Fair Trade Commission Begins Review Preparation for HYBE-SM Merger... Key Issue is 'Market Definition'

Fair Trade Commission studying the entertainment market through reports
Key issue in merger review is 'market definition'

[Asia Economy Reporter Eunju Lee, Sejong = Reporter Seungseop Song] The International Corporate Merger Division of the Korea Fair Trade Commission (KFTC) has begun preparations for the merger review between HYBE and SM Entertainment. While the review depends on HYBE's public tender offer, the officials have started investigating the entertainment market due to the significance of the matter. Once the review officially begins, "market definition" is expected to be the most challenging task.

According to the KFTC on the 21st, the International Corporate Merger Division has been assigned the merger review between HYBE and SM and has launched a comprehensive investigation into the entertainment industry. This follows HYBE's announcement of plans to secure an additional 25% stake through a public tender offer by the 1st of next month. Under the current Fair Trade Act, if a company with assets or sales exceeding 300 billion KRW acquires 15% or more of the shares of a listed company with assets or sales exceeding 30 billion KRW, it must file a post-merger review notification with the KFTC. It is almost certain that HYBE will exceed this threshold through the tender offer.

The KFTC has divided responsibilities such that post-merger notifications (filed within 30 days from the merger date) are handled by the International Corporate Merger Division, while pre-merger notifications are managed by the Corporate Merger Division. For large companies (with total assets or sales exceeding 2 trillion KRW), pre-merger notifications are generally required due to their economic impact, and thus the Corporate Merger Division usually conducts the reviews.

However, in HYBE's case, since the merger attempt is through a "public tender offer," it falls under post-merger notification and is therefore handled by the International Corporate Merger Division. HYBE is conducting the tender offer at a price of 120,000 KRW per share to increase its stake in SM. A KFTC official stated, "This case is not handled by the International Corporate Merger Division simply because it is a global business," adding, "At the planned time, the success of the tender offer was uncertain, so even though it is a large company, it falls under post-merger notification and thus the International Corporate Merger Division's responsibility."

The officials are highly likely to initiate the review and are acquiring preliminary knowledge of the entertainment industry through securities firm reports and other sources. In particular, they anticipate that "market definition" will be a more difficult and complex task than ever once the review begins.

Market definition is the process by which the KFTC first delineates the economically meaningful scope of the market to evaluate the competitive restrictions caused by a merger. The core of merger review is to assess the "market dominance" that may change due to the merger, and the first step is to define the market in which the two companies compete. If the market is defined too narrowly, concerns about exclusion of competitors due to monopoly or abuse of dominance caused by the merger may be overestimated. Conversely, if the market is defined too broadly, the market changes caused by the merger may be underestimated.

The KFTC expects that determining "how far" to define the market in which the two companies compete will not be straightforward if the review proceeds. This is because the service areas in which the two companies operate are very diverse. In addition to the traditional music album and digital music markets, the two companies have expanded into various sectors such as the performance industry, goods sales industry, and fan meeting platform industry. A KFTC official said, "We must first define the scope of competition in each service the two companies have entered and the extent of the services provided, but this process is expected to be very difficult."

The increasingly complex revenue structure of the entertainment industry also complicates the judgment. Even within the idol music market, it is necessary to decide whether to limit the market to star-level idols only, include idols performing indie music, or consider female and male idols as part of the same market. These judgments are subject to interpretation and are not easy. Geographic market definition is also a key consideration. The KFTC must decide whether to limit the market to the domestic market where HYBE and SM operate or to include the global market as well. A KFTC official explained, "While we consider the effects of the merger on overseas markets, the KFTC is Korea's competition authority, so corrective measures are limited to the domestic market."