These are trying times for Samsung Electronics, the largest Korean company by market capand one of the largest technology companies in the world. The once high-flying smartphone maker has hit several road blocks over the past two years, including greater competition from Chinese Android manufacturers that has led to declining profits for several quarters straight.
If business challenges weren’t enough, the company is also experiencing a critical leadership transition from the group’s patriarch, Lee Kun-hee, to his son, Lee Jae-yong. The elder Lee, who famously guided Samsung’s rise from low-quality consumer goods manufacturer to top device manufacturer starting in the 1990s, had a heart attack last year that has left him incapacitated.
The younger Lee seems destined to take over Samsung, but a crucial shareholder vote tomorrow remains between him and his destiny – and the votes today are too close to call.
At issue is a proposed merger of Cheil Industries and Samsung C&T (Construction and Trading) that is being vigorously opposed by U.S.-based hedge fund Elliott Associates, who is perhaps best known for fighting Argentina over its sovereign debt.
If the merger receives the required two-thirds shareholder approval, ownership will be well on its way to being consolidated by Lee Jae-yong. If it is blocked though, it could massively complicate the future of the most important Android manufacturer in the world. Samsung Electronics is just one part of the Samsung Group. In fact, while it is by far the largest and most important company in the family, it is joined by around 80 other companies in industries as diverse as finance, construction, semiconductors, heavy industries, and life insurance.
The Lee family owns small direct stakes in each of these companies, but its real power comes from the cross-ownership structure of these companies. Each company in the Samsung empire owns percentages of other Samsung companies, providing leverage to shareholders like the Lees to influence business strategy and decision-making.
For instance, Cheil Industries, a component of the conglomerate which produces chemicals and electronics materials, owns 19.3% of Samsung Life Insurance, and Life owns 7.2% of Samsung Electronics.
In the strange web of interconnected shareholding that defines Korean chaebol conglomerate structure, the proposed merger of Cheil with C&T is considered by analysts a key linchpin for the Lee family to effectively gain leverage over Samsung Electronics. By combining the two companies, Lee Jae-yong would own key stakes in Samsung Electronics through the newly combined entity’s partial ownership of Samsung Life Insurance, and thus in Samsung Electronics.