After the explosions, Split the cake.

In the aftermath of the craziness of black Friday, will focus on other kinds of events. Samsung has been in the news very often. First we saw how they presented the new version of his flagship line, then with horror we saw how this Titanic product, that some said it was the first ending punch to apple, had this little issue that, well it made the phone explode like a firework.

After this the company fell like Icarus and faced an estimated hole of 6.1 trillion dollars. And just when we stopped hearing about Samsung on the news and the dust started to clear new information comes in and re shakes all the prior wounds.

Today, the New York based Elliot Management fund, which owns 0.6 percent of the company just proposed to split the company in two with the intention of boosting the stock price while giving at the same time  giving  30 trillion won ($26 billion) in one hell of a special dividend, supposing 75% of the free cash flow of the company.

I am no financial analyst or an investment banker, but this looks as a huge move proposed, that will reshape the company completely. So, in order to see how is this going to play out, lets see very briefly the structure of the Korean giant.

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As you can see, this company is huge. Just Samsung electronics, the section of the holding that we are talking about is only the 28% of the total sales of the company. As you can see, Samsung electronics has four divisions, being the IT the biggest by far, representing nearly 50% of the total Net Revenue of the division.

Now, the proposition of Elliot Management is to divide Samsung electronics in two. A holding company for ownership purposes and an operating company. This split would have several impacts, the first and most important is that the company will be easier to control, with the downside that the costs will increase with the split. This has been seen as a very good idea by the finances community, for example David Green, head corporate of Aberdeen Asset Management Asia says that“A simpler structure is certainly preferable, and yes most would agree they can afford to pay out more

Secondly this split, due to the reduction of the size,  would help the Lee family, the founders of the Samsung corporation, to gain more control over the Jewels of the crown of the corporation.

The proposal of Elliot Management continues with a restructuring of the shareholders return plan, giving back 75% of the free cash flow of the company to the investors and finally introducing independent directors into the company.  As you can see the proposal, seems very reasonable, David Green calls it as “difficult to argue against”.

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Paul Singer of Eliot Management

The proposal has been accepted to consideration today by the Samsung director board since it is in the line with the reorganization efforts that the new director Jay Y. Lee hear of the founder and father Lee Kun-hee has been executing since the the incantation of the patriarch in 2014, with actions like sealing none-core assets of the company in order to reduce the companies size.

It is still a very fogy proposal but, unlike the last proposal of Elliot Management in 2015 against the merger of two other divisions of the firm, this proposal looks much more alive than the last one, with the potential of reshaping the technological giant into a completely different business operation system.

 

 

 

10 comments

  1. Samsung has more issues in its consumer electronics division. They have recalled over 2.8 million Top loading washing machines because the government has deemed them unsafe. This has me begging to question Samsung and its management over its supply chain. They have had their issues in the last few months that leads me to question if they are simply too big. The proposed split may benefit Samsung and help them with clarity in their supply chain.

  2. jagpalsingh03 · ·

    Interesting idea and great read! Samsung has had a myriad of issues this past year (washers like Andrew said, links to the corrupt Korean Prime Minister, etc) that are definitely cause for concern and reflection; but, I hope Samsung does not do anything too rash. They’re still at the forefront of technological innovation and, except for its fatal flaw, the Samsung Note 7 was the best phone available on the market to date. I believe Samsung said it will take the next 6 months to review the proposal, so that gives me hope that the company is approaching this possible decision with the research and due process it deserves. Also part of Elliot’s proposal was the addition of 3 new independent Board of Director members, but Samsung has only committed to adding one additional external Board member. It’ll be interesting to see what happens to Samsung over the next year and 2017 is shaping up to a very important one for the future of the Korean company.

  3. Nice post. I think you got some of the currencies wrong (I doubt they are 6.1 trillion dollars in the whole, as that’s 2x the size of the US federal budget), but the sentiments are right on.

    1. Im sorry i should had said that it is not american dollars. Since the company is based on South Korea the official currency is the South Korean won, which has an exchange rate of 1/0.000856 us dollars. This would mean that the real amount in american dollars will be around 5.2216 billion dollars, depending of the exchange rate.

  4. rohansuwarna · ·

    Great post! I just read that the Galaxy S8 will have major changes made to the software and hardware. I don’t think this is Samsung’s last chance for a comeback, however it is definitely hard times for the South Korean tech company. Hopefully, the division you mentioned into a holding company and an operating company will bring new success to the company. Perhaps a new change in the formulation of their business model will help them create new products to put some pressure back onto Apple.

  5. polmankevin · ·

    Cool post. It has become very obvious that Samsung is having trouble in its consumer electronics business. They had difficulties with Galaxy phone and recalls on washing machines. They clearly recognize these challenges and are searching for ways to deal with them. This is an interesting proposal from Elliot Management. It seems to be gaining traction within the company and is being taken seriously by the board. Let’s hope the company can turn around some of its struggles in 2017. Thanks for sharing, great insight.

  6. Very interesting post about the power revolving from shareholder activism and how it pertains to the technology space. After the exploding phones debacle, I haven’t really heard much from Samsung. Last I heard they were making a play in the connected devices space, similar to that of Amazon Alexa. It’s unfortunate that they fell this far this fast, because a lot of people loved Samsung devices. I liked them for the fact that as an Iphone user, Samsung’s innovation helped push Apple to new heights, and without them as a competitor I am afraid the Iphone 7,8,9 will all look the same, feel the same, and operate the same as before. With just minuscule changes that Apple will charge and arm and a leg for.

  7. Great read. Really like how this was different then most pieces I read this week. I find that Samsung really did have a rough year but I do believe they should not make any extreme decisions to try and bounce back. I feel like over the years certain companies when going off the deep end try to make up for it but it can go the wrong way.

  8. daniellep2153 · ·

    Unfortunately, I think Samsung has some major issues they have to face first before they can rebuild themselves to the company they used to be. They used to be such a trusted brand, but now with what they have going on with recalls on phones and washer machines, they need to do something big and public to show their customers that they can still be a trusted company. This could definitely be a good starting point though. Great Post.

  9. Yesterday when I was flying back for to Boston I was asked (as I always am now) if I have a Galaxy Note 7. If you are unaware, the FAA is not allowing them on airplanes. At this time I asked the gate agent if anyone still has one of these phones. Is response was that there are fewer and fewer these days.

    This entire event has really tarnished Samsung’s reputation and they have a lot of rebuilding to do of their brand.

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