Samsung's $6 Billion Stock Wipeout Marks Latest Flare-Up Over 2015 Merger
SEOUL—A merger of two Samsung affiliates in 2015 is drawing fresh scrutiny this week, wiping out billions of dollars of stock-market value and creating new headaches for South Korea’s biggest conglomerate.
On Tuesday, the country’s financial regulators issued a warning to Samsung Biologics Co., the conglomerate’s contract drug-manufacturing arm, for alleged accounting irregularities, triggering a two-day stock selloff that has erased $6 billion from the company’s market capitalization.
Meantime, U.S. activist hedge fund Elliott Management Corp. said this week that it is taking legal action against the South Korean government for its role in approving the merger, which created a de facto holding company in which third-generation heir Lee Jae-yong wound up holding a large stake.
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At the time of the merger in 2015, the tie-up between Samsung C&T Corp. and Cheil Industries Inc. drew criticism from foreign investors and corporate-governance advocates, including Elliott, which saw the deal as unfair to minority shareholders. Elliott opposed the deal and rallied shareholders against it.
The deciding vote in favor of the deal was cast by South Korea’s National Pension Service, which is overseen by South Korea’s Ministry of Health and Welfare.
Since then, several of the deal’s central figures have been charged with bribery and imprisoned, including the head of the pension service and Mr. Lee, a vice chairman of Samsung Electronics Co. Mr. Lee has denied wrongdoing.
The surrounding scandal also led to the conviction of South Korea’s then-President Park Geun-hye on multiple charges including bribery.
The renewed scrutiny on the deal, three years after its approval, could mean continued turbulence for the Samsung conglomerate, several months after Mr. Lee was released from prison on a suspended sentence. It also shines a spotlight on South Korea’s National Pension Service, the world’s fourth-largest pension fund.
Samsung Biologics’ accounting methods drew regulators’ attention because the company, in which Samsung C&T held a 43% stake as of the end of 2017, changed its accounting practices in the run-up to the 2015 merger. That allowed Biologics to report an uptick in profits following years of losses—a reversal of fortune that some skeptics believe was engineered to sweeten the deal’s prospects.
On Tuesday, South Korea’s Financial Supervisory Service issued a preliminary notice to Samsung Biologics and its auditors, contending the company violated accounting rules.
The subsequent two-day selloff erased roughly one-fifth of the company’s market value, pushing shares to their lowest level in three months.
A Samsung Biologics spokesman said that the company would cooperate with the investigation, adding that it had changed its accounting methods in 2015 because a shareholder, Biogen Inc., wanted to boost its equity stake, requiring the adoption of the new standard. The spokesman said that external auditors had later signed off on the move.
If financial regulators conclude Samsung Biologics breached accounting rules, the drug manufacturer could be subject to a fine of up to 20% of its accounting-fraud value and have trading temporarily suspended, Seo Mi-hwa, an analyst for Yuanta Securities Korea, said in a note to clients Thursday.
Financial regulators haven’t said when they will make a final decision on the probe.
‘The web of corruption reaching from the President herself down to the NPS, unfairly damaged Elliott and other Samsung C&T shareholders’
The Elliott hedge fund said separately this week that it is taking legal action against the South Korean government over its role in the Samsung C&T-Cheil merger, arguing that its “unlawful intervention” in the deal violated the U.S.-Korea Free Trade Agreement. Elliott didn’t say how much it is seeking in damages.
“The facts revealed since the 2015 merger are clear: the web of corruption reaching from the President herself down to the NPS, unfairly damaged Elliott and other Samsung C&T shareholders,” Elliott said in a statement, referring to Ms. Park, the former president.
South Korean regulators said Wednesday that the audit of Samsung’s contract drug-manufacturing affiliate’s accounting isn’t linked to Elliott’s lawsuit, and that it wouldn’t bolster the U.S. hedge fund’s claim.
A spokesperson for the pension service referred requests for comment to the Health Ministry, which couldn’t be reached for comment.
The NPS also said this week that it is considering filing a damage suit against government officials who exerted pressure on the retirement fund to support the merger. The NPS lost roughly $130 million as part of the deal, special prosecutors have previously said. Two former top-ranking NPS officials are currently facing a trial at the country’s highest court.
Write to Timothy W. Martin at timothy.martin@wsj.com and Eun-Young Jeong at Eun-Young.Jeong@wsj.com