Kakao is thinking about selling SM Entertainment?

Kakao is reportedly considering selling SM Entertainment after fiercely battling HYBE to acquire the label. According to an exclusive MTN Report, Kakao is exploring potential selling options, with Korean video game developer NCsoft being one of the candidates to acquire SM. 

The decision comes after Kakao's management raised concerns about SM Entertainment hiring personnel linked to lawmaker Lee Cheol Gyu, a vital member of the Yoon Seok Yeol party, without prior consultation.

Kakao is currently conducting a thorough audit of SM Entertainment's management. The investigation aims to determine if personal relationships with the management influenced the acquisition. Depending on the audit results, there is speculation about a possible change in SM Entertainment's leadership.

The once amicable relationship between the two companies seems to have cooled, and attention is focused on understanding the reasons behind this shift and the potential future actions of both companies.

A source familiar with the situation stated on January 29, "Kakao has considered selling SM Entertainment and is known to have explored the possibility of NCsoft acquiring it at the end of last year." The source added, "The seriousness of Kakao's intentions and NCsoft's response are not yet known."

Another source in the venture capital industry also confirmed, "Under-the-table discussions between the two companies have actually taken place."

Speculation about Kakao selling SM Entertainment has been circulating since the end of 2023 due to controversies arising during the SM Entertainment acquisition process, leading to the arrest of Bae Jae Hyun, the Kakao investment head, and internal turmoil within the group. In October of last year, Financial Supervisory Service Governor Yim Jong Hyun highlighted the importance of reversing profits obtained through illegal activities. This statement indirectly suggested that Kakao's acquisition of SM Entertainment, allegedly involving market manipulation, would be inappropriate. Governor Yim's remarks point to a need for ethical financial practices, especially in high-profile business transactions like this one.

NCsoft, known to be a priority target contacted by Kakao, is struggling due to the weakening competitiveness of its core gaming business. Although it pursued initiatives such as building an entertainment platform, these efforts were ultimately abandoned. NCsoft is undergoing restructuring, including downsizing non-core businesses. Hence, the acquisition of SM Entertainment by NCsoft is regarded as complex and not a straightforward process.

NCsoft also stated, "We have not considered acquiring SM Entertainment."

Kakao initiated a forensic investigation earlier this month through the law firm Kim & Jang, focusing on SM Entertainment employees. Allegations include the high-priced acquisition of companies owned by SM Entertainment directors A and senior executive B, as well as companies affiliated with The HUB, operated by a friend of Chief Administrative Officer Lee Sang Soo. The audit is said to include details related to StudioClon, which SM Entertainment acquired in April of last year.

Regarding these issues, Kakao commented, "The audit results have not been released yet."

SM Entertainment recently hired Yoon Joon Ho, a former aide to lawmaker Lee Cheol Gyu, who served as an aide to the lawmaker and worked in the National Assembly office from 2003, participating as a special committee member for the 20th presidential transition committee.

The appointment is seen as a response to various controversies and external pressures surrounding SM Entertainment, with no prior information sharing with Kakao.

The acquisition of SM Entertainment by Kakao was pursued to maximize synergy in their entertainment business collaboration. The possibility of a large-scale IPO through the merger of Kakao Entertainment and SM Entertainment has also been speculated. The acquisition process involved dramatic competition, including other strong contenders like HYBE and CJ ENM.

However, the controversies surrounding market manipulation have caused internal turmoil, casting the acquisition of SM Entertainment by Kakao in a negative light. While the ideal scenario would be for Kakao to prevail in legal disputes and fully leverage the synergies with SM Entertainment, this aspiration faces significant challenges.

During the process of comprehensive business restructuring, management innovation, and efforts to enhance transparency at the group level, SM Entertainment might emerge as a hindrance. Consequently, there is speculation that post-acquisition, Kakao will exert greater control over the management and executives of SM Entertainment.

The evolving nature of the increasingly strained relationship between Kakao and SM Entertainment is being closely monitored with keen interest.