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boulevarddoubleHoly shit y'all.
The last two days have been bananapants.
Okay, so if you haven't read part 1-3, you absolutely do need to.
All the background you could ever want.
Let's recap very quickly: Lee Soo Man (LSM), founder, former CEO, and father of Noise Music, has been roundly beaten in the game of business by a Private Equity investment firm, Align Partners (AP), who have convinced the current Board of Directors to adopt their 12-point proposal for raising SM Entertainment's (SM) profitability.
Step 1 was dissolving the relationship between SM and LSM's production company Like Planning.
Step 2 saw AP being granted a spot on the new, larger Board of Directors.
And Step 3, which was a step too far apparently, was convincing the current board (including co-CEO Lee Sung Soo, LSM's nephew) further diluting LSM's power as majority shareholder by selling ~9% of SM's shares to Kakao.
The same disclaimers apply to this post. I'm not an expert in finance. I'm not an expert in law. I'm definitely not an expert on Korean law. Once again, I will add my own speculation in bold.
Part 4: The deal with the devil. Hell!
You're Lee Soo Man. You're hanging out in America over the Lunar New Year. You have broken your arm. All of a sudden you find out you're basically being pushed out of the company you built.
Naturally, you fly back to Seoul immediately and call your lawyers.
While in part 3 I did mention the injunction LSM filed against the sale of stock to Kakao, we now have more updates.
I speculatively mentioned I didn't think LSM had a chance of winning based on the statement I saw. However, since then, more details of his argument have emerged.
Basically, the injunction hinges on two points:
First, it is against the bylaws of the SM charter for the board to issue new stock to raise funds without an urgent cashflow need.
Second, the charter also states that if the board does issue new stocks the current investors basically have first dibs, which was not offered to anyone. Instead these stocks were sold directly to Kakao, which is a violation of this rule.
Korean analysts think that he has a good chance of winning this injunction.
(I suspect he called his lawyers, told them to make a statement and then they actually figured out how to fight this thing.)
Now, we're still waiting on the outcome of this injunction, again filed on the 7th. In the meantime, SM (aka the board, aka AP) put out a counter-statement being like "no, this was perfectly legal, blah blah blah."
However, Lee Soo Man wasn't going to stop there.
Shortly after the injunction request, rumors began circulating that LSM approached his biggest rival -- Hybe -- to rekindle the possibility of selling his shares to the entertainment giant.
And then on February 9th, Hybe formally announced it was considering making a tender offer to LSM and some minority shareholders, so that they could become a majority shareholder.
From there, everything moved very quickly.
SM released a bizarre statement about joining together with the artists to fight hostile takeovers. The memes are already very good. Laugh through the pain.
Then around 4pm MST, it was announced that Hybe had officially purchased a 14.8% stake in SM by acquiring shares from LSM at 120,000 won per share, earning LSM approximately $335 million in one fell swoop. The details of the plan include Hybe buying the rest of LSM's shares after a year, as well as LSM selling all his shares in SM subsidiaries.
In the same article, it was also mentioned that Hybe was going after not just LSM's stake, but making the same offer to minority shareholders, to attempt to control a 40% stake in SM.
Basically, Hybe is going after a supermajority that would be akin to a straight up acquisition.
Now, let's take a quick break to talk about the differences in these two deals, because I think it's tripping a lot of people up.
Deal 1: Kakao
Imagine a company's stock like a pie. Before you sell any, you have a whole pie, and unless your company grows in size, you only have a set number of slices to sell. Let's say you have 10 slices. To issue shares to Kakao, becasue they didn't have enough slices, they took those 10 slices and chopped them into 20 slices.
"How can they do that without the approval of the current pie-owners?"
Well, that's what LSM is asking, too. Chopping the slices he owns into more slices automatically makes his slices smaller and less valuable. It makes all of the investors' slices less valuable.
So why would AP, a firm known as a "shareholder activist" allow this to go through when it makes everyone's shares worth less? Well, adding Kakao to their alliance gives them a big voting bloc to take on LSM's ~19% of votes. Speculatively, because I can't know their whole plan, with Kakao on their side they are likely to pass their entire agenda, take a seat on the board, and attempt to improve their own earnings that way.
