K-pop giant Hybe buys SM Entertainment founder’s shares, SM CFO calls it a ‘hostile takeover’

We’re not starting a cult but some followers on Instagram would be nice. Thank you.

Drop whatever K-drama you’re watching right now because this saga is unfolding in real time.

Hybe, the company behind popular K-pop group BTS, has acquired a 14.8% stake in SM Entertainment, according to a report by KBS World.

The shares were bought from SM founder and former CEO Lee Soo-man for 422.8 billion won (S$436.5 million).

This is Soo-man, who before the acquisition, held 18.46% of SM’s stake:

This means Hybe has become the largest shareholder of SM, which is home to K-pop groups like NCT, Girls Generation and Aespa.

For people like us, this sounds like your average, boring ol’ stock and trading news. Yawns.

So… where’s the drama?

And then bam, on Feb. 20, SM Entertainment uploaded an influencer tell-all style video titled “The reason why SM is against Hybe’s hostile takeover”.

You’ll get what I mean after seeing this:

The 15-minute-long video was uploaded to SM’s ~official~ YouTube channel and fronted by CFO Cheol Hyuk-jang.

It’s very long, but he basically talked about Soo-man’s decision to sell his stake came as soon as SM 3.0 was announced.

Now, this is going to be a very long article (you’ve been warned), but here’s the lowdown on who’s who and what’s SM 3.0.

The people involved

 

What’s SM 3.0?

It is the company’s new vision, focusing on what it calls the “multi-production centre label” system.

SM 3.0 is said to focus on fans and shareholders.

Implemented in 2023, the new vision aims to produce three new music groups and one virtual solo artist this year, compared to the precious debut cycle that only saw one music group every 3.5 years.

Why did the video title call Hybe’s acquisition of shares a “hostile takeover”?

Because Hybe and SM — stiff competitors in the K-pop world — are among the biggest entertainment agencies in South Korea.

Hybe is the company behind internationally-loved K-pop groups like BTS, NewJeans, and Tomorrow X Together.

Meanwhile, SM has created popular groups like Super Junior, Girls Generation, Red Velvet and NCT.

Hyuk-jang (SM’s CFO) mentioned in the video that the acquisition would be unfair to the K-pop industry, as integrating the two companies would “create a monopoly by taking 66% of the total market revenue”.

How will it affect fans?

He said it would undermine the diversity of the K-pop market and fair competition.

“Ultimately, K-pop fans will be the ones that will be most affected by the monopoly. SM puts reasonable prices to concert tickets to allow broader scope of fans to enjoy cultural performances. Meanwhile, Hybe has taken advantage of its position in the K-pop market to almost double the concert ticket prices, as reported in the news several times recently.

Hybe is raising not only its own concert ticket prices but also those of the labels it has acquired, which illustrates the impact monopoly will have on the industry.”

To put it into the local context, it’s almost like when Grab acquired Uber in Southeast Asia in 2018. A total game-changer.

What Hybe said…

After Hybe announced its intentions to be SM’s largest shareholder, Hybe CEO Park Ji-won said it will ensure the independence of its rival company.

Here’s a Twitter post by Hybe from Feb. 22 confirming the acquisition:

OPEN LETTER TO FANS, ARTISTS, EMPLOYEES, AND SHAREHOLDERS OF SM ENTERTAINMENT pic.twitter.com/CsxqAmopFy

— HYBE OFFICIAL (@HYBEOFFICIALtwt) February 22, 2023

“We’ll ensure SM’s independence… Hybe has already proved the value of its multi-label system,” he apparently said in a briefing session for Hybe employees.

Park also said that Soo-man will “take no more royalties” and assured staff that Soo-man will not participate in management or production.

“The main pillars (fans, artistes and employees) of the K-pop industry will be able to benefit from this acquisition plan,” he added.

A report by Yonhap News Agency (YNA)  mentioned that Hybe has offered to buy SM shares held by minority shareholders, seeking up to 25% of SM.

