Cheol Hyuk-Jang, the CFO of SM Entertainment, responded to the recent dealings of K-pop rival HYBE in a video posted on YouTube. In the video Hyuk criticized HYBE’s takeover bid as being a move to monopolize the K-Pop industry.
“This is clearly a hostile takeover attempt that has not been consulted with the current management and board. Through this attempt for hostile takeover, HYBE seems to plan to exercise management control by dominating the board of directors. We know better than anyone else that under such a governance structure, it is difficult to make decisions that prioritize the value of all SM shareholders”, said Cheol.
Last month HYBE purchased 422.8 billion Shares, or an 18.8% stake of SM Entertainment. Making them the largest single shareholder of the company. HYBE has since filed to increase its percentage of the company to close to 40% of the company.
The remaining shares account for over 60% of the company, but they’re split into much smaller percentages. Leaving the remaining owners with far less influence and power. The biggest shareholders following HYBE are:
- South Korea-based Kakao Corp – 9.05%
- Asset management company Korea Investment Management – 4.45% stake
- Chinese tech conglomerate Alibaba – 3.71% stake
- Public pension fund National Pension Service – 3.68% stake
Cheol Hyuk-Jang’s fears that an eventual merger of the two companies would dilute SM Entertainment’s artists exposure. Citing that HYBE would in fact prioritize their artists, putting SME artist to the back burner.
“With the optimal album release time limited to 100 times a year, HYBE is already saturated with artists from its labels. As a result, SM artists will have no choice but to be put on a lower priority. In addition, SM will give up the fan platform business aspired by SM 3.0 and use the HYBE platform. Such a platform will simply increase some licensing revenue but not be properly reflected in the corporate value. As a result, SM will lose a new growth engine by missing out on the data that can help deepen [our] understanding [of] fans,” said Cheol.
HYBE and SM Entertainment represent the majority share of the K-Pop market revenue. Cheol also warned that combining the two companies would create an unfair monopoly in the Korean music industry.
“If the two companies are integrated, the combined entity would create a monopoly by taking 66% of the total market revenue. Furthermore, as of Q3 2022, the two companies’ combined profits from albums/digital music account for 70% of the market. Regarding concert/performance profit, the two companies took up as much as 89%. As a result of an integration, over 60% of the top-ranking artists by album sales would be under a single company, undermining the diversity of the K-pop market. A lot of indicators of market share imply that HYBE’s acquisition of SM will undermine fair competition, which clearly shows that this acquisition is unfair. In the Korean entertainment market, the artists have put in their highest endeavors while the entertainment agencies have engaged in constructive competition.” said Cheol.
A monopoly within the Korean music industry is a proposition that could also lead to the diminished value in SM Entertainments shares. HYBE’s control of a majority stake in SM Entertainment could possibly lead to scrutiny by the Fair Trade Commission, which in turn could put SM Entertainment’s future at risk.
Cheol explains, “If the corporate consolidation is rejected due to the reason of monopoly, a large number of SM shares will be released into the market, leading to a plummeting share price.”
Considering HYBE’s latest moves acquiring various companies related to the music industry, his fears are warranted. The world may be witnessing the creation of a global K-pop goliath forming right before our eyes.