Deal 2: Hybe
Hybe has set out to purchase existing slices of pie by paying the owners of those slices a premium. At the time of the deal, SM stock was trading around 98,000 won. LSM was paid 120,000 per share.
Unlike the Kakao deal, this doesn't change the total number of slices, and very clearly is making the owners of the slices money if they sell.
So, where are we now? And what happens next?
As of the morning of February 10th, we have no updates on the injunction, and so far, no other notices of minority owners selling to Hybe.
We do have one clarification, which makes this story even more bizarre.
I admit that I never in my life saw LSM reaching out to Hybe first. Which he did. Factually. And knowing he did, I fully assumed that he had done so specifically to be voted back onto the board by them.
However, Hybe issued a statement today stating that not only would LSM not be returning to work with SM in anyway, he was only allowed to produce music outside of Korea for the next three years, and he was not allowed to work with any SM artists. They also reiterated that all of his voting rights have been transferred to Hybe, and that he has sold his subsidiary shares and that Hybe will buy his remaining shares.
So what the fuck is in this for LSM?
Was he actually money motivated all along??? Is he the unicorn of egotistical old men????
I suspect he saw the tide, even with the injunction, turning against him and decided to say the biggest fuck you he could while getting out with as much money as he could. There is also the possibility that he returns to the scene -- three years isn't actually that long.
What comes next?
This is less clear. We will find out whether the injunction goes through or not. If it does (and again, analysts believe it will), there is some speculation that Kakao may make a similar tender offer to minority shareholders.
It's also possible that the South Korean government steps in and halts or otherwise mitigates the sale of LSM's stock to Hybe. Given Hybe's stated intention to own 40% or more of the company, that has triggered very real monopoly concerns, no matter what the company stans want you to think.
Hybe has been gobbling up entertainment companies left and right, and them having a controlling stake in the second-largest KEnt company is the definition of anti-competitive.
I do expect the alliance of AP/SM Board/Kakao to fight back against what is essentially a Hybe takeover. I am anticipating a fresh wave of lawsuits going back and forth from now until the final showdown that will happen at the March shareholder meeting.
And since several people have asked me about this, here is my opinion on the whole matter:
We are in hell. There are only demons here.
There is a lengthy thread that has gone viral saying the larger threat to the KEnt industry is Kakao buying into SM. While that thread makes some good points -- Kakao is a vast, sprawling tech giant that is much larger than most kpop fans realize -- I personally don't believe this is true.
First, at this point in time, Kakao's stock purchase would only be 9%. Even if the Hybe deal gets nixed by regulators, that still puts LSM as the majority shareholder. Yes, there is an alliance that effectively negates his voting rights, but on the surface, Kakao's investment in SM appears to be literally waht it is - a tech giant looking to further diversify their portfolio as a strategic partnership with an entertainment company.
The thread calls their deal an "acquisition". While they are acquiring a stake in SM, it is not at all a takeover.
Not like what Hybe is doing. Hybe has openly stated (which to be fair to the thread's OP, much has come to light after they posted) they are making a play to completely control voting rights and the board, and have an active hand in the management of SM through these vehicles.
However where I really disagree with the thread is the assertion that the acquisition by Hybe is "better" for the artists because Kakao is a shark-like business that will only look at profits.
This assertion completely glosses over the history of Hybe acquisitions where they have absolutely broken up groups either by outright disbandment or refusing to negotiate on contracts. Just ask any Nu'est or GFriend stan.
Hybe is not your friend. Kakao is not your friend. SM is not your friend. The company that employs you is not your friend.
We are in hell and there are only demons here.
That said, I am less concerned about Kakao in large part because they are simply a giant trying to get a little bit bigger. They don't currently seem concerned with managing the direction of SM outside of being the partner for some tech-based projects.
Hybe, however, is attempting to consolidate power in a single industry that would effectively push out any smaller competitors. They will be able to raise prices, bully venues, bully music shows -- even more than they already do.
That is bad for artists. And that is bad for fans.
And whew. That is all the updates as of 9am MST on February 10th. Again, I will continue to update as we learn more.
Part 5: Let the mudslinging begin. Messy!
