Shall “Daum Kakao” merger create synergy? (2)

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: NEWSis)

With the advent of “Daum Kakao” merger, the question still remains as to whether the incorporation could bring about the expected synergy. It further remains to be seen whether or not the merger could threaten Naver’s dominance in industry. Concerning this issue, even among Kakao and Daum’s ranking officials, there appears to be less than firm conviction.

Daum Communications CEO Choi Se-hoon expects Kakao to create powerful synergy. “Daum has tried to reach out into the mobile territory without success. But Daum’s all-stock deal with Kakao will truly help us,” said Choi. In fact, Daum has been a distant second to Naver as an Internet firm. It should be noted that Naver operates its own chat application ― Line ― in more than 120 countries.

One of securities analysts expected “some” synergy effects as the alliance allows Kakao to use Daum’s infrastructure, while Daum may secure its next cash-generator using Kakao platform. But officials at both Daum and Kakao unofficially admit there still are obstacles to be surmounted.

“How to combine two different corporate tribes is key”

“The key issue is how to combine the two different tribes in the shortest time,” said one Daum executive. Mentioning previous struggles after Naver’s acquisition of HanGame, the executive urged Kim Beom-soo, the biggest shareholder of “Daum Kakao” to focus on finding measures for management stability.

Despite its strong presence in Korea, Kakao is not yet strong enough overseas beyond some countries in the Asian region. Kakao recently launched apps in Indonesia, Malaysia and the Philippines. However, company officials said it has no imminent plans to expand outside Asia yet, given the merits of having a concentrated market.

“It’s unlikely that any synergy will be coming soon as services offered by Daum and Kakao are popular in Korea. For Kakao, it’s hard to catch up with Naver’s Line, while Daum is also seeing difficulties in narrowing the market gap with Naver in Korea,” said an official at Kakao.

Last year, Kakao raked in $203 million in revenue and $59 million in profits, the bulk of which it earned from selling stickers and game-linked purchases. “When you talk ‘global,’ it’s been in doubt over the effects of the alliance,” said an official in the local internet industry.

“Meanwhile, business fields that “Daum Kakao” aims to target overlap with those run by Naver, raising uncertainties. We will see whether or not the new unit will launch a ‘wholly-new’ mobile service,” said a senior fund manager from a U.S. -based investment bank in Seoul.

“Daum Kakao alliance will bring no impact on Naver” Naver official

Naver spokesman declined to make comment on the effects of Daum Kakao deal. But one ranking Naver official said the company doesn’t believe that the alliance will make any significant impact on Naver. Kakao has about 145 million users in Asia, about a quarter of those using WhatsApp.

Kakao was established in 2006 by Kim Beom-soo. He owns a 29.9 percent stake in Kakao, while K-Cube Holdings, owned by the founder, has another 23.7 percent stake.

Daum shares up vs Naver shares down?

As news spread that Daum and Kakao will be merged, shares related to Daum and Kakao soared, while those of Naver fell slightly. Can this be a precise reflection of market prospects?

Most of market analysts positively evaluated the merger of Daum Communications and Kakao. “Considering the current market caps only, stock prices have the potential to rise by at least 30 percent after the merger,” said one securities analyst. “Given the synergy effects, there could be a further rise in share values” he added.

Daum and Kakao agreed to merge by swapping stocks. The stock swap ratio was set to be one Kakao share for 1.556 shares of Daum. Regarding the synergy effect from the merger, one Korean analyst said that while Kakao is buying Daum’s infrastructure through the deal, Daum will be acquiring a growth engine.

Daum gets growth engine while Kakao uses Daum’s resources

Another analyst said, “Daum can get a growth engine through the Kakao platform, while Kakao can make use of Daum’s resources in pushing for strategic new businesses or advancing into overseas markets.” He said that in the short term, there could be synergy between advertisements, games and content businesses.

However, he pointed out that Lee Jae-woong, the founder and the main shareholder of Daum, will be losing dominance. Currently, Kim Beom-soo, co-founder of Kakao, has a 29.9 percent stake in Kakao, while K-Cube Holdings, which is fully owned by Kim, has 23.7 percent stake in Kakao. Hence, his stake in Kakao totals 53.6 percent. Lee, meanwhile, has only 13.9 percent stake in Daum.

Lee Jae-woong loses dominance, Kim Beom-soo has more shares

After the merger, Kim and K-Cube Holdings will have a 39.8 percent stake, while Lee will have only 3.4 percent. “Considering the positive outlook on the growth of the merged company and the growth potential of Kakao, the deal will positively work on the share prices of Daum,” a third analyst said.

An analyst at Kiwoom Investment & Securities expected a positive synergistic effect. He said, “Daum will be having more influence in the Internet portal, while mobile service of Kakao will be strengthened to create a synergy effect.”

He said that the value of Daum as an Internet portal, as well as the search services and display advertisement, game business will create such effects with Kakao’s mobile messenger and other mobile services. Overall, most analysts expect that “Daum Kakao” may weaken the influence of Naver. Naver’s dominance lasted for the past decade.

The trading of Daum stocks was suspended as of May 26, at Friday’s closing price of 78,100 won. If a review on their merger is completed, the trading could resume soon. Naver dipped 3.99 percent on the stock market Monday, closing at 745,000 won.