set to shed the “Samsung” name after the deal, plunged the maximum amount allowed by the exchange on Wednesday, ending the day at 28,850 won (US$26.10). Stocks at Hanwha Chemical, the company that acquired it, rose 0.75% to 13,500 won (US$12.21) during the day’s trading.
 
By Lee Jeong-hun, staff reporter and Kwak Jung-soo, business correspondent
Please direct questions or comments to [english@hani.co.kr]
 


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