Kakao investigates financials at K-pop label SM after deal

South Korea’s Kakao Corp. is investigating the financial practices of SM Entertainment Co. after it took a controlling stake in the K-pop pioneer, adding another chapter to a drama that has captured the attention of the nation’s business leaders.

Kakao, an internet and messaging powerhouse, has hired a law firm to probe SM’s books at the request of Kakao board’s audit committee, according to a person familiar with the situation who asked not to be identified because the matter is private. Kakao’s inquiry is focused on investments that SM management made after Kakao boosted its holding.

SM shares slid as much as 3.9% in Seoul trading.

A representative for SM Entertainment declined to comment. A Kakao spokesman said an audit is being carried out on SM’s accounts but declined to elaborate further. 

Kakao fought an intense battle for SM with Hybe Co., the label behind boyband sensation BTS, electrifying South Korea as two of the best-known K-pop labels slugged it out over for control of their destinies. Kakao rode to the rescue of SM’s management after departed SM founder Lee Soo-man sold a 15% stake to Hybe.

A woman walks past the photograph of Jin, a member of K-pop boy band BTS.

Kakao and Hybe had both seen ownership of SM as a way to reach a broader audience and to expand the popularity of Korean entertainment. The bidding war sent SM’s shares to record highs and Hybe backed down from its bid in March. 

Just several months later, though, the Korean authorities arrested Kakao’s chief investment officer for alleged stock price manipulation connected to the bidding war, plunging the company into crisis. They are also probing other potential violations including excessive listing of affiliates, breach of fair trade rules and monopolistic practices by Kakao, which has grown from a mobile messenger to one of Korea’s largest business groups by assets. 

Kakao in December nominated Shina Chung, the former head of its corporate venture-capital arm, as its next chief to lead the firm out of crisis. 

Kakao has not decided what kind of management changes it will make at SM after its investigation, the person said. While local media had said Kakao would replace SM’s management, Kakao plans to investigate thoroughly and then follow standard procedures to determine what actions to take.