[The Editors' Verdict]Kakao, Falling into Its Own Trap?

A Battle of Pride Turns Into a "War of Money"
The Winner's Curse May Be Cause for Concern

The idiom "caught in one's own trap" is similar in meaning to the Korean proverb "jasungjabak" (自繩自縛), which describes a situation where someone falls into a trap or structure of their own making. This expression is said to originate from the Chinese character word "jibak" (自縛), which appears in the biography of Liu Xie in the "Book of Han" (漢書), a historical record of the Western Han Dynasty authored by Ban Gu during the Later Han period. In the story, a nobleman named Wonseop's slave gets into a scuffle with a merchant at the market and ends up committing murder. During a discussion about the incident with the local governor, Yun Gong of Mureung, the phrase "make him strip and bind himself" (使肉袒自縛) is used.

The word "jasungjabak" came to mind as I watched the management rights war over SM Entertainment (SM) unfold between HYBE and Kakao. The reason is Kakao. After effectively blocking and frustrating HYBE's public tender offer for SM shares, Kakao launched its own tender offer at a higher price. However, with SM's stock price soaring, Kakao may now be feeling a sense of regret.

On the final day of HYBE's tender offer (February 28), Kakao made a massive purchase of SM shares. According to public disclosures, Kakao bought 666,941 shares at 121,325 won each, and Kakao Entertainment purchased 387,400 shares at 126,200 won each on the open market. On that day, SM's share price dipped below HYBE's tender offer price of 120,000 won during trading, but thanks to Kakao's buying, it closed at 127,600 won. The result of HYBE's tender offer was disastrous: only four individual shareholders participated.

Even after HYBE's tender offer ended, Kakao continued to buy SM shares on the open market?68,505 shares at 128,750 won on March 2, and 44,554 shares at 126,746 won on March 3. This seemed almost as if they wanted to prove that their purchases on February 28 were not intended to drive up the price and disrupt HYBE's tender offer.

A dramatic turn of events soon followed. On the night of March 6, Kakao's board of directors decided to launch a new tender offer to acquire up to a 35% stake in SM at 150,000 won per share, and announced this decision the next morning. As a result, SM's share price, which had closed at 130,100 won on March 6, continued to surge and finished at 158,500 won on March 8?far surpassing Kakao's tender offer price.

Rumors are now rampant in the market that HYBE may launch another tender offer at 180,000 won per share. While HYBE has remained silent, the rising share price is believed to be driven by these expectations. Kakao's tender offer deadline is March 26, so there is still plenty of time. However, even just the rumors have sent SM's share price soaring, putting Kakao's tender offer at risk?a situation reminiscent of HYBE's failed attempt.

With both sides playing their tender offer cards, the battle to acquire SM has become a true "war of money," with pride on the line. Naturally, the financial burden on both HYBE and Kakao has increased significantly.

In this context, it is important to consider the intrinsic value of SM. The market is citing price-to-earnings ratios and other metrics as justification for the soaring share price. However, even if there is potential for synergy with either HYBE or Kakao, it is questionable whether SM's current share price is justified.

Moreover, there are rumors that SM has already become internally divided during this acquisition battle, and that the production of a certain artist's album has been delayed. There is also uncertainty over whether the company is properly managing artists whose contracts are nearing expiration. All of these factors undermine SM's intrinsic value. In the end, the current share price of SM, fueled by dreams of a distant future, may turn out to be a Pyrrhic victory?a winner's curse.