The agency for South Korean boy band BTS, HYBE Co Ltd, abandoned their offer to acquire SM Entertainment Co Ltd on Sunday, paving the way for social media behemoth Kakao Corp to assume company control.

Why Is Sm Attractive?

SM was the first K-pop agency, started in 1995 by South Korean folk song singer Lee Soo-man with a meager 50 million won. It was followed by two other agencies, JYP Entertainment, and YG Entertainment, which competed with it.

Before BTS’s recent rise to global popularity, the trio ruled the K-pop business for over two decades, making their agency HYBE the most prominent music label in the country.

The label, which bears Lee’s initials, is widely seen as a turning point in the rise of Korean pop music, with the first significant breakthrough occurring in 2002, when an SM artist, BoA, achieved success on the Japanese charts.

Taking cues from BoA’s success in Japan, several South Korean pop groups launched full-fledged foreign campaigns, first in Asia and then in the Americas and Europe.

Girls’ Generation, H.O.T., EXO, Red Velvet, Super Junior, SHINee, NCT Dream, and Aespa are successful K-pop acts calling SM their home. Market capitalization-wise, it trails only HYBE, a rival entertainment conglomerate in South Korea, by $5.5 billion.

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Family Feud with ‘Emperor Lee’

Larger-than-life Although he is widely regarded as the “godfather” of K-pop, Lee, 70, has held no formal position at SM for many years.

Instead, he used a private company he founded to facilitate the industry’s international growth and provide management and training services to exert his influence.

To address governance difficulties and hefty fees paid to Lee’s private company, activist fund Align Partners, which owns about 1% of SM, has begun demanding that the company’s management team, led by Lee’s nephew and protege Lee Sung-soo, sever all links with the founder.

Frictions between SM and Lee came to the fore last month when his nephew called the founder “Emperor of SM Empire” in a YouTube video and criticized him for demanding unfavorable revenue-sharing deals and undermining SM’s governance.

The 43-year-old nephew has been with SM for 17 years and claims he notified Lee on January 17 that he would be making decisions as CEO instead of being a “rubber stamp.”

In response, Lee said he was “hurt” by his nephew’s words.

Takeover Battle

Last month, SM’s management announced a $173 million share sale transaction with Kakao, reducing Lee’s power as the company’s largest shareholder by making the tech giant the second-largest stakeholder behind Lee, who had the most significant holding at 18%.

Lee sold a fifteen percent share in SM to HYBE, a competitor agency, and then sought an injunction to prevent the court-approved agreement, setting up a takeover struggle.

To acquire an additional 25% ownership, HYBE made a public tender offer but received little support from shareholders.

Earlier this month, Kakao, which already owned around 5% of SM, launched a tender bid at a higher price to acquire up to 35% for 1.25 trillion won ($946.80 million).

HYBE said that its decision to halt the takeover bid came after the stock market showed “signs of overheating due to competition.”

How Does the Acquisition Help Kakao?

Due to the management dispute and Lee’s plan to divest, SM is seen as a valuable, scarce asset that is up for grabs. Kakao, the most widely used social networking site in South Korea, has recently acquired a stake in Starship Entertainment, a smaller K-pop firm.

Kakao Entertainment received a boost in its SM bid in January as it announced an investment of 1.2 trillion won ($966.27 million) from the Government Investment Corporation of Singapore and the Public Investment Fund of Saudi Arabia.

Analysts said that control of SM would bolster Kakao Entertainment’s plans for an initial public offering.

($1 = 1,327.9200 won)

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