Last month, Korean media broke the news that SM Entertainment‘s founder Lee Soo Man will be selling his ownership of the music agency—but what does that really mean for the company and its artists? Here’s a simple, easy-to-understand breakdown of SM Entertainment’s shareholder structure, possible share acquisition, and what could happen if Naver or Kakao Entertainment buys Lee Soo Man’s shares.
What is Lee Soo Man’s position?
While Lee Soo Man is no longer the CEO of SM Entertainment, resigning from the board of directors in 2010 to focus on overseas expansion and the development of new business and artists, he does still own the largest stake in the company. Now, however, he’s looking to sell some or all of his shares.
What are shares, stocks, and stakes?
Confused about what all these terms mean? Companies are divided into shares for trading purposes, which each share representing one “unit” of ownership over assets and potentially profits. Stock is the collective term for all the shares in a company, while your stake is the percentage of shares that you own. For example, if a company’s stock has 1 million shares and you own 10,000 of them, you hold a 1% stake.
Who are SM’s largest shareholders?
As with many major corporations, SM Entertainment’s stock (which comprises around 23.4 million shares in total) is split between numerous owners. The largest shareholder right now is Lee Soo Man, who owns 18.73% of the company—or 4,392,368 shares—as of December 2020.
The remaining shares account for over 80% of the company, but they’re split into much smaller percentages. As such, the remaining owners have far less influence and power than Lee Soo Man. The biggest shareholders following Lee Soo Man are:
- Asset management company Korea Investment Management – 4.45% stake
- Chinese tech conglomerate Alibaba – 3.71% stake
- Public pension fund National Pension Service – 3.68% stake
The remaining 69.43% of the company is split between several, much smaller shareholders. As of 2019, for example, SM Entertainment soloist and creative director BoA owns a 0.04% stake in the company.
Why is Lee Soo Man selling his shares?
According to investment bankers, Lee Soo Man has been attempting to sell his stake in SM Entertainment since 2020 after revealing that he has no intention of passing down his shares to his children. Instead, bankers say Lee has decided that a new partnership with a major corporation is necessary to further SM Entertainment’s development.
So, by selling his shares to an entertainment or media company, Lee Soo Man can help secure a brighter future for SM Entertainment. In particular, it’s said that Lee Soo Man is looking to partner SM Entertainment up with an IT company; this makes sense given the music agency’s foray into technology like DEAR U, Kihno, and artificial intelligence.
On top of that, a second reason for the sale has been proposed. Earlier this year, SM Entertainment was ordered to pay ₩20.0 billion KRW (about $18.0 million USD, which is 3.19% of the company’s net worth) to the Korean government after a tax investigation, just shortly after it was reported that the company made a net loss of ₩15.6 billion KRW (about $14.0 million USD) in the third quarter of 2020. Now, it’s said that Lee Soo Man appears to be fatigued by the intense tax investigation, making him want to sell up.
Where do Kakao Entertainment and Naver fit in?
According to last month’s reports, Naver and Kakao Entertainment will soon be competing to acquire all or some of Lee Soo Man’s stake in SM Entertainment. SM Entertainment representatives later confirmed that the agency is in talks regarding “business alliances and equity investment” with various companies, though nothing has been set in stone yet.
Share acquisition is when one company purchases a percentage of another company’s stock. If you purchase 51% or more of a company’s stock, you become the majority shareholder, which means you can make decisions about the company without approval from other shareholders. Anyone who owns less than 50% of the company is a minority shareholder.
However, if there is no majority shareholder—which is the case at SM Entertainment—the company or individual with the largest portion of the shares becomes the controlling shareholder.
Controlling shareholders have significant influence, leverage, and power; they can push for seats on the board, overturn votes, and generally take ownership of operations and decisions. If either Naver or Kakao Entertainment acquire Lee Soo Man’s 18.73% stake, they’ll become the controlling shareholder of SM Entertainment.
What are the possible outcomes?
Ultimately, there are a few possible outcomes to this situation. One is that either Naver or Kakao Entertainment could acquire the full 18.73% stake in SM Entertainment and become its controlling shareholder. Another option is that Naver or Kakao Entertainment could choose to invest in a specific SM Entertainment subsidiary instead, such as DEAR U.
Alternatively, Lee Soo Man may decide to only share a portion of his shares, which may see him remain the controlling shareholder. There’s also the possibility that both Naver and Kakao Entertainment could split the shares between them, though this is less likely given that Naver and Kakao are competitors.
Or, failing all this, Lee Soo Man may retain his entire stake or choose to sell the shares to another company. That said, right now, Kakao Entertainment and Naver are definitely the strongest contenders.
Why exactly do Naver and Kakao want SM Entertainment shares, and how would their acquisition impact the company and its artists?
Here’s a simple breakdown on everything to do with Naver and Kakao Entertainment competing for a stake in the company.