hankyoreh

Choi Chi-hun

Accountants with Deloitte Anjin, the firm that composed the report assessing the appropriateness of the ratio used in the merger of Cheil Industries and Samsung C&T in 2015, recently told investigating prosecutors that the company had prepared the report so as to justify the 1-to-0.35 merger ratio requested by Samsung. This report played a decisive role in convincing the National Pension Service, one of the major investors in Samsung C&T, to support a merger that would harm its own investment. This discovery further underlines Samsung’s responsibility for eroding South Koreans’ retirement pension as part of efforts to strengthen Samsung Vice Chairman Lee Jae-yong’s control of the group.

On July 10, Hankyoreh reporters learned that Anjin accountants who helped draft the report assessing the merger ratio at the request of Samsung C&T recently admitted to the prosecutors that they’d doctored the content of the report by exaggerating the value of Cheil Industries and underestimating the value of Samsung C&T in order to produce the merger ratio Samsung had requested.

To carry out that request, accountants manipulated the details of the two companies’ business operations and their cash and debt. In order to inflate the value of Cheil Industries, accountants assessed insubstantial projects at Samsung BioLogics (Samsung Bio) as being worth 2.9 trillion won (US$2.47 billion) while concealing call options at the company that ought to have been regarded as 1.5-2 trillion won (US$1.28-1.7 billion) of debt. Furthermore, 1.7 trillion won (US$1.45 billion) in cash assets at Samsung C&T were omitted from the assessment to downgrade its value, while the two companies’ discount and growth rates were manipulated as well. “We deliberated with Samsung throughout the process of writing the report in order to obtain the desired merger ratio,” accountants who were involved in drafting the report told the prosecutors.

Through this process, Anjin drafted a report finding that a merger ratio of 1 to 0.35 was appropriate and submitted that to Samsung on May 25. The very next day, Samsung decided to merge the two companies at a ratio of 1 to 0.35, trading one share of Cheil Industries for 3 shares of Samsung C&T, in consideration of stock prices over a certain period.

Even though Samsung C&T had three times the operating profits and two and a half times the capital reserves of Cheil Industries at the end of 2014, the merger ratio (which is supposed to represent the ratio of the two companies’ value) had Cheil Industries being worth three times as much as Samsung C&T. Since Lee Jae-yong had no share in Samsung C&T but held a majority share of 23.2% at Cheil Industries, a merger ratio that favored Cheil Industries enabled him to increase his stake in the post-merger company.

That June, Samsung C&T used this report — which had been drafted per its own instructions — as objective evidence to convince its shareholders, including the National Pension Service (NPS), of the legitimacy of a merger ratio of 1 to 0.35. After reviewing the report, the NPS decided on July 10 to support the merger. A week later, on July 17, the merger motion was adopted, with 69% of votes in favor, at Samsung C&T’s general meeting of stockholders.

The person who had the most to gain from the 2015 merger was Lee Jae-yong. Although he only had a 0.6% share in Samsung Electronics, the group’s crown jewel, his control was reinforced by the merger’s bias toward Cheil Industries, in which he held a controlling share of 23.2%. After the merger, Lee ended up as the largest shareholder in Samsung C&T, with a share of 17%, which placed that company’s 4.1% stake in Samsung Electronics under his direct control. People’s Solidarity for Participatory Democracy (PSPD) has estimated that the financial profit that Lee gained in this manner was worth between 2 and 3.6 trillion won (US$1.7-3.06 billion), while the NPS suffered 330-600 billion won (US$280.53-510.06 million) in losses.

The accountants’ confession that the merger ratio report was manipulated could impact the South Korean Supreme Court’s ruling in the influence-peddling scandal involving Lee and former South Korean President Park Geun-hye. It’s likely to make its ruling in August or sometime afterward. The key dispute in the case is whether Lee did favors for Park in exchange for help in securing control of the group. The revelation that the merger report was doctored to justify the planned merger rate in 2015 further undermines Samsung’s claim that there was no campaign underway to give Lee control of the group.

By Choi Hyun-june and Lim Jae-woo, staff reporters

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