I have been following the story of Kakao Corp closely over the last two years and its been an interesting ride so far, due to get much more so with the merger announced this week on betech.asia. While 'many' are confused about the benefits of a rising Kakao merging with Daum Communications, an internet portal in decline, I believe that there are a few key factors that 'many' are missing.
Kakao Corp. - A Brief Intro:
Kakao Corp was founded around in 2010 with the aim of becoming a new social platform, perhaps to rival Facebook. What started as a very basic messaging service has now grown into a fully fledged social platform that dominates the mobile lives of around 95% of Korean smartphone users. As well as the messaging service (the most prominent in Korea by a mile), Kakao now features services for photo sharing, 'Kakao Story' that looks and acts much like a Facebook wall, Kakao music, Kakao News, Kakao Group chat and free calls, and a number of other beta solutions for business. The Killer monetization tool is Kakao Game which appeared in July 2012 and ensured that Kakao Corp would quickly become a multi billion dollar enterprise (now valued at around $2Bn).
Kakao: Much more than a messenger
While Kakao has failed to see rockstar global success, more than 3/4 of their users are now outside Korea (currently around 130M globally).
Daum Corp - A Brief Intro:
Daum was founded in 1995, during the first internet bubble in Korea and emerged as one of five key domestic web 2.0 companies (the others are NHN, Nexon, NCSoft, and Ahn Labs). While Naver has become by far the dominant internet portal in Korea, Daum has maintained its 15% - 20% hold since. This is, up until its share price started to enter a worrying slide around six months ago that was not showing signs of recovery. This is, as Naver has gained a tighter grip and Google has begun to rise (now around 10% market share in Korea). Daum's market cap now stands at just over $1Bn.
Daum's share price had been in decline, until the merger announcement (Bloomberg)
The Merger:
The key takeout from the merger announced this week was that Daum would benefit from Kakao's experience in the global markets and that Kakao would benefit from being aligned with a strong web portal. The market cap of the merged entity will be around $3Bn and will also give Kakao a 'back door' entry for an IPO, something the company had announced would happen in May 2015. By merging with Daum Kakao will be able to reduce cost, time and energy in filing for an IPO on thier own. This at a time when the messaging market globally has exploded with recent acquisitions of Viber ($900M to Rakuten) and WhatsApp ($19Bn to Facebook). Only Kakao and Kik remained 'on their own', without an exit, and therefore the war chest to move on to the next stage.
What can $2Bn Kakao Really Get from $1Bn flagging Daum?
On the face of it you may think that Kakao is losing out, but there are a few things we need to take heed of.
1. The Chairman of Kakao (Kim Bom Su) was also one of the founding team at NHN, who went on to build Korea's biggest portal, Naver (currently $24.7Bn market cap). So, he knows how to build a massively successful internet portal site and his inside knowledge of how Naver works will prove a massive asset to Daum, their arch-rival.
2. Daum has a relatively successful web presence in Korea. While Daum is Naver's little baby brother the portal has been successful for the last ten years and with the mobile presence that Kakao can bring there is every chance that, at least in Korea, daum's flagging fortunes can be reversed.
3. Kakao has learned some tough lessons about global competition. While global user acquisition has not been astounding they have not died in the process of global expansion, like Cyworld did. I spoke with Kakao CEO, Sirgoo Lee, a year ago and he openly admitted that Kakao should have concentrated more on expansion in the early days. Instead they let Line, Wechat (and others) gain a foothold regionally that acted as a strong stepping stone to the rest of the world. This to say, that kakao may well have learned from past mistakes and with the injection of cash through their backdoor IPO, Kakao may be able to see their overesas endeavours begin to pay more fruit.
I believe that there is a lot more that we will see from Daum-Kakao in the future. A few months ago the brightest glimmer of hope in their future was the expected IPO. But what after that? Now with an internet portal at their back, an injection of cash and lessons from the past I think the Kakao story could be just beginning.
