BTS and EXO become one family? Problems that need to be solved before such a scene could happen
K-pop fans are watching the situation closely to see whether HYBE will take over SM.
On February 10th, HYBE announced that they had signed a contract with SM’s founder/ former executive producer Lee Soo Man to acquire 14.8% share for a total of 422.8 billion won and became the largest shareholder of SM Entertainment.
This event shocked the whole K-pop industry. Thanks to BTS’s success, HYBE grew significantly after acquiring and establishing numerous labels, such as Pledis Entertainment, Source Music, KOZ Entertainment and ADOR. Although BTS has begun their military service period, artists from the labels, such as Seventeen, LE SSERAFIM, Zico, and NewJeans are filling the vacancy. SM Entertainment is a large company that has lasted throughout the long history of K-pop with various active artists, such as Super Junior, EXO, NCT, aespa, etc. The combination of these two companies is expected to have an overwhelming influence on the K-pop market.
However, for that to happen, these problems have to be solved. First of all, it is the management dispute between Lee Soo Man and SM’s current CEOs. Align Partners Capital Management previously exposed the existing management system that is highly profitable for Lee Soo Man. SM’s co-CEOs Lee Sung Soo and Tak Young Joon, who are holding the management power, announced the “SM 3.0” strategy, aiming to make evolution by changing from Lee Soo Man’s single production system to a multi-production center/label system. The co-CEOs made Kakao become the second-largest shareholder to push ahead with their plan. However, Lee Soo Man did not agree and filed an injunction.
The result is in the hand of the court. If Lee Soo Man’s injunction is accepted, it would be easier for HYBE’s acquisition of SM shares to proceed. If not, the situation would become very complicated. Kakao may try to offer a higher price than HYBE to attract minor shareholders.
The shareholders’ meeting scheduled for next month is also an important factor. The shares owned by SM’s minor shareholders account for over 60%. In the confrontation between HYBE-Lee Soo Man and Kakao-Lee Sung Soo & Tak Young Joon-Align, the one that wins the votes of minor shareholders will be more advantageous.
Even if the competition with Kakao is won, there is still a mountain called the Fair Trade Commission. According to the FTC, if a company with assets or sales of 300 billion won or more acquires 15% or more of the shares of a listed company with assets or sales of 30 billion won or more, it must report the business combination to the FTC. The amount of shares bought by HYBE is 14.8%, which is not applicable right away. However, if HYBE takes over 15% of shares through a tender offer of minority shareholders’ stocks, it must report the business combination to the Fair Trade Commission. Separately, even if HYBE executives and employees concurrently serve as SM executives, they are subject to business combination reporting. This is because HYBE is a large-scale company with assets or sales exceeding 2 trillion won.
When a business combination report is received, the Fair Trade Commission examines whether competition in the market is not restricted and whether there are concerns about abuse of market dominance. The combined market share of HYBE and SM is also subject to review. However, since the entertainment industry has various fields such as production, distribution, and content industry, the market share may vary depending on how the scope is set. Through this, the Fair Trade Commission may not approve the merger, or it may conditionally allow it if it issues a corrective order and takes complementary measures, such as disposing of some shares.