[SM Management Battle] Round 1 Hive Victory... Depends on Kakao Executives' Will

On the 3rd, the court accepted the claims of former SM Entertainment (hereinafter SM) Chief Producer Lee Soo-man in the injunction application to prohibit Kakao from issuing a paid-in capital increase and convertible bonds, which was considered the biggest turning point in the SM acquisition battle. This put HYBE in a favorable position in the SM management rights dispute. Initially, it was widely analyzed that the injunction ruling would favor the SM-Kakao camp since the paid-in capital increase and convertible bond issuance were conducted after legal review. However, the tide turned after HYBE submitted a 100-page document at the last minute.

HYBE Secures Advantageous Position with Over 19% Stake

Although HYBE failed in its public tender offer to acquire SM, combining the 14.8% stake purchased from Lee Soo-man, the remaining 3.65% stake held by Lee Soo-man, and approximately 1% stake acquired from Galaxia SM, a Hyosung affiliate, HYBE’s total stake amounts to 19.45%. If some minority shareholders had accepted the tender offer, HYBE could have secured around 20% of the shares. Having secured a significant stake that cannot be ignored in the management rights dispute, HYBE is expected to strengthen additional share purchases, secure allies, and especially intensify public relations efforts targeting minority shareholders.

The immediate challenge begins with the shareholders' meeting scheduled for the end of this month. HYBE must win the votes of minority shareholders who hold 63.55% of the shares. The HYBE-Lee Soo-man camp needs to actively explain and alleviate concerns about potential conflicts of interest between SM shareholders and HYBE shareholders if HYBE acquires SM. For example, they must dispel worries that HYBE might focus more on HYBE’s artists or content than on SM.

Explanation is also needed regarding SM’s consistent claim of an "M&A without due diligence." SM has criticized HYBE’s share acquisition as a "hostile M&A involving over 1 trillion won without a single due diligence." They have also pointed out that "HYBE’s corporate governance is neither sound nor rational." The criticism questions whether HYBE can present a proper vision for enhancing corporate value after the acquisition, given the rushed M&A process without a detailed due diligence. Furthermore, HYBE must demonstrate to shareholders its determination to completely resolve various issues caused under the "Lee Soo-man one-man producing" system.

HYBE opened a shareholder proposal campaign page called "SM with HYBE" the day before, revealing their vision for a new SM and appealing to minority shareholders for proxy voting rights. The key point of this shareholders' meeting is the election of directors. Currently, SM’s board consists of four members: three inside directors and one outside director. Their terms all expire on the 27th. Since the entire board will be replaced, the number of board members aligned with each camp inserted at this meeting could significantly influence the outcome of the management rights dispute. Kakao-SM has nominated nine candidates in total, including inside and outside directors, while HYBE-Lee Soo-man has nominated six candidates. As of the end of December last year, minority shareholders holding less than 1% stake account for 63.55%. Ultimately, the side that persuades these shareholders is likely to gain the upper hand. Accordingly, a fierce public relations battle between the two sides is expected, with both likely to exploit each other’s weaknesses.

Kakao’s Weakened Momentum: Attack or Retreat? 'Ample Ammunition,' Kakao Management’s Will is Key

HYBE failed in the tender offer, and the court’s injunction against Kakao’s share acquisition means both camps have recorded one loss each. However, based on the shares currently secured, Kakao is at a disadvantage. Its momentum for further action has significantly weakened. Kakao may withdraw from the acquisition battle following the court ruling. On the other hand, with legal uncertainties resolved, it could launch an aggressive share accumulation campaign. This depends on the determination of Kakao’s management.

Kakao Entertainment is in a desperate situation to increase its corporate value. Two years ago, it expanded by acquiring Radish (web novels) and Tapas (webtoons) and prepared for an IPO, but postponed it due to market downturns, causing a decline in corporate value. It must quickly grow to appease existing shareholders. This is why Kakao signed a contract to acquire a 9.05% stake in SM (about 210 billion won) through third-party allotment paid-in capital increase and convertible bond issuance, with a clause allowing the transfer of contractual status, rights, and obligations to Kakao Entertainment.

Kakao Entertainment’s financial strength is solid. In January, it raised 1.2 trillion won from Singapore’s Government Investment Corporation (GIC) and Saudi Arabia’s Public Investment Fund (PIF). The first tranche of 890 billion won was received last month, with the remainder scheduled for July 20. Although the funds were declared to be used equally for operating expenses and acquisitions of other companies, they could all be used for the SM acquisition. This is because the funding purpose includes a clause stating it may change according to the company’s business strategy. Kakao Entertainment is also reportedly discussing raising up to 200 billion won from the private equity fund H&Q Korea.

If Kakao aggressively pursues share accumulation based on its financial power, HYBE will have to engage in a "war of money" to defend its management rights. Going forward, the acquisition battle is expected to be influenced by variables such as the selection of board members at the shareholders' meeting, the identity of other corporations that have purchased large amounts of shares through IBK Investment & Securities Pangyo branch, NH Investment & Securities, and Mirae Asset Securities, and SM’s additional repurchase of treasury shares.