Kakao and HYBE End Chicken Game... SM to Promote "3.0 Strategy" (Comprehensive Report 2)

SM's Second Largest Shareholder Lee Soo-man Strikes Back at Kakao
Controversy Escalates with Stock Tender Offer and Expos?s

"Let's End the Reckless Chicken Game"... Kakao Acquires Management Rights
SM Announces Active Business with 3.0 Strategy Implementation

The month-long acquisition battle between Kakao and HYBE for SM Entertainment (SM) has come to an end. It is reported that both companies reached an agreement after realizing they could not continue an excessive chicken game over acquiring SM. Kakao plans to hold the management rights of SM and collaborate with HYBE, the largest shareholder, to expand the business. SM will accelerate the implementation of its SM 3.0 strategy.

This acquisition battle began when SM's board decided on the 7th of last month to issue third-party new shares and convertible bonds to Kakao. This was Kakao's move to secure about 9.05% of SM's shares and become the second-largest shareholder after former executive producer Lee Soo-man. SM had announced its 'SM 3.0' management strategy on the 3rd of that month, declaring its intention to move away from the single leadership system under Lee.

In response, Lee filed an injunction on the 7th at the Seoul Eastern District Court to prohibit the issuance of new shares and convertible bonds. He also signed a contract with HYBE to sell his 14.8% stake in SM for 428.8 billion KRW.

HYBE then entered the acquisition battle by proposing a public tender offer of 120,000 KRW per share to buy shares held by minority shareholders. However, since SM's stock price exceeded 120,000 KRW at the time, HYBE faced difficulties in purchasing. Except for acquiring 0.98% of shares from Galaxia SM, HYBE only managed to acquire 4 shares, effectively failing in the public tender offer.

During this process, HYBE proposed a new management team and governance improvement plan for SM on the 16th of last month. SM responded with a series of disclosures. SM CEO Lee Sung-soo targeted former producer Lee by addressing offshore tax evasion allegations and the reasons behind the delay of the girl group aespa's comeback. He also criticized HYBE's acquisition attempt as a hostile merger and acquisition (M&A).

The tide seemed to turn in favor of HYBE when the Seoul Eastern District Court approved Lee's injunction on the 3rd of this month. In response, Kakao countered. On the 7th, Kakao announced a public tender offer to purchase 8,333,641 shares, equivalent to 35% of SM's stock, at 150,000 KRW per share.

However, Kakao also struggled with the volatile stock price. After Kakao announced its intention to buy at 150,000 KRW per share, SM's stock price soon exceeded 160,000 KRW. On the 8th, it even reached an all-time high of 161,200 KRW. As the stock price continued to fluctuate around 150,000 KRW, criticism arose both inside and outside the market that the companies were engaging in an excessive chicken game.

[Image source=Yonhap News]

Ultimately, both companies decided to resolve the overheated acquisition battle. They agreed that HYBE would transfer management rights to Kakao. HYBE stated that "considering that proceeding with a counter public tender offer would negatively impact HYBE shareholders' value and fuel market overheating," it made this decision.

Kakao expressed respect for HYBE's decision. It announced plans to proceed with the public tender offer scheduled until the 26th as planned and to concretize business cooperation with HYBE. Bae Jae-hyun, Kakao's Chief Investment Officer (CIO), said, "Based on SM's global intellectual property (IP) and production system, and the IT technology and IP value chain business capabilities of Kakao and Kakao Entertainment, we will create new synergy through the combination of IT and IP."

SM also expressed respect for the agreement. SM stated, "We will accelerate the SM 3.0 strategy promised to shareholders, members, fans, and artists through this agreement." The SM 3.0 strategy aims for production centers and internal and external labels to independently produce content. SM plans to actively continue its business by increasing the number of active artists to more than 21 teams by 2025.

If Kakao holds more than 15% of SM's shares in the future, it must report the business combination to the Korea Fair Trade Commission within 30 days. The Fair Trade Commission will review concerns about abuse of monopoly and competition restrictions and take corrective actions if necessary. HYBE also holds 15.78% of SM's shares and has a reporting obligation. If the shareholding ratio is reduced below 15% within the reporting period or if Kakao's actual control over SM is confirmed, reporting will not be required.

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