![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
boulevarddoubleWell, we're in good news, bad news land right now. In bad news, there has been lots of back and forth and most of it is confusing for the average kpop fan. In good news, it basically doesn't mean anything.
I'm making this update right now not because there have been major developments, but because if I don't I will absolutely forget something and then people will be like "what does THIS mean" and I'll be like "that was two days ago, keep up" but then I won't have helped them keep up and it'll be a whole mess on top of this mess.
Big shouts to TMIKpop on twitter.
Usual disclaimer: Not a finance professional. Not a lawyer. Not Korean. Much of this content I read using google translate. Personal speculation is in bold.
Parts 1-3 (the backstory)
Part 4 (the Hybe acquisition)
Part 5 (the mudslinging)
Part 6: The court and public opinion. All rise!
When we left of on February 17th, the finger pointing had begun in earnest, with soon-to-be former SM Entertainment (SM) CEO Lee Sung Soo/Chris Lee coming out of left field with serious accusations of tax evasion against his uncle Lee Soo Man (LSM). He also accused Hybe of not doing their due diligence in the midst of this acquisition.
Hybe responded to all these accusations by reiterating that LSM would no longer be involved with SM, and that any wrongdoing by LSM occurred under the governance of the current SM Board so like, what do you want from them.
We all went to bed thinking things would settle down a bit until the Kakao injunction hearing on the 22nd.
Not at all.
Sunday night (Monday morning KST) the official SM Entertainment YouTube released a 15 minute video featuring CFO Jang Cheol Hyuk entitled "The reason why SM is against HYBE's hostile takeover". The contents of the video are much of what we've already heard - the backstory on the sale, the claims of tax evasion, and another mention of the employees being against the Hybe acquisition.
They did make some good points about the combined power of SM+Hybe, very clearly showing that it would be a market monopoly.
I genuinely don't know how anyone can argue otherwise. Even with SM as an "independent" company, Hybe would have control over 70% of album sales. This isn't speculation, this is fact. This is a fact that can be verified outside of SM's kwangya pink powerpoint.
That is a monopoly.
However there is one point they made that I have been hesitant to bring up, in large part because I'm not Korean, I'm not a lawyer, and I'm not a Korean lawyer. But SM have many, so here goes. SM asserts that Hybe have intentionally evaded Korean law with their separate deals to LSM and the minority shareholder tender offer.
Any purchase of 15%+ of a company triggers an automatic review by Korea's Federal Trade Commission. By purchasing just 14.8% of LSM's ~19% now and buying the rest in a year, as well as making separate offers to minority shareholders, they are coming under that "15% single purchase" law, even though they have outright stated the intent is to acquire ~40% of the company between the two purchases.
SM is alleging this should have triggered a preliminary review because of the threat of monopoly. They are also warning shareholders that if there is a review, it could have a negative impact on the SM stock price. Which is important, because as of close on Wednesday the 22nd, they were trending at only 121,000 won - just 1,000 over the Hybe tender offer.
So what was the point of this video?
I believe this was the "sensible" counterattack to pair with Chris Lee's rather unhinged one. At this point in time, there is not much SM can do except attempt to persuade minority shareholders not to sell, and to attempt to spark outrage amongst fans and the general public.
A few other things followed suit, rather quickly. The first, later that Monday, was the SM Q4 earnings call. SM reported lower operating profits than they had the year before, in part because they sold off some assets in 2021 that accounted for a one-time inflation.
It's important to remember that Q4 of 2022 was the last time LSM would get paid out on the Like Planning contract. Everything going forward should be devoid of LSM hijinks, regardless of which evil alliance is the victor here.
The market responded coolly to their earnings, even though they were solid. In part, this is because they wanted to see more details around the SM 3.0 strategy.
On February 20th, SM released another official video, titled "SM 3.0: IP Monetization Strategy". Once again, Jang Cheol Hyuk is walking the shareholders through an official presentation on their forward-looking plans. These plans are clearly intended to be executed in a Hybe-free environment.
The video states they plan on achieving a 35% operating profit (up from 19% in 2022) primarily because they have cut out Like Planning and other LSM-owned subsidiaries from the process, and by monetizing "derivative IP", i.e. not your typical musical artists, but things like character IP, licensing deals (such as the NCT Sanrio) and expanding into things like webtoons and other creative content with that character IP.
