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Financial regulators raid SM Entertainment amid investigation into Kakao’s recent share-buying spree

By | Published on Thursday 20 April 2023

SM Entertainment

South Korea’s financial regulator raided the headquarters of SM Entertainment earlier this week adding another chapter to the recent corporate dramas that have been occurring in the world of K-pop.

According to news agency Yonhap, sources say that the raid is part of an investigation into allegations that South Korean internet company Kakao manipulated stock prices as part of its recent bid to take control of the SM business.

Kakao – which has its own entertainment division and operates streaming service Melon – went to war with K-pop powerhouse Hybe – best known as the home of BTS – in a bid to take control of SM Entertainment.

In doing so, the two companies basically got themselves involved in an internal battle within SM between its management team, on the one side, and its founder and until recently biggest shareholder Lee Soo-man, on the other.

The management team wanted an alliance with Kakao, proposing to issue new shares to sell to the internet firm. Lee opposed that proposal, blocked the issuing of any new shares in the courts. Then he persuaded Hybe to try to secure a controlling stake in SM by buying up existing stock from current shareholders. To facilitate that process, Lee sold most of his SM shares to Hybe.

But Kakao then announced that it was also in the market to buy up existing SM shares in a bid to get a 40% controlling stake and it offered a better price. Not keen to get into a price war, Hybe quickly bailed, allowing Kakao to acquire that 40% in SM stock and take control of the business.

Yonhap reports that, during these events, Hybe filed a complaint with the country’s Financial Supervisory Service. The news agency explains that: “Hybe accused Kakao of manipulating SM’s stock prices through another company to hinder Hybe from making a tender offer to secure a larger stake in SM”.

Since then, officially at least, all three companies – SM, Kakao and Hybe – have made up. And to prove it, it was announced earlier this week that artists signed to SM will be using Hybe’s direct-to-fan platform Weverse from later this year instead of a rival service SM itself launched last year.

However, the investigation into the allegations of misconduct on Kakao’s part continues. This week’s raid on SM’s offices follows a similar raid at Kakao’s headquarters and its entertainment business earlier this month.