US Hedge fund Elliott Associate’s ‘attack on Samsung’

In 2003, American hedge fund Sovereign Asset Management Ltd. purchased a massive amount of shares from SK Corp., a holding company of the SK Group. As the major shareholder’s shareholding ratio was not high, SK was on alert over Sovereign’s takeover attempt. Leftist groups that were hostile to Korean conglomerates and some intellectuals, who blindly pursued Wall Street principles believing that whatever pushes up stock prices is good, took the side of Sovereign. Although the hedge fund failed to take over the management right of SK, it left Korea in 2005 after making a profit of around 1 trillion won (approx. USD 898 million) from the deal.

Japanese economic analyst Kazuyuki Hamada wrote a book titled "Hedge Fund," which investigated risks and hazards of speculation funds in 1999. He gave the book a subtitle of "A monster at the end of a century." Hamada criticized, “Hedge fund sometimes corrects the irony of economic system in a developing country. But the correction is usually excessive, dealing a fatal blow to the patient.” Ten years ago, SK lost investment potential during the fight against Sovereign. Situation was similar to KT&G, Korea’s tobacco and ginseng firm, which was under attack of "business hunter" Carl Icahn in 2006.

U.S.-based hedge fund Elliot Associates bought Samsung C&T shares to increase its shareholding ratio to 7.1 percent after the announcement was made on the merger between Samsung C&T and Cheil Industries, two key affiliates of Korean conglomerate Samsung. “The terms are neither fair to nor in the best interests of Samsung C&T’s shareholders,” said Elliott. Analysts view that Elliott’s opposition to block the merger is an attempt to put pressure on Samsung to increase its offer and ultimately make profits like Sovereign. Samsung Group owns about 14 percent of Samsung C&T, which is twice as many as that of Elliott. Still, it is necessary for Samsung to thoroughly prepare.

Evidenced by American Citibank’s takeover of local Hanmi Bank, the merger between Caltex and GS Group, Saudi Arabian ARAMCO’s acquisition of S-Oil, it is welcoming that sound foreign capitals invest in Korea, create employment and pay tax. However, caution must be paid to foreign hedge funds that buy out shares of major domestic companies only aiming at hostile takeover or short-term profits. Going beyond making profits, if Sovereign and Icahn had taken over management rights of SK and KT&G, the results would have shaken the domestic economy. Stock prices may go up when a foreign hedge fund tries a hostile takeover to a local company, in a so-called ‘issue-making stock effect.’ However, it is individual small investors who buy stocks at high prices may suffer the loss ultimately as time passes.

shkwon@donga.com