[SM Management Battle] "It Has to Be SM"... Kim Beom-su vs Bang Si-hyuk, A Do-or-Die Showdown

Kakao Declares Public Tender Offer... Global Gamble
Hive Contemplates Countermove Targeting 'Entertainment Empire'
Seoul National University Alumni Face Off... IT and Entertainment Industry Networks Intertwined

SM Entertainment (SM) is at the center of a battle for management control between Kakao founder Kim Beom-su (Head of Future Initiative Center) and HYBE founder Bang Si-hyuk (Chairman). Although they come from different fields?IT and entertainment?they are engaged in an unyielding competition, staking their companies' futures on acquiring SM. This showdown between two founders exemplifies the fierce clash between the IT industry and the entertainment industry, both aiming for global platforms.

‘Beyond Korea’ vs ‘Entertainment Empire’

On the 7th, Kakao announced a public tender offer for SM at 150,000 KRW per share. Kakao currently holds a 4.9% stake and plans to add 35% more through the tender offer. This price is 25% higher than the 120,000 KRW per share offered by HYBE in last month's tender offer. The funds allocated for the tender offer amount to 1.25 trillion KRW, signaling that Kim is making a decisive move to acquire SM.

The reason Kakao and HYBE are fighting fiercely over SM is due to the immense value of SM's intellectual property (IP). As the eldest brother in the domestic entertainment industry, SM has owned various K-pop idol IPs since HOT in 1997. Both Kakao and HYBE dream of leveraging SM's IP to leap onto the global stage. Recently, the revenue generated by K-pop idols is no longer limited to music sales and concert earnings. Based on massive fandoms, value creation methods have diversified into webtoons, web novels, games, and merchandise. For example, HYBE partnered with Naver Webtoon last year to release the webtoon ‘Seven Fates: Chakho,’ featuring the seven BTS members as beast hunters, which recorded 15 million global views within two days of release. SM is also generating substantial revenue, especially in Asia, by showcasing its IP content through an experiential theme park based on the virtual world concept ‘Gwangya.’

Kim’s primary mission is ‘Beyond Korea.’ Amid various platform regulations and neighborhood business controversies, he believes SM must shed its domestic-only label and expand overseas. To this end, he has targeted SM’s successful overseas idol IP as a weapon. The plan is to combine Kakao’s IT technology and platform with SM’s IP. Kakao Entertainment has webtoons, web novels, dramas, and movies but lacks a strong presence in the fandom-heavy K-pop sector. Although Kakao owns artists like IVE and IU through subsidiaries Starship and EDAM Entertainment, it cannot compare to HYBE, which boasts BTS, SEVENTEEN, LE SSERAFIM, TOMORROW X TOGETHER, and NewJeans. SM is the final puzzle piece Kakao needs.

Looking at the revenue structure, SM is an ideal partner. Unlike Kakao, which earns 20% (1.1065 trillion KRW accumulated by Q3 last year) of its total revenue overseas, SM generates 62% (372.7 billion KRW) from overseas sales. Furthermore, SM plans to invest 1 trillion KRW to expand its business by acquiring overseas management companies, aiming for 260 billion KRW in overseas revenue by 2025.

Bangs’s goal is also global. If HYBE acquires SM, it will become a mega entertainment company owning world-renowned K-pop groups such as BTS, EXO, SEVENTEEN, and NCT. As of last year, nine of the top 15 K-pop album sellers are under HYBE’s umbrella. HYBE could become a game changer in the global popular music market beyond K-pop.

HYBE has been aggressively targeting overseas markets, especially North America, based on BTS’s foundation. In 2021, HYBE acquired Ithaca Holdings, a U.S. media company representing global pop stars like Ariana Grande and Justin Bieber, for $950 million (about 1.231 trillion KRW). The acquisition included SB Projects, managing the two pop stars as well as J Balvin and Demi Lovato, and Big Machine Label Group, a record label that discovered Taylor Swift and expanded HYBE’s influence.

Ithaca Holdings founder Scooter Braun managed PSY’s overseas activities during the ‘Gangnam Style’ craze. HYBE’s acquisition of QC Media Holdings in February this year was led by Braun. Braun had maintained business ties with key figures at QC Media Holdings for over 20 years. QC Media Holdings is known as a top label in the hip-hop field, representing prominent artists such as Lil Baby, Lil Yachty, Migos, and City Girls.

SM is also a necessary card for Bang’s challenge of diversifying revenue. Last year, 67% of HYBE’s operating profit came from Big Hit Music, home to BTS. In other words, HYBE is overly dependent on BTS. Acquiring SM would transform HYBE into a company encompassing the entire entertainment industry, not just music. SM has entertainers like Kang Ho-dong and Shin Dong-yup, models such as Han Hye-jin and Jang Yoon-ju, and actors including Yoo Hae-jin and Go Ah-sung. This complements HYBE, which primarily has music labels.

Seoul National University Alumni Kim Beom-su & Bang Jun-hyuk... Key Players Also from S-Line

Kim and Bang are industry giants leading IT giant Kakao and entertainment giant HYBE, respectively, and are senior and junior alumni of Seoul National University (SNU). Many other key figures involved in the acquisition battle are also from SNU. Although they fiercely compete over SM, the possibility of cooperation between the two continues to surface.

