New Kakao-Daum Merger Aims to De-Throne Naver-Line And Expedite Kakao’s IPO

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Kakao Corp, this week has announced an agreement to buy Korea’s second largest domestic Internet-portal operator Daum Communications in an all-stock deal. It is hoped that the deal will boost the merged entity’s presence in on both Web and mobile services. The deal comes at a time when tech analysts are heralding the end of messaging 2.0, as most independent messaging services which have seen enormous growth recently will now have merged or been acquired.

Rumours have abounded in recent months about a possible Kakao IPO in May next year, and creates the basis for an interesting shift in Korea’s highly competitive internet landscape. The merged company, Daum Kakao, will be positioning itself in direct competition with Naver (Korea’s largest search portal) and Line, the messaging service that was released by NHN Corp. nine months after Kakao launched in 2011.

The deal will assume a Kakao a valuation of 3.1 trillion won ($3.03 billion), and Kakao will gain three-quarters of the new company that aims to be formed by the end of this year. Daum is currently trading at a market cap of around $1Bn.

The deal is the latest in a global series of acquisitions of mobile messaging services, including Viber ($900M by Rakuten), and WhatasApp ($19Bn by Facebook). Kakao doesn’t charge users for its messaging service and generates profits mainly from in-app purchases within games on its mobile gaming platform that launched in July 2012.

In finalising the deal, Daum Kakao will issue 43 million new shares to Kakao and Kakao’s chairman and biggest shareholder, Kim Beom-su, will become the biggest shareholder in the new company, with a 22.2% stake.

As of April, Kakao had 140 million registered users globally. That compares with about 500 million monthly active users for world-wide leader WhatsApp. Daum is one of the two big Web-portal operators in South Korea.

While analysts said that Daum is likely to benefit by taking advantage of Kakao’s strong mobile presence in the domestic market, some have questioned the advantages for Kakao. “The merger will act as a strong growth boost for Daum, which has been struggling to keep up with Naver,” one industry insider was quoted as saying. However, Kakao’s benefit is less clear to establish, as Daum is largely restricted to the Korean market and would not be able to assist Kakao’s further global growth.

“We are not exactly sure what Kakao can gain from [this] merger,” said a UBS spokesperson. “With the growth of its mobile-game business slowing in Korea, Kakao has been seeking growth drivers in the overseas market, which so far has not been easy due to intense competition.” It is not clear how a merger with Daum can catalyse global growth for the new company. However, people close to the deal have cited a faster and cheaper [back door] IPO as one benefit Kakao can expect, allowing the company to focus on growth, rather than a listing on its own.

Kakao, which is part-owned by China’s internet giant, Tencent, last month reported a 2013 net profit for 2013 of 61.4 billion won, more than 10 times the previous year’s profit of 5.3 billion won.

The deal is subject to approval by Daum and Kakao shareholders at a meeting slated for August. Daum is listed on South Korea’s technology-heavy Kosdaq market. Trading in its shares was temporarily halted Monday. On Friday, they ended 6.7% higher at 78,100 won.

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