(Reuters) - Samsung Electronics Co Ltd moved to tighten its grip on vital electronics parts supplies as it looks to stay ahead of rival Apple Inc with new products in a fast changing technology industry.
The South Korean group's unlisted Samsung Display unit could become the biggest shareholder of Corning Inc, the maker of scratch-resistant Gorilla Glass used in many mobile gadgets, as part of a deal in which Corning buys Samsung Display out of a 1995 joint venture making glass for liquid crystal displays.
That deal includes a new 10-year LCD glass supply agreement between New York-based Corning and Samsung Display, which makes LCD panels for tablets and TVs for Apple, Sony Corp and Lenovo Group. Corning said the deal would add about $2 billion to its annual sales.
As part of the agreement, Samsung Display will receive new convertible preferred shares in Corning worth $1.9 billion, and will invest another $400 million by subscribing to new convertible preferred shares. If the preferred shares are converted, Samsung Display would become the U.S. firm's biggest shareholder, with a 7.4 percent stake.
The deal follows a series of bolt-on acquisitions by Samsung Group firms in recent months as the group muscles deeper into key supply chains and positions itself for technology shifts.
Corning, whose Gorilla Glass is widely used in Samsung's Galaxy devices, Nokia's Lumia and Google unit Motorola's Droid Razr, also produces ceramic substrates, optical fibers and specialty glass solutions.
"By moving beyond a simple glass supply alliance, Samsung is trying to take a longer-term view for its future product pipelines as Corning has vast technologies not just in displays but in other emerging areas," said Brian Park, an analyst at Tongyang Securities.
"They're likely to co-develop and co-test key technologies such as plastic panels, which are critical for making wearable devices. Should they crack such technologies, rivals like Apple (would need to) come to them for parts supplies."
Corning shares rose by as much as 28 percent in extended trading on Tuesday, as investors welcomed the deeper alliance with the world's biggest maker of smartphones and TVs. Corning also announced a $2 billion share buyback.
Shares in Samsung Electronics, which owns 84.8 percent of unlisted Samsung Display, slipped 0.9 percent in Seoul on Wednesday, while Samsung SDI, which owns the rest of Samsung Display, dropped nearly 8 percent. Some analysts said the deal could cut investment gains booked by Samsung SDI by up to a fifth.
"The deal gives Samsung a further leg-up in components, as they are now partnering at a deeper level, not just low-level joint ventures," said Soh Hyun-cheol, an analyst at Shinhan Investment Corp. "Corning has original technology in many areas such as glass, fibre optic, ceramics and cable. For them, a partnership with Samsung will help reduce the risks involved in entering into new businesses, where they have to move quickly as growth in a maturing LCD industry is easing very sharply."
Samsung said it has no plans to exercise management control over Corning. Founding families of Samsung Group and Corning have had close ties for four decades, since they started a cathode ray tube glass venture in 1973.
Samsung has long used joint ventures, many with foreign firms such as Japan's Sanyo, as a way to master the technologies it needed to expand into electronics. It's relationship with Corning has grown, too, with ventures on LCD and OLED glass manufacturing, as the display industry evolved rapidly from bulky CRT to flat screen display. The industry is now bracing for the next big change - OLED screens that can be curved or bent, making them ideal for wearable devices.
The LCD glass venture competes with Nippon Electric Glass Co Ltd and Asahi Glass Co.
Earlier this year, Samsung Electronics bought a stake in Japan's Sharp Corp, and its units this month closed the acquisition of German OLED raw materials firm Novaled AG.
"Samsung has made strides in improving both hardware and software capability, but they need to do more to improve the software side and offer really competitive products that work seamlessly across different platforms, devices, networks and various contents," said Park at Tongyang.
Corning said the deal, expected to close in the 2014 first quarter, would add about $350 million in annual profit before special items.
The company reported preliminary third-quarter results that were in line with market estimates - earnings of about 33 cents per share, up from 28 cents a year earlier, and net sales of $2.1 billion, up from $2 billion. Full results will be announced on October 30.
"The impact of the additional share repurchase program should offset the potential dilution of shares embedded in the convertible preferred security," CEO Wendell P. Weeks said in a statement.
Reporting by Chandni Doulatramani and Neha Alawadhi in Bangalore and Miyoung Kim in SEOUL; Editing by Don Sebastian, Ted Kerr and Ian Geoghegan