In 2019, Naver and Japan’s SoftBank established LINE Yahoo (LY) Corporation with a 50-50 joint investment, forming a cross-border alliance. Their strategy was to create synergy by combining LINE, Japan’s leading messenger service nurtured by Naver, and Yahoo Japan, the top portal site operated by SoftBank. However, due to a personal information leakage incident at LY Corp. late last year, Naver and SoftBank are negotiating the sale of their stakes under pressure from the Japanese government. Even if just one share of the current 50-50 stake structure transfers to SoftBank, it would affect Naver’s overseas subsidiaries under LY.
In 2012, Kakao brought in China’s Tencent as a strategic investor. Kakao needed a powerful ally to secure its position as the leading mobile messenger in the South Korean market. Despite the business synergy expected from Tencent, China’s largest internet and gaming company and operator of the leading mobile messenger WeChat, there have been no significant results. Tencent has remained a controversial “Chinese capital” tag for Kakao, raising concerns over potential personal information leaks.
Why did Naver and Kakao seek partners in Japan and China, and what impact do these partnerships have today?
Naver and Kakao’s mobile messenger businesses were once led by their respective founders, Lee Hae-jin and Kim Beom-su, who had previously worked together under NHN. Kim launched the KakaoTalk service in South Korea in 2010, ahead of Lee, who shifted his focus to Japan rather than competing domestically against the successful KakaoTalk. Although LINE started over a year later than KakaoTalk, it grew explosively in Japan following the 2011 Tohoku earthquake, becoming the nation’s favorite messenger.
In 2019, Lee joined hands with SoftBank Chairman Son Jeong-ui, also known as Masayoshi Son, to merge LINE (messenger) and Yahoo Japan (portal) with the ambition of creating a world-leading AI tech company. Japanese media had predicted from the start of LY Corporation that SoftBank would gain control, and recent investigations by the South Korean government confirmed this observation. The grand vision of competing with big tech companies from the United States and China is now at a critical juncture due to the Japanese government’s pressure for a stake sale following the data leak incident last year.
LY recently announced in its earnings report that it would replace its entire board with Japanese members. The prevailing market scenario for the Naver and SoftBank stake sale negotiations is that Naver would sell part of its A Holdings (LY’s holding company) stake to SoftBank and become the second-largest shareholder. This change would inevitably affect not only LINE’s business in Japan but also its overseas operations in countries like Thailand and Taiwan and its subsidiaries owned by LY.
“Even if a single share were subtracted from 50% (of Naver’s shares in A Holdings), it would inevitably cause harm to Naver,” Park Ju-geun, CEO of Leaders Index, said. He suggested that Naver incorporate Southeast Asian businesses to maintain an overseas foothold. “It must not choose to disclaim its control of LINE Plus (LINE Yahoo’s Korean subsidiary managing LINE’s overseas operations),” Park emphasized.
According to the Financial Supervisory Service’s Data Analysis, Retrieval and Transfer System (DART), LINE Yahoo’s overseas subsidiaries and affiliates are managed by Z Intermedia Global Corporation, wholly owned by LINE Yahoo. Z Intermediate Global holds 100% of LINE Plus, 35.7% of LINE Games, 18.8% of Naver Z, and 52.16% of IPX (formerly LINE Friends).
“A 50-50 shareholding implies absolute trust in the other party, but as the two controlling shareholders have different nationalities, Naver should have been considered and prepared for this aspect,” remarked Park Kyung-suh, a professor of economics at Korea University and former chairman of the Korea Institute Of Corporate Governance.
In April 2012, during its early stages, Kakao received Tencent’s 72 billion won (about 53.18 million) investment. Tencent became the second-largest investor, holding a 13.3% stake after the founder Kim Beom-su. Although Maximo (Tencent’s subsidiary) has since halved its stake due to the Kakao-Daum merger and additional investments, the label “Chinese capital-derived” Kakao still lingers.
Netizens have even speculated that Tencent’s WeChat is a clone of KakaoTalk, given their technological and conceptual similarities. According to the DART on May 20, as of the end of the first quarter this year, Maximo held a 5.93% stake in Kakao.
From Tencent’s viewpoint, aligning with Kakao had numerous advantages. “It was Tencent, not the largest shareholder, that “hit the jackpot” with the 2014 Kakao-Daum Communications merger,” an investment industry insider revealed. “Tencent rarely meddles in management. The value of the merger warrants alone exceeds 400 billion won ($295.43 million), five to six times the initial investment.”
Another IT industry expert noted, “Tencent’s investment in Kakao wasn’t for business synergies initially. For founder Kim Beom-su, it was crucial to put as much money as possible into the platform business early on to dominate the market,” adding, “KakaoTalk can’t be expanded into China or significantly impact overseas markets, so Tencent is viewed as a strategic investor.”
Tencent has invested in other Kakao Group companies, including KakaoBank. Through Skyblue Luxury Investment, a special purpose corporation (SPC), Tencent invested 4 billion won (about $295,137) when KakaoBank was launched in 2016. Later, Tencent participated in a capital increase to secure a 3.72% stake (15,239,183 shares) in KakaoBank. Tencent currently holds a 1.6% stake in KakaoBank.