The last two days have been bananapants.
Okay, so if you haven't read part 1-3, you absolutely do need to.
All the background you could ever want.
Let's recap very quickly: Lee Soo Man (LSM), founder, former CEO, and father of Noise Music, has been roundly beaten in the game of business by a Private Equity investment firm, Align Partners (AP), who have convinced the current Board of Directors to adopt their 12-point proposal for raising SM Entertainment's (SM) profitability.
Step 1 was dissolving the relationship between SM and LSM's production company Like Planning.
Step 2 saw AP being granted a spot on the new, larger Board of Directors.
And Step 3, which was a step too far apparently, was convincing the current board (including co-CEO Lee Sung Soo, LSM's nephew) further diluting LSM's power as majority shareholder by selling ~9% of SM's shares to Kakao.
The same disclaimers apply to this post. I'm not an expert in finance. I'm not an expert in law. I'm definitely not an expert on Korean law. Once again, I will add my own speculation in bold.
Part 4: The deal with the devil. Hell!
You're Lee Soo Man. You're hanging out in America over the Lunar New Year. You have broken your arm. All of a sudden you find out you're basically being pushed out of the company you built.
Naturally, you fly back to Seoul immediately and call your lawyers.
While in part 3 I did mention the injunction LSM filed against the sale of stock to Kakao, we now have more updates.
I speculatively mentioned I didn't think LSM had a chance of winning based on the statement I saw. However, since then, more details of his argument have emerged.
Basically, the injunction hinges on two points:
First, it is against the bylaws of the SM charter for the board to issue new stock to raise funds without an urgent cashflow need.
Second, the charter also states that if the board does issue new stocks the current investors basically have first dibs, which was not offered to anyone. Instead these stocks were sold directly to Kakao, which is a violation of this rule.
Korean analysts think that he has a good chance of winning this injunction.
(I suspect he called his lawyers, told them to make a statement and then they actually figured out how to fight this thing.)
Now, we're still waiting on the outcome of this injunction, again filed on the 7th. In the meantime, SM (aka the board, aka AP) put out a counter-statement being like "no, this was perfectly legal, blah blah blah."
However, Lee Soo Man wasn't going to stop there.
Shortly after the injunction request, rumors began circulating that LSM approached his biggest rival -- Hybe -- to rekindle the possibility of selling his shares to the entertainment giant.
And then on February 9th, Hybe formally announced it was considering making a tender offer to LSM and some minority shareholders, so that they could become a majority shareholder.
From there, everything moved very quickly.
SM released a bizarre statement about joining together with the artists to fight hostile takeovers. The memes are already very good. Laugh through the pain.
Then around 4pm MST, it was announced that Hybe had officially purchased a 14.8% stake in SM by acquiring shares from LSM at 120,000 won per share, earning LSM approximately $335 million in one fell swoop. The details of the plan include Hybe buying the rest of LSM's shares after a year, as well as LSM selling all his shares in SM subsidiaries.
In the same article, it was also mentioned that Hybe was going after not just LSM's stake, but making the same offer to minority shareholders, to attempt to control a 40% stake in SM.
Basically, Hybe is going after a supermajority that would be akin to a straight up acquisition.
Now, let's take a quick break to talk about the differences in these two deals, because I think it's tripping a lot of people up.
Deal 1: Kakao
Imagine a company's stock like a pie. Before you sell any, you have a whole pie, and unless your company grows in size, you only have a set number of slices to sell. Let's say you have 10 slices. To issue shares to Kakao, becasue they didn't have enough slices, they took those 10 slices and chopped them into 20 slices.
"How can they do that without the approval of the current pie-owners?"
Well, that's what LSM is asking, too. Chopping the slices he owns into more slices automatically makes his slices smaller and less valuable. It makes all of the investors' slices less valuable.
So why would AP, a firm known as a "shareholder activist" allow this to go through when it makes everyone's shares worth less? Well, adding Kakao to their alliance gives them a big voting bloc to take on LSM's ~19% of votes. Speculatively, because I can't know their whole plan, with Kakao on their side they are likely to pass their entire agenda, take a seat on the board, and attempt to improve their own earnings that way.
