Some rather significant financial news came out of South Korea yesterday: Samsung Electronics has decided to buy a 10 percent stake in smartphone rival Pantech, which cost the tech giant 53 billion South Korean Won (KRW).
Pantech is currently South Korea’s third largest handset manufacturer, but the company has been facing financial troubles recently and has been struggling with debt issues for many years, which is probably the reason for this extra capitalization from Samsung.
Of course there’s nothing wrong with owning shares in your competitors, but why has Samsung suddenly decided to assist a struggling company when surely it would benefit from the demise of one of its domestic rivals?
Preventing accusations of monopoly
Well that might actually be one of the biggest arguments for saving Pantech, so as to avoid the appearance of market monopolisation. Samsung Electronics currently makes up about 60% of the domestic market in South Korea, whilst by comparison Pantech holds just over a 10% share of the market. If Pantech was to disappear, or be completely bought out by Samsung, then it could give rise to a wave of concerns about Samsung’s market dominance, which could turn into a legal matter that Samsung would obviously like to avoid.
On the other hand, Samsung wouldn’t like to lose a controllable rival to another large company or a foreign investor, so it makes sense for Samsung to prop-up the company rather than risk having an outside buyer come in and stir up the market. In particular, Samsung could be fearful that a low-cost Chinese company could come in and start undercutting its prices, especially if the company was to begin offering mid-range smartphones in the Korean market, which is typically dominated by more premium products.
Protecting business interests
Perhaps even more importantly than that, Samsung would no doubt like to avoid a foreign company from owning shares in Pantech as Samsung currently sells a lot of technology and hardware parts to its rival. If another company was to buy a stake in Pantech then it would be privy to the technology bought from Samsung, which could be a threat to the smartphone giant’s dominance.
Speaking of deals between the two companies, it’s also likely that Samsung would like to continue selling parts to its rival company as well. If Pantech was to go out of business, Samsung SID and Electro-Mechanics divisions would lose out on over 200 billion KRW worth of parts that they sell to Pantech on an annual basis. In other words, a 53 billion KRW investment is a price worth paying to maintain a 200 billion KRW business.
It’s always possible that Samsung might simply want to own a stake in a company that it thinks will produce a decent return on its investment. But in business, things tend to be a little more complicated than face value would suggest.