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SEOUL — The bitter battle for control of K-pop’s fabled agency SM Entertainment has spilled out publicly like an episode of HBO’s Succession. K-pop’s largest agency, HYBE — home to boy band BTS — is pitted against the management of SM, which for years was South Korea’s dominant K-pop company. But as SM’s Lee Soo-man sided with HYBE against the company he founded, a corporate shakeup has turned into a battle royale.

SM sought to maintain its independence through a partnership with Kakao, a South Korean internet giant that has acquired several entertainment agencies. In February, Kakao said it would buy a 9.05% stake in SM against the wishes of Lee, SM’s charismatic founder and rock singer-turned-mogul, whose equity in SM allowed him to challenge the purchase in court. 

About a week later, Lee — a controversial figure who helped build the K-pop business over the last three decades but has been convicted of embezzlement in the past — privately approached HYBE founder and chairman Bang Si-hyuk, offering to sell about 80% of his SM shares to HYBE, with an option to sell the remaining chunk at a later date, according to a person with direct knowledge of the matter. As a result, HYBE now has a 15.8% stake in SM, making it the company’s largest shareholder. 

Since then, the companies have traded almost daily salvos.

After a March 3 provisionary injunction upheld Lee’s court challenge to the Kakao acquisition, Kakao announced it had canceled its investment in SM and launched a tender offer seeking to buy 35% of SM from minority shareholders. HYBE is now appealing to SM shareholders to back its board nominees and vision for the company. SM sees the move as a hostile takeover and is asking shareholders to appoint independent directors. The clock is ticking before a March 31 annual shareholder meeting.

Both HYBE and SM have grand ambitions to expand K-pop and take on the major labels globally. HYBE increased its revenue 125% to 1.78 billion won ($1.41 billion) from 2020 to 2022, largely by acquiring Ithaca Holdings in 2021 for $1.05 billion and giving its founder, Scooter Braun, the reins to its U.S. operations, HYBE America. In February, HYBE America made its first major move, purchasing Atlanta-based hip-hop company Quality Control Music for $300 million.

SM hopes to more than double its 2022 revenue of 850 billion won ($644 million) to 1.8 trillion won ($1.36 billion) by 2025 through a mix of partnerships and acquisitions, which include acquiring a U.S. management company and, by the second half of 2024, launching its first U.S.-based artist. “Our plan is not limited to local activities of Korean artists,” co-CEO Tak Young-jun said in a Feb. 23 video.

The company plans to spend 350 billion won ($266 million) on a music publishing company and 300 billion won ($228 million) to acquire record labels, with two-thirds of that amount ($152 million) targeting U.S. companies “with a solid local network that can support Korean artists’ global expansion and have global production capabilities in genres complementary to SM,” Lee Sung-soo, SM’s chief creative officer and co-CEO, said in the same video.  

But minus its powerful founder, SM doesn’t intend to take the world stage with HYBE’s help. It had envisioned Kakao as its preferred partner in a mission — dubbed “SM 3.0” — it has said it will still push forward with in order to expand outside of Korea and build outposts in Japan, Southeast Asia and the Americas.

A HYBE acquisition of a controlling interest in SM could potentially face regulatory scrutiny from South Korea’s Fair Trade Commission since it exceeds 15% of SM’s stock ownership. In 2022, HYBE was behind 26.8% of albums sold in Korea, while SM was behind 19.1%, according to Korea chart company Circle Chart.

As Lee Dominated, SM’s Luster Was Fading 

Though few had predicted such a dramatic unraveling, SM was overdue for a transformation. Once the leading K-pop innovator, SM has debuted just one completely new act, Aespa, in the last five years. It continues to operate through a single pipeline with Lee at the helm of artist management and production, while rivals like HYBE and JYP Entertainment have diversified their portfolios, relying on multiple teams that produce more acts with more independence.

SM’s shares have been chronically undervalued, industry observers say, due to an arrangement where the company paid producing fees to a separate entity owned by Lee. SM paid Lee 24 billion won ($18.1 million) in 2021, equivalent to more than a quarter of SM’s operating profit that year. Even in years when SM produced a loss, Lee took home a sizable paycheck.

The board of directors, packed with Lee allies, allowed the practice to continue for years, until Align Partners Capital Management, a private equity firm, led a shareholder revolt last year. Lee, who now holds about 3% of SM shares, appears headed out the door. HYBE and SM say his role will be reduced if not completely phased out.

“It’s hard to put up a resistance in Korean culture,” Lee Changhwan, CEO of Align Partners, says about the difficulty in over-riding a founder and company’s biggest shareholder. “The governance structure has to go through fundamental changes.”

South Korean stocks are often undervalued, analysts say, since some companies can seem to be managed for the benefit of founders and families to the detriment of general shareholders. Still, in the HYBE-SM power struggle, SM shareholders appear to have won either way: The March 7 share price of 149,700 won ($113.84) is up over 116% since SM announced it would terminate Lee’s contract on Oct. 14.

A K-Pop Pioneer With A Criminal Past

The 70-year-old Lee, who founded SM in 1995, has been credited with making K-pop what it is today. Inspired by early MTV music videos and New Kids on the Block, which he watched during his master’s degree studies in California in the 1980s, he paved the way for K-pop to win overseas fans with a signature formula of visually striking performance and dance pop. 

Lee crafted BoA, the female singer who SM scouted in 1998 when she was 11 years old, into the first K-pop artist to break through in the Japanese market; she went on to sell millions of singles and albums. Groups from TVXQ and Girls’ Generation to EXO and NCT have followed suit with international stardom. In 2000, SM became the first K-pop agency to list its shares publicly. 

Even before PSY and BTS became global household names, Lee was lecturing publicly about K-pop conquering the world — and about a future when non-Korean singers would join the fray and be trained and managed by K-pop production teams.

Lee’s artistic vision and drive didn’t make up for the company’s corporate governance problems, however. Shareholders have in recent years slammed SM for losses from non-music businesses such as a winery and restaurants while Lee was still getting his producer’s fees. Several SM acts have seen members leave acrimoniously over what they called harsh training and “slave contracts,” resulting in government intervention, including shorter contracts for K-pop trainees and stars.

In 2002, Lee made headlines when he fled the country to escape prosecution while facing embezzlement allegations. After a brief stay on Interpol’s wanted list, he surrendered to Korean authorities and was convicted for siphoning off 1.15 billion won ($892,000 at the time) in company funds during a recapitalization round, which he used to buy shares in SM. (He served three years of probation, and in 2007 he received a presidential pardon — and then returned to the company.) SM has also paid fines for tax evasion, most recently in 2021. 

In recent weeks, Lee Sung-soo, the co-CEO who is also nephew to founder Lee’s late wife, leveled a series of accusations at his uncle, which range from previously undisclosed tax evasion through a shell company based in Hong Kong to making “arbitrary” changes to SM bands’ musical direction to advance his own business interests. 

While the elder Lee has not directly addressed the allegations, HYBE has responded that it was unaware of such an arrangement during the deal’s signing. In a statement to Billboard, HYBE says its SM acquisition was made “following research on the corporate fundamentals, including publicly disclosed information about SM.”