Kim is from the SNU Department of Industrial Engineering, class of ’86. Lee Jin-soo, co-CEO of Kakao Entertainment, which is participating in the SM tender offer alongside Kakao, is from SNU’s Business Administration class of ’92. Lee met Bang at NHN (now Naver) in 2004 and later served as vice president at iWiLab, Kakao’s predecessor. He founded Podotree, the predecessor of Kakao Page, a webtoon and web novel platform, leading Kakao’s content business. Lee Chang-hwan, CEO of Align Partners, who sided with Kakao and SM’s current management, is a junior from SNU’s Business Administration class of ’05.

Several SNU alumni are also in HYBE’s camp. Bang is from SNU’s Department of Aesthetics, class of ’91, and Lee Soo-man, former SM executive producer who partnered with him, is from SNU’s Department of Agricultural Machinery, class of ’71. Despite a 20-year age gap, they are SNU alumni and have long worked together in the same industry. Lee Hae-jin, Naver’s Global Investment Officer (GIO) and an ally of HYBE, is from SNU’s Computer Science class of ’86.

Although not from SNU, other key players exist. On Kim’s side, Bae Jae-hyun, Kakao’s Chief Investment Officer (CIO) for the Kakao community, is a key figure. Bae, formerly of CJ Group’s Future Strategy Office, has led major mergers and acquisitions at Kakao, from acquiring Loen Entertainment, which operates the music platform Melon, to securing 1.2 trillion KRW in investment for Kakao Entertainment. Bae is currently leading the SM acquisition efforts and is listed as a candidate for Kakao’s internal director ahead of the shareholder meeting at the end of March, positioning him as a future leader.

On Bang’s side, HYBE CEO Park Ji-won is actively working. He is leading not only the SM acquisition but also HYBE’s transformation into a platform company. Bang recruited Park, who previously served as CEO of Nexon Korea, to HYBE in 2020, considering him essential to realizing Bang’s vision of evolving into a comprehensive digital platform company beyond music.

120,000 → 150,000 → ? ... The Direction of the ‘Chicken Game’

The variable is SM’s stock price. After Kakao’s tender offer announcement, SM’s stock price surpassed Kakao’s offered price of 150,000 KRW per share. As of 9:10 a.m. on the 8th, it recorded 153,500 KRW. Following a 13% surge the previous day, it started strong again. The tender offer ends on the 26th of this month, and if the price remains above 150,000 KRW, Kakao’s tender offer could fail.

In the securities industry, there is growing expectation that HYBE might raise its tender offer price in response. If Kakao’s tender offer succeeds, HYBE could find itself owning 15.78% of shares but unable to participate in management. HYBE has not yet issued an official statement, but the market estimates it has the capacity to buy up to 160,000 KRW per share. Considering HYBE’s cash assets as of late September last year, Q4 operating cash flow, and Q1 new borrowings, its financial mobilization capacity is estimated at about 1.9 trillion KRW. After deducting approximately 300 billion KRW for acquiring a U.S. hip-hop label, HYBE could mobilize about 1.6 trillion KRW without external financing.

HYBE has spent about 450 billion KRW to secure SM shares. The remaining funds are estimated at about 1.15 trillion KRW. Kim Hyun-yong, a researcher at Hyundai Motor Securities, explained, “HYBE needs to secure an additional 5.8 million shares to reach about 40% ownership. Multiplying 5.8 million shares by 180,000 KRW results in about 1.044 trillion KRW, which HYBE can afford.” He added, “Tender offer prices in the 150,000 to 160,000 KRW range are not yet in the ‘winner’s curse’ territory. At 150,000 KRW, the price-to-earnings ratio (PER) is about 40 times, but if it rises to 180,000 or 200,000 KRW, the PER exceeds 50 times, which becomes risky.”

PER is an indicator calculated by dividing the current stock price by earnings per share. It estimates the profit a company earns per share. Generally, a PER below 10 indicates undervaluation, while above 100 suggests overvaluation. Excessive bleeding competition could lead to a ‘winner’s curse,’ where the acquirer suffers from cost burdens despite winning. Both Kakao and HYBE face the burden of endlessly engaging in a costly competition, each mobilizing over 1 trillion KRW. Therefore, there is talk that HYBE and Kakao might dramatically join forces. Although unlikely, HYBE might respond to Kakao’s tender offer or remain as the second-largest shareholder and cooperate with Kakao.

While the tender offer results must be closely watched, the outcome of SM’s regular shareholders’ meeting scheduled for the end of this month is also crucial. Even if Kakao acquires a large stake through this tender offer, it will be after the shareholder registry closure, so Kakao will have little voting rights. This contrasts with former executive producer Lee Soo-man’s original 18.4% stake, which carries definite voting rights under HYBE.

However, SM’s small shareholders still account for over 60%, making it difficult to predict their choices at the shareholders’ meeting. Key ‘big players’ as of the shareholder registry closure at the end of last year include the National Pension Service (8.96%), Com2uS (4.2%), and KB Asset Management (3.83%), and which side they support will be a point of interest.

For these reasons, both HYBE and Kakao/SM’s current management are expected to intensify their public relations efforts to control the board during the remaining period. HYBE opened the shareholder proposal website ‘SM with HYBE’ early on the 2nd, presenting a rosy vision by citing examples of Kia Motors and luxury brand Bulgari, which have become global companies. SM’s current management also launched the ‘SAVE SM 3.0’ website, featuring the company’s signature pink color, appealing to shareholders’ choices. Another variable is that HYBE has seven director candidates awaiting selection at the shareholders’ meeting, while SM’s current management has 11 candidates.