Samsung in bad spot over Lee’s indictment

The influence-peddling scandal, which led to the impeachment of South Korean President Park Geun-hye, is getting knottier. It took the dramatic turn when a court granted special prosecutor’s request for permission to arrest Samsung Group’s de facto leader Jay Y Lee over allegations of bribery and embezzlement. Lee is accused to have made payments of tens of millions of dollars to benefit Park’s close friends Choi Soon-sil. The investigations are focused on whether those payments were made in order to gain the favour of Korean national pension fund to a controversial merger of Samsung’s affiliates to help pave way for Lee’s transition to power.
Now, in the latest blow to Samsung, South Korean special prosecutor is seeking to indict Lee. The billionaire has denied wrongdoing. The prosecutor aims to indict 19 people including Samsung’s quintet. The indictment fleshes out the private conversation between President Park and Lee.
Samsung has till now maintained that it never made any unlawful offer or paid a bribe to the president or her confidante Choi Soon-sil in return for political favours. But the special prosecutor alleges Samsung made payments to gain the backing of the government-run National Pension Service having significant stakes in Samsung Electronics and listed affiliates. The conglomerate’s transition to a new leadership suffered a major setback due to botched debut of the Note 7. Although a typical trial and verdict could take up to 18 months, the special-prosecutor law recommends resolving the case much sooner. Post indictment, Lee can seek bail and the court must make its first ruling within three months.
A trial for Lee would be severe blow to the company’s brand and to its ability to make strategic decisions, including acquisitions and management changes.
Soon after the Lee’s indictment announcement, Samsung Group said it was dismantling its division that makes key decisions relating to its business strategy. It could further hamper its fast decision-making.
Samsung scandal has also sown uncertainty about government’s future policy towards country’s chaebols, the tightly linked business conglomerates in the country that are controlled by a handful of families. The entire Samsung Group includes electronics, shipbuilding and insurance units and has combined revenues equivalent to about one-fifth of South Korea’s gross domestic product. The government is likely to apply more pressure against the system of chaebols. And if the opposition party really comes into power this year in the wake of the recent political scandal, they will push for the revision of the commercial law, which seems very destructive for chaebols.
Lee was largely involved with building a good image of Samsung, establishing solid network with his global counterparts and calling the final shots when cutting big acquisition deals in new growth areas. Despite Lee’s embroilment in the scandal, Samsung’s businesses across all segments remain strong, which was well proved by its earnings and the recent share rallies.
Samsung shares are trading near record highs, an indication that market expects stability even after indictment. The stock rose 1 percent on Tuesday to 1,922,000 won at the close in Seoul, apparently showing that market has made up its mind about Samsung’s prospects. So far, the investors have been sanguine. After strong earnings report, Samsung shares surged to an all-time high. But the real test lies ahead as Samsung Electronics is launching S8 in March. It will be a litmus test for Samsung.