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Samsung SDS

What is Samsung Electronics vice chairman Lee Jae-yong hoping to achieve with the reorganization of Samsung SDS?

The question of the reorganization’s aims is becoming the focus of attention after Samsung’s recent acknowledgement of some of the specifics, including the separation of SDS’s logistics and IT business and their merging with or acquisition by Samsung C&T and Samsung Electronics respectively.

In response to a Korea Exchange inquiry notice request on June 3, SDS acknowledged that it was “considering divestiture.” At the same time, it said it was not yet examining additional plans for mergers or other moves after the divestiture. Samsung C&T and Samsung Electronics, which have been mentioned as possibilities for acquiring the business, also said they were not considering mergers with SDS’s businesses.

The two companies appear likely to pursue acquisitions after some time passes following the SDS divestiture. SDS currently plans to raise the divestiture plan at a June 8 board of directors meeting.

Investor reactions were sharply divided. SDS share prices plunged to 149,000 won (US$128), down 18,000 won (US$15.50), or 10.8%, from the day before. Meanwhile, previously weak Samsung C&T share prices jumped by 8,000 won (US$6.90) to 122,000 won (US$104.80) - a 7.02% increase.

The SDS decline appeared to reflect disappointment over the evaporation of a “premium” investors had come to expect with stronger control for Lee. With share prices down two-thirds from a high of 429,500 won (US$369) just after the company’s late 2014 listing, a governance structure premium appears unlikely once the reorganization is carried out.

Analysts offered three possible reasons for Samsung’s decision to reorganize SDS. The first was as an exit strategy for Lee and his sisters Boo-jin and Seo-hyun, who together own 17% of the company.

“If Lee Jae-yong and his sisters are going to have a tough time selling SDS shares on the market or to affiliates, one easy approach is that use the ‘project restructuring’ approach to turn them into Samsung C&T and Samsung Electronics stocks,” said the group Solidarity for Economic Reform.

A second reason was the new growth potential offered to Samsung C&T by the acquisition of SDS’s logistics arm. Samsung C&T has been struggling with poor performance and low share prices since its 2015 merger. The company may also acquire Samsung Logistics, the logistics affiliate for Samsung Electronics.

A third reason is the stronger control the move would give Lee Jae-yong. Since SDS’s listing in 2014, many have speculated that it could end up merged with Samsung Electronics as a way of giving Lee greater control.

If Samsung sees an outright integration as out of the question following the controversy generated by last year’s C&T merger, it could view a two-step approach of divestiture and merging as a roundabout strategy for achieving the same aim.

The effect the changes would have on boosting Lee’s control depend on the approach adopted in the reorganization.

“Given the scale of the two companies’ assets, we can presume an exchange ratio of 0.1 to one. In that case, Lee Jae-yong’s combined share in Samsung Electronics nearly doubles to 1.01% from its current 0.58%,” said a market expert on the potential merging of Samsung Electronics and SDS’s IT arm.

It’s a significant change, given Samsung Electronics’s status as the group’s core. Lee Boo-jin and Lee Seo-hyun would also see their shares rise by 0.2 percentage each.

Assuming an exchange rate of 0.12 to one, the changes to Lee Jae-yong’s share from a Samsung C&T merger with SDS’s logistics arm are expected to be minimal.

By Kwack Jung-soo, business correspondent

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