[비즈한국] The arrest of Kakao035720 chief Kim Beom-su (Chairman of the Corporate Reinvention Committee) has significantly dampened expectations for a Kakao Entertainment initial public offering (IPO). Kakao Entertainment was considered a leading candidate for its next major listing, expected to serve as the bridgehead for Kakao's global expansion. Even the approximately 1.16 trillion won investment secured last year from the Saudi Public Investment Fund (PIF) and the Government of Singapore Investment Corporation (GIC) came with the condition of an IPO. However, a series of negative events within the group has stalled this momentum. With judicial risks mounting, there is even talk of a potential sale, where the company might abandon the IPO and offload its stake to repay investors. This stands in stark contrast to the moves of its competitor, Naver Webtoon, which entered the U.S. Nasdaq market in June and is accelerating its global business expansion.
Naver Has Entered the Nasdaq, but What About Kakao?
Kakao's content division is seeing stagnant performance. Kakao released its preliminary earnings for the second quarter on the 8th. Revenue in the content division was 1.0496 trillion won, similar to last year's level. Content revenue—which includes stories (webtoons/web novels), music, and media—had grown to 1.131 trillion won in the third quarter of last year, then slowed for two consecutive quarters to 1.042 trillion won in the fourth quarter and 1.034 trillion won in the first quarter of this year, before showing a slight recovery. Second-quarter revenue for the story segment within the content division was 215.7 billion won, down 7% compared to the same period last year. This is the result of increased costs due to Piccoma's strategic marketing expansion in response to intensifying competition in the Japanese webtoon market.
Although Kakao should be hitting the accelerator to ride the wave of webtoon business expansion, such as Naver Webtoon's Nasdaq listing, the indictment of Kakao Corporate Reinvention Committee Chairman Kim Beom-su has made disruptions to Kakao Entertainment's existing strategy inevitable. Kakao Entertainment is an integrated content subsidiary created by the 2021 merger of Kakao Page and Kakao M. Since the acquisition of SM Entertainment, the company has seen growth in revenue and profit metrics, but it is now facing backlash after being embroiled in various risks.
Expectations for an IPO, which remained in and outside the industry, are also fading. As the controversy over SM Entertainment's stock manipulation has moved to the courtroom, the prevailing view is that it will be difficult to pursue a listing until these judicial risks are resolved. Given the prolonged situation and the fact that the group's head has been arrested, a devaluation of the company's value is expected, and issues regarding decision-making—whether due to market downturns or the power vacuum left by Chairman Kim—cannot be overlooked.
The market capitalization of the Kakao Group, which reached 120 trillion won in 2021, evaporated by 1.712 trillion won (4.70%) in a single day on the 23rd of last month—the day an arrest warrant was issued for Chairman Kim—dropping from 36.383 trillion won to 24.671 trillion won. Kakao's stock price, which stood at 61,900 won in January this year, has fallen to the 38,000 won range following Chairman Kim's arrest.
SM Entertainment: Meant to be a Wing, Became an Anchor
The essence of the crisis facing Kakao lies in a management style that prioritized accumulating capital through the "splitting off" of subsidiaries for listing, rather than innovating in its core platform business. At the center of this are the "Beyond Korea" strategy and Kakao Entertainment. Following the success of KakaoTalk, Kakao expanded its reach by acquiring promising companies. The strategy was to grow these acquired companies and then list them to raise necessary funds. As a key subsidiary, Kakao Entertainment had consistently been the subject of listing rumors since its official launch, being touted as Kakao’s next IPO candidate after Kakao Games293490.
To use its entertainment business as a bridgehead for global expansion, Kakao raised 1.154 trillion won from the Saudi Public Investment Fund (PIF) and the Government of Singapore Investment Corporation (GIC) for a 10.2% stake. This time, SM Entertainment was the key. The prosecution’s view is that Kakao moved aggressively to acquire SM Entertainment, which possesses famous artists and music intellectual property (IP), to inflate the value of Kakao Entertainment before the IPO.
Hwang Yong-shik, a professor of business administration at Sejong University, noted, "Although an IPO is a means, not an end, companies across all industries have perceived the IPO as a formula for success that brings capital gains. The Kakao situation is a result of those side effects." He added, "Recovery of trust and the rebuilding of leadership are now required, and it appears that pursuing an IPO will be difficult for the time being."
Amidst the crisis, rumors of a sale are also emerging for some subsidiaries, including Kakao Games and Kakao VX. After being criticized in 2021 for encroaching on local small-business areas through "octopus-style" business expansion, Kakao had reduced its subsidiaries. The number of subsidiaries, which was 158 as of June 2021, has decreased by nearly 5% to 124 currently. However, Kakao has drawn a line against the sale rumors. While they hinted at "cleaning up" some subsidiaries, they remained silent on the sale of specific entities.
Kakao CEO Chung Shin-a stated during the earnings conference call on the 8th, "In the second half of the year, we intend to speed up efficiency measures for businesses deemed to have insufficient operational synergy with the KakaoTalk platform or AI." She added, "While it is difficult to disclose detailed information at this point, we plan to communicate with the market once the plans under review take concrete shape."
The mere mention of a possible stake sale is a disgrace for Kakao Entertainment. It is expected that Kakao Entertainment will have to renegotiate the contract conditions promised during the pre-IPO stage by the end of this year. A representative from Kakao Entertainment stated, "Nothing has been decided specifically regarding the listing," adding, "We plan to proceed at the optimal time to maximize corporate and shareholder value in the long term."