They also outline big plans to debut 2 new groups a year under the multi-label system, acknowledging that the 1-man show of LSM probably served as a road block to releasing new music and debuting new artists. It's revealed that Dream Maker, LSM's concert subsidiary, placed a cap on how many concerts it would prepare in a year. By moving away from Dream Maker, SM believes they can hold over 400 concerts and fan meetings by 2025.
One thing we did learn is that the SMCU and Kwangya are owned by SM and not by LSM and a large part of the derivative IP strategy.
Unfortunately.
One interesting thing about this video is that Jang mentions they are accelerating consolidation of all their "fan" apps (Beyond Live, Kwangya Club, etc.) into one single SM-owned fan platform.
Personally of all the assertions, I think this is probably the savviest business move, though similar to TV streaming, we're seeing all the companies move to this so that fans are paying over and over for the same thing just to follow their favorite artists. At some point this structure will break (like we are already seeing with Netflix).
And just like modern TV streaming, the key value of this fan platform is not any monthly subscription, but fan data monetization. They say that it will be used specifically to create new and more relevant IP, however, there's a high likelihood that the data itself is valuable enough to sell (or share as part of their partnership with Kakao).
In my opinion, I actually think that 3.0 as a strategy is solid. However, even independently of this Hybe takeover mess, it would be a feat to pull off. Every major organization that goes through a restructuring and overhaul has to do massive amounts of change management and inevitably finds issues that weren't accounted for in the plan. So, even though I think this is a good idea, I am taking this with a massive grain of salt.
SM wasn't finished releasing videos, though. On the 22nd, they released another 9 minute video detailing the intent behind the partnership with Kakao.
This video simply outlines how they will be using Kakao's platforms to distribute SM IP Content, and in turn, use Kakao's expertise to create the Fan Platform detailed in the SM 3.0 video. They make some allusions to potential efficiencies in distribution and leveraging Kakao Entertainment's knowhow for running the new multi-label system under SM 3.0.
Nothing you wouldn't expect when they announced a "strategic technical partnership".
So let's talk about Kakao.
Of the three evil corporations in this farce, Kakao is a candidate for most evil. Their very real crimes are numerous and detailed. They have already faced allegations of monopolizing other industries -- because they have attempted to monopolize other industries.
Kakao is also, by the numbers, the biggest player here. Overall, Kakao's market cap is valued at about $21 Billion USD, compared to Hybe's $6B and SM's $3B. Kakao already has an entertainment subsidiary - Kakao Entertainment - that owns several labels (Starship, IST, EDAM, Antenna, and High Up). Kakao definitely has a strangehold on kpop distribution.
To be concerned about Kakao making another major play in the KPop industry is valid.
It is even worth being concerned that Kakao is attempting to go after actual ownership of SM.
While speculation had already begun that Kakao would make a tender offer to minority shareholders in the same vein as Hybe, that talk has picked up recently. They have also secured additional funding (most of it from foreign investors) that is believed to be specifically set aside to further entrench themselves in the KPop industry.
However, the facts are this:
1) The shares sold to Kakao by the SM board would put them as the second largest shareholder (either to LSM as it was when they were sold, or to Hybe now).
2) The SM board has recommended three Kakao employees to sit on the board of directors. Hybe has submitted recommendations of an entire board that is friendly to Hybe (minus the CEO/Chairman positions, which they did not make a recommendation for).
(Note: Initially this point said "a single Kakao employee" and I was mistaken. They have recommended three, with the remainder being current SM employees as well as people friendly to the Kakao/SM alliance such as the CEO of Align Partners).
3) As outlined by the SM Board, the current strategy is still very lucrative for Kakao, even without full management and control of SM IP -- which they would not own under this deal. People keep saying they do, but they don't. Not unless they can beat out Hybe's share.
4) The fate of Kakao's 9% share purchase is still undetermined.
That last point is the most important. The initial hearing for the temporary injunction was held today, with no ruling as of yet. As I mentioned in part 4, LSM's lawyers are arguing that the board was in violation of the SM charter in issuing the stock to Kakao. Meanwhile, SM is arguing that the partnership with Kakao is necessary to remove LSM and his "bad management" from the company.