SM Entertainment said…

But here’s what Hyuk-jang had to say about the entire hullabaloo:

Would SM really be independent?

It is a “difficult promise to keep”, Hyuk-jang countered.

In the video, he stated that Hybe would ultimately acquire about 40% stake through a tender offer currently underway.

Under such governance, it would be difficult to make decisions that prioritise the “value” or worth of all SM shareholders.

Calls out Hybe’s “weak governance”

He also criticised Hybe’s corporate governance, calling it “far from sound or rational”.

Hyuk-Jang said that if Hybe takes over SM, it is “inevitable” that SM will also be subject to such “weak governance”.

One of the issues that could arise as a result of the acquisition includes SM’s artistes being put on a lower priority.

85% of SM staff oppose Hybe’s acquisition

It’s not just the bosses that are affected by the acquisition.

The CFO claimed that SM staff are against the acquisition as well.

Quoting an anonymous employee survey, Hyuk-jang claimed that 85% of SM staff oppose Hybe’s acquisition as it is “an act of ignoring the efforts of the employees who are working day and night”.

Shocked by Soo-man’s decision

He ended the video saying that Soo-man’s decision to sell his share was a “bigger shock”.

SM’s board of directors said that they took up the position for its shareholders, while also protecting the dignity of Soo-man and SM’s legacy.

“The role of our management team is to work for SM employees and artists, as well as for fans and shareholders. This will not change and should not change under and circumstance. As long as our fans and shareholders believe in us, SM will not stop taking a new leap forward.”

Deeper issues

This is just the tip of the iceberg of an ongoing dispute between Soo-man and the senior executives at SM Entertainment.

As it is, SM 3.0 has caused some internal strife in SM.

One of SM’s talents, singer and actor Kim Min-jong, reportedly sent an email to all SM employees criticising SM 3.0, alleging that the main goal is to “end Soo-man’s production”.

A report from YNA quoted Min-jong as saying,

“Contrary to what was announced, Co-CEOs Lee Seong-soo and Tak Young-joon, who said they were there for Soo-man and the SM family, cut off all conversations with Soo-man. They made one-sided announcements and farewells without any discussion with the insiders.”

However, many employees have also voiced their opinion on an anonymous employee community called Blind (similar to Glassdoor reviews).

These employees expressed their support for Soo-man’s resignation with comments like “Do not get drunk on the glory of the past and stay alert” and “SM has become a third-class company earning less than Hybe in terms of market capitalisation and operating profit.”

In a video by Seong-Soo on Feb. 16, the Co-CEO of SM alleged that Soo-man established a Hong Kong-based company in 2019 to evade taxes.

He also said that he will resign as Co-CEO in March 2023 instead of seeking a second term.

(Seong-soo is Soo-man’s nephew, by the way.)

In response, Hybe’s CEO said that it has not been informed about Soo-man’s ownership of the Hong Kong-based company and that it is a “scenario that can never occur” in his company.

Currently, Hybe has several labels under its umbrella, including Bighit Music (BTS), Pledis Entertainment (Seventeen) and Ador (NewJeans).

What has Soo-man said?

In response to his nephew’s video,  JTBC News reported that Soo-man had been holding back on what Seong-soo has said and done.

Soo-man allegedly said that he felt hurt as he has seen Seong-soo grow up.

“I’ve watched my late wife’s nephew (Seong-soo) grow up since he was four. He’s been with me since he entered SM when he was 19, working on fan management. He’s a kind nephew who grew up with a pastor as a father. My heart hurts.”

However, he has yet to address the other allegations.

Do fans really care?

The video gained over 500,000 views overnight.

So are the K-pop fans #TeamHybe or #TeamSM?

Neither, it seems. They’re on team as-long-as-the-idols-and-staff-are-ok, lol.

Top image from Hybe, SM Entertainment, Wikipedia and screenshot from YouTube.