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In US$8b Samsung bid, some Koreans break ranks to side with foreign activists

In a country with a record of hostility towards foreign capital, some local investors are breaking with tradition as they side with a US hedge fund opposing an US$8 billion merger seen vital to the transfer of leadership at South Korea's top conglomerate.

[SEOUL] In a country with a record of hostility towards foreign capital, some local investors are breaking with tradition as they side with a US hedge fund opposing an US$8 billion merger seen vital to the transfer of leadership at South Korea's top conglomerate.

Hundreds of Samsung C&T Corp's small stakeholders have converged on a public web forum in recent days to protest what they say is a low-ball all-stock takeover offer from Cheil Industries Inc, an affiliate of Samsung Group and the conglomerate's de facto holding company.

Heirs of Samsung Group's founding Lee family want the merger to consolidate holdings of key affiliates including Samsung Electronics Co Ltd into a company under their control. Opponents say the Lee family should pay a higher price.

The online protest is unusual in a culture where South Korea's big family-controlled conglomerates, or chaebol, are seen as pillars of the country's economy and typically get their way. Simply appealing to a sense of patriotism to get a deal done is no longer acceptable, the protesting investors say. "This is my retirement money," one investor claiming to own 7,000 Samsung C&T shares said on the forum, hosted by Naver, South Korea's top web portal. "I have to protect my assets." The exalted position of chaebol in Korean society wobbled last year when a Hyundai Motor Co-led group paid 10.6 trillion won (S$13.4 billion) for real estate in Seoul that was more than triple the property's appraised value.

The deal angered shareholders and led several domestic institutional investors to publicly criticise the conglomerate - a rare event in a society that values consensus.

Now, the prospect of what critics say is a bad deal for Samsung C&T shareholders has made some retail investors - known as "ants" in local trading circles for the size of their shareholdings - unusually vocal.

Some of them say they will side with Elliott Associates LP, Samsung C&T's third-biggest stakeholder, which opposes the deal. Some of the "ants" are even offering to make the US hedge fund their proxy at the Samsung C&T shareholder meeting to vote on the deal in July. "The practice of demanding sacrifice from only the ants needs to change," one investor said on Paxnet, a popular site for retail investors.

Elliott has filed two court injunctions seeking to block the deal. It has also sent letters to major Samsung C&T shareholders including South Korea's National Pension Service and Samsung SDI Co Ltd - another Samsung Group firm - urging them to vote against the merger.

Samsung C&T sold treasury shares to KCC Corp, a move that C&T said will defend shareholders against what it called "an attack by a foreign hedge fund seeking short-term trading gains".

Even if Samsung gets its way, the level of outcry against the deal could make South Korea's powerful families tread more carefully in the future, investors and analysts say.

Local support for the foreign fund's stance is unusual given South Korea's long-running suspicion towards foreign private equity and hedge funds. The stereotype of the money-hungry foreign opportunist is a staple of local media coverage.

US-based private equity firm Lone Star remains the archetypical villain, often portrayed as a greedy investor that took advantage of the country in the aftermath of the 1997-98 Asian financial crisis, profiting massively from its investment in Korea Exchange Bank.

Cheil and Samsung C&T, a construction arm of the Samsung group, insist that the offer, made last month, is in accordance with the law.

Critics complain that it is unfair because the book value of Samsung C&T's stakes in listed firms such as Samsung Electronics was around 13 trillion won at the end of March - 46 per cent higher than the valuation assigned to the company by Cheil.

Samsung may nonetheless muster the votes to get its way.

Some investors want to trade in their Samsung C&T shares, given what is widely considered a weak outlook for its core business. The merged company will have the full backing of the group's resources as the de facto holding company - which may in the long run lead to much better returns. "From a shareholder value perspective, it's better for Samsung C&T to merge with Cheil rather than remain a construction company," said Huh Nam-kwon, chief investment officer at Shinyoung Asset Management, a Samsung C&T shareholder.

Also in the deal's favour: many institutional investors count conglomerates like Samsung among their top clients, and voting against such a crucial deal could be seen to be bad for business. "We who live in this country have to be careful speaking about Samsung, but when someone from the outside is this vocal, we can then say 'yes, this is right and Elliott is doing the right thing,'" said Nam Dong-woo, equities head at Eastspring Asset Management, a Samsung C&T shareholder . "Someone has belled the cat, and in the long run this is a good thing."