K-Pop: HYBE and Kakao End Hostilities in Takeover Battle for SM Entertainment

Korean tech giant Kakao has gained the upper hand in the battle for control of K-pop agency SM Entertainment, after HYBE Corp., the firm behind music idols BTS, said March 12 that it had called off its takeover bid.

SM is the second-largest Korean music talent firm and is behind music acts including Super M, Aespa, BoA and Red Velvet, Girls’ Generation, H.O.T., EXO, Super Junior, SHINee and NCT Dream.

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HYBE said March 12 that it will “discontinue the acquisition process […] after observing that the market has been showing signs of overheating due to competition with both Kakao and Kakao Entertainment,” something that it said could “damage shareholder value.”

Kakao and HYBE had been locked in an increasingly bitter and high stakes battle for control of SM since the beginning of February when HYBE bought a nearly 15% stake in SM from K-pop pioneer Lee Soo-man. Lee is estranged from the company he founded.

SM hit back immediately with a plan to issue shares and convertible bonds that would have made Kakao and its subsidiary Kakao Entertainment SM’s second-largest shareholder, with a 9% interest.

That avenue was blocked when Lee sought and obtained a court injunction preventing the issue.

But, earlier this week, deep-pocketed Kakao returned fire with an offer of KRW150,000 per share to existing shareholders, worth close to $1 billion for a 35% stake in SM. That easily trumped HYBE’s open market offer of KRW120,000 to buy a further 25% of SM’s shares and drove SM’s share price to a new high of KRW147,800 at the close of trading on Friday.

HYBE said Sunday that it had “discussed the matters with Kakao and reached an agreement to suspend the process of acquiring SM’s management rights. Concurrently, the two companies agreed to cooperate on matters related to their platforms.”

In its own statement, Kakao said that it will continue to buy SM shares through March 26 as planned under its tender offer.

Korean business media additionally report that HYBE will no longer put forward candidates for SM’s board of directors at a shareholder meeting scheduled for March 30.

The moves would appear to give Kakao management control at SM, leaving HYBE with an unspecified deal to co-operate with a Kakao-controlled SM in “platforms” or online business. HYBE controls Weverse, the powerful fan platform that is used by BTS and other acts.

Neither company’s statements addressed whether HYBE would retain or sell the 14.8% stake in SM that had been obtained from Lee. Nor whether it will follow through, as previously announced, with purchase of Lee’s remaining 3.5% holding.

SM’s current management had vigorously opposed what it saw as a hostile takeover by its biggest rival. It had already outlined its own plans for restructuring, called SM 3.0, centered on establishing multiple production centers, new labels and expanded use of the IP rights of its artists.

SM issued its own statement Sunday welcoming the deal between HYBE and Kakao. “We will push for the SM 3.0 strategies with speed and fulfill our future vision to become a global entertainment company centered on fans and shareholders,” it said.

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