Kakao's Acquisition of SM 'Into the Fog'... The Scale of Damage Compensation Is Key

Kakao's Music-Related Business Revenue Increases by 50 Billion KRW in One Year
SM Entertainment Acquisition Needed to Maximize Business Synergy
Data Center Fire and Com2uS Investment in SM Shares Complicate Calculations

On the 20th, as Kakao CEO Namgung Hoon resigned due to a failure caused by a data center fire and the company entered an emergency management system, employees are arriving at work in the lobby of Kakao Ajit in Seongnam, Gyeonggi Province. Photo by Kang Jin-hyung, Seongnam aymsdream@

[Asia Economy Reporter Seungjin Lee] Kakao's bid to acquire SM Entertainment (hereafter SM Entertainment) has fallen into uncertainty. Kakao, a leading candidate to acquire SM Entertainment, now faces significant compensation payments due to a data center fire, casting a shadow over its Q4 performance. Meanwhile, Com2uS's acquisition of SM Entertainment shares has raised speculation that the acquisition itself may be off the table.

Music-Related Business Drives Kakao's Growth

On the 8th, Kakao reported that out of its total content division revenue of 871.1 billion KRW in Q3 this year, 'Music' accounted for 29%, approximately 250 billion KRW. This marks an increase of over 50 billion KRW compared to the 197 billion KRW music revenue in Q3 last year. In Q3 last year, music's share of the content division revenue was 20%. The proportion of music in the overall content business is rapidly increasing.

A Kakao representative commented on the Q3 results, saying, "Melon continues to maintain its position as the number one music platform, and in music distribution, we hold the top spot in K-POP. The successful solo concert of IU and the rise of girl group IVE as representatives of the 4th generation idols are reflected in these results."

Kakao Entertainment acquired Loen Entertainment in 2016, bringing the leading music streaming platform Melon under its umbrella. Additionally, Kakao Entertainment has several subsidiaries with various agencies, representing famous artists such as IU, Apink, and IVE. As part of expanding its entertainment business this year, Kakao partnered with the Seoul Metropolitan Government to build 'Seoul Arena,' the country's first dedicated popular music venue.

Last year, Kakao entered the SM Entertainment acquisition race to maximize synergies in music-related businesses. SM Entertainment owns intellectual property (IP) of globally popular artists, which Kakao viewed as a pivotal point for its global expansion. Kakao engaged in behind-the-scenes talks with SM Entertainment but failed to reach the final stage due to a mismatch in price expectations.

SM Acquisition, Once a Possibility, Now Clouded by Fire Incident

Regarding the SM Entertainment acquisition, Kakao announced on the 13th of last month that "we have continuously reviewed various options such as business partnerships and equity investments to strengthen our global content business competitiveness, but no specific decisions have been made yet," while maintaining that the possibility of acquisition remains "open."

However, just two days after this announcement, on the 15th, a fire at the Pangyo data center plunged the SM Entertainment acquisition into uncertainty. Currently, the estimated compensation Kakao must pay users due to the data center fire is at least 40 billion KRW. When including damage reports from free users received up to the 6th, the compensation amount is expected to far exceed 40 billion KRW. Kakao, which experienced a decline in operating profit in Q3, faces a bleak outlook for Q4. Not only will compensation for service outages be reflected, but the advertising and commerce markets are also expected to continue slowing down.

Moreover, Com2uS's move to acquire approximately 70 billion KRW worth of SM Entertainment shares poses another obstacle. On the 1st, Com2uS announced it holds about 990,000 shares of SM Entertainment, roughly 4.2%. Com2uS explained that this is not for exercising voting rights but to expand synergies in new businesses such as the metaverse (extended virtual world).

Com2uS's stake in SM Entertainment has further complicated the acquisition battle. Even if Kakao acquires the entire 18.5% stake held by Chief Producer Lee Soo-man, the emergence of Com2uS as a dark horse means additional share purchases will be necessary to secure stable management control.

CJ ENM, which joined Kakao in last year's SM Entertainment acquisition race, remains cautious, suggesting the SM acquisition will be a long-term battle. An industry insider explained, "Given the current unfavorable financial market conditions and the complicated calculations caused by Com2uS's acquisition of SM Entertainment shares, the SM acquisition is expected to become a prolonged process."

This content was produced with the assistance of AI translation services.