[KCGF Opinion] Samsung Electronics share buyback: Too Little, Too Late

18 Nov 2024



Samsung Electronics share buyback: Too Little, Too Late


 

Urge Samsung cancel entire W10 trillion worth of treasury shares

Must disclose value-up plan after comprehensive board discussions within this year




On November 14, 2024, Samsung Electronics experienced a substantial drop in market cap, breaking the W300 trillion level based on common shares (in fact, total W333tr including W35tr for preferred shares). The company, following the BoD approval, disclosed on November 15th the intention to buy back W10 trillion worth of treasury shares over the next 12 months, with the primary objective of “enhancing shareholder value”. Samsung Electronics will initiate the buyback and cancellation of W3 trillion worth of treasury shares within a three-month period. However, the decision regarding cancellation of the remaining W7 trillion is still pending. The timing of the announcement is disappointing and the amount is too small. We would like to inquire what measures the BoD and management have taken to address shareholder concerns. There has been a surge in visits to Korea by senior portfolio managers since fall. We believe their primary objective is to meet with Samsung Electronics' senior management to evaluate and decide on their positions in the company.


The scale of the current share buyback program is insufficient, considering the recent collapse in share price and market cap, and the company's strong cash position and operating cash flow. We propose that the company buyback and immediately cancel the entire W10 trillion worth of treasury share within this year. Apple bought back and canceled W133 trillion (or US$95bn), equivalent to 3% of its market cap, last fiscal year. We urge Samsung Electronics implement a similar, ongoing shareholder return program, comprising annual share buyback of 3-4% of its outstanding shares, in addition to its dividend payouts. It is worth noting that Samsung Electronics' share price has declined 39% this year, while the Philadelphia Semiconductor Index has increased by 18%, Micron by 16%, TSMC by 80%, and Nvidia by 190% during the same period.


The proposed immediate buyback and cancelation of W3 trillion, a mere 1% of the market cap, and the total W10 trillion, equating to only 3%, is inadequate. In light of the substantial investment losses suffered by shareholders in recent years, this level of shareholder return policy is insufficient, in our view. Samsung Electronics holds W104 trillion in cash and equivalents as of 3Q, and is expected to generate over W60 trillion in operating cash flow this year. Given this ample liquidity, the company has significant capacity for both dividends and share buyback program.


The BoD has the ultimate authority to decide on share buyback and cancellations. We strongly recommend that the four inside directors (Han Jong-hee, Noh Tae-moon, Park Hak-kyu, and Lee Jeong-bae) and six outside directors (Kim Han-jo, Kim Jun-sung, Heo Eun-nyeong, Yoo Myung-hee, Shin Jae-yun, and Cho Hye-kyung) of Samsung Electronics prioritize the following seven-point agenda for discussion and resolution at the next board meeting.



1.  Immediate completion of share buyback and cancellation within this year;


2.  Long-term shareholder return plan that includes annual share buyback and cancellation of 3-4% of outstanding shares, in addition to a stable dividend policy;


3.  Disclose a value-up plan within this year;


4.  Transition into a professional management system similar to that of Apple and Microsoft, where there is no controlling shareholder, ensuring alignment between management and shareholders;


5.  Implement a compensation system centered around equity rewards, similar to global IT companies;


6.  Benchmark against TSMC and upgrade the BoD to a world-class level; and


7.  Pursue a dual listing on the NASDAQ and the Korean Exchange.



Treasury share in Korea, like Pandora's box, opens up a complex web of corporate governance challenges in business, legal, and economic that only experts can navigate. The mismatch between legal and accounting, the necessity and appropriateness of management control, the rubber-stamp board members, overvalued market cap, and the positive and negative functions of M&As are just a few of the issues. In advanced economies, it is virtually impossible for a proposal to buy back treasury shares without a concurrent plan to cancel those shares to be placed on the board agenda, as this would involve the use of funds contributed by minority shareholders.


The recent survey by our Forum revealed that most foreign investors, including pensions and large mutual funds do not reflect treasury shares in their financial analysis and equity valuation. Results were quite shocking; over 80% of foreign investors do not reflect treasury shares in the market cap or financial analysis if it is not canceled. Additionally, foreign investors with extensive experience investing in Korea were more skeptical of treasury share practice. A large US mutual fund manager criticized the Korean treasury share practice, stating that companies often sell into the market instead of canceling it, which does not reduce market cap or total number of outstanding shares. Also, a manager of a large sovereign wealth fund made a cynical comment that they often do not get canceled and therefore are not reflected in financial ratio calculation. The Korea Exchange does not even take account the impact of treasury share buyback to adjust market cap size. It is clear and simple that treasury shares are purchased with 'company money'. The use for the purpose of defending the management control of a specific shareholder is a clear violation of the law. This action is universally prohibited across the globe, regardless of jurisdiction.






November 18, 2024

Korean Corporate Governance Forum

Chairman, Namuh Rhee