The judge mentioned they will accept additional filings up until February 28th. At some point before then, we will likely find out if the temporary injunction is upheld. The sale of the stock becomes official on March 6th if it is not.
These two dates are key in attempting to understand Kakao's strategy here.
First, February 28th is the day that Hybe's tender offer closes. That means that minority shareholders have to decide whether or not to sell to Hybe before they know whether or not the legal issue with Kakao is resolved. Some may bet on Hybe, some may be persuaded by the SM/Kakao alliance.
Second, until the injunction is resolved, it's unlikely that Kakao makes any sort of tender offer, even though they have the funds to do so.
If Kakao loses this injunction and their stock purchase is nullified, I would guess that they back out of the deal wholesale and Hybe wins outright. They have enough capital that they could make a similar play at JYP or YG and get their foot into the Big 3/4 that way.
If Kakao wins the injunction, they will then be able to complete the purchase of 4.5% of the stock, with the remainder being able to be converted in 2024. This means that without a massively successful tender offer, Kakao is well behind Hybe in actual influence in voting rights.
Meanwhile, Hybe has put out their own statement once again stating they respect SM and they will ensure governance and independence and blah blah blah.
As someone who has watched multiple M&As happen it was very boilerplate and should be taken with the largest grain of salt ever. I did think it was interesting that they called out SM's 'success' in China when SM's presentations steered clear of mentioning China at all.
So, what is the best-case scenario if you're a fan of SM artists?
In short: there isn't one.
The best case scenario is that LSM isn't a dick and Kakao isn't needed and no one is talking about NFTs.
But that time has passed.
It seems at this point there's almost no way that SM isn't swallowed, most likely by Hybe, but if not them, then by a Kakao that will position itself as "well you said you didn't want Hybe to control the board."
The funniest case scenario is that Kakao gets to be the secondary shareholder but Hybe doesn't get the shareholder interest to hit their 40% stake and the two can be played against each other until something else in the market shifts. This is what I will be rooting for.
And that's all the updates through Wednesday February 22, at 4pm MST.
UPDATE: Part 7: The SM Stock Multiverse. Madness!
I'm making this update right now not because there have been major developments, but because if I don't I will absolutely forget something and then people will be like "what does THIS mean" and I'll be like "that was two days ago, keep up" but then I won't have helped them keep up and it'll be a whole mess on top of this mess.
Big shouts to TMIKpop on twitter.
Usual disclaimer: Not a finance professional. Not a lawyer. Not Korean. Much of this content I read using google translate. Personal speculation is in bold.
Parts 1-3 (the backstory)
Part 4 (the Hybe acquisition)
Part 5 (the mudslinging)
Part 6: The court and public opinion. All rise!
When we left of on February 17th, the finger pointing had begun in earnest, with soon-to-be former SM Entertainment (SM) CEO Lee Sung Soo/Chris Lee coming out of left field with serious accusations of tax evasion against his uncle Lee Soo Man (LSM). He also accused Hybe of not doing their due diligence in the midst of this acquisition.
Hybe responded to all these accusations by reiterating that LSM would no longer be involved with SM, and that any wrongdoing by LSM occurred under the governance of the current SM Board so like, what do you want from them.
We all went to bed thinking things would settle down a bit until the Kakao injunction hearing on the 22nd.
Not at all.
Sunday night (Monday morning KST) the official SM Entertainment YouTube released a 15 minute video featuring CFO Jang Cheol Hyuk entitled "The reason why SM is against HYBE's hostile takeover". The contents of the video are much of what we've already heard - the backstory on the sale, the claims of tax evasion, and another mention of the employees being against the Hybe acquisition.
They did make some good points about the combined power of SM+Hybe, very clearly showing that it would be a market monopoly.
I genuinely don't know how anyone can argue otherwise. Even with SM as an "independent" company, Hybe would have control over 70% of album sales. This isn't speculation, this is fact. This is a fact that can be verified outside of SM's kwangya pink powerpoint.
That is a monopoly.
However there is one point they made that I have been hesitant to bring up, in large part because I'm not Korean, I'm not a lawyer, and I'm not a Korean lawyer. But SM have many, so here goes. SM asserts that Hybe have intentionally evaded Korean law with their separate deals to LSM and the minority shareholder tender offer.
