Morning Agenda: Samsung Heir’s Conviction Shakes Up Empire

August 28, 2017

By AMIE TSANG

https://www.nytimes.com/2017/08/25/business/dealbook/samsung-heir-conviction-bribery-embezzlement.html

Lee Jae-yong, the heir to the Samsung business empire, leaving court in Seoul, South Korea, on Friday. He was sentenced to five years in prison. Credit Chung Sung-Jun/Getty Images

It’s a potentially huge moment for corporate Korea. Lee Jae-yong, the heir to the Samsung business empire, was sentenced today to five years in prison after being convicted of bribery and embezzlement.

A South Korean court found that there was sufficient evidence that Mr. Lee had bribed the government, expecting to gain state support for a merger of two Samsung-controlled companies.

South Korea has historically dealt light penalties to major business figures. But Mr. Lee’s conviction may embolden the country’s leaders to put further pressure on business empires, known as chaebols, that helped lift the nation from the ashes of the Korean War but which are now seen as sources of corruption.

The prison sentence will also test whether the Samsung conglomerate can still thrive without the Lee family at the helm. The company had argued that Mr. Lee was the one providing a long-term strategic vision.

Worth noting: Mr. Lee plans to appeal his sentence. And chaebol leaders convicted of crimes have tended to be pardoned, including:

• Lee Kun-hee, Mr. Lee’s father who was convicted twice of tax evasion and bribery

• Chung Mong-koo, the chairman of Hyundai Motor Group, who was convicted of embezzlement and breach of duty

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• Chey Tae-won, the chairman of SK Group, who was convicted of fraud in 2003 and of embezzlement in 2013

But The New York Times notes that this time might be different: South Korea’s president, Moon Jae-in, took power after his predecessor was impeached because of corruption. And Mr. Moon has promised to take on his country’s business empires.

The Amazon Effect

The most notable reaction to Amazon’s coming changes at Whole Foods, starting with lower prices on a wealth of basic items, was in the stock prices of Whole Foods competitors:

Kroger: down 8.1 percent

Sprouts: down 7 percent

Supervalu: down 6.6 percent

Costco: down 5 percent

Why? Amazon appears to be using one of its tried-and-tested tactics, enormous price cuts intended to win market share, on an industry with low margins. And the new war is starting on Monday, when the takeover is expected to wrap up.

Long ago, other supermarket chains joined Whole Foods in selling food labeled organic — even Walmart sells it now. But with Amazon’s backing, Whole Foods can now undercut many of its rivals on delicacies like (and these descriptions are straight from the news release):

• organic avocados

• organic responsibly-farmed salmon and tilapia

• organic baby kale and baby lettuce

• animal-welfare-rated 85-percent-lean ground beef

• creamy or crunchy almond butter

SoftBank Opens Spigot for WeWork

Few venture capital firms can deploy the financial firepower that SoftBank of Japan — and, more important, its $93 billion Vision Fund — has at its disposal. But the technology world was stunned all the same by SoftBank’s $4.4 billion investment in WeWork, the operator of shared working spaces.

Let’s take a look at the investment terms:

• WeWork is now valued at $17 billion, excluding the new investment

• About $3 billion is going to WeWork itself

• Of that $3 billion, over half will go toward buying out existing investors

• More than half of the $3 billion will be coming from the Vision Fund

• The remaining $1.4 billion will go toward WeWork ventures in Asia

• SoftBank is getting two seats on WeWork’s board

Here are the top questions facing investors and analysts:

How could WeWork command a $17 billion valuation? The company has argued that it’s not just about real estate, but about the future of how people work. It has already signed up corporate clients like Microsoft.

Will venture capitalists look to SoftBank as a preferred exit for their investments? After all, SoftBank has an enormous war chest that it must spend. And a private investment is much easier to negotiate than an initial public offering.

