Shall “Daum Kakao” overcome Naver?

Daum Communications Corp. CEO Choi Sae-hoon, left, and Kakao Corp. CEO Sirgoo Lee listen to reporter's question during a press conference in Seoul, South Korea, Monday, May 26, 2014. Mobile messenger service Kakao Talk is seeking a backdoor listing on the South Korean stock exchange by combining with the country's second largest Internet portal. Daum Communications Corp. and Kakao Corp. said Monday that Kakao shareholders will get 1.556 Daum shares for each Kakao share they own. (Photo : AP/NEWSis)

The merger of Daum and Kakao will take place on October 1st

Shall Daum and Kakao defeat their overwhelming rival Naver? On Monday, Daum and Kakao joined hands to overtake their superior Internet competitor Naver. However, it remains to be seen whether their efforts could bring fruit and “create synergy” as the two merged companies wish. The merger of the two companies will take place on October 1st.

Daum Communications, the nation’s second-largest web portal, announced Monday it will acquire Kakao, the operator of the nation’s top mobile instant messenger service, which might lead to “an upheaval” in the Korean mobile and Internet industry.

As a result of the stock swap arrangement which is expected to be the “biggest deal” in the IT industry in Korea this year, the two firms will become a united IT giant tentatively named “Daum Kakao” with a market capitalization exceeding 3 trillion won ($2.92 billion), according to Daum.

Integrated firms will have staff of 3200

On the other hand, Naver, the competitor of the merged “Daum Kakao”, has a cap estimated at 25.56 trillion won as of the end of Monday trading, far exceeding that of the combined firms. The integrated firm’s staff will number some 3200 adding Kakao’s 600 to Daum’s 2600, also far outmanned in the human resources.

The two firms said the merger will compensate for what each other is lacking, and will create “synergy” from their respective strengths, in an effort to cope with the rapidly-changing market conditions. The merger could be part of the struggle that could cope with the slugging business of Daum.

“Since the two firms do not overlap in their business areas, Kakao’s competence in the mobile platform coupled with Daum’s strength in content, skilled human resources and business know-how will make further growth,” said Daum CEO Choi Sae-hoon during a press conference at a hotel in downtown Seoul, Monday. “We hope that the merger will be a soft landing, since the two companies share the common values such as emphasis on horizontal corporate culture and communication.”

“The merger purports to become a more competitive platform”

“The merger will make us become a more competitive platform provider,” Kakao CEO, Lee Sirgoo said. “With this ‘historical marriage’ between the two firms, we will go into uncharted territory in the IT industry.”

Earlier on May 23, the two companies held a board of directors’ meeting to approve the merger. A general meeting of shareholders in August will finalize the deal. The merger is expected to take place on Oct. 1. The merger agreement calls for one Kakao share to be exchanged for 1.556 new Daum shares.

With the swap deal, unlisted Kakao shares will undergo a back-door listing. The Korea Exchange has banned the trading of Daum shares until it determines whether to approve the back-door listing.

Kim Beom-soo, chairman of Kakao’s board with the largest stake in the firm, will be the biggest shareholder of the combined company. Kim and K-Cube Holdings owned by Kim currently hold a 53.6 percent stake in Kakao that will be converted into a 39.8 percent stake in Daum Kakao, compared with Daum Chairman Lee Jae-woong’s 3.4 percent.

Daum has been lagging in competition with Naver

Founded in 1995, Daum started with a web portal service and garnered popularity with the nation’s first free webmail and online community services. The firm has optimized its services for the mobile environment as the mainstream online platform changed from web to mobile.

However, Daum has been failing to win in its competition with Naver, the country’s top web portal, both in web and mobile, and suffered from loss of users and sales. So the merger could be a struggle to reverse this trend vis-a-vis naver.

Kakao emerging as leader in the mobile sector

Kakao has emerged as a leader in the mobile sector since it was launched in 2006, with its unrivaled popularity of Kakao Talk on the local market, and has expanded its services including social networking service Kakao Story and mobile game platform Kakao Game. Kakao Talk has become a household name among SNS users.

With more than 145 million subscribers to Kakao Talk around the globe, Kakao Game has dominated the nation’s mobile game platform market. It attracted over 500 million users as of May of 2014 and its cumulative sales surpassed 1 trillion won earlier this year, in the duration of about 20 months since the launch of the service in July 2012.

Details of merger to be determined in the future

Despite high expectations over the newly-established “Daum Kakao,” the two CEOs avoided suggesting details of their future, saying much has not yet been decided on strategies or restructuring.

It appears that the two will firms will concentrate on the merger process while maintaining their current business directions and strategies. In the meantime, the headquarters of the unified company will stay on Jeju Island, where Daum’s main office is located.