Bloomberg News

Samsung Slumps Most in 4 Years on U.S. Sales Ban Concerns

August 27, 2012

Samsung Facing Product Delays After Apple Wins

The new Galaxy S III smartphone, produced by Samsung Electronics Co., is displayed for attendees during the global launch event in London, U.K.. Photographer: Chris Ratcliffe

Samsung Electronics Co. (005930) plunged the most in almost four years, wiping out more than $12 billion in market value, on concern some devices may be banned in the U.S. after a jury said it violated Apple Inc. (AAPL:US) patents.

Samsung plummeted 7.5 percent after a California court on Aug. 24 ruled the world’s biggest handset maker infringed six of seven patents. Jurors said the Suwon, South Korea-based company must pay more than $1 billion in damages in the first lawsuit between the dominant global smartphone rivals to go before a U.S. jury.

A ban may undermine Samsung’s grip on a smartphone market valued at $219.1 billion by Bloomberg Industries and set a precedent for rival handset makers that use Google Inc. (GOOG:US)’s Android operating system. A judge scheduled a hearing next month to consider Apple’s request for a permanent U.S. sales ban on devices such as the Galaxy S and S II smartphones and the Galaxy Tab 10.1 computer.

“What’s concerning is whether any ban will be extended to flagship models and will have an impact on cases in other places,” Seo Won Seok, a Seoul-based analyst at Korea Investment & Securities Co., said by phone today. “Perhaps Samsung has technology to avoid some infringements, but they also need to come up with ways to get around Apple’s patents within the Android operating system.”

Samsung Memo

Samsung shares fell to 1,180,000 won at the close in Seoul trading, trimming their gain this year to 12 percent, compared with a 64 percent climb for Apple. In German trading today, Apple climbed as much as 2.6 percent to the equivalent of $682.64, the steepest increase in almost a month.

Yields on Samsung’s five-year $1 billion U.S. dollar- denominated bonds due April 2017 rose 15 basis points to 1.72 percent, according to prices from Credit Agricole SA. (ACA)

It’s “regrettable” that the verdict has caused concern among employees and customers, Samsung said in a memo posted on the company’s blog today.

“We trust that the consumers and the market will side with those who prioritize innovation over litigation, and we will prove this beyond doubt,” Samsung said.

The company will ask the judge to overturn the verdict and, if she doesn’t, will appeal the case, Mira Jang, a spokeswoman for Samsung, said in an e-mail.

The verdict may delay Samsung’s introduction of new products using Android software so it can redesign them.

Smaller iPad

North America is the third-largest region for Samsung mobile-phone sales after Asia Pacific and Western Europe, according to HMC Investment Securities Co. The South Korean company generated 16 percent of its revenue in the Americas as of June 30, according to data compiled by Bloomberg.

Samsung vaulted to the top of the global smartphone market by introducing a variety of Galaxy models using the Android operating system. The company may have to postpone some product releases at a time when it needs to compete against Apple’s new iPhone and possibly a smaller iPad.

“It’s kind of the worst-case scenario for Samsung,” Young Park, a Hong Kong-based analyst at Woori Investment & Securities Co., said on Bloomberg Television’s “On the Move Asia.”

U.S. District Judge Lucy Koh, who presided over the four- week trial in San Jose, California, set a Sept. 20 hearing on Apple’s request for a sales ban on some Samsung products. She ordered Apple to file a one-page chart by today identifying which devices it seeks to ban. She also could triple the damages under federal law.

Injunction Chances

“We expect there is a two-thirds chance of an injunction against Samsung products,” Peter Misek, an analyst at Jefferies & Co. Inc., wrote in an Aug. 26 report.

Samsung’s schedules for introducing products won’t be affected by the verdict, James Chung, a Seoul-based spokesman for the company, said by phone on Aug. 25.

The global lineup for the rest of this year includes the next version of the Galaxy Note, which sold more than 10 million units in less than a year. The company began selling a tablet edition of the Note this month, following the May release of the Galaxy S III, the newest version in its bestselling smartphone series.

Samsung, which has gotten around other sales bans by modifying some product features, has sought to differentiate its products since the global patent fight with Apple began last year, and the design and feature of the Galaxy S III may be distinctive enough to avoid a ban, Seo said.

Capital Spending

Samsung -- the largest maker of computer-memory chips, flat-screen panels and televisions -- plans 25 trillion won ($22 billion) in capital expenditure this year to boost manufacturing capacity, including 15 trillion won for chips and 6.6 trillion won for flat-screen panels used in smartphones, tablet computers and TVs.

The company had cash and near-cash assets of 15.5 trillion won as of June 30, according to data compiled by Bloomberg.

While a fine without a sales ban would be “a slap on the wrist” for Samsung, the company may also suffer damages to its reputation, Mark Newman, a senior research analyst at Sanford C. Bernstein in Hong Kong, wrote in a report today.

“This result has proved to be an embarrassment and could be a slight dent on public opinion,” he wrote.

The verdict may affect other makers of Android-based devices. Apple has sued smartphone makers, including HTC Corp. (2498), the world’s fourth-largest, which generated $15.8 billion in revenue last year mostly by selling phones including the Desire and Sensation models.

Largest Customer

HTC shares dropped 1.9 percent to NT$257.50 in Taipei trading, while ZTE Corp. (763), another Android-phone maker, declined 7.1 percent in Hong Kong trading. Nokia Oyj (NOK1V), which doesn’t make Android phones, gained as much as 11 percent in Helsinki trading today.

“Although this situation will be a short-term relief to HTC if Apple successfully bans Samsung’s questionable devices from the U.S. market, we see increasing litigation risks for HTC,” Jeff Pu, who rates the stock reduce at Fubon Financial Holding Co., wrote in an Aug. 27 note.

Two of the patents in the case brought by Apple against Samsung are also part of the iPhone maker’s case targeting more than a dozen HTC devices before the International Trade Commission. HTC declined to comment in an e-mail. Most claims made by Apple against Samsung “don’t relate to the core Android operating system,” Google said yesterday.

Apple is Samsung’s largest customer, even as they compete to sell phones that allow users to surf the Web and play games, and as they fight in courts on four continents over patent infringement claims. Apple accounts for about 9 percent of Samsung’s revenue, making it the company’s largest customer, according to data compiled by Bloomberg.

“It’ll take some time for an actual sales ban to take effect, and Samsung will appeal, making it a long-term fight,” Heo Pil Seok, chief executive officer at Seoul-based Midas International Asset Management Ltd., which oversees $5 billion, said by phone. “This will be an uncertainty for Samsung, and investors hate uncertainty the most.”

To contact the reporters on this story: Jun Yang in Seoul at jyang180@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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