Samsung and Elliott Associates

I’m not an expert on Korea.  In fact, I think of Korea in much the way I think of India or Indonesia–or Japan or Italy, for that matter.  They’re all places where very powerful family controlled industrial groups have enormous economic and political power.  As a result, the rules of the stock market game are very different from those that prevail, say, in the United States.  Piecing them together can take an enormous amount of time and effort.  I’ve believe that, except in the case of Japan in the 1980s, the reward for mastering these markets would never be large enough to justify the effort involved.

In the case of Korea, government policy, both formally and informally, is heavily tilted in favor of a set of family controlled industrial conglomerates called chaebols (much like the zaibatsu/keiretsu of Japan).  In my view, these are not American-style corporations.  They care little for profit growth/maximization or for the welfare of ordinary shareholders–Korean or foreign.  I’ve found the laws and regulations that govern them to be bewilderingly complex and their financial statements (admittedly I haven’t read one carefully in well over a decade) unreliable.

Recently, Samsung, a major chaebol, decided that one affiliate, Cheil, would buy another, Samsung C&T, at what appears to be a bargain basement price. US activist investor, Elliott Associates, then bought a bunch of Samsung C&T stock and challenged the takeover.  Its objective was presumably either to have its stake bought out at a higher price by some other Samsung company or to compel Cheil to raise the acquisition price for everyone.

My initial reaction on reading this was that Elliott was fooled by superficial similarities with the US and didn’t understand the deeper political and cultural barriers it would face in Korea.  That has, so far, proved to be the case.  Shareholders have voted in favor of the acquisition as originally proposed.  Elliott is apparently continuing to sue to try to prevent/reverse this outcome.

The situation is a little more interesting than I’d thought, though, and bears watching:

–the Elliott effort to have Samsung C&T shareholders reject the takeover failed by only 3% of the shares voted.  This is a surprisingly small amount, in my opinion.  On the other hand,

–the deciding vote in favor was cast by the government-connected National Pension Fund, which ironically has previously been a critic of chaebol behavior.

My guess is that it’s ultimately Elliott’s foreignness that swayed the voting, particularly at the NPS.  Were a Korean equivalent to attempt the same thing, the outcome might have been different.  If so, there may be hope for investors in Korea after all.  I’ll continue to be on the sidelines until there’s more tangible evidence of change, however.





death of Kim Jong-il: investment implications

North Korean media announced overnight that its “Supreme Leader,” Kim Jong-il, had died at age 70.  He will be succeeded by his third son, Kim Jong-un, a twenty-something with little experience and limited visibility, even in North Korea.

Asian stock markets sold off on the news.  That was on the worry, I think, that the North Korean government would stage a military provocation to “demonstrate” Kim Jong-il’s leadership ability–as it did when he was being introduced as heir.

investment implications

Other than in national intelligence agencies (which don’t share their information), the outside world knows very little about North Korea.  It’s an unruly client state of China, formed artificially at the end of the Korean War–separation along social and cultural lines would have been east vs. west.  It’s very poor.  It has big armed forces, but little industry.  It has nuclear weapons–and missiles capable of delivering them at least as far as Tokyo.

I think the most likely outcome from the leadership transition–temporary saber-rattling aside–is continuation of the status quo.

It is possible, however, that the absence of a dictator fully in control of the country will prompt a push in North Korea for reunification with South Korea.  This is something that both sides have talked about, off and on, for twenty years.  And there would be some pressure in the South for reuniting communities that have been apart for half a century.  Having seen the decade of economic stagnation that followed the reunification of the former East and West Germanies, however, I think Seoul would regard this as at best a mixed blessing, or as the best of a number of unfavorable choices.

This is the only outcome from Kim Jong-il’s death that I can see as having major investment implications.

I’ve always found South Korea a difficult place to invest in.  Lots of local quirks, including sprawling family-owned conglomerates (chaebols) with opaque operating procedures, and unpredictable (to me, anyway) intrusions of government into company operations.  So I’ve only occasionally owned companies like Samsung Electronics or Hyundai Motor, despite the excellence of their products.

I don’t think reunification would change government or corporate behavior at all.  Nevertheless, it would likely spawn enormous construction projects in the North, as well as the shifting of labor-intensive industrial production away from the South and the expansion of low-end Southern retail concepts there.  These moves could generate huge profits for the companies involved and would last a long time.

This prospect would most likely merit making the research effort to identify the beneficiaries.  In fact, the economic positives of reconstruction would probably be so powerful that a less-than-level playing field for foreigners might not matter that much.