Kakao Faces Overseas M&A Blockade... Group Risk Materializes

Kakao Pay Faces Sudden Halt in US Securities Firm Acquisition
Judicial Risks Disrupt 'Beyond Korea' Plans

Kakao Pay's acquisition of a U.S. securities firm has come to an abrupt halt. The target company postponed the deal citing regulatory uncertainties, including legal risks surrounding Kakao. Risks originating from the parent company Kakao have spread to its affiliates, blocking overseas mergers and acquisitions (M&A). This is seen as a setback to the business strategy aimed at shedding the domestic-only label and expanding overseas operations.

U.S. Securities Firm Notifies "Difficult to Conclude Share Acquisition"

Kakao Pay recently received a letter from the U.S. securities firm Siebert stating that it is difficult to conclude the share acquisition deal. The reason pointed out by Siebert is the parent company Kakao. This Nasdaq-listed company disclosed to the U.S. Securities and Exchange Commission (SEC) that "A material adverse effect has occurred with respect to Kakaopay in light of, among other events, Korean authorities taking action against Kakaopay, its parent company, Kakao Corp. and its subsidiaries to address what it described as the current crisis at Kakao Corp. and its subsidiaries."

Kakao Pay has been pursuing the acquisition of Siebert since April. It planned to acquire 51% of Siebert’s shares in two installments for 103.8 billion KRW. The first transaction secured 19.9% of the shares on May 1, and the second transaction remains pending. If the second transaction is blocked, the acquisition will effectively fall through.

If the acquisition fails, the business will inevitably suffer. Kakao Pay has not shown significant results in new businesses beyond payments and remittances. It aimed to break through with securities business targeting the overseas stock trading market, but this has also become uncertain. In the third quarter of this year, Kakao Pay recorded consolidated sales of 158.9 billion KRW and an operating loss of 9.5 billion KRW. Considering it achieved an operating profit of 12 billion KRW on a separate basis, it means Kakao Pay Insurance and Kakao Pay Securities, which are pushing new businesses, suffered losses exceeding 20 billion KRW.

An industry insider said, "Timing is very important in M&A, and the emergence of such noise is quite a major negative factor." He explained, "It will likely take considerable time both to normalize the deal and, if it fails, to find a new acquisition target, so the impact on Kakao Pay’s securities business could be quite significant." However, Kakao Pay stated that it does not agree with Siebert’s judgment and is conducting an internal review regarding the transaction execution.

Legal Risks Hamper the 'Beyond Korea' Strategy

The Kakao Group has expanded its overseas business through M&A. It has pursued the 'Beyond Korea' strategy to raise the overseas sales ratio from the current 20% level to over 30% by 2025. The acquisition of SM Entertainment, which was embroiled in stock price manipulation allegations, was a key project for this purpose.

The same applies to other affiliates. Kakao Entertainment consecutively acquired North American webtoon and web novel platforms Tapas and Radish. Kakao Mobility completed its first overseas M&A in March by acquiring the UK mobility platform Split. These moves were aimed at expanding beyond the domestic market and stepping into overseas markets.

Ironically, the risks that began with the SM acquisition seem to be hindering the Beyond Korea strategy. Legal risks are spreading throughout the group as key executives and the Kakao corporation itself were indicted on stock price manipulation allegations during the SM acquisition.

Overseas deals that Kakao is pursuing or considering are expected to face setbacks for the time being. Bae Jae-hyun, Kakao’s Chief Investment Officer who led M&A and large-scale investment attraction domestically and internationally, has been arrested and indicted, and Kim Beom-su, Kakao’s founder and head of the Future Initiative Center, is also under prosecution investigation. The 'Compliance and Trust Committee' (Compliance Committee), scheduled to launch within the year, has announced thorough verification of major decision-making. As an external oversight body, the Compliance Committee will scrutinize risk factors of each affiliate and exercise strong powers such as emergency suspension requests for core decision-making bodies. Given that Compliance Committee Chairperson Kim So-young stated, "We will propose that compliance and coexistence operate as fundamental management principles of the community rather than just management indicators shown in numbers," a full review of the overseas business strategy is deemed inevitable.