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.





consumer electronics: a new front on the online/bricks-and-mortar battlefield

I’d been planning to write this post before the announcement yesterday that the CEO of Best Buy is resigning.  Maybe it’s a bit more topical today.

trying to end discounts on consumer electronics

Early in the month, Korean and Japanese consumer electronics firms–among them, Samsung, LG, Sony and Panasonic–announced new rules for sales of their high-end products in the US.

Previously, the device manufacturers had at least threatened to, and perhaps actually withheld sales incentive payments to retailers who aggressively discounted the recommended selling prices set by the brands.  That didn’t stop internet retailers from undercutting their bricks-and-mortar rivals, however.  The manufacturers are now taking a new tack.

From April 1st, the consumer electronics companies say they won’t just not pay marketing money to discounters.  They won’t ship “hot” products to them at all.  To get the latest and greatest, buyers will have to go to full-price outlets.

Sounds crazy. 

Why would they do this?

Two reasons occur to me:

1.  The manufacturers want to preserve the bricks-and-mortar distribution channel.  In particular, they want to preserve the big-box strip mall retailers like Best Buy.

This would be somewhat like what the book publishers did a year ago, when they forced Amazon–by withholding newly-published “best seller” e-books from the internet retailer–to charge higher prices.  That provided a pricing umbrella under which independent bookstores could a least continue to limp along and under which Barnes and Noble could complete development of its own e-reader, the Nook.

2.  As far as I’m aware, the consumer electronics companies aren’t going to raise wholesale prices.  So they won’t initially make more money.  They may think, however, that if all retailers become more profitable, then they’ll be less likely to resist future increases in wholesale quotes–or future reductions in sales incentives.

the new plan won’t work

My guess is that this new plan will do more harm than good.  Four reasons:

1.  When prices go up, consumers buy less.  If the price of, say, high-end HDTVs rises by the $800 a unit that some are suggesting, sales volumes will doubtless contract.  Pre-Great Recession, a customer might think of a new HDTV as being like a new car–and finance it.  Not today.  Absent easy availability of cheap credit–and customer willingness to use it–the falloff in unit volume that higher prices brings might be surprisingly large.  And not every manufacturer is in rude financial health, so profit contraction could be painful.

2.  There’s no reason to think that loss in unit volume will be distributed equally across all competitors.  In an environment of smaller price differentials, competition won’t disappear.  It will just take a new form.  My candidate is perceived product quality.  If so, I think this means the market will gravitate toward Samsung and away from Sony.   In any event, market share losers would be under enormous pressure to go back to the old system, before the new competitive game causes irreparable damage to their businesses.

3.  The umbrella of higher prices will potentially allow competitors who don’t adopt the new system–or new market entrants, for that matter–to compete successfully by discounting aggressively.

4.  The move won’t fix what ails Best Buy, in my opinion.

Thirty years ago, suburban big box retailers were an evolutionary advance over urban department stores and local mom and pop shops.  They still are, but the latter, like the dodo, aren’t the competition anymore (actually, the dodo never were).

Today’s competition takes two forms:

–internet retailers, and

–Wal-Mart/Target/Costco, the discount retailers who are the modern successors to the department store.

Compared with the latter group, Best Buy stores are too big and too seasonal (think:  Toys R Us). Best Buy has to lease, light, heat/cool and staff its retail space for the full twelve months of the year, even though 60% of its profits come from sales that happen between the year-end holidays and the Super Bowl.  The others just expand and contract their seasonal departments, depending on the time of year.

Tilting the playing field away from internet retailers and to the benefit of bricks-and-mortar will, it seems to me, just intensify the battle between Best Buy and Wal-Mart et al.  I think we all know who’s going to win that struggle.

there is a better solution for consumer electronics

By the way, this all shows how prescient Apple was in opening its Apple Stores.