HYBE vs. Kakao
The two giants in the South Korean entertainment industry are going all out in the battle to take over SM Entertainment.
The hottest topic in the K-pop industry right now is the battle between two companies, HYBE and Kakao. HYBE is home to BTS, the most successful K-pop group to this date. Kakao is a tech giant that owns everything, with a little exaggeration, in South Korea. Recently, the two companies have been neck to neck with each other in the battle over SM Entertainment, a quintessential K-pop idol factory.
Investors, the public, and K-pop fans have been paying close attention to this corporate drama since early February. There has been a flood of coverage by English media about it, and the most extensive ones are the two megathreads (1,2) on Reddit. Never underestimate the capacity for the indulgence of the K-pop community, although some fans are complaining about fatigue. We can see in the Reddit threads that K-pop fans think K-pop is about loving their artists, not about a global marketing scheme.
The drama will come to an end at any time soon.1 However, at this moment, both companies are constantly countering each other, so we still have time to read this article.
There are many different ways to look at this HYBE vs. Kakao drama. Some are as follows.
It’s a financial saga full of jargon. If you know the meaning of the following terminologies, it will be easy to understand what’s happening: convertible bonds, hostile takeover, antitrust regulations, market manipulation, etc. In fact, this part is pretty well covered by English media, so we will skip the details for now.2
Investors are keeping their eyes on the battle, as it involves hot stocks. Kakao Entertainment3 has not gone public yet, but it’s aiming for a hot debut at the end of this year at the earliest. The stock price of SM Entertainment has been on a rollercoaster ride throughout the course of this corporate battle.
Both companies have dire reasons to acquire SM Entertainment. As a Financial Times article explains it very well, HYBE needs to diversify its artist portfolio and Kakao Entertainment needs to increase its worth before public listing, among other reasons.
The two companies, actually all three companies including SM Entertainment, are entertainment giants in South Korea, but their portfolios are somewhat different. Both companies are claiming that they can bring better synergy with SM Entertainment’s portfolio. We will discuss this point further in the second part of this article.
K-pop fans are concerned that their favorite groups will disband, or fly under the radar if the company falls into wrong hands. Some K-pop fans are also concerned that the signature sound of each label will be weakened, and there will be less diversity in K-pop.
It’s also about a leadership feud between Lee Soo-man, the founder of SM Entertainment, and his nephew Lee Sung-soo. The story is well-elaborated in a Koreaboo article. The employees of SM Entertainment are divided, too. Some take sides with Lee Soo-man (and HYBE), while others take sides with Lee Sung-soo (and Kakao). According to a survey, 85% of the employees disapprove of Lee Soo-man and HYBE.
The nationality of the major shareholders of both companies was an important issue for some people. Kakao, the parent company of Kakao Entertainment, recently disclosed the nationality of its shareholders amid criticism for its ties to “China money.”
This story also has two supporting actors, who are not the major players but had a significant influence on the development of the story. They are Saudi Arabian Crown Prince Mohammed bin Salman Al Saud and an investment firm called Align Partners.
Following Mohammed bin Salman’s visit to Seoul last November, the sovereign wealth funds of Saudi Arabia and Singapore invested $930 million in Kakao Entertainment. Thanks to this investment, Kakao has a lot of cash to play the game.
Align Partners is an investment firm that claims to be an activist fund. It owns 1.1% of SM Entertainment. In 2022, Align Partners set out to improve the governance structure of the company. It succeeded in terminating the production contract between SM Entertainment and Like Planning, a company owned by Lee Soo Man. This was one of the significant incidents that triggered the current ownership battle over SM Entertainment.
In the second part of this article, we will take a close look at the main characters. What they were in the past, what they are now, and what they aim to be in the future. By doing so, we will try to envision the two alternative realities: the future where HYBE takes over SM Entertainment, versus the future where Kakao takes over SM Entertainment.
It will pretty much come to a conclusion by the end of March, as new SM Entertainment board members will be elected at the shareholder meeting on March 31.
Refer to this Billboard article for a starter if you want to dig into it.
Kakao Entertainment is one of many subsidiaries and affiliates of Kakao, a tech conglomerate. It will be explained more in the second part of this article.