Daum-Kakao merger: affirmative


With the shareholders of both Daum Communications Corp. and Kakao Corp. having ratified the merger of the two firms on August 27th, the merged entity is well on its way to becoming the largest company on South Korea’s secondary bourse, the KOSDAQ. The deal is now in its last lap, with all the requisite procedures currently being finalized and all the lawyers dotting the i’s and crossing the t’s. The company will be officially launched on October 1st.The companies had already announced that they would be keeping their names in the merged company, and the merger looked set to become one of Korea’s groundbreaking Internet-based M&A moments. Now, however, the details are emerging: Daum will exchange its newly-issued stocks for Kakao’s stock. The stock swap ratio is fixed at one Daum share for 1.556 shares of Kakao.

Not only will this merger spawn a global provider of communication, information, and daily life services; it is also likely that the merged company will become the biggest on the tech-heavy KOSDAQ in terms of market capitalization, exceeding that of Celltrion Inc. Industry watchers predict that Daum-Kakao’s market cap may be as high as 10 trillion, given that the value of South Korea’s most commonly-used messenger service provider, Kakao, hovers at approximately 9 trillion.

For Kakao, this merger deal is effectively a reverse merger, which gives it a back-door listing. Analysts predict that Daum-Kakao may be aiming for a turnaround in the search-engine market by placing more emphasis on mobile-based services. It is also likely that Daum-Kakao will be seeking a listing on the country’s main bourse after fulfilling the necessary three years on KOSDAQ.

At present, Kakao Talk, attracting 37 million users out of a national population of 50 million, commands a pool of about 152 million users worldwide. It spans fifteen languages, including Korean, English, Japanese, German, Arabic, Russian, and Spanish.

Kakao has been diversifying its business portfolio in recent years, thereby compensating for the falling profits from more conventional sources. It launched Bank Wallet Kakao, a mobile platform that enables small-sum financial transactions and mobile payments.

Tongyang Securities Inc. also adjusted its target price of Daum to 200,000 won, taking into account Kakao’s broadening revenue streams.

Daum and Kakao have not yet made any public statements regarding the fate of Daum’s MyPeople mobile messenger service. However, officials from Kakao did state that there were no planned post-merger layoffs. In fact, it was made known that the number of employees at the firm had been increasing in the last few months, as a result of the escalating demand for services.

Nevertheless, it remains to be seen whether the latest entrant to the M&A trend will be enough to challenge its formidable rival, Naver Corp., which remains Korea’s no. 1 search engine. The merger may indeed cause ripples in the local portal and mobile social network market; however, whether it can cause splashes, especially in the search-engine market, is still a question worth asking.