What is the theme connecting SoftBank’s investments? The conglomerate has spent billions investing in a host of companies, including the graphics chip maker Nvidia, a developer of artificial intelligence software, and an indoor farming start-up.

Cohn on Taxes and Charlottesville

Gary D. Cohn, President Trump’s top economic adviser, outlined the White House’s priorities for a tax code overhaul to The Financial Times.

Here are the highlights:

• Moving to a territorial tax system, rather than taxing corporate profits worldwide

• Eliminating many corporate deductions, but lowering the overall business tax rate to an unspecified level

• No border-adjustment tax, which would make imports more expensive

• The White House wants the legislation to pass by year’s end. “It’s not like they are just starting the process now,” Mr. Cohn said.

He also spoke about Mr. Trump’s comments on the white nationalist rally at Charlottesville, Va., where the president blamed “many sides” for the outbreak of violence. News reports have said that Mr. Cohn, who is Jewish, was upset by the remarks but did not plan to resign.

“As a patriotic American, I am reluctant to leave my post as director of the National Economic Council because I feel a duty to fulfill my commitment to work on behalf of the American people,” he told the F.T.

Washington’s Hand in the Small-Deal Boom

Merger activity has been healthy so far this year, with announced deal volumes worldwide up 4 percent to $2 trillion as of Aug. 1, according to Thomson Reuters. Yet much of the activity has come not from the classic blockbuster transactions that dominate headlines, but from smaller deals.

The volume of small deals, or those worth less than $20 billion, announced this year is up 30 percent, Goldman Sachs estimates. The volume of large deals is down 40 percent.

John Waldron, a global co-head of Goldman’s investment banking division, explains why in a video posted on the firm’s website.

• Corporate leaders expected more policy changes, particularly around taxes, infrastructure investments and a health care overhaul.

• Many important regulatory positions, particularly those overseeing antitrust, have not been filled. “They don’t have the people in place to really drive the decision making at this point,” Mr. Waldron says.

• Goldman remains optimistic about the prospects for deal making in general heading into the back half of the year.

The bottom line: Big deals are the riskiest kind of transactions to strike — and the instability in Washington is sapping corporate boards of their confidence in making such hefty bets.

All Eyes on Central Banker Retreat

It’s that time of year, when the world’s top central bankers have flown to Jackson Hole, Wyo., for the Federal Reserve’s annual conference there. Here’s what analysts and investors are thinking about as the meetings begin in earnest today:

What will happen to interest rates, particularly if Mr. Trump declines to nominate Janet L. Yellen for a second term as the Fed’s chairwoman? Her possible replacements range from Mr. Cohn, who is generally considered a moderate, to a conservative academic like John B. Taylor, an economist at Stanford University.

• Will Mario Draghi, the president of the European Central Bank, announce any changes to its policy of quantitative easing — the buying of government bonds to stimulate the economy — when he speaks at 1 p.m. local time?

Bonus: Play Jackson Hole bingo, courtesy of Bloomberg News.

The HNA Mystery Deepens

Regulators are scrutinizing HNA Group. A Wall Street bank has stepped away from it.

And more questions are being raised about who owns the Chinese conglomerate.

Take Pacific American Corporation, or PAC.

HNA says it is an independent company that buys engines, spare parts and other airline equipment for Hainan Airlines, HNA’s subsidiary.

But it is run by the son and the younger brother of HNA’s co-founder and co-chairman, Chen Feng. And it was once controlled by HNA, according to corporate documents reviewed by The Times.

The younger brother, Chen Guoqing, was instrumental in helping to create the initial ownership structure of HNA through entities set up in Hong Kong and the Cayman Islands, which effectively obscured the ownership.

The lack of disclosures may have violated China’s securities laws on “connected” transactions, say experts on Chinese law.

Related Reading:

• A Bloomberg review of fund prospectuses and disclosures showed that HNA had used a network of trusts and asset management products, and more conventional financing, to fund everything from takeovers to day-to-day expenses.

 

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