Amid internal and external troubles, is Samsung considering splitting up and rebuilding itself or cutting off its arms in the short term?

On November 29, Samsung announced that it was considering whether to split into two companies in order to increase long-term shareholder value. Behind this decision is the huge operating pressure Samsung is facing. The Note 7 incident, coupled with the subsequent washing machine recall and bribery scandal, has left Samsung scarred, and in the mobile phone and home appliance markets, Samsung is facing strong challenges from competitors. Industry insiders are concerned about the prospects for Samsung's business fission. Whether the "spin-off and reorganization" will create another Samsung in the future or is just a short-term act of cutting off one's arm to please the capital market is still unknown.

Consider splitting

On November 29, Samsung Electronics announced that it would increase cash returns to shareholders and use 50% of its own cash flow to return to shareholders in the next two years. Samsung has said that it plans to use 30%-50% of its cash flow, about 5.7 trillion won, to return to shareholders by the end of 2017. Samsung Electronics calculated that it would increase its cash return plan to shareholders to 9.5 trillion won (about 8.1 billion US dollars).

In this statement, Samsung said it would seriously consider the proposal made by international investment shareholders to increase the number of independent director seats. The statement pointed out that Samsung is looking for "highly qualified" directors with global corporate experience and plans to add at least one new independent director at the annual shareholders' meeting in March 2017.

In addition, Samsung will consider converting the company into an investment-holding public company in the future, which will weaken the control of the third-generation heirs of the founder to a certain extent. The statement said that in the past few years, measures have been taken to simplify the business and focus on core capabilities. Determining the optimization structure is a highly complex task involving important strategic, operational, legal, regulatory and financial considerations. The company has hired external consultants to conduct in-depth research on the company's optimization structure. Samsung Electronics decided to adopt some of the investors' suggestions and evaluate the company's corporate structure. There is no definite response to the company's spin-off and specific listing on the U.S. capital market regulatory market. Samsung said it would take at least six months to explore the new structure.

Samsung made this decision due to a suggestion made by a US hedge fund in October this year. The US hedge fund holds 0.62% of Samsung's shares. The company suggested that Samsung Electronics be transformed into a holding company and listed separately in Seoul and Nasdaq in the United States after the split . It is understood that other fund shareholders of Samsung such as APG and HGI also support the above suggestion.

Troubled times

This year has undoubtedly been an eventful one for Samsung.

In August, several Samsung Note 7 battery explosions occurred in South Korea and other countries, and then spread to the global market. The Korean company, which occupies the largest share of the global mobile phone market, faced dozens of Note 7 fire accidents in more than two months. Not only did it fail to control the increase in the number of accidents, but it also still could not give a convincing cause of the accidents, and finally stopped the production of the once ambitious Note 7.

However, the trauma this incident has brought to Samsung is immeasurable. In the view of industry insiders, Samsung will not only bear economic losses of over 10 billion yuan, but also face the brand damage caused by this incident. Liu Qicheng, editor-in-chief of World Communications Network, believes that the brand damage Samsung has suffered in this incident cannot be measured by money at all. Consumers will have doubts about Samsung's products in the future, which will affect the market performance of Samsung products. This is the biggest hurdle Samsung has faced in many years. For a multinational company of this size, it is a big blow.

But the matter is far from over. After the mobile phone recall incident, Samsung Electronics America announced that it plans to proactively recall some of the approximately 2.8 million top-type washing machines produced since March 2011, saying that when large clothes are spun at high speed, there is a risk that the inner drum of the washing machine will lose balance, causing excessive vibration and causing the top to fall off.

Since then, Samsung has been investigated by South Korean prosecutors for allegedly bribing a close friend of South Korean President Park Geun-hye. Prosecutors suspect that Samsung secretly bribed the two institutions controlled by Choi Soon-sil. 53 companies under 19 South Korean business groups donated tens of billions of won in total, with Samsung donating the most. In November, South Korean prosecutors suddenly inspected Samsung's Seoul headquarters and confiscated computer hard drives, account books and other related documents. Prior to this, prosecutors had summoned a group of Samsung executives, including Samsung Electronics Vice Chairman Lee Jae-yong.

While Samsung has suffered a series of blows, its competitors have been making strong inroads into the market. Huawei released its high-end annual flagship Mate 9 last month, and its mobile phone profits even exceeded Samsung's.

Pros and Cons

Jackdaw Research analyst Jane Dawson said that while Samsung's consideration of a split is not a direct response to recent events, it could be part of Samsung's reassessment of its long-term structure.

Analysts are still divided on whether the "spin-off and reorganization" will create another Samsung in the future or is a short-term act of cutting off one's arm to please the capital market. Li Tao, editor-in-chief of Home Appliance Network, believes that judging from the statement released by Samsung Electronics, the company has shown sufficient sincerity in responding to the structural reform suggestions put forward by shareholders. Holger Miller, an analyst at Constellation Research, also said that the spin-off can enhance Samsung's focus. The total valuation of each business after the spin-off will exceed the valuation of multiple businesses integrated into one.

"However, Samsung Electronics is currently mired in a product discontinuation crisis and is unable to extricate itself. In addition, the group is involved in political scandals, etc. It is obviously not a good time window for immediate implementation," said Li Tao.

However, some experts said that Samsung Electronics needs to consider many potential factors when moving to a holding structure, such as changes in taxation and other regulations. It is reported that Korean law requires that a holding company must hold at least 30% of the shares of a listed subsidiary. If the split is really carried out, Samsung Electronics must purchase the shares of subsidiaries, such as Samsung SDI, Samsung Electro-Mechanics, and Samsung SDS, to meet the legal requirements, and the expenses may reach billions of dollars.

Reporters learned that Samsung Electronics' industries involve chip manufacturing, consumer electronics, mobile phones, batteries and other fields. In the past decade, Samsung Electronics has carried out 27 transnational mergers and acquisitions, and this year it has invested in 7 overseas companies including Harman, QDvision and NewNet Canada. If it is really implemented in mid-2017 as stated in the statement, it will inevitably first carry out a radical reorganization of its industries. It is expected that the chip manufacturing and screen manufacturing businesses will be the core of each after the split, but the emerging automotive business should also be considered for independent listing, which means that this unprecedented reform commitment will be protracted and calculated in years.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.