The tangled ties behind the Kakao-Daum merger

Posted on : 2014-05-27 16:58 KST Modified on : 2014-05-27 16:58 KST
The monumental merger is the result of many years of interplay between some of S. Korea’s internet giants
 Kakao Corp. board of directors chair Kim Beom-su; Daum Communication founder Lee Jae-ung and Naver board of directors chair Lee Hae-jin.
Kakao Corp. board of directors chair Kim Beom-su; Daum Communication founder Lee Jae-ung and Naver board of directors chair Lee Hae-jin.

By Kim Jae-seob, IT correspondent

Kim Beom-su, chair of the Kakao Corp. board of directors; Lee Jae-ung, founder of Daum Communication; and Lee Hae-jin, chair of the board of directors at Naver. 

Following the announcement on May 26 that Daum and Kakao are merging, the web of connections between these three individuals is attracting fresh attention.

Before founding Kakao, Kim Beom-su had started a company called Hangame, a game company that he sold to Naver when it started gaining popularity. Until that time, Naver had been struggling to compete with Daum’s Hanmail service, but the acquisition of the game company gave it a much-needed shot in the arm.

But now, Kim is handing Kakao - South Korea’s dominant mobile messaging service - to second-place Daum, giving the company the tool it needs to go toe to toe with leading portal Naver.

Furthermore, the merger makes Kim the single largest shareholder of the resulting company, which is called Daum Kakao. This paves the way for a showdown between Kim and Lee Hae-jin, the main shareholder in Naver, in the South Korean mobile and IT market and the global mobile messaging market, with their pride on the line.

As it happens, Kim and Lee go way back. Kim was born in 1966, making him a year older than Lee, but because Kim spent an extra year retaking the university entrance exam, the two ended up in the same class at Seoul National University (SNU). Kim and Lee entered SNU together in 1986, Kim majoring in industrial engineering and Lee in computer engineering, and they both graduated in 1990.

After that, Kim and Lee went on to graduate school. Kim got his master’s degree at SNU, while Lee got his at KAIST. The next time the two met was in 1992 at Samsung SDS. Kim was the first to become an entrepreneur with the establishment of Hangame in 1998. A year later, in 1999, Lee embarked on a new path, launching the search engine Naver.

Kim and Lee created the company NHN with the merger of Hangame and Naver in 2000. The merger was a masterstroke, enabling Naver to elbow aside Daum to become the top search engine in South Korea. In 2007, Kim stepped down as president of NHN, and Lee kept growing the company, going from strength to strength.

Meanwhile, Kim went to the US and spent some time in San Jose, a hot bed of startups, planning his next move. In 2010, he returned to South Korea to launch the mobile messenger KakaoTalk. The application became wildly popular, and the company expanded its business operations to include KakaoStory, a social networking service, and KakaoGame.

With Kim back in South Korea, the fateful confrontation between him and Lee had begun. Naver released its own messaging service called Line to counter Kakao’s onslaught, but it failed to beat KakaoTalk, at least in the domestic market. At this, Naver shifted directions and worked on countering Kakao by bolstering its influence and brand value in the global market.

While Lee was threatening Kakao, Kim was hesitant to enter the PC market, which was Naver’s playground. One reason for this was Naver’s close ties with the government; another was Kim’s belief that it would be tough to challenge Naver, which had grown into a corporate behemoth. This is why Kim was so slow to launch a PC version of KakaoTalk, and also why he did not even look into desktop businesses.

Daum Communication President Choi Sae-hoon (left) and Kakao President Lee Seok-woo embrace after a press conference announcing their merger
Daum Communication President Choi Sae-hoon (left) and Kakao President Lee Seok-woo embrace after a press conference announcing their merger

But when Naver pressed its attack on the mobile messenger market - Kakao’s turf - with Line and Band, Kim found himself forced to make a decisive move. The success of the Naver-backed application Line, which began in Japan and soon dominated the Asian market, was making Kim nervous.

For Kim, joining forces with Daum seems to have been a necessary choice. Adapting nimbly to the advent of the mobile internet age, brought on by the proliferation of smartphones, Kakao pushed aside established messengers NateOn and MSN and positioned KakaoTalk as South Korea’s dominant messenger with breathtaking speed.

But there was only so far Kakao could go in its current state. The company could solve the issue of funding by going public, but money alone could not buy contents for its messaging service.

2014 marked Daum’s twentieth anniversary, and founder Lee Jae-ung desperately needed a new source of vitality for the company. He also needed to settle an old grudge: to appease his wounded pride. Daum had dominated the South Korean internet, with Hanmail being South Korea’s email service of choice at the time, until it surrendered its position to the upstart Naver.

At the dawn of the mobile internet age, Daum tried to get its mojo back with the MyPeople messaging app, but this was not successful. In the meantime, Naver increased its lead, while Google and other foreign companies gradually intensified their attack. For several years, Daum’s revenues stagnated around 400-500 billion won (US$390.1 million-$488.6 million).

But Lee Jae-ung was not content to remain in second place forever. He thought that Daum needed a new source of momentum, and the most suitable candidate for this was KakaoTalk, which had by then become not only South Korea’s most popular messenger, but indeed its most popular platform, in the mobile internet age.

In the end, Lee Jae-ung did not hesitate to hand over the company he had founded back in 1995 - the company that, at one time, had been South Korea’s best-known internet portal thanks to Hanmail - to a seven-year-old startup. The merger of Kakao and Daum means that Lee Jae-ung, who had controlled 13.7% of Daum stock, only has a 4.1% share in the resulting company. He had been the largest stockholder at Daum; now, four people have more stock than him. There are also rumors that Kakao pushed for “Daum” to be at the front of the new company’s name.

In the future, Lee Jae-ung plans to dedicate himself even further to building a social company, as he has already been doing.

“In the past, Lee Jae-ung would sell company stock to provide incubation and angel investment for startups. Now, he is planning on focusing on that completely,” a source at Daum said on condition of anonymity.

It is entirely impossible that the next Kakao or Naver could emerge from one of the startups that Lee Jae-ung is investing in. It looks like we have not seen the last of the convoluted links among these three individuals.

 

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