Any purchase of 15%+ of a company triggers an automatic review by Korea's Federal Trade Commission. By purchasing just 14.8% of LSM's ~19% now and buying the rest in a year, as well as making separate offers to minority shareholders, they are coming under that "15% single purchase" law, even though they have outright stated the intent is to acquire ~40% of the company between the two purchases.
SM is alleging this should have triggered a preliminary review because of the threat of monopoly. They are also warning shareholders that if there is a review, it could have a negative impact on the SM stock price. Which is important, because as of close on Wednesday the 22nd, they were trending at only 121,000 won - just 1,000 over the Hybe tender offer.
So what was the point of this video?
I believe this was the "sensible" counterattack to pair with Chris Lee's rather unhinged one. At this point in time, there is not much SM can do except attempt to persuade minority shareholders not to sell, and to attempt to spark outrage amongst fans and the general public.
A few other things followed suit, rather quickly. The first, later that Monday, was the SM Q4 earnings call. SM reported lower operating profits than they had the year before, in part because they sold off some assets in 2021 that accounted for a one-time inflation.
It's important to remember that Q4 of 2022 was the last time LSM would get paid out on the Like Planning contract. Everything going forward should be devoid of LSM hijinks, regardless of which evil alliance is the victor here.
The market responded coolly to their earnings, even though they were solid. In part, this is because they wanted to see more details around the SM 3.0 strategy.
On February 20th, SM released another official video, titled "SM 3.0: IP Monetization Strategy". Once again, Jang Cheol Hyuk is walking the shareholders through an official presentation on their forward-looking plans. These plans are clearly intended to be executed in a Hybe-free environment.
The video states they plan on achieving a 35% operating profit (up from 19% in 2022) primarily because they have cut out Like Planning and other LSM-owned subsidiaries from the process, and by monetizing "derivative IP", i.e. not your typical musical artists, but things like character IP, licensing deals (such as the NCT Sanrio) and expanding into things like webtoons and other creative content with that character IP.
They also outline big plans to debut 2 new groups a year under the multi-label system, acknowledging that the 1-man show of LSM probably served as a road block to releasing new music and debuting new artists. It's revealed that Dream Maker, LSM's concert subsidiary, placed a cap on how many concerts it would prepare in a year. By moving away from Dream Maker, SM believes they can hold over 400 concerts and fan meetings by 2025.
One thing we did learn is that the SMCU and Kwangya are owned by SM and not by LSM and a large part of the derivative IP strategy.
Unfortunately.
One interesting thing about this video is that Jang mentions they are accelerating consolidation of all their "fan" apps (Beyond Live, Kwangya Club, etc.) into one single SM-owned fan platform.
Personally of all the assertions, I think this is probably the savviest business move, though similar to TV streaming, we're seeing all the companies move to this so that fans are paying over and over for the same thing just to follow their favorite artists. At some point this structure will break (like we are already seeing with Netflix).
And just like modern TV streaming, the key value of this fan platform is not any monthly subscription, but fan data monetization. They say that it will be used specifically to create new and more relevant IP, however, there's a high likelihood that the data itself is valuable enough to sell (or share as part of their partnership with Kakao).
In my opinion, I actually think that 3.0 as a strategy is solid. However, even independently of this Hybe takeover mess, it would be a feat to pull off. Every major organization that goes through a restructuring and overhaul has to do massive amounts of change management and inevitably finds issues that weren't accounted for in the plan. So, even though I think this is a good idea, I am taking this with a massive grain of salt.
SM wasn't finished releasing videos, though. On the 22nd, they released another 9 minute video detailing the intent behind the partnership with Kakao.
This video simply outlines how they will be using Kakao's platforms to distribute SM IP Content, and in turn, use Kakao's expertise to create the Fan Platform detailed in the SM 3.0 video. They make some allusions to potential efficiencies in distribution and leveraging Kakao Entertainment's knowhow for running the new multi-label system under SM 3.0.
Nothing you wouldn't expect when they announced a "strategic technical partnership".
So let's talk about Kakao.
