Ariana Grande (left) and Justin Bieber, pop stars of Ithaca acquired by HYBE (File photo, courtesy of Reuters via Yonhap and social media)
South Korea’s entertainment and content industries suffered from hasty expansions with investments of billions of dollars in the global market through acquisitions of foreign companies, losing money from those entities.
HYBE Co., the label behind global K-pop sensation BTS, and CJ ENM Co., the entertainment powerhouse of the Academy Award-winning film Parasite, were hammered by mounting losses from their overseas units. Online giants Naver Corp. and Kakao Corp. were also hit by rising deficits from webtoon and web novel businesses in other countries.
Such failures resulted from a lack of thorough analysis of the industry and integrations of human resources, as well as excessive takeover costs, industry sources said.
Entertainment firms and content providers usually face difficulties in post-merger integration (PMI) due to different cultures between companies. Buyers often give up creating synergies with their own businesses as the existing executives of acquired companies oppose the strategies. Purchasers spend big money on buying other firms for their artists, but those core human resources leave them after acquisitions.
“Compared with Korea’s major manufacturers, content companies have yet to build overseas PMI experiences and know-how,” said an investment banking industry source in Seoul. “They may have overlooked the nature of the industry whose core asset is human, and cultural differences.”
South Korean entertainment and content companies spent billions of dollars to acquire overseas firms from 2020 to the first half of 2022, taking advantage of low interest rates, with goals of expanding their businesses into the world.
But few of them reported profits from those deals.
MOUNTING LOSSES
HYBE in 2021 shocked the world’s music industry as it acquired Ithaca Holdings of pop stars Justin Bieber and Ariana Grande for about $1 billion. Scooter Braun, the founder of Ithaca, had pledged to help HYBE’s artists make inroads into the US market when he sold the label to the South Korean music giant.
HYBE had been optimistic expecting that Ithaca would generate profits of 60 billion won ($44.1 million) a year once offline concerts were resumed with COVID-19 becoming an endemic disease. The label had also pinned its hope on Braun’s networks in the world’s largest US music industry, betting such a big money.
Ithaca is now HYBE’s largest risk, however, due to increasing losses. The US label logged a net loss of 142.4 billion won last year, more than double the deficit of 70.1 billion won in 2022.
Its cash cow Bieber suspended tours due to health issues, while major artists including Grande showed signs of leaving due to conflict with executives. Braun, the current CEO of HYBE America Inc., acquired a hip-hop label run by his friend for 266.9 billion won, although it generated an operating profit of only 500 million won, boosting Ithaca’s losses.
Min Hee-jin, the chief of ADOR, HYBE’s label behind globally popular girl group NewJeans, openly criticized the K-pop behemoth’s takeover of Ithaca.
“It paid the eyepopping 1 trillion won to buy a loss-making company,” said Min, who is in dispute with HYBE.
HOLLYWOOD STUDIOS
Two of the major studios in Hollywood were acquired by South Korean companies in 2021. CJ ENM bought Endeavor Content Parent LLC. of Golden Globe and Oscar award-winning films including La Land for $775.3 million, while Contentree JoongAng Corp. took over Wiip, the producer behind HBO’s Mare of Easttown.
La La Land (File photo)
The South Korean companies aimed to add global sales networks and competitiveness to K-content such as films and dramas.
But their dreams collapsed as actors and screenwriters went on strike once they closed those acquisition deals. The labor actions boosted fixed costs but reduced operation rates.
CJ ENM and Contentree failed to normalize the management of those US units as they did not take action due to fears of provoking Hollywood artists with strong self-esteem.
Fifth Season, formerly Endeavor Content, reported a loss of 117.9 billion won last year.
WEBTOON, WEB NOVEL
Naver in 2021 bought Toronto-based Wattpad Corp., the world’s largest web novel platform, for $600 million. That prompted its archrival Kakao to acquire Tapas Media Inc. and Radish Fiction Inc., webtoon and mobile novel platforms in North America, for 780.9 billion won.
The two leading South Korean online giants spent such big money to become the world’s top player in the digital comics and novel market, although sales and operating profits of those content platforms fell far short of the takeover values.
Those acquisitions without thorough due diligence put pressure on the online behemoths with losses of those units.
Radish and Tapas logged a combined loss of 425.2 billion won last year, far more than the 20 billion won shortfall when Kakao acquired in 2021. Wattpad reported a loss of 9.8 billion won in 2023, swinging from a profit of 3.1 billion won before Naver took over.
South Korean companies still need to seek global expansions as such losses are inevitable in the early stages, some industry sources said.
“Errors at the initial stage are inevitable, so they should continue to knock on the door of the global market rather than being excessively daunted,” said an investment banking industry executive.
There was a success story. Netmarble Corp., a game developer, bought the world’s No. 3 social casino game publisher SpinX Games for $2.2 billion in 2021, betting on the global online gambling market in a move to diversify its business.
SpinX Games reported a profit last year.
By Jun-Ho Cha and Ji-Eun Ha
chacha@hankyung.com
Jongwoo Cheon edited his article.
