SM, Hive's Sudden Acquisition: "Opposition to Hostile M&A"

"Opposition to Privatization by Specific Shareholders and Forces"

[Asia Economy Reporter Kim Heeyoon] Upon news of HYBE's acquisition of SM Entertainment (hereafter SM), SM's management expressed opposition.

[Photo by SM Entertainment]

On the 10th, SM released an official statement from its co-CEOs and management (25 senior executives including center heads and above).

In the statement, SM emphasized, "As we are on the verge of transformation and leap forward into a fan- and shareholder-centered company leading global entertainment once again through the SM 3.0 era, we clearly state that all executives, employees, and artists unite to oppose all hostile M&A attempts currently being reported."

Here, 'hostile M&A' refers to Chairman Bang Si-hyuk and HYBE's acquisition of SM. The day before, rumors spread mainly in the securities sector that HYBE, the agency of BTS, would pursue management rights of SM through a public tender offer for shares.

On the 10th, HYBE announced it had decided to acquire SM Entertainment shares worth 422.8104 billion KRW.

SM stated, "The strategic partnership announced on the 7th between SM and Kakao is the first step of SM 3.0 to secure future growth engines for SM's new leap forward. We are confident it will create strong synergy by diversifying the use of SM's IP and strengthening global capabilities."

On the 7th, SM announced it had signed a contract with Kakao Entertainment regarding a strategic partnership and Kakao's subscription to SM's new shares and convertible bonds. As a result, Kakao will be able to additionally secure 1.14 million common shares of SM. After conversion, Kakao's stake in SM will be 9.05%, making it the second-largest shareholder.

In the statement, SM's management explained, "We have sufficiently communicated and reached agreement with Kakao regarding the meaning of the strategic partnership SM envisions. Ultimately, the strategic alliance with Kakao is a management decision to accelerate the execution of the SM 3.0 strategy and has no relation whatsoever to the management dispute claimed by the largest shareholder."

The largest shareholder and founder of SM, Lee Soo-man, opposed the contract with Kakao and initiated legal action. On the 8th, through his legal representative, the law firm Hwawoo, he filed an injunction to prohibit the issuance of new shares and convertible bonds against SM. He claims that the current SM management pushed the contract with Kakao without any prior consultation with him, the largest shareholder, causing a management dispute.

Bang Si-hyuk, Chairman of HYBE [Photo by HYBE]

On the 3rd, after the current management announced the 'SM 3.0' vision revealing future producing plans excluding him, speculation arose that Lee Soo-man had selected HYBE as a negotiation partner to sell his shares.

SM admitted, "It is true that we failed to recognize the problems with the producing contract early on, and internal voices pointing out these issues were minimal." At the same time, "Since last year, shareholders and stakeholders have begun to present specific opinions in earnest. As concerns grew that dividends and shareholder returns were not progressing due to a structure where the largest shareholder alone received a significant portion of operating profit annually (from a minimum of 27% to a maximum of 199% between 2015 and 2021), SM gradually became vividly aware of these problems internally."

They continued, "SM conducted an objective review from the ground up regarding the points of conflict of interest raised by shareholders and made various sincere efforts to prepare for a new future. As a result, former chief producer Lee Soo-man gave early termination notice on September 15, 2022, and by resolution of the board of directors on October 14, 2022, the contract was terminated on December 31, 2022."

The following is the full official statement from SM Entertainment regarding the 'HYBE acquisition rumors.'

Hello, this is SM Entertainment (hereafter “SM”) co-CEOs Lee Sung-soo and Tak Young-joon.

We are issuing this statement on behalf of ourselves and 25 senior executives including center heads and above.

On February 3, SM announced its core future strategy, “SM 3.0,” which involves a shift from single producing by Like Planning to a multi-production center/label system. However, immediately after the announcement of this new vision and future, it has come to light that attempts to sell shares and acquire the company, which disregard SM’s intense efforts and the values pursued with our artists, are being discussed.

About 600 SM employees dream of advancing SM into the global No.1 entertainment company, and based on their efforts, many SM artists have proudly led K-POP. Now, as SM prepares to transform and leap forward into a fan- and shareholder-centered company leading global entertainment once again through the SM 3.0 era, we clearly state that all employees and artists unite to oppose all hostile M&A attempts currently being reported.

The strategic partnership announced on the 7th between SM and Kakao is the first step of SM 3.0 to secure future growth engines for SM’s new leap forward. We are confident it will create strong synergy by diversifying the use of SM’s IP and strengthening global capabilities. We have sufficiently communicated and reached agreement with Kakao regarding the meaning of the strategic partnership SM envisions. Ultimately, the strategic alliance with Kakao is a management decision to accelerate the execution of the SM 3.0 strategy and has no relation whatsoever to the management dispute claimed by the largest shareholder.

Regarding how to build and utilize artists’ IP throughout their lifecycle, SM has maintained a producing contract with former producer Lee Soo-man’s personal company Like Planning since 2004. As SM’s founder and pioneer who created the current K-POP, SM knows better than anyone Lee’s capabilities and achievements. However, precisely because we knew so well, we failed to recognize the problems with the producing contract early on, and internal voices pointing out these issues were minimal.

However, since last year, shareholders and stakeholders have begun to present specific opinions in earnest. As concerns grew that dividends and shareholder returns were not progressing due to a structure where the largest shareholder alone received a significant portion of operating profit annually (from a minimum of 27% to a maximum of 199% between 2015 and 2021), SM gradually became vividly aware of these problems internally. We could no longer ignore the active interest and concerns expressed by shareholders and stakeholders who love and encourage SM and its artists more than anyone else.

Accordingly, SM conducted an objective review from the ground up regarding the points of conflict of interest raised by shareholders and made various sincere efforts to prepare for a new future. As a result, former chief producer Lee Soo-man gave early termination notice on September 15, 2022, and by resolution of the board of directors on October 14, 2022, the contract was terminated on December 31, 2022.

At SM, about 600 employees are working day and night, generating ideas and dedicating themselves to their roles. We understand how fiercely SM artists strive. In 2022, SM released about 30 albums, internally reviewing over 400 demo songs weekly for these releases. From album concepts to promotion, the passion and efforts of all employees reach every corner.

To SM shareholders and stakeholders,

We will begin a new leap forward through the SM 3.0 era. Moving away from the past where all authority and honor were concentrated in one person, experts from various fields and collective intelligence will come together to nurture artists and share the joy and rewards.

SM will take every step toward this new leap together with employees and shareholders. Please continue to watch over and support us. We also ask for your great expectations and interest in the upcoming announcements of SM 3.0 business strategies to enhance fan and shareholder value.

Thank you.