HYBE and CJ ENM Encounter Challenges with Their U.S. Acquisitions: Was it Worth It?
HYBE, CJ ENM, and other prominent South Korean entertainment companies are facing difficulties in managing their U.S. subsidiaries. These companies invested around 1 trillion won each in acquiring local businesses, aiming to establish a global production system. However, the performance of their subsidiaries has not seen significant growth and has become a burden. Observers suggest that more meticulous due diligence is required when acquiring foreign companies.
According to the Financial Supervisory Service’s electronic disclosure system on the 11th, CJ ENM USA Holdings recorded approximately 91.2 billion won in revenue in the first half of the year, showing a significant decline of about 73% compared to the previous year’s 341.7 billion won. During the same period, its net loss expanded from 33.8 billion won to 93.5 billion won. The performance of CJ ENM USA Holdings includes the results of around 50 subsidiaries, with a focus on Fifth Season (formerly Endeavor Content).
Fifth Season is an American film and drama production company acquired by CJ ENM for approximately 930 billion won last year. It received acclaim from both audiences and critics for producing works like “La La Land” and “Call Me by Your Name,” showcasing its production capabilities.
However, Fifth Season’s losses continue to grow, negatively impacting CJ ENM’s overall performance. Recently, Hanhwa Securities revised its outlook for CJ ENM, titling a report “CJ ENM Expected to Report an Annual Operating Loss This Year.” They adjusted the company’s projected annual operating profit from a surplus of 45.4 billion won to a deficit of 43.3 billion won. Analyst Ki-hoon Lee, a research fellow at Hanhwa Securities Research Center, explained, “The biggest variable is Fifth Season,” and added, “To make matters worse, a strike by writers and actors’ unions, the first in 63 years, has started.”
Fifth Season is currently attempting to attract investments, but it is reported that it has not gained much attention from the capital market. CJ ENM has been trying to contact investors to inject external capital of approximately $300 million (about 400 billion won) into Fifth Season since the first half of this year. However, it is known that there are disagreements in the evaluation of the company’s value, causing delays. An industry source from the investment banking (IB) sector commented, “Investors are hesitant due to the lack of signs of Fifth Season’s performance recovery,” and noted, “Due to the still-high interest rates, investors prefer investment destinations with assured current profitability over future potential.” Fifth Season is currently focusing on restructuring measures, including a recent decision to reduce its workforce by 12%, in response to its deteriorating business situation.
Similarly, HYBE has not been able to achieve the expected synergy effects since its acquisition of a U.S. local entertainment company. According to the Financial Supervisory Service’s electronic disclosure system, ITHACA Holdings recorded approximately 74.2 billion won in revenue in the first half of this year, representing a significant contraction of about 19% from the previous year’s 91.4 billion won. During the same period, its net profit plummeted from 16.3 billion won to 3 billion won.
It is suggested that more pressing than the contraction in performance is the management of artists. Reports have emerged in the United States, including Billboard, stating that top stars affiliated with ITHACA Holdings, such as Ariana Grande, have decided to part ways with the company. According to recent reports in the U.S. Billboard, Ariana Grande has cut ties with Scooter Braun and HYBE. ITHACA Holdings is known for its top stars, including Justin Bieber and Ariana Grande, and if these stars actually depart, the 1 trillion won spent on the acquisition and merger (M&A) could become meaningless.
In some quarters of the IB industry, the difficulties faced by Korean entertainment companies in managing U.S. subsidiaries are attributed to oversights during the due diligence phase. A securities industry insider commented, “The pursuit of global production company acquisitions for performance led to somewhat hasty contracts,” implying that the focus on performance may have overlooked important operational factors.
There is also an interpretation that there is resistance from employees and artists of the acquired companies to Korean management. An industry source in the entertainment industry stated, “K-pop and Korean films are popular, but Koreans directly acquiring and managing local companies is a different dimension,” adding, “American artists and entertainment company employees still tend to resist directives from Asian executives.”
However, considering the need for Korean companies to increase their global market share, it is suggested that despite some trial and error, they should continue to attempt M&A activities. A financial investment industry insider stated, “The fact that Korean companies have emerged as acquirers of foreign entertainment companies is unprecedented, so to some extent, mistakes or failures are unavoidable,” and added, “Korean management companies must try various methods, such as complete replacement of the acquired company’s management team with Koreans or not interfering with the existing management team, to gradually develop a suitable model for foreign entertainment company acquisitions.”