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Bloomberg

Samsung Group suffered a setback when shareholders thwarted the conglomerate’s plan to merge its shipbuilding and engineering units. If history is any indication, the two companies will try again -- and succeed.

Samsung Heavy Industries Co. and Samsung Engineering Co. said yesterday they’ll shelve plans to merge after too many investors chose to get cash payouts -- 1.6 trillion won ($1.4 billion) in total -- instead of shares in the combined entity. As the Samsung units consider their options, they can look back to Hyundai Motor Group and LG Group, which also experienced similar impediments before succeeding in subsequent attempts.

For Samsung, the deal’s collapse spoiled plans to form a company that could better compete with Technip SA and Saipem SpA for bigger orders of large gas tankers and energy projects. It also signaled that even South Korea’s largest industrial group, which is in the middle of a once-in-a-generation leadership transition, is facing mounting scrutiny from minority shareholders.

“They will try again to merge, but with better terms that will satisfy shareholders on both sides,” said Chang Sea Jin, author of the 2008 book “Sony Vs Samsung” and a professor at the National University of Singapore. “This shows that the voices of small investors are being heard by chaebols.”

Shares Plunge

Samsung Heavy will carefully review market conditions and shareholders’ opinions if the companies reconsider another merger attempt, the company said in a statement. Samsung Engineering is considering all options, said Edward Kang, a company spokesman.

Following the deal’s breakdown, shares of Samsung Heavy and Samsung Engineering plunged the most since April in Seoul yesterday. Samsung Heavy ended unchanged at 23,450 won after rising as much as 2.6 percent earlier. Samsung Engineering fell 1.1 percent to 53,000 won after gaining as much as 3.2 percent.

The setback comes at a sensitive time for Samsung. Lee Kun Hee, the group patriarch whose business empire includes the world’s biggest mobile phone maker and companies in the healthcare sector, has been hospitalized since May, and the family is trying to restructure the group. Lee’s only son, Lee Jae Yong, is seen as the most likely heir apparent to the group’s top position.

“This is definitely different from what we’ve seen before from Samsung Group,” said Lee Jin Woo, fund manager at KTB Asset Management Co., which oversees about $8.4 billion worth of assets. “One concern is that this failure may signal some weakening in management decisions since Chairman Lee Kun Hee was hospitalized. Some people could doubt whether the group’s leadership is intact.”

Try Again

In the past, companies have tried repeatedly until success.

Hyundai Mobis Co., South Korea’s biggest auto parts maker and a unit of Hyundai Motor Group, succeeded in buying Hyundai Autonet in 2009, five months after its initial attempt failed because of costs related to the mandatory buyback. LG Innotek Co. merged with LG Micron Ltd. in July 2009, after failing in December 2008.

“Samsung most likely will try again to merge the two units,” said Park Moo Hyun, an analyst at Hana Daetoo Securities Co. in Seoul. “That’s what we’ve seen in the past with other conglomerates. With share prices falling, they may actually succeed the second time.”

The merger between the Seoul-based companies was called off after failing to win shareholders’ confidence. The cost of buying back shares from investors exceeded the target that was set, triggering the collapse.

The buyback price for Samsung Heavy was 27,003 won, 4.9 percent higher than the closing price on Nov. 17, the last day to apply for the buyback. Samsung Engineering’s price was 65,439 won, 7.6 percent more. With the buyback prices higher than the market prices, investors went for the clear profit.

Oil Prices

The market hasn’t been in Samsung Heavy and Samsung Engineering’s favor after the merger was announced in September.

Global oil prices have fallen to the lowest level in four years, prompting companies to consider spending cuts. That means orders for offshore drilling and production facilities could weaken for Samsung Heavy and other shipbuilding rivals.

In South Korea, a company can call off a merger should buyback requests reach a level that could increase its financial burden.

“Investors seemed to see this as a good opportunity to make a quick buck,” said Lee Jae Won, an analyst at Yuanta Securities Korea in Seoul.

Among those shareholders was the National Pension Service, the biggest investor in Korea, which exercised its rights to sell part of its holdings to Samsung Heavy and Samsung Engineering. It did so as part of a portfolio management strategy because the buyback prices were higher than the previous day’s close, spokeswoman Lee Cheol Hee said Nov. 18.

The pension fund held a 5.2 percent stake in Samsung Engineering as of Sept. 22 and owned 5.9 percent of Samsung Heavy as of December, according to earnings statements.

“It wouldn’t be a surprise if we hear of this merger again in the next few months,” Park at Hana Daetoo said. “Next time, they will be a bit smarter.”