Kakao announces 'complete management overhaul' of SM Entertainment

Kakao announced a management overhaul of K-pop agency SM Entertainment following reports that its executives had engaged in financial misconduct.

Kakao founder Kim Beom-su is summoned for questioning by the Financial Supervisory Service for alleged stock manipulation in Kakao’s attempt to takeover K-pop agency SM Entertainment on Oct. 24, 2023. [YONHAP]

Kakao might've have bit off more than it could chew when it bought SM Entertainment last year. The tech company is imposing a “complete management overhaul” on the K-pop agency.

Kakao founder Kim Beom-su first promised such an overhaul back in December, in an effort to appease the government and angry shareholders.

Kakao is also looking to oust the agency's current executives, according to media reports.

The conglomerate launched a probe into the behavior of several SM Entertainment higher-ups last month on suspicions that the parties had signed an investment deal without their employer's consent, following the purchase of the K-pop agency. The executives' PCs were confiscated for digital forensics.

“We are looking into SM Entertainment’s financial statements through an outside law firm based on the Act on External Audit of Stock Companies,” Kakao said. “We are requesting that SM Entertainment file data and conduct investigations into whether the company’s investment deal that was made without the consent of Kakao was conducted properly.”

Rumors have been swirling in the tech and entertainment industries that Kakao was considering selling the K-pop agency behind aespa and NCT after financial regulators accused the tech giant of rigging the stock market while bidding against HYBE to buy the agency last year. Kakao's business structure was also under significant criticism at the time. MTN News reported that it approached game publisher NCSoft with an offer to sell SM Entertainment in late 2023.

“Rumors about Kakao selling SM Entertainment are not true,” Kakao briefly stated in an electronic disclosure Monday, specifically referring to that report.

The tech giant acquired a 39.87 percent stake in the K-pop agency for $963 million last March as part of its efforts to expand its presence overseas.

It is alleged to have injected 240 billion won ($179 million) into the market to inflate the price of SM Entertainment's shares last February in order to block its competitor HYBE from buying them.

Financial regulators launched a full probe into the incident, which it alleges violated the Capital Markets Act. The Kakao entity and its top executives, including founder Kim Beom-su, were summoned for questioning in October. Chief Investment Officer Bae Jae-hyun is currently on trial and in custody on the charges.

The SM saga is just the latest in a long series of troubles that Kakao has undergone in the past year.

Prosecutors also filed for arrest warrants on Monday for Kakao Entertainment co-CEO Kim Sung-su and Lee Joon-ho, who heads the company’s investment strategy.

The prosecutors uncovered the alleged malpractice while investigating the stock manipulation.

While investigating the allegation, prosecutors have uncovered another alleged malpractice and filed arrest warrants on Monday for Kakao Entertainment CEO Kim Sung-su and Lee Joon-ho, head of the company's investment strategy.

The duo is alleged to have orchestrated Kakao Entertainment's 2020 purchase of production studio Baram Pictures at a price higher than its market value of 20 billion won in order to inflate the company's price margin.

SM Entertainment’s market value has fallen more than 1.9 trillion won since Kakao bought the company last March. SM Entertainment shares hit 158,500 won per share on and a market cap at 3.7 trillion won on March 8, at the height of the takeover battle. On Feb. 1, SM Entertainment shares closed at 74,300 won. The company is currently valued at 1.7 trillion won.

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]