Samsung's Lee built a global name, not a global company
It’s time for his successors to make the business more international. A share sale could be just the thing.
Lee Kun-hee turned Samsung into a household name and a global brand. But he never really managed to transform Samsung Electronics Co. into a truly international company.
Samsung, the name, can be found across all corners of the globe. And inside almost every device on the planet — stamped on memory and storage chips, as well as display screens. That's thanks to Lee, who died at 78 over the weekend after many years of hospitalization and a diminishing role in his empire's operation.
A bonfire he lit in the 1990s, literally from electronics products that didn't meet his standards, is emblematic of Lee's determination to build a global top-tier brand known for quality. Today it's the world's most ubiquitous electronics label, besting Japanese archrival Sony Corp.
Samsung's transformation coincided with, or perhaps even helped shape, South Korea's own move away from autocratic and military leadership into a more democratic, open nation run by a civilian leader. Seoul had just hosted the Olympics and the world was on the cusp of the computer and internet revolutions. In the 1990s, the company went even deeper into memory chips, a business that industry pioneer Intel Corp. moved away from a decade earlier. That decision underpins Samsung's technological strength to this day.
Yet from a management perspective, Lee and his son Jay Y. Lee were busy building an inward-looking empire. Its board and executive ranks are stacked almost exclusively with Koreans while outsiders rarely get a word in. When Paul Elliot Singer's Elliott Management Corp. took a stake in affiliate Samsung C&T Corp., local prosecutors responded with an investigation into a possible breach of disclosure rules. It eventually dropped the case without indictment, but the point had been made.
This kind of insularism, like the chaebol system itself, isn't healthy and stands as the biggest risk to Samsung's longevity. American technology companies have been able to survive, and ride out crises, with globally diverse management teams and a willingness to engage outside views.
If Lee's successors want to solidify the South Korean giant's future, their massive inheritance tax bill may be the catalyst. The nation's 50% levy means his estate, likely to include the younger Lee and current de-facto leader, will be on the hook for around $10 billion of his father's $20.7 billion fortune.
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Samsung itself has three times that figure in cash on hand. But that's shareholder money, and the tax bill ought to be paid out of the estate. The Lee family will need to raise the funds itself, and a sale of Samsung Electronics stock is the most likely solution.
In this way, a forced sale may end up being a blessing for Samsung's shareholders and a chance to build a new future.
Of course, there are alternatives, which include borrowing against those shares or selling family assets, including stakes in other companies. There's also the expectation that Samsung may boost its dividend (it can afford to), which would offer a cash injection to the Lee family. The patriarch only owned around 4.2% of Samsung and maintained control through a complicated network of subsidiaries, par for the course among the nation's chaebol. While a 2% share sale in open markets is feasible, it would take time and possibly depress the share price.
Instead, the Lee family should shop around for a buyer directly — one that can help turn the company more global.
Right now, Samsung is 54% foreign-owned. Yet the lion's share of that stake is in its Seoul-traded common stock. Its London-traded depositary receipts are worth only $24 billion, or just 7.5% of its market capitalization. By comparison, Taiwan Semiconductor Manufacturing Co.'s New York-traded receipts are valued at $94 billion, equal to 23% of market value, according to Bloomberg Data. Samsung's business is also overweight South Korea, at 15% of revenue, while the nation's economy is just outside the top 10 globally and accounts for less than 2% of world GDP.
An easy solution would be to hold a New York listing. The Lee family could offload the required stake, and Samsung could raise more funds.
But a preferred approach would be to invite a strategic investor to join its shareholder ranks, and even its board. It would be a beautiful irony if Elliott were to be that candidate given their history. Intel or Nvidia Corp. might be a better choice.
Intel is struggling right now, as my colleague Tae Kim noted, yet it has lots of cash and could surely raise more. It also has an uncanny ability to reform itself when under pressure — witness the move into server chips when desktop PC sales slowed. The two could even team up to take on their nemesis: TSMC.
Nvidia would be an even better partner. The fabless chip designer is a global hero right now thanks to its gallop into artificial intelligence. However, I admit the prospects for such an investment are dim given that it's planning to buy Arm Ltd. in a deal that's already facing regulatory scrutiny. Other candidates include Huawei Technologies Co. or, to be truly edgy, Mukesh Ambani's Reliance Group.
As the world remembers Lee Kun-hee's legacy for creating a global brand, it's time for his successors to start their own legacy of building a global company.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Written by Tim Culpan.