Deal 2: Hybe
Hybe has set out to purchase existing slices of pie by paying the owners of those slices a premium. At the time of the deal, SM stock was trading around 98,000 won. LSM was paid 120,000 per share.
Unlike the Kakao deal, this doesn't change the total number of slices, and very clearly is making the owners of the slices money if they sell.
So, where are we now? And what happens next?
As of the morning of February 10th, we have no updates on the injunction, and so far, no other notices of minority owners selling to Hybe.
We do have one clarification, which makes this story even more bizarre.
I admit that I never in my life saw LSM reaching out to Hybe first. Which he did. Factually. And knowing he did, I fully assumed that he had done so specifically to be voted back onto the board by them.
However, Hybe issued a statement today stating that not only would LSM not be returning to work with SM in anyway, he was only allowed to produce music outside of Korea for the next three years, and he was not allowed to work with any SM artists. They also reiterated that all of his voting rights have been transferred to Hybe, and that he has sold his subsidiary shares and that Hybe will buy his remaining shares.
So what the fuck is in this for LSM?
Was he actually money motivated all along??? Is he the unicorn of egotistical old men????
I suspect he saw the tide, even with the injunction, turning against him and decided to say the biggest fuck you he could while getting out with as much money as he could. There is also the possibility that he returns to the scene -- three years isn't actually that long.
What comes next?
This is less clear. We will find out whether the injunction goes through or not. If it does (and again, analysts believe it will), there is some speculation that Kakao may make a similar tender offer to minority shareholders.
It's also possible that the South Korean government steps in and halts or otherwise mitigates the sale of LSM's stock to Hybe. Given Hybe's stated intention to own 40% or more of the company, that has triggered very real monopoly concerns, no matter what the company stans want you to think.
Hybe has been gobbling up entertainment companies left and right, and them having a controlling stake in the second-largest KEnt company is the definition of anti-competitive.
I do expect the alliance of AP/SM Board/Kakao to fight back against what is essentially a Hybe takeover. I am anticipating a fresh wave of lawsuits going back and forth from now until the final showdown that will happen at the March shareholder meeting.
And since several people have asked me about this, here is my opinion on the whole matter:
We are in hell. There are only demons here.
There is a lengthy thread that has gone viral saying the larger threat to the KEnt industry is Kakao buying into SM. While that thread makes some good points -- Kakao is a vast, sprawling tech giant that is much larger than most kpop fans realize -- I personally don't believe this is true.
First, at this point in time, Kakao's stock purchase would only be 9%. Even if the Hybe deal gets nixed by regulators, that still puts LSM as the majority shareholder. Yes, there is an alliance that effectively negates his voting rights, but on the surface, Kakao's investment in SM appears to be literally waht it is - a tech giant looking to further diversify their portfolio as a strategic partnership with an entertainment company.
The thread calls their deal an "acquisition". While they are acquiring a stake in SM, it is not at all a takeover.
Not like what Hybe is doing. Hybe has openly stated (which to be fair to the thread's OP, much has come to light after they posted) they are making a play to completely control voting rights and the board, and have an active hand in the management of SM through these vehicles.
However where I really disagree with the thread is the assertion that the acquisition by Hybe is "better" for the artists because Kakao is a shark-like business that will only look at profits.
This assertion completely glosses over the history of Hybe acquisitions where they have absolutely broken up groups either by outright disbandment or refusing to negotiate on contracts. Just ask any Nu'est or GFriend stan.
Hybe is not your friend. Kakao is not your friend. SM is not your friend. The company that employs you is not your friend.
We are in hell and there are only demons here.
That said, I am less concerned about Kakao in large part because they are simply a giant trying to get a little bit bigger. They don't currently seem concerned with managing the direction of SM outside of being the partner for some tech-based projects.
Hybe, however, is attempting to consolidate power in a single industry that would effectively push out any smaller competitors. They will be able to raise prices, bully venues, bully music shows -- even more than they already do.
That is bad for artists. And that is bad for fans.
And whew. That is all the updates as of 9am MST on February 10th. Again, I will continue to update as we learn more.
Part 5: Let the mudslinging begin. Messy!
