April 27, 2017 / 8:38 AM / 5 months ago

Samsung's choice of Plan A doesn't quite add up

A man looking at his mobile phone walks past an advertisement promoting Samsung Electronic's Galaxy S8 at its store in Seoul, South Korea, April 27, 2017. REUTERS/Kim Hong-Ji

HONG KONG (Reuters Breakingviews) - Samsung Electronics is falling back on Plan A. The board of the South Korean electronics giant has definitively rejected a restructuring proposal from U.S. hedge fund Elliott. The dismissal does not quite add up.

While reporting the best quarterly results since 2013, Samsung on Thursday said it would not adopt a holding company structure, wrapping up a six-month review.

The board argues the set-up would not make Samsung more competitive - and could somehow harm its long-term operations. That justification doesn’t quite hold water. The restructuring is more about Samsung becoming more transparent and valuable. The overhaul would help unlock 750,000 won ($636) of value per share for Samsung Electronics, according to an October estimate by Sanford C. Bernstein analyst Mark Newman. That would add more than a third to the market value of the $256 billion firm.

A more convincing reason is the current “uncertain legal and regulatory environment”. Last year opposition lawmakers proposed blocking big conglomerates like Samsung from using treasury stock in creating holding companies. Other groups like SK and LG have restructured this way, and Lotte is now taking steps to follow suit.

If the bill becomes law, Samsung would have to spend tens of billions of dollars to buy shares in the operating unit to meet minimum ownership requirements. That would be a real headache. No wonder Samsung is reluctant to spend months doing detailed preparation for a restructuring that could be derailed at the stroke of a legislator’s pen.

But Samsung said it would not consider setting up a holding company ever again. That is extreme and leaves questions on what it will do with its complex crossholdings, which let the Lees control the company with small direct stakes. The company said it will untangle them, but didn’t say how and how long it would take.

To be sure, Samsung is trying to boost shareholder value in other ways, and that is welcome. It plans to cancel more than $35 billion of treasury stock after buying back more shares. Business is booming too. But the overarching issue is how Samsung will shed its old self. The company didn’t deliver an answer to that.

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