Kakao Launches Tender Offer to Buy 35% of SM Entertainment

Last month, Kakao failed in its bid to acquire up to 35% of South Korea's iconic K-pop agency SM Entertainment. This time around, the company seeks a majority stake and greater influence over its business strategy.

At SM's annual shareholders meeting on March 31st, Kakao says it respects the label's tradition and identity and will maintain its independence.

1. Kakao Wants to Secure the Largest Shareholder Position

Kakao, best known for its messaging service Kakao Talk and music streaming platform Melon, has launched a tender offer to purchase 35% of SM Entertainment. As a result, shares in the music label have surged 14 per cent to W148,500 today according to Reuters.

Kakao is striving to secure the largest shareholder position possible, as it wants to guarantee that SM's growth trajectory is maintained and stable management remains at the music label. Furthermore, it hopes to enhance its platform capabilities through collaboration with SM.

On Friday, Lee Soo Man - founder of SM - rescinded his earlier agreement to issue new shares and convertible bonds to Kakao after a Seoul court ruled in his favor. An injunction has been placed on SM to prevent it from selling more shares while they are engaged in a business management dispute, according to legal representatives for Lee on Friday.

Kakao Entertainment has declared their intent to purchase SM Entertainment's shares, and their co-CEO confirmed this in a statement shared with Korea JoongAng Daily on Monday. With such an aggressive strategy in place, they plan to remain the biggest shareholder of SM.

Kakao's aggressive bid to acquire SM shares is motivated by their desire to gain priority status with SM, which would enable them to issue additional shares on a continuous basis. However, this could result in share dilution and unfair competition for SM investors.

Meanwhile, HYBE is looking to increase its stake in SM. It has already acquired 14.8% of the music agency from SM founder and top shareholder Lee Soo-man, with plans to purchase an additional 3.65% stake.

It is a difficult battle, but one worth fighting. The outcome could have long-lasting repercussions for both SM and its artists.

South Korea's rapidly developing music industry is set to have a major effect on its future. K-pop, the third-largest industry globally, has significantly contributed to the country's economic development; it generates over 70% of countrywide revenues and provides employment for many young people in South Korea. Furthermore, this lucrative source of income provides vital stability for many adults throughout the nation.

2. SM’s Growth Is Under Threat

Kakao has launched a tender offer to purchase up to 35% of SM Entertainment, intensifying their battle with entertainment firm HYBE for control of the music label.

Established by Lee Soo-man, SM is the world's largest music label with international hit groups such as EXO and NCT. With their strong management team and rising share value over recent years, SM has seen its stock value soar significantly.

In January, Kakao and SM announced a strategic partnership that would see them collaborate on music production and distribution. Unfortunately, this move was opposed by the agency's founder who then filed an injunction preventing it from proceeding.

Last week, however, a Seoul court rejected the deal and gave Kakao permission to launch its own tender offer for shares in SM. Already owning 4.9% of SM, the tech group said its plan to own up to 40% would strengthen their strategic partnership with SM and guarantee stable management at the company.

On Tuesday, Kakao and its subsidiary Kakao Entertainment made a regulatory filing stating they would purchase 8.33 million shares, or 35% of SM, through an open tender offer at 150,000 won per share. If successful, this will total 1.25 trillion won and give Kakao majority ownership in SM, making them the second-largest shareholder of the company.

Kakao has long sought to enter the entertainment industry and secure the intellectual property rights of SM artists for overseas expansion. Additionally, it plans to list a portion of its entertainment unit on the stock market.

Kakao made an aggressive offer, but investors were wary. This deal will increase Kakao's stake in SM by nearly 40% from its current 4.9%, raising concerns that this could be a risky move given SM's rising popularity and that Kakao already owns a stake in another music label.

Kakao remains undeterred despite concerns from some investors, insisting on pushing ahead with its tender offer that ends March 26. The tech firm believes its growth is at risk and wants to become the largest shareholder of SM in order to safeguard its partnership with the music label.

3. Kakao’s Business Strategy Is Stable

Kakao's business strategy remains stable and expanding as it introduces new services. It has a major focus on its core messaging app, kakaotalk, as well as apps for music, games and even ride-sharing.

Kakao Talk boasts a large user base and is one of the most popular messengers in Korea. To maintain its success, it has formed strategic partnerships with companies and celebrities to provide exclusive content and services. These include Kakao Style - a mobile shopping mall - and Kakao Story - the social networking app.

Kakao's services have seen tremendous popularity, leading to a significant boost in profits. On Thursday, its share price reached an all-time high of 410,500 won.

Kakao recorded record revenues of 1.74 trillion won during the third quarter, surpassing expectations. Additionally, it outpace Naver in operating profit with a 39.9 percent rise from the prior quarter.

Financial services business of Uber is expanding quickly, offering various kinds of taxis and a brokerage service. According to industry analysts, these finance-related activities will continue driving revenue growth in the near future.

Kakao's music division, operated through Melon streaming service, continues to see growth. As a major force in the Korean music market with an influential share of distribution rights in Korea, this platform can be highly sought-after by artists.

Recently, the company unveiled a music service that allows users to design their own rooms and listen to their favorite songs. Additionally, it offers a music subscription service with over 40 million songs in its library.

Kakao has also ventured into e-commerce with the launch of "Talk Channel 2.0," an e-commerce platform available through their messaging app kakaotalk that will offer manufacturers' virtual shopping malls on its messaging app. A retail industry official anticipates this service being available next month.

Kakao stands out from its competitors by not taking commissions from online shopping businesses, instead charging zero percent. Furthermore, it plans to open up its platform to other e-commerce businesses and share data related to shopping with them.

4. Kakao’s Business Strategy Is Stable

One year after Kakao's devastating fire, the company is back on track for double-digit growth. Its advertising and gift delivery businesses saw a 72% year-on-year growth to reach 1.1 trillion won last year. Kakao also plans on launching its own e-commerce service in the second half of this year - challenging platform giants Naver and Coupang with new competition.

Kakao's ambitious expansion has some analysts concerned that it may have put scale ahead of stability in its business model. The company outsources server management and lacks data centers of its own, leading to the Oct. 15 fire and other unexpected issues. To ensure a reliable service for users, Kakao is investing heavily in technology.

CCS Insight recently reported that Microsoft is launching an AI platform to assist it in recognizing users' needs and creating better products. This strategy is expected to boost the company's revenue by 51% within three years, according to CCS Insight's research report.

Kakao's strategy goes beyond e-commerce; the company hopes to acquire domestic gaming companies and expand internationally. Its investment in Daum Games, for instance, is estimated to raise around 380 billion won and the funds will be put towards acquisitions.

The Korean online media giant also plans to integrate mobile comics app Tapas with fiction site Radish, in an effort to become a formidable rival to Naver's Webtoon and Wattpad platforms.

Kakao's strategy to diversify their revenue sources included increasing gaming revenue in 2017. In 2017, they sold 463.1 billion won worth of games - an increase of 208 percent year-on-year.

Another encouraging sign for Kakao is its focus on building an impressive content library. Its apps and websites offer a vast selection of entertainment material, such as games, films, music and books.

Furthermore, KakaoTalk has been actively engaged in "Open Innovation," an approach which encourages external stakeholders to contribute to the creation of its services and products. This strategy has been instrumental to the success of their messaging app, KakaoTalk.