On February 20, 2023, SM Entertainment’s YouTube channel uploaded a video titled “The reason why SM is against HYBE’s hostile takeover” in both English and Korean to the surprise of many fans. In the video SM’s CFO (Chief Financial Officer) Cheol Hyuk Jang broke down the reasons why the current employees of SM are against a “hostile takeover” by HYBE corporation, following news of the corporation becoming the largest shareholder of SM on February 9 after acquiring 14.8% shares from Lee Soo Man.
The CFO then announced that HYBE ultimately wants to acquire around 40% shares of the company, and to dominate the board of directors, stating that it is clearly a hostile takeover attempt. They believe that HYBE leaving SM to have their independence is an empty promise.
According to the CFO, HYBE has not made any formal request of due diligence from SM. Over 1 trillion won of capital will be infused into the tender offering deal (of 40% shares) and HYBE will take a short-term loan to finance the deal.
In the video SM’s CFO made the following points:
- HYBE is already saturated with artists, and this would push SM artists to a lower priority.
- SM artists will have to use Weverse and abandon the former fan platforms and commerce resulting in lost commerce opportunities.
- Any new business opportunities will likely be allotted to HYBE’s subsidiary.
- Basically, more profits of HYBE, no benefits for SM
- SM and HYBE are the top two major entertainment agencies, so if the two integrate, it would create a monopoly of around 66% of the market value.
- The two companies combined profits for quarter 3 of 2022 accounted for 70% of the market.
- Concerts and performances took up 89% of the profit.
- 60% of the top-ranking artists in album sales will belong under one single company, reducing the diversity of the K-pop market.
- 85% of employees oppose being absorbed by HYBE.
Cheol Hyuk Jang states that as of now, the old shares and the tender offer shares must be considered as the same deal and have to go through the Fair Trade Commission.* If it does not it will be problematic. If HYBE closes the deal before April 5th before it can pass through the FTC the hostile takeover would be obvious. However even the FTC’s ruling can serve as a risk for SM’s future, if the HYBE’s consolidation is rejected by reason of monopoly, then a large number of SM’s shares will be released into the market and leading to a plummeting share price. If the corporate consolidation is granted by the FTC, there is a possibility that HYBE could reduce the size of SM.
The CFO made more comments about protecting SM’s legacy and ends by asking everyone to pay attention to the next announcement of the SM 3.0 strategy which will enhance fan and shareholder value.
Check out the video below
*According to the Fair Trade Commission, if a company with assets or sales of more than 300 billion won acquires more than 15% of shares of a listed company with assets or sales of more than 30 billion won, it must report the business combination to the Fair Trade Commission. When a report of a business combination is received, the FTC will examine whether the combination of the two companies does not limit competition in the market or whether there is any fear of acquiring and abusing market dominance.
Update 12:30PM KST
HYBE representatives have not commented on the SM video. However, it is reported that HYBE can not accept a tender offer increase.1