Of the three evil corporations in this farce, Kakao is a candidate for most evil. Their very real crimes are numerous and detailed. They have already faced allegations of monopolizing other industries -- because they have attempted to monopolize other industries.
Kakao is also, by the numbers, the biggest player here. Overall, Kakao's market cap is valued at about $21 Billion USD, compared to Hybe's $6B and SM's $3B. Kakao already has an entertainment subsidiary - Kakao Entertainment - that owns several labels (Starship, IST, EDAM, Antenna, and High Up). Kakao definitely has a strangehold on kpop distribution.
To be concerned about Kakao making another major play in the KPop industry is valid.
It is even worth being concerned that Kakao is attempting to go after actual ownership of SM.
While speculation had already begun that Kakao would make a tender offer to minority shareholders in the same vein as Hybe, that talk has picked up recently. They have also secured additional funding (most of it from foreign investors) that is believed to be specifically set aside to further entrench themselves in the KPop industry.
However, the facts are this:
1) The shares sold to Kakao by the SM board would put them as the second largest shareholder (either to LSM as it was when they were sold, or to Hybe now).
2) The SM board has recommended three Kakao employees to sit on the board of directors. Hybe has submitted recommendations of an entire board that is friendly to Hybe (minus the CEO/Chairman positions, which they did not make a recommendation for).
(Note: Initially this point said "a single Kakao employee" and I was mistaken. They have recommended three, with the remainder being current SM employees as well as people friendly to the Kakao/SM alliance such as the CEO of Align Partners).
3) As outlined by the SM Board, the current strategy is still very lucrative for Kakao, even without full management and control of SM IP -- which they would not own under this deal. People keep saying they do, but they don't. Not unless they can beat out Hybe's share.
4) The fate of Kakao's 9% share purchase is still undetermined.
That last point is the most important. The initial hearing for the temporary injunction was held today, with no ruling as of yet. As I mentioned in part 4, LSM's lawyers are arguing that the board was in violation of the SM charter in issuing the stock to Kakao. Meanwhile, SM is arguing that the partnership with Kakao is necessary to remove LSM and his "bad management" from the company.
The judge mentioned they will accept additional filings up until February 28th. At some point before then, we will likely find out if the temporary injunction is upheld. The sale of the stock becomes official on March 6th if it is not.
These two dates are key in attempting to understand Kakao's strategy here.
First, February 28th is the day that Hybe's tender offer closes. That means that minority shareholders have to decide whether or not to sell to Hybe before they know whether or not the legal issue with Kakao is resolved. Some may bet on Hybe, some may be persuaded by the SM/Kakao alliance.
Second, until the injunction is resolved, it's unlikely that Kakao makes any sort of tender offer, even though they have the funds to do so.
If Kakao loses this injunction and their stock purchase is nullified, I would guess that they back out of the deal wholesale and Hybe wins outright. They have enough capital that they could make a similar play at JYP or YG and get their foot into the Big 3/4 that way.
If Kakao wins the injunction, they will then be able to complete the purchase of 4.5% of the stock, with the remainder being able to be converted in 2024. This means that without a massively successful tender offer, Kakao is well behind Hybe in actual influence in voting rights.
Meanwhile, Hybe has put out their own statement once again stating they respect SM and they will ensure governance and independence and blah blah blah.
As someone who has watched multiple M&As happen it was very boilerplate and should be taken with the largest grain of salt ever. I did think it was interesting that they called out SM's 'success' in China when SM's presentations steered clear of mentioning China at all.
So, what is the best-case scenario if you're a fan of SM artists?
In short: there isn't one.
The best case scenario is that LSM isn't a dick and Kakao isn't needed and no one is talking about NFTs.
But that time has passed.
It seems at this point there's almost no way that SM isn't swallowed, most likely by Hybe, but if not them, then by a Kakao that will position itself as "well you said you didn't want Hybe to control the board."
The funniest case scenario is that Kakao gets to be the secondary shareholder but Hybe doesn't get the shareholder interest to hit their 40% stake and the two can be played against each other until something else in the market shifts. This is what I will be rooting for.
And that's all the updates through Wednesday February 22, at 4pm MST.
UPDATE: Part 7: The SM Stock Multiverse. Madness!
no subject
Date: 2023-03-01 04:21 